<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 8, 1999.
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
THE KROLL-O'GARA COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
OHIO 3711 31-1470817
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
NO.)
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER)
</TABLE>
9113 LESAINT DRIVE
FAIRFIELD, OHIO 45014
(513) 874-2112
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ABRAM S. GORDON, ESQ.
VICE PRESIDENT AND GENERAL COUNSEL
THE KROLL-O'GARA COMPANY
9113 LESAINT DRIVE
FAIRFIELD, OHIO 45014
(513) 874-2112
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
WITH COPIES TO:
<TABLE>
<S> <C>
TIMOTHY E. HOBERG, ESQ. THOMAS SHERRARD, ESQ.
TAFT, STETTINIUS & HOLLISTER LLP SHERRARD & ROE
1800 FIRSTAR TOWER SUNTRUST CENTER BUILDING
425 WALNUT STREET 424 CHURCH STREET, 20TH FLOOR
CINCINNATI, OHIO 45202 NASHVILLE,TENNESSEE 37219
(513) 381-2838 (615) 742-4523
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
------------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER UNIT OFFERING PRICE(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value $.01.......... 989,431 shares n/a $4,752,280 $1,322
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon the maximum number of shares of common stock that the Registrant
may be required to issue in the merger, calculated as 3,678,690 , the
aggregate number of shares of common and preferred stock of Background
America, Inc. outstanding on March 1, 1999 or then issuable pursuant to
outstanding stock options or warrants, times an exchange ratio of 0.2689628
share of the Registrant's common stock for each share of Background America
stock.
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933, as amended, and
computed pursuant to Rule 457(f)(2) on the basis of the $4,752,280 book
value of the Background America common and preferred stock to be cancelled
in the merger, assuming the prior exercise of all outstanding options and
warrants to purchase Background America common stock.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
[BACKGROUND AMERICA LETTERHEAD]
TO THE SHAREHOLDERS OF
BACKGROUND AMERICA, INC.:
You are cordially invited to attend a Special Meeting of Shareholders of
Background America, Inc. to be held on , 1999, at .m., local
time, at the principal executive offices of Background America at 1900 Church
Street, Suite 400, Nashville, Tennessee.
At the Special Meeting, you will be asked to consider and vote on a proposal to
approve an Agreement and Plan of Merger which provides for the merger of a
wholly owned subsidiary of The Kroll-O'Gara Company into Background America,
with the result that Background America will become a wholly owned subsidiary of
Kroll-O'Gara. Upon completion of the merger, each outstanding share of
Background America common and preferred stock will be exchanged for 0.2689628 of
a share of Kroll-O'Gara common stock (subject to withholding of 10% of the
shares as security for the payment of claims Kroll-O'Gara may have as a result
of the merger and 2% of the shares for excess expenses of Background America
relating to the merger). Cash will be paid in lieu of issuing fractional shares.
You have the right to dissent from the merger.
This Proxy Statement/Prospectus describes the Merger Agreement and the proposed
merger in more detail, including the conditions which must be met to complete
the merger and the effects of the merger on the rights of Background America
shareholders. Please read this document carefully and consider thoughtfully the
information contained in it.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT AND THE
MERGER, AND UNANIMOUSLY RECOMMENDS THAT YOU VOTE FOR APPROVAL OF THE MERGER
AGREEMENT.
Approval of the Merger Agreement will require the affirmative vote of at least a
majority of the votes entitled to be cast at the Special Meeting by the holders
of the outstanding shares of Background America common stock and preferred stock
voting together, as well as the affirmative vote of at least two-thirds of the
votes entitled to be cast at the Special Meeting by the holders of the
outstanding shares of Background America preferred stock, voting separately as a
class. Whether or not you plan to attend the Special Meeting, you are urged to
complete, sign, and return promptly the enclosed proxy card. The proposed merger
is a significant step for Background America and your vote on this matter is of
great importance.
ON BEHALF OF THE BOARD OF DIRECTORS, I URGE YOU TO VOTE FOR APPROVAL OF THE
MERGER AGREEMENT BY MARKING THE ENCLOSED PROXY CARD "FOR" ITEM ONE.
We look forward to seeing you at the Special Meeting.
Sincerely,
Michael D. Shmerling
Chairman of the Board
and Chief Executive Officer
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE SECURITIES TO BE ISSUED UNDER THIS PROXY
STATEMENT/ PROSPECTUS OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS
ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus is dated , 1999 and was first
mailed to shareholders on or about , 1999.
<PAGE> 3
BACKGROUND AMERICA, INC.
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
------------------------
Background America, Inc. will hold a Special Meeting of Shareholders on
, 1999, at local time, at 1900 Church Street, Suite 400,
Nashville, Tennessee, to vote on:
1. A proposal to approve the Agreement and Plan of Merger, dated as of January
21, 1999, by and among The Kroll-O'Gara Company, Kroll-O'Gara Tennessee,
Inc. (a wholly owned subsidiary of Kroll-O'Gara) and Background America,
Inc., providing for the merger of Kroll-O'Gara Tennessee, Inc. into
Background America with the result that Background America will become a
wholly owned subsidiary of Kroll-O'Gara, and the waiver of any liquidation
preference otherwise payable to holders of Background America preferred
stock.
2. Any other matters that properly come before the Special Meeting or any
adjournment or postponement of the Special Meeting.
Background America shareholders at the close of business on ,
1999 are receiving notice of and may vote at the Special Meeting. Approval of
the Agreement and Plan of Merger requires the affirmative vote of at least a
majority of the outstanding shares of Background America's common and preferred
stock voting together, as well as the affirmative vote of the holders of at
least two-thirds (66 2/3%) of the outstanding shares of Background America's
preferred stock voting as a separate class.
The Special Meeting may be adjourned from time to time without notice other than
an announcement at the Special Meeting or at any other adjournment. Any business
for which notice is given above may be transacted when the Special Meeting
reconvenes.
Background America shareholders have dissenters' rights in connection with the
merger. These rights are described in the accompanying Proxy
Statement/Prospectus.
PLEASE MARK, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT IN THE ENCLOSED
ENVELOPE PROMPTLY, whether or not you plan to attend the Special Meeting. If you
attend the Special Meeting, you may vote in person if you wish, even if you
previously returned your proxy card.
By Order of the Board of Directors
Michael D. Shmerling
Chairman of the Board
and Chief Executive Officer
, 1999
PLEASE DO NOT SEND IN ANY STOCK CERTIFICATES AT THIS TIME. IF WE COMPLETE THE
MERGER, WE WILL SEND YOU INSTRUCTIONS ON HOW TO EXCHANGE YOUR STOCK
CERTIFICATES.
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY..................................................... 1
The Companies............................................. 1
The Merger................................................ 1
Differences in Rights of Shareholders..................... 5
Dissenters' Rights........................................ 5
SUMMARY HISTORICAL, SUPPLEMENTAL AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION.................. 6
Information Presented..................................... 6
Other Relevant Information................................ 8
Kroll-O'Gara Selected Historical Consolidated Financial
Information............................................ 9
Background America Selected Historical Consolidated
Financial Information.................................. 10
Kroll-O'Gara and Background America Selected Unaudited Pro
Forma Combined Condensed Historical Financial
Information............................................ 11
Kroll-O'Gara and Background America Selected Unaudited Pro
Forma Combined Condensed Historical Financial
Information Including Kizorek, Inc..................... 12
Kroll-O'Gara Selected Supplemental Consolidated Financial
Information............................................ 13
Kroll-O'Gara and Background America Selected Supplemental
Unaudited Pro Forma Combined Condensed Financial
Information............................................ 15
Kroll-O'Gara and Background America Selected Supplemental
Unaudited Pro Forma Combined Condensed Financial
Information Including Kizorek, Inc..................... 16
Unaudited Comparative Per Share Information............... 17
RISK FACTORS................................................ 20
THE SPECIAL MEETING......................................... 25
Time and Place; Purpose................................... 25
Proxies................................................... 25
Solicitation of Proxies................................... 25
Record Date and Voting Rights............................. 25
THE MERGER.................................................. 27
Background of the Merger.................................. 27
Reasons for and Advantages of the Merger.................. 27
Disadvantages of the Merger............................... 28
Recommendation of Background America Board of Directors... 28
Management of Kroll-O'Gara After the Merger............... 28
Interests of Certain Persons in the Merger................ 28
Accounting Treatment...................................... 30
United States Federal Income Tax Consequences............. 30
</TABLE>
i
<PAGE> 5
<TABLE>
<S> <C>
Federal Securities Law Consequences....................................................................... 31
Dissenters' Rights........................................................................................ 32
THE MERGER AGREEMENT........................................................................................ 33
Terms of the Merger....................................................................................... 33
The Escrow Funds.......................................................................................... 34
Exchange of Certificates.................................................................................. 36
Representations and Warranties............................................................................ 37
Conduct of Business by Background America Pending the Merger.............................................. 38
Additional Agreements..................................................................................... 38
Conditions to the Merger.................................................................................. 39
Termination............................................................................................... 40
MARKET PRICES AND DIVIDENDS................................................................................. 40
Market Prices............................................................................................. 40
Dividends................................................................................................. 41
THE KROLL-O'GARA COMPANY.................................................................................... 42
Management's Discussion and Analysis of Financial Condition and Results of Operations -- Historical....... 42
Management's Discussion and Analysis of Financial Condition and Results of Operations -- Supplemental..... 58
Business.................................................................................................. 69
Management................................................................................................ 86
Executive Compensation and Other Information.............................................................. 88
Certain Relationships and Related Party Transactions...................................................... 92
Principal Shareholders and Holdings of Management......................................................... 96
BACKGROUND AMERICA, INC. ................................................................................... 98
Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 98
Business.................................................................................................. 104
Principal Shareholders and Holdings of Management......................................................... 108
DESCRIPTION OF KROLL-O'GARA CAPITAL STOCK................................................................... 109
COMPARISON OF RIGHTS OF HOLDERS OF KROLL-O'GARA COMMON STOCK AND BACKGROUND AMERICA COMMON STOCK............ 112
RIGHTS OF HOLDERS OF BACKGROUND AMERICA PREFERRED STOCK..................................................... 116
LEGAL MATTERS............................................................................................... 117
EXPERTS..................................................................................................... 117
OTHER BUSINESS.............................................................................................. 118
WHERE YOU CAN FIND MORE INFORMATION......................................................................... 118
INDEX TO FINANCIAL STATEMENTS............................................................................... F-1
APPENDIX A: Agreement and Plan of Merger................................................................... A-1
APPENDIX B: Business Corporations -- Dissenter's Rights.................................................... B-1
</TABLE>
ii
<PAGE> 6
SUMMARY
This summary highlights selected information from this document. It does not
contain all the information that is important to you. You should read this
entire document carefully. For additional information, see "Where You Can Find
More Information" (page 117).
We call this document a Proxy Statement/Prospectus. It is a Proxy Statement sent
by Background America to you and the other shareholders of Background America.
It also is a Prospectus of The Kroll-O'Gara Company covering the shares of
Kroll-O'Gara common stock which you and the other shareholders of Background
America will receive if the merger is completed. These Kroll-O'Gara shares have
been registered with the Securities and Exchange Commission. Background America
has supplied the information in this document which relates to it, and
Kroll-O'Gara has supplied the information which relates to it.
THE COMPANIES (PAGES 41 AND 97)
THE KROLL-O'GARA COMPANY
9113 LeSaint Drive
Fairfield, Ohio 45014
(513) 874-2112
Kroll-O'Gara is a leading global provider of a broad range of specialized
products and services designed to provide governments, businesses and
individuals with information, analysis, training, advice and products that
mitigate risks. Kroll-O'Gara has a network of 60 offices in 19 countries and had
1997 revenues of $190.4 million.
BACKGROUND AMERICA, INC.
1900 Church Street, Suite 400
Nashville, Tennessee 37203
(615) 320-9800
Background America provides background investigation services to government,
corporate, not-for-profit, professional and other clients. Headquartered in
Nashville, Tennessee, Background America maintains operations centers in
Hampstead, Maryland and Clearwater, Florida.
THE MERGER
GENERAL
We propose a merger as a result of which Background America will be acquired by,
and will become a wholly owned subsidiary of, Kroll-O'Gara. We hope to complete
the merger in late March 1999. The merger agreement is the document that governs
the merger. We have attached this agreement as Appendix A to this Proxy
Statement/Prospectus, and we encourage you to read it.
WHAT YOU WILL RECEIVE IN THE MERGER (PAGES 32-35)
The merger agreement provides that each share of Background America common or
preferred stock which you own just before the merger will convert to 0.2689628
of a share of Kroll-O'Gara common stock. On , 1999, the closing
price of Kroll-O'Gara common stock was $ per share, which means that the
value of 0.2689628 of a share of Kroll-O'Gara common stock was $ on
that date. This value will vary from time to time as the price of Kroll-O'Gara
common stock fluctuates.
At least initially, you will receive only 88% of the shares of Kroll-O'Gara
common stock into which your Background America common or preferred stock
converts. Of the remaining 12%,
- - 10% will be deposited in an escrow fund as security for claims Kroll-O'Gara
may have as a result of the merger, and
- - 2% will be separately escrowed to cover expenses of Background America
relating to the merger which exceed $450,000.
After one year, any shares of Kroll-O'Gara common stock in the 10% escrow fund
which are not subject to claims by (and, therefore, return to) Kroll-O'Gara will
be released and apportioned to former Background America shareholders. No later
than six months after the merger,
1
<PAGE> 7
any shares in the 2% escrow fund which have not yet been used for excess
expenses will be released to former Background America shareholders. If the
amount required to pay claims against either escrow equals or exceeds the value
of the shares in that escrow, you will not receive any shares from the escrow.
Therefore, it is possible that you will not receive any shares of Kroll-O'Gara
common stock beyond the 88% issued at the time of the merger.
The 10% escrow fund is for the benefit of Kroll-O'Gara and will be
Kroll-O'Gara's only source of indemnification for claims, other than expenses,
relating to the merger. On the other hand, the 2% escrow fund is only for the
benefit of Background America shareholders. If expenses of the merger exceed
$450,000, Kroll-O'Gara may be entitled to proceed against you or any other
Background America shareholder for some or all of the excess. You will then have
to look to the 2% escrow fund for reimbursement. Moreover, Kroll-O'Gara is not
required to make its claims for reimbursement of expenses within any specified
time period. Therefore, Kroll-O'Gara could seek to recover expenses after the 2%
escrow fund has been terminated, at which point you may have no readily
available source of reimbursement for amounts owed to Kroll-O'Gara.
If you do not properly exercise dissenters' rights in connection with the
merger, you will be deemed to have agreed to the escrows and conditions
described above.
In the merger you will receive only whole shares of Kroll-O'Gara stock and cash
in payment for any fractional share.
SPECIAL INFORMATION FOR OPTION AND WARRANT HOLDERS (PAGE 33)
In addition to its shareholders, Background America is furnishing this Proxy
Statement/ Prospectus to holders of its stock options and warrants in connection
with the solicitation of the consents described below.
The merger agreement requires that the holders of all options and warrants to
purchase Background America common stock must consent to amending these options
and warrants so that, unless previously exercised, they survive the merger and
become exercisable for Kroll-O'Gara common stock. In addition, holders of stock
options and warrants will be asked to decide whether to exercise their options
and/or warrants at the time of the merger. Options and warrants which are not
exercised will remain outstanding as options and warrants to purchase
Kroll-O'Gara common stock.
If you hold options and/or warrants to purchase Background America common stock
and you elect to exercise them at the time of the merger, 12% of the shares of
Kroll-O'Gara common stock that you receive in the merger which are attributable
to those options and warrants will be subject to escrow. Additionally, although
you previously may not have been a Background America shareholder, Kroll-O'Gara
then may be entitled to proceed against you for excess expenses of the merger.
If you do not exercise your options and warrants until after the merger, the
shares of Kroll-O'Gara common stock that you receive upon exercise will not be
subject to escrow or claims for excess expenses of the merger.
COMPARATIVE PER SHARE INFORMATION (PAGE 17)
Kroll-O'Gara's stock trades on the National Market tier of The Nasdaq Stock
Market. On January 21, 1999, the last trading day before we announced the
merger, Kroll-O'Gara common stock closed at $37.25 per share. On ,
1999, Kroll-O'Gara common stock closed at $ per share. There is no trading
market for Background America's stock.
You can obtain current stock price quotations for Kroll-O'Gara common stock
(symbol "KROG") from a newspaper, on the Internet or by calling your broker.
OUR RECOMMENDATION (PAGE 27)
The Board of Directors of Background America believes that the merger is fair to
you and in your best interests. The Board unanimously recommends that you vote
"FOR" approval of the merger agreement.
2
<PAGE> 8
REASONS FOR THE MERGER (PAGE 26)
The Background America Board of Directors believes the merger will benefit both
you and Background America for a number of reasons:
1. Kroll-O'Gara has more capital resources to devote to the growth of
Background America's business than does Background America and, as a public
company, also has access to the capital markets. Kroll-O'Gara has indicated
that it wants the current management of Background America to continue to
develop our business.
2. We believe the merger will permit cost savings which increase the efficiency
of Background America's operations. This also should increase the
profitability of the business.
3. As a Kroll-O'Gara shareholder, you will own an interest in a larger and more
diversified company which has grown significantly in recent years. Although
this puts you at risk with regard to the other aspects of Kroll-O'Gara's
business, it also means that fluctuations in Background America's business
are likely to be "smoothed out" in the context of the larger company.
4. You should have greater liquidity for your Kroll-O'Gara common stock than
you have had for your Background America common or preferred stock.
Kroll-O'Gara's stock is traded on the Nasdaq National Market. Background
America's stock is not publicly traded.
5. By exchanging your Background America stock for Kroll-O'Gara stock, you will
receive a premium of between % and % over the book value of your
Background America stock.
These expectations are, of course, forward-looking and there is no assurance
that they will be fulfilled. You should review carefully the "Risk Factors"
section of this Proxy Statement/Prospectus and familiarize yourself with
Kroll-O'Gara by reading the information provided elsewhere in this document
before making your decision on the merger.
THE SPECIAL MEETING OF SHAREHOLDERS (PAGE 24)
We will hold a Special Meeting of Background America shareholders at
, Nashville, Tennessee, at local time, on
, 1999. At this meeting, we will ask you:
1. To approve the merger, and
2. To act on any other matters that properly may be presented for a vote.
Currently, we know of no other matters to be presented at the meeting.
RECORD DATE; VOTING POWER (PAGE 24)
You may vote at the Special Meeting if you owned Background America common or
preferred shares as of the close of business on , 1999. You will
have one vote for each share of Background America common stock and one vote for
each share of Background America preferred stock which you own on that date.
VOTE REQUIRED AND VOTING AGREEMENT (PAGE 25)
To approve the merger, Background America shareholders holding a majority of the
outstanding shares of Background America common and preferred stock, voting
together, must vote in favor of the merger agreement. Additionally, the merger
must be approved by the holders of at least two-thirds (66 2/3%) of the
outstanding shares of Background America preferred stock, voting as a separate
class.
Three of the holders of Background America common stock, who together own 83.2%
of the common stock, and six of the holders of Background America preferred
stock, who together own 85.9% of the preferred stock, have entered into an
agreement committing themselves to vote FOR the merger. These percentages
include shares held by Michael D. Shmerling, Background America's Chief
Executive Officer, who owns approximately 51% of the common and 16% of the
preferred stock, and shares held
3
<PAGE> 9
by Alan Wernick, a director, who owns approximately 4% of the common and 1% of
the preferred stock. In addition, based upon the unanimous recommendation of the
Board, we expect that Background America's other executive officers and
directors, who own approximately 4% of the common and 1% of the preferred stock,
also will vote all of their shares to approve the merger agreement. Accordingly,
we expect that the merger will be approved regardless of the vote by other
shareholders.
EXCHANGE OF CERTIFICATES (PAGE 35)
If the merger is completed, your shares of Background America stock will be
converted into shares of Kroll-O'Gara common stock and you will need to exchange
your Background America stock certificates for Kroll-O'Gara stock certificates.
If we complete the merger, we will send you detailed instructions on how to
exchange your stock certificates. Please do not send us any stock certificates
until you receive these instructions.
WHAT WE NEED TO DO TO COMPLETE THE MERGER (PAGE 38)
The completion of the merger depends on a number of conditions being met. These
conditions are set forth in the merger agreement. Some of the conditions are:
1. Background America shareholders must approve the merger agreement;
2. there must be no governmental order blocking completion of the merger, and
no governmental proceeding trying to block the merger;
3. Kroll-O'Gara must receive a letter from its independent public accountants
stating that the merger will qualify for "pooling of interests" accounting
treatment and Background America must receive a letter from its accountants
as to its poolability;
4. Holders of no more than 7.5% of the outstanding stock of Background America
may exercise dissenters' rights; and
5. Holders of Background America's outstanding options and warrants must
consent to amending these options and warrants so that, unless previously
exercised, they survive the merger, are exercisable for Kroll-O'Gara common
stock and otherwise do not interfere with Kroll-O'Gara's ability to account
for the merger as a "pooling of interests."
Unless prohibited by law, either Kroll-O'Gara or Background America could waive
a condition to the merger that has not been satisfied and complete the merger
anyway.
We cannot be certain whether or when any of these conditions will be satisfied,
or waived if permissible. We cannot be certain that we will complete the merger.
TERMINATION OF THE MERGER AGREEMENT (PAGE 39)
The two companies can agree at any time to terminate the merger agreement
without completing the merger, even if the Background America shareholders
already have approved the merger.
Either company also can terminate the merger agreement if:
1. the merger is not completed by June 30, 1999; or
2. the other company materially violates any of its representations, warranties
or obligations under the merger agreement.
FEDERAL INCOME TAX CONSEQUENCES (PAGE 29)
We expect that neither of the two companies nor the shareholders of Background
America will recognize any gain or loss for U.S. federal income tax purposes in
the merger, except in connection with any cash that Background America
shareholders receive instead of fractional shares. This tax treatment will not
apply, however, to any Background America shareholder who exercises dissenters'
rights under Tennessee law. Additionally, the exercise of options and warrants
may result in taxable income.
4
<PAGE> 10
Determining the actual tax consequences of the merger to you as a taxpayer can
be complicated. Your tax treatment will depend on your specific situation. You
should consult your tax advisor for a full understanding of the tax consequences
to you of the merger.
ACCOUNTING TREATMENT (PAGE 29)
We expect the merger to qualify as a "pooling of interests," which means that,
for accounting and financial reporting purposes, Kroll-O'Gara will treat
Background America as if it had always been a part of Kroll-O'Gara.
MANAGEMENT OF KROLL-O'GARA AFTER THE MERGER (PAGE 27)
The current directors and executive officers of Kroll-O'Gara will remain
unchanged after the merger.
INTERESTS OF BACKGROUND AMERICA'S DIRECTORS AND OFFICERS IN THE MERGER (PAGE 27)
Some directors and officers of Background America have interests in the merger
that are, or may be, different from your interests. Background America has nine
directors and seven officers (one of whom also is a director). Four of the
directors and six of the officers hold options to purchase shares of Background
America common stock which, if not exercised at the time of the merger, will be
converted into options to purchase Kroll-O'Gara common stock. One of these
directors also holds warrants to purchase Background America common stock which
will be converted into options to purchase Kroll-O'Gara common stock.
Four of Background America's officers have entered into employment agreements
with Background America which will be effective at the time of the merger, and
three of these officers also will receive "stay" bonuses from Kroll-O'Gara if
the merger is completed and they stay in the employ of Kroll-O'Gara. In addition
some officers and directors own or have interests in companies that may have
business dealings with Background America after the merger.
The Board of Directors of Background America was aware of these interests and
took them into account in approving the merger agreement.
DIFFERENCES IN RIGHTS OF SHAREHOLDERS (PAGE 111)
Tennessee law and Background America's Charter and Bylaws currently govern your
rights as a shareholder of Background America. Kroll-O'Gara is an Ohio
corporation and, if the merger is completed, Ohio law and Kroll-O'Gara's
Articles of Incorporation and Code of Regulations will govern your shareholder
rights.
Additionally, if you own Background America preferred stock, you have certain
preferential rights as a preferred stock owner which you will lose as a holder
of Kroll-O'Gara common stock.
DISSENTERS' RIGHTS (PAGE 31)
Tennessee law permits holders of Background America common and preferred stock
to dissent from the merger and to have the fair value of their stock appraised
by a court and paid to them in cash. To do this, holders of dissenting shares
must follow required procedures, including filing notices with us and either
abstaining or voting against the merger. If you dissent from the merger and
follow the required procedures, your shares of Background America common and/or
preferred stock will not become shares of Kroll-O'Gara common stock. Instead,
your only right will be to receive the appraised value of your shares in cash.
We have attached the applicable provisions of Tennessee law related to
dissenters' rights to this Proxy Statement/Prospectus as Appendix B.
5
<PAGE> 11
SUMMARY HISTORICAL, SUPPLEMENTAL AND UNAUDITED PRO FORMA
COMBINED CONDENSED FINANCIAL INFORMATION
INFORMATION PRESENTED
The following pages contain tables which present, either singly or in
combination, three types of selected financial information for Kroll-O'Gara and
Background America.
(1) Historical financial information -- This is consolidated financial
information which has not been restated or adjusted to give effect to
transactions which occurred after it was prepared or to transactions which are
proposed.
Selected historical financial information for Kroll-O'Gara appears on page
9, and selected historical financial information for Background America appears
on page 10.
Except as discussed below, the selected historical financial information
for Kroll-O'Gara and Background America is derived from their full audited and
unaudited historical financial statements and notes which begin on pages F-7 and
F-50, respectively, of the Financial Statements section of this Proxy
Statement/Prospectus. You should read the selected historical financial
information of each company together with its full historical financial
statements and their notes.
The selected historical and supplemental (described below) financial
information for Kroll-O'Gara includes data as of December 31, 1993, 1994 and
1995 and September 30, 1997 and 1998, as well as data for the years ended
December 31, 1993 and 1994 and the nine months ended September 30, 1998, that is
derived from unaudited consolidated financial statements of Kroll-O'Gara. Some
of these unaudited financial statements are not included in this document.
The selected historical financial information for Background America
includes data as of December 31, 1995 and September 30, 1998, as well as data
for the period ended December 31, 1995 and the nine months ended September 30,
1997 and 1998, that is derived from unaudited consolidated financial statements
of Background America. Some of these unaudited financial statements are not
included in this document.
You also should read Kroll-O'Gara's selected historical financial
information together with Kroll-O'Gara's "Management's Discussion and Analysis
of Financial Condition and Results of Operations," beginning on page 41, and
Background America's selected historical financial information together with its
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," beginning on page .
(2) Supplemental financial information -- This is restated historical
consolidated financial information for Kroll-O'Gara. On December 7, 1998
Kroll-O'Gara acquired Laboratory Specialists of America, Inc. and on December
31, 1998 it acquired both Securify Inc. and Schiff & Associates, Inc. In each
case, the merger was accounted for as a pooling of interests. As a result,
Kroll-O'Gara was required to restate its historical financial statements and to
present all prior period financial information as if these acquired companies
always had been a part of Kroll-O'Gara.
Selected supplemental financial information for Kroll-O'Gara appears on
pages 13 and 14. This data is derived (except as discussed under "Historical
financial information" above) from the full audited and unaudited consolidated
supplemental financial statements and notes of Kroll-O'Gara which begin on page
F-90 of the Financial Statements section of this Proxy Statement/Prospectus. You
should read the selected supplemental financial information of Kroll-O'Gara
together with its full supplemental financial statements and their notes and
together with Kroll-O'Gara's "Supplemental Management's Discussion and Analysis
of Financial Condition and Results of Operations" beginning on page 57.
6
<PAGE> 12
Unlike unaudited pro forma data (discussed below), supplemental financial
information is audited to the extent and for the periods required by law and
accounting rules.
(3) Pro forma financial information -- This is unaudited data which assumes
something happened at an earlier time, although the event may not be reflected
in the company's historical or supplemental financial statements. A variety of
pro forma information is presented in the tables which follow:
<TABLE>
<S> <C> <C>
Page 11 -- Pro forma selected financial information for Kroll-O'Gara
which is based on Kroll-O'Gara's historical financial
statements and assumes Background America was merged with
Kroll-O'Gara throughout the time periods or at the times
presented. See also the related full pro forma financial
statements beginning on page F-142.
Page 12 -- Pro forma selected financial information for Kroll-O'Gara
which is based on Kroll-O'Gara's historical financial
statements and assumes that both Background America and
Kizorek, Inc. were merged with Kroll-O'Gara throughout the
time periods presented. Kizorek was acquired by Kroll-O'Gara
on September 1, 1998, in a transaction accounted for as a
purchase, effective (for accounting purposes) on July 1,
1998. Under purchase accounting, the results of operations
of Kizorek actually are included in Kroll-O'Gara's
historical and supplemental financial statements only from
July 1, 1998 forward. See also the related full pro forma
financial statements beginning on page F-149.
Page 15 -- Pro forma selected financial information for Kroll-O'Gara
which is based on Kroll-O'Gara's supplemental financial
statements and assumes Background America was merged with
Kroll-O'Gara throughout the time periods or at the times
presented. See also the related full pro forma financial
statements beginning on page F-153.
Page 16 -- Pro forma selected financial information for Kroll-O'Gara
which is based on Kroll-O'Gara's supplemental financial
statements and assumes that both Background America and
Kizorek were merged with Kroll-O'Gara throughout the periods
presented. See also the related full pro forma financial
statements beginning on page F-161.
</TABLE>
You need to keep a number of things in mind when you read the pro forma
information in this document:
- Pro forma financial information does not include transaction fees and
costs incident to an acquisition, nor does it include post-merger costs
associated with integrating the operations of the acquired company or
companies with Kroll-O'Gara's operations.
- Kroll-O'Gara currently expects to incur nonrecurring charges of
approximately $2.0 million, net of tax benefits, for these purposes in
the acquisition of Background America. Kroll-O'Gara also currently
expects to incur similar nonrecurring charges of approximately $3.2
million, net of tax benefits, related to the recently consummated
acquisitions of Laboratory Specialists of America, Inc., Securify Inc.
and Schiff & Associates, Inc.
- Pro forma information does not include discontinued operations,
extraordinary items or the cumulative effects of accounting changes. The
basic and diluted per share impact of these items, if and when
applicable, are disclosed in the related full pro forma financial
statements beginning on page F-141.
- Pro forma data does not reflect any reduced operating expenses or other
financial benefits which may be achieved after a merger.
- Pro forma data does not show how Kroll-O'Gara actually would have
performed had an acquisition taken place at the beginning of the time
periods presented.
7
<PAGE> 13
- As a result, although -- under one set of assumptions -- the pro forma
data in this Proxy Statement/Prospectus may illustrate some of the
financial characteristics of Kroll-O'Gara after the acquisition of
Background America, it does not predict or suggest future results.
OTHER RELEVANT INFORMATION
In reviewing the financial information which follows, you also should know,
and bear in mind, the following:
(a) Kroll-O'Gara completed acquisitions using the purchase method of
accounting with aggregate purchase prices totalling approximately $23.2
million in 1997 and approximately $24.4 million during the first nine
months of 1998. As a result, financial results from period-to-period
are not comparable.
(b) Kroll-O'Gara's full year 1997 results also were impacted significantly
by approximately $7.2 million of costs relating to the merger on
December 1, 1997 with Kroll Holdings, Inc., which was accounted for as
a pooling of interests.
(c) Prior to October 28, 1996, a number of the entities that now are a part
of Kroll-O'Gara were not subject to federal and state income taxes.
(d) The pro forma basic and diluted earnings per share information
presented assumes that no shares escrowed in the Background America
merger ultimately are returned to Kroll-O'Gara and cancelled.
8
<PAGE> 14
KROLL-O'GARA SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................. $77,215 $86,784 $85,841 $153,661 $190,413 $136,390 $178,943
Cost of sales......................... 45,664 56,189 62,114 111,459 131,644 92,919 120,100
------- ------- ------- -------- -------- -------- --------
Gross profit........................ 31,551 30,595 23,727 42,202 58,769 43,471 58,843
Selling, general and administrative
expenses, including amortization.... 25,487 29,953 28,364 33,703 42,593 29,793 36,860
Merger related costs.................. -- -- -- -- 7,205 -- --
------- ------- ------- -------- -------- -------- --------
Operating income (loss)............... 6,064 642 (4,637) 8,499 8,971 13,678 21,983
Interest expense...................... (2,692) (2,598) (2,813) (3,140) (4,806) (3,387) (3,322)
Other income (expense), net........... 434 466 (384) 336 (393) 33 540
------- ------- ------- -------- -------- -------- --------
Income (loss) before minority
interest, provision (benefit) for
income taxes, extraordinary item
and cumulative effect of change in
accounting principle.............. 3,806 (1,490) (7,834) 5,695 3,772 10,324 19,201
Minority interest..................... -- -- -- -- (156) (118) --
------- ------- ------- -------- -------- -------- --------
Income (loss) before provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle......................... 3,806 (1,490) (7,834) 5,695 3,616 10,206 19,201
Provision (benefit) for income
taxes............................... 7,070 (1,751) (1,298) (162) 2,352 4,035 7,641
------- ------- ------- -------- -------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle.... (3,264) 261 (6,536) 5,857 1,264 6,171 11,560
Extraordinary item, net of tax
benefit............................. -- -- -- -- (194) (194) --
------- ------- ------- -------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle......................... (3,264) 261 (6,536) 5,857 1,070 5,977 11,560
Cumulative effect of change in
accounting principle, net of tax
benefit............................. (295) -- -- -- (360) -- --
------- ------- ------- -------- -------- -------- --------
Net income (loss)..................... $(3,559) $ 261 $(6,536) $ 5,857 $ 710 $ 5,977 $ 11,560
======= ======= ======= ======== ======== ======== ========
Basic earnings (loss) per share....... $ (0.47) $ 0.03 $ (0.65) $ 0.55 $ 0.05 $ 0.46 $ 0.74
======= ======= ======= ======== ======== ======== ========
Basic weighted average shares
outstanding......................... 7,554 8,510 10,021 10,742 13,061 13,058 15,580
======= ======= ======= ======== ======== ======== ========
Diluted earnings (loss) per share..... $ (0.47) $ (0.02) $ (0.65) $ 0.51 $ 0.05 $ 0.42 $ 0.72
======= ======= ======= ======== ======== ======== ========
Diluted weighted average shares
outstanding......................... 7,554 8,969 10,021 11,160 13,721 13,825 15,955
======= ======= ======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------------------------------ -------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......................... $23,920 $14,511 $ 4,087 $10,600 $ 31,526 $ 37,321 $ 88,521
Net property, plant and equipment....... 7,204 7,012 6,876 8,563 14,612 13,896 18,389
Total assets............................ 59,551 63,902 66,767 81,234 133,971 130,082 218,262
Long-term debt, including current
portion............................... 23,374 27,566 30,915 17,479 50,065 54,485 40,507
Shareholders' equity.................... 10,339 11,076 4,657 16,867 27,954 25,921 118,924
</TABLE>
9
<PAGE> 15
BACKGROUND AMERICA SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
---- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues..................................... $ -- $ 1,776 $ 4,221 $ 3,076 $ 5,028
Cost of sales................................ -- 1,624 3,448 2,555 3,360
---- ------- ------- ------- -------
Gross profit............................... -- 152 773 521 1,668
Selling, general and administrative expenses,
including amortization..................... 76 1,237 2,178 1,568 2,469
---- ------- ------- ------- -------
Operating loss............................. (76) (1,085) (1,405) (1,047) (801)
Interest expense............................. -- (42) (84) (79) (9)
Interest income.............................. -- -- 93 52 76
Other income (expense), net.................. -- (2) 59 14 17
---- ------- ------- ------- -------
Net loss................................... $(76) $(1,129) $(1,337) $(1,060) $ (717)
==== ======= ======= ======= =======
AS OF SEPTEMBER
AS OF DECEMBER 31, 30,
-------------------------- ------------------
1995 1996 1997 1997 1998
---- ------- ------- ------- -------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital.............................. $(86) $(1,365) $ 3,051 $ 3,332 $ 2,023
Property, plant and equipment, net........... 20 343 629 608 747
Total assets................................. 61 1,675 5,202 5,517 4,801
Long-term debt, including current portion.... 70 1,310 152 152 132
Shareholders' deficit........................ (66) (243) (1,575) (1,298) (1,981)
</TABLE>
10
<PAGE> 16
KROLL-O'GARA AND BACKGROUND AMERICA
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.................................... $85,841 $155,437 $194,634 $139,466 $183,971
Cost of sales................................ 62,114 113,083 135,092 95,474 123,460
------- -------- -------- -------- --------
Gross profit............................... 23,727 42,354 59,542 43,992 60,511
Selling, general and administrative expenses,
including amortization..................... 28,440 34,940 44,771 31,361 39,329
Merger related costs......................... -- -- 7,205 -- --
------- -------- -------- -------- --------
Operating income (loss).................... (4,713) 7,414 7,566 12,631 21,182
Interest expense............................. (2,813) (3,182) (4,890) (3,466) (3,331)
Interest income.............................. -- -- 93 311 835
Other income (expense), net.................. (384) 334 (334) (212) (202)
------- -------- -------- -------- --------
Income (loss) before minority interest,
provision for income taxes,
extraordinary item and cumulative effect
of change in accounting principle....... (7,910) 4,566 2,435 9,264 18,484
Minority interest............................ -- -- (156) (118) --
------- -------- -------- -------- --------
Income (loss) before provision for income
taxes, extraordinary item and cumulative
effect of change in accounting
principle............................... (7,910) 4,566 2,279 9,146 18,484
Provision (benefit) for income taxes......... (1,298) (162) 2,352 4,035 7,641
------- -------- -------- -------- --------
Income (loss) from continuing operations... $(6,612) $ 4,728 $ (73) $ 5,111 $ 10,843
======= ======== ======== ======== ========
Basic earnings (loss) per share from
continuing operations...................... $ (0.66) $ 0.42 $ (0.01) $ 0.37 $ 0.66
======= ======== ======== ======== ========
Basic weighted average shares outstanding.... 10,050 11,247 13,805 13,755 16,478
======= ======== ======== ======== ========
Diluted earnings (loss) per share from
continuing operations...................... $ (0.66) $ 0.39 $ (0.01) $ 0.34 $ 0.64
======= ======== ======== ======== ========
Diluted weighted average shares
outstanding................................ 10,050 11,670 13,805 14,533 16,895
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 90,543
Net property, plant and equipment........................... 19,136
Total assets................................................ 223,063
Long-term debt, including current portion................... 40,639
Shareholders' equity........................................ 122,911
</TABLE>
11
<PAGE> 17
KROLL-O'GARA AND BACKGROUND AMERICA
SELECTED UNAUDITED PRO FORMA COMBINED CONDENSED HISTORICAL FINANCIAL INFORMATION
INCLUDING KIZOREK, INC.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 SEPTEMBER 30, 1998
----------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................. $209,110 $190,356
Cost of sales............................................. 143,205 127,371
-------- --------
Gross profit............................................ 65,905 62,985
Selling, general and administrative expenses, including
amortization............................................ 50,222 41,909
Merger related costs...................................... 7,205 --
-------- --------
Operating income (loss)................................. 8,478 21,076
Interest expense.......................................... (4,979) (3,366)
Interest income........................................... 93 835
Other income (expense), net............................... (334) (202)
-------- --------
Income before minority interest, provision for income
taxes, extraordinary item and cumulative effect of
change in accounting principle....................... 3,258 18,343
Minority interest......................................... (156) --
-------- --------
Income before provision for income taxes, extraordinary
item and cumulative effect of change in accounting
principle............................................ 3,102 18,343
Provision for income taxes................................ 2,681 7,584
-------- --------
Income from continuing operations....................... $ 421 $ 10,759
======== ========
Basic earnings per share from continuing operations....... $ 0.03 $ 0.65
======== ========
Basic weighted average shares outstanding................. 14,157 16,478
======== ========
Diluted earnings per share from continuing operations..... $ 0.03 $ 0.64
======== ========
Diluted weighted average shares outstanding............... 14,834 16,895
======== ========
</TABLE>
12
<PAGE> 18
KROLL-O'GARA SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $81,187 $91,784 $94,998 $164,918 $206,103 $147,880 $194,562
Cost of sales.......................... 47,855 58,480 66,764 117,298 139,766 98,803 128,123
------- ------- ------- -------- -------- -------- --------
Gross profit......................... 33,332 33,304 28,234 47,620 66,337 49,077 66,439
Selling, general and administrative
expenses, including amortization..... 27,148 32,227 31,809 37,712 47,646 33,459 42,434
Merger related costs................... -- -- -- -- 7,205 -- --
Asset impairment....................... -- -- -- 125 -- -- --
------- ------- ------- -------- -------- -------- --------
Operating income (loss).............. 6,184 1,077 (3,575) 9,783 11,486 15,618 24,005
Interest expense....................... (2,744) (2,599) (2,897) (3,261) (5,092) (3,563) (3,512)
Other income (expense), net............ 439 533 18 386 (332) 72 797
------- ------- ------- -------- -------- -------- --------
Income (loss) from continuing
operations before minority
interest, provision (benefit) for
income taxes, extraordinary item
and cumulative effect of change in
accounting principle............... 3,879 (989) (6,454) 6,908 6,062 12,127 21,290
Minority interest...................... -- -- -- -- (156) (118) --
------- ------- ------- -------- -------- -------- --------
Income (loss) from continuing
operations before provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle.......................... 3,879 (989) (6,454) 6,908 5,906 12,009 21,290
Provision (benefit) for income taxes... 7,098 (1,540) (824) 365 3,305 4,809 8,652
------- ------- ------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary
item and cumulative effect of
change in accounting principle..... (3,219) 551 (5,630) 6,543 2,601 7,200 12,638
Loss from operations and disposal of
discontinued clinical business,
net of tax........................... -- -- -- (1,274) -- -- --
------- ------- ------- -------- -------- -------- --------
Income (loss) before extraordinary
item and cumulative effect of
change in accounting principle..... (3,219) 551 (5,630) 5,268 2,601 7,200 12,638
Extraordinary item, net of tax
benefit.............................. -- -- -- -- (194) (194) --
------- ------- ------- -------- -------- -------- --------
Income (loss) before cumulative
effect of change in accounting
principle.......................... (3,219) 551 (5,630) 5,268 2,407 7,006 12,638
Cumulative effect of change in
accounting principle, net of tax
benefit.............................. (295) -- -- -- (360) -- --
------- ------- ------- -------- -------- -------- --------
Net income (loss).................... (3,514) 551 (5,630) 5,268 2,047 7,006 12,638
Dividends on preferred stock........... -- -- 13 -- -- -- --
------- ------- ------- -------- -------- -------- --------
Net income (loss) available to common
shareholders....................... $(3,514) $ 551 $(5,643) $ 5,268 $ 2,047 $ 7,006 $ 12,638
======= ======= ======= ======== ======== ======== ========
Basic earnings (loss) per share from
continuing operations................ $ (0.45) $ 0.06 $ (0.52) $ 0.45 $ 0.15 $ 0.50 $ 0.71
======= ======= ======= ======== ======== ======== ========
Basic weighted average shares
outstanding.......................... 7,880 8,926 10,884 11,607 14,007 13,929 17,845
======= ======= ======= ======== ======== ======== ========
Diluted earnings (loss) per share from
continuing operations................ $ (0.45) $ 0.01 $ (0.52) $ 0.42 $ 0.14 $ 0.46 $ 0.69
======= ======= ======= ======== ======== ======== ========
Diluted weighted average shares
outstanding.......................... 7,880 9,384 10,884 12,161 14,799 14,808 18,371
======= ======= ======= ======== ======== ======== ========
</TABLE>
13
<PAGE> 19
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31, SEPTEMBER 30,
------------------------------------------------ ------------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- -------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................................ $24,095 $17,396 $ 7,627 $11,991 $ 35,278 $38,526 $ 97,148
Net property, plant and equipment.............. 7,922 7,752 8,305 10,763 17,560 16,870 21,714
Total assets................................... 62,709 70,907 75,440 92,064 150,484 144,825 243,873
Long-term debt, including current portion...... 25,767 28,010 31,953 27,939 54,239 58,246 42,775
Shareholders' equity........................... 12,771 16,926 11,471 23,117 38,467 33,780 138,319
</TABLE>
14
<PAGE> 20
KROLL-O'GARA AND BACKGROUND AMERICA
SELECTED SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1995 1996 1997 1997 1998
------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................. $94,998 $166,694 $210,324 $150,956 $199,590
Cost of sales............................. 66,764 118,922 143,214 101,358 131,483
------- -------- -------- -------- --------
Gross profit............................ 28,234 47,772 67,110 49,598 68,107
Selling, general and administrative
expenses, including amortization........ 31,885 38,949 49,824 35,027 44,903
Merger related costs...................... -- -- 7,205 -- --
Asset impairment.......................... -- 125 -- -- --
------- -------- -------- -------- --------
Operating income (loss)................. (3,651) 8,698 10,081 14,571 23,204
Interest expense.......................... (2,897) (3,303) (5,176) (3,642) (3,521)
Interest income........................... 127 41 172 349 1,006
Other income (expense), net............... (109) 343 (352) (211) (116)
------- -------- -------- -------- --------
Income (loss) from continuing operations
before minority interest, provision
(benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ (6,530) 5,779 4,725 11,067 20,573
Minority interest......................... -- -- (156) (118) --
------- -------- -------- -------- --------
Income (loss) from continuing operations
before provision (benefit) for income
taxes, extraordinary item and
cumulative effect of change in
accounting principle................. (6,530) 5,779 4,569 10,949 20,573
Provision (benefit) for income taxes...... (824) 365 3,305 4,809 8,652
------- -------- -------- -------- --------
Income (loss) from continuing operations
before extraordinary item and
cumulative effect of change in
accounting principle................. (5,706) 5,414 1,264 6,140 11,921
Dividends on preferred stock.............. 13 -- -- -- --
------- -------- -------- -------- --------
Income (loss) from continuing
operations........................... $(5,719) $ 5,414 $ 1,264 $ 6,140 $ 11,921
======= ======== ======== ======== ========
Basic earnings (loss) per share from
continuing operations................... $ (0.52) $ 0.45 $ 0.09 $ 0.42 $ 0.64
======= ======== ======== ======== ========
Basic weighted average shares
outstanding............................. 10,913 12,112 14,751 14,626 18,743
======= ======== ======== ======== ========
Diluted earnings (loss) per share from
continuing operations................... $ (0.52) $ 0.41 $ 0.08 $ 0.38 $ 0.62
======= ======== ======== ======== ========
Diluted weighted average shares
outstanding............................. 10,913 12,671 15,560 15,516 19,311
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30, 1998,
-------------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 99,170
Net property, plant and equipment........................... 22,461
Total assets................................................ 248,674
Long-term debt, including current portion................... 43,698
Shareholders' equity........................................ 142,306
</TABLE>
15
<PAGE> 21
KROLL-O'GARA AND BACKGROUND AMERICA
SELECTED SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
INFORMATION INCLUDING KIZOREK, INC.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
1997 SEPTEMBER 30, 1998
------------- -------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................... $224,800 $205,975
Cost of sales............................................... 151,327 135,394
-------- --------
Gross profit.............................................. 73,473 70,581
Selling, general and administrative expenses, including
amortization.............................................. 55,275 47,483
Merger related costs........................................ 7,205 --
-------- --------
Operating income (loss)................................... 10,993 23,098
Interest expense............................................ (5,265) (3,556)
Interest income............................................. 172 1,006
Other income (expense), net................................. (352) (116)
-------- --------
Income before minority interest, provision for income
taxes, extraordinary item and cumulative effect of
change in accounting principle......................... 5,548 20,432
Minority interest........................................... (156) --
-------- --------
Income before provision for income taxes, extraordinary
item and cumulative effect of change in accounting
principle.............................................. 5,392 20,432
Provision for income taxes.................................. 3,634 8,595
-------- --------
Income from continuing operations......................... $ 1,758 $ 11,837
======== ========
Basic earnings per share from continuing operations......... $ 0.12 $ 0.63
======== ========
Basic weighted average shares outstanding................... 15,103 18,743
======== ========
Diluted earnings per share from continuing operations....... $ 0.11 $ 0.61
======== ========
Diluted weighted average shares outstanding................. 15,912 19,311
======== ========
</TABLE>
16
<PAGE> 22
UNAUDITED COMPARATIVE PER SHARE INFORMATION
The table below shows comparative earnings per share and shareholders'
equity (book value) per share for Kroll-O'Gara and Background America on
historical, supplemental (for Kroll-O'Gara) and pro forma bases, as each is
identified. The historical data is derived from the historical financial
statements of Kroll-O'Gara and Background America. Because the merger will be
accounted for as a pooling of interests, the pro forma data assumes that
Background America has been merged with Kroll-O'Gara throughout the periods
shown. We computed the pro forma equivalent for the merger data and the
supplemental pro forma equivalent for the merger data by multiplying the pro
forma combined for the merger amounts and supplemental pro forma combined for
the merger amounts, respectively, by an exchange ratio of 0.2689628 of a share
of Kroll-O'Gara common stock for each share of Background America common and
preferred stock. Unaudited comparative per share information does not include
discontinued operations, extraordinary items or the cumulative effects of
accounting changes. The basic and diluted per share impact of these items, if
and when applicable, are disclosed in the related full pro forma financial
statements beginning on page F-141.
Unaudited comparative per share information does not include transaction
fees and costs incident to an acquisition, nor does it include post-merger costs
associated with integrating the operations of the acquired company or companies
with Kroll-O'Gara's operations. Kroll-O'Gara currently expects to incur
nonrecurring charges of approximately $2.0 million, net of tax benefits, for
these purposes in the acquisition of Background America. Kroll-O'Gara also
currently expects to incur similar nonrecurring charges of approximately $3.2
million, net of tax benefits, related to the recently consummated acquisitions
of Laboratory Specialists of America, Inc., Securify Inc. and Schiff &
Associates, Inc.
The calculation of shareholders' equity per common share assuming full
dilution includes the (1) proceeds from the assumed exercise of stock options
and warrants outstanding at the end of each period as a component of
shareholders' equity, and (2) stock options and warrants outstanding at the end
of each period as a component of common shares outstanding.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS
-------------------------- ENDED
1995 1996 1997 SEPTEMBER 30, 1998
------ ------ ------ ------------------
<S> <C> <C> <C> <C>
Earnings (loss) per common share from continuing
operations (basic)
Kroll-O'Gara:
Historical..................................... $(0.65) $ 0.55 $ 0.10 $ 0.74
Pro forma combined for the merger.............. (0.66) 0.42 (0.01) 0.66
Pro forma combined for the merger and for
Kizorek..................................... n/a n/a 0.03 0.65
Supplemental................................... (0.52) 0.56 0.19 0.71
Supplemental pro forma combined for the
merger...................................... (0.52) 0.45 0.09 0.64
Supplemental pro forma combined for the merger
and for Kizorek............................. n/a n/a 0.12 0.63
Background America:
Historical, assuming conversion of preferred
shares...................................... (0.69) (0.60) (0.48) (0.21)
Pro forma equivalent for the merger............ (0.18) 0.11 (0.00) 0.18
Supplemental pro forma equivalent for the
merger...................................... (0.14) 0.12 0.02 0.17
</TABLE>
17
<PAGE> 23
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS
-------------------------- ENDED
1995 1996 1997 SEPTEMBER 30, 1998
------ ------ ------ ------------------
<S> <C> <C> <C> <C>
Earnings (loss) per common share from continuing
operations (diluted)
Kroll-O'Gara:
Historical..................................... $(0.65) $ 0.51 $ 0.09 $ 0.72
Pro forma combined for the merger.............. (0.66) 0.39 (0.01) 0.64
Pro forma combined for the merger and for
Kizorek..................................... n/a n/a 0.03 0.64
Supplemental................................... (0.52) 0.52 0.18 0.69
Supplemental pro forma combined for the
merger...................................... (0.52) 0.41 (0.08) 0.62
Supplemental pro forma combined for the merger
and Kizorek................................. n/a n/a 0.11 0.61
Background America:
Historical, assuming conversion of preferred
shares...................................... (0.69) (0.60) (0.48) (0.21)
Pro forma equivalent for the merger............ (0.18) 0.11 (0.00) 0.17
Supplemental pro forma equivalent for the
merger...................................... (0.14) 0.11 0.02 0.17
</TABLE>
<TABLE>
<CAPTION>
AT AT
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
<S> <C> <C>
Shareholders' equity (deficit) per common share (end of
period)
Kroll-O'Gara:
Historical................................................ $2.14 $7.63
Pro forma combined for the merger......................... 2.34 7.46
Pro forma combined for the merger and for Kizorek......... 2.87 7.46
Supplemental.............................................. 2.75 7.75
Supplemental pro forma combined for the merger............ 2.91 7.59
Supplemental pro forma combined for the merger and for
Kizorek................................................ 3.38 7.59
Background America:
Historical................................................ (0.73) (0.90)
Pro forma equivalent for the merger....................... 0.63 2.01
Supplemental pro forma equivalent for the merger.......... 0.78 2.04
Shareholders' equity (deficit) per common share assuming
full dilution
Kroll-O'Gara:
Historical................................................ $2.17 $7.59
Pro forma combined for the merger......................... 2.36 7.41
Pro forma combined for the merger and for Kizorek......... 2.86 7.41
Supplemental.............................................. 2.73 7.65
Supplemental pro forma combined for the merger............ 2.87 7.49
Supplemental pro forma combined for the merger and for
Kizorek................................................ 3.33 7.49
Background America:
Historical................................................ (0.73) (0.90)
Pro forma equivalent for the merger....................... 0.64 1.99
Supplemental pro forma equivalent for the merger.......... 0.77 2.01
</TABLE>
18
<PAGE> 24
Neither Kroll-O'Gara nor Background America has paid any dividends on its common
stock, and no dividends accrue or are payable on Background America's preferred
stock until June 2000. Kroll-O'Gara does not anticipate paying any dividends on
the Kroll-O'Gara common stock in the foreseeable future. Additionally, the terms
of Kroll-O'Gara's Senior Notes due 2004 and of its credit agreement with its
bank require maintenance of certain financial ratios which may limit the funds
available for cash dividends. See "Market Prices and Dividends."
19
<PAGE> 25
RISK FACTORS
In addition to the other information in this Proxy Statement/Prospectus,
you should carefully consider the Risk Factors discussed below in evaluating the
merger of Background America with Kroll-O'Gara.
Some of the information in this Proxy Statement/Prospectus is
forward-looking. Forward-looking statements can be identified by the use of
language such as "may," "will," "expect," "anticipate," "estimate," "continue"
or other similar words. These statements discuss future expectations which are
subject to risks and uncertainties. When considering such forwarding looking
statements, you should keep in mind the risk factors and other cautionary
statements in this Proxy Statement/Prospectus. Actual results could differ
materially from those currently anticipated due to a number of factors,
including those identified in this section and elsewhere in this document.
INABILITY TO MANAGE PLANNED GROWTH
Kroll-O'Gara plans to develop further its existing lines of business in
current markets and to expand into new geographic markets. To do this, it will
need to enhance the capabilities of its operational and financial systems and
will require additional employees, management and operational and financial
resources. If Kroll-O'Gara cannot do these things when necessary, it could be
adversely affected.
Kroll-O'Gara also plans to grow through the acquisition of additional
companies that will complement its existing operations or provide it with an
entry into markets it does not currently serve. Since January 1, 1997,
Kroll-O'Gara has made multiple acquisitions. It currently intends to continue
making acquisitions for the foreseeable future. When companies are acquired,
Kroll-O'Gara may not be able to integrate or manage these businesses so as to
produce returns that justify the investment. Additionally, issues relating to
new acquisitions may divert the attention of Kroll-O'Gara's management from
existing operations.
The expansion of Kroll-O'Gara's business eventually will require additional
capital. Kroll-O'Gara may not be able to generate adequate cash from operations
or obtain adequate financing from external sources for this purpose. The
issuance of additional Kroll-O'Gara common stock to raise capital or to finance
acquisitions may result in dilution to holders of Kroll-O'Gara common stock. Any
debt financing may increase significantly Kroll-O'Gara's leverage and may
involve restrictive covenants which limit Kroll-O'Gara's operations. Future
acquisitions by Kroll-O'Gara also may require approval under Kroll-O'Gara's
credit facility. See "The Kroll-O'Gara Company -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
COMPETITION BY COMPANIES WITH GREATER RESOURCES
There are a large number of companies, both public and private, that
provide products or services similar to those offered by Kroll-O'Gara.
Kroll-O'Gara also may encounter competition from future industry entrants. Some
of Kroll-O'Gara's current competitors have, and new competitors may have,
substantially greater financial and other resources than Kroll-O'Gara and may be
more resistant to pricing pressures. A number also have long established
relationships with their clients. For example, some accounting firms and other
large security product and service providers have indicated an interest in
expanding their product offerings to certain of the investigative and consulting
services provided by Kroll-O'Gara. These companies could be formidable
competitors if they elect to devote the necessary resources to businesses which
are competitive with Kroll-O'Gara. See "The Kroll-O'Gara Company --
Business -- Competition."
20
<PAGE> 26
LOSS OR REDUCTION OF U.S. MILITARY CONTRACTS
U.S. Military contracts account for a significant portion of Kroll-O'Gara's
business, representing 17%, 36% and 23% of net sales for 1995, 1996 and 1997,
respectively. The U.S. Military funds these contracts in annual increments, and
the contracts require subsequent authorization and appropriation which may not
occur or which may provide less than the total amount of the contract.
Kroll-O'Gara may not receive future contracts and the size of any contracts that
are received may vary. Fluctuations in spending by the U.S. Government for
national defense could adversely affect Kroll-O'Gara's ability to receive future
contracts. Also, the U.S. Government generally may cancel its contracts
unilaterally, at its convenience. The loss of, or a significant reduction in,
this business would have a material adverse effect on Kroll-O'Gara. See "The
Kroll-O'Gara Company -- Business -- U.S. Government Contracts."
DEPENDENCE OF SECURITY PRODUCTS AND SERVICES GROUP ON CERTAIN SINGLE AND
PRIMARY SOURCE SUPPLIERS
Kroll-O'Gara is the prime contractor to the U.S. Military for the supply of
armoring and blast protection for High Mobility Multi-Purpose Wheeled Vehicles,
commonly known as HMMWVs. HMMWVs armored by Kroll-O'Gara are manufactured by AM
General Corporation under separate U.S. Military contracts. Should deliveries of
HMMWVs to Kroll-O'Gara be significantly interrupted, there could be a material
adverse effect on Kroll-O'Gara.
In 1997, Kroll-O'Gara obtained approximately 69% of the glass used in
armoring its vehicles from Pilkington Aerospace Limited. If Kroll-O'Gara ever
needed to select one or more additional or substitute suppliers, delays could be
encountered in obtaining glass which meets Kroll-O'Gara's specifications.
ANTICIPATED IMPORTANCE OF NEW INFORMATION SECURITY GROUP
In late December 1998, Kroll-O'Gara established its Information Security
Group by acquiring Securify Inc. The Information Security Group provides
objective information security services to businesses and government agencies,
including network and system security review and repair, product assessment,
creation and implementation of security policies, architecture and design, and
training. Kroll-O'Gara expects this Group to make a significant contribution to
its business in the future. The Group's success will depend, in large part, on
its ability to remain fully up-to-date in a number of technical areas which are
changing and evolving rapidly. These include the nature of software and hardware
offerings by other parties and encryption technologies. Equally important is the
Group's need to attract and retain highly qualified people with experience and
expertise in these areas. Failure in either regard could have a material adverse
effect on the future prospects of the Information Security Group.
FLUCTUATIONS IN OPERATING RESULTS
Kroll-O'Gara derived approximately 23% of its net sales for 1997 from U.S.
Military contracts and an additional 5% from commercial contracts with U.S.
governmental agencies or foreign governments. Kroll-O'Gara reports these
contracts through its Security Products and Services Group. Because these
contracts generally are awarded on a periodic and/or sporadic basis, the
Security Products and Services Group has significant fluctuations from time to
time in its business. Period-to-period comparisons within a given year or
between years may not be meaningful or indicative of operating results over a
full year.
Kroll-O'Gara generally does not have long term contracts with clients in
its Investigations and Intelligence Group or its Information Security Group, and
the businesses of these Groups depend on obtaining many new projects each year,
most of which are of relatively short duration. As a result, Kroll-O'Gara's net
sales and net income from year-to-year and period-to-period in its
Investigations and
21
<PAGE> 27
Intelligence Group and its Information Security Group are not predictable.
Additionally, the level of corporate acquisitions and other financial
transactions affects the demand for Kroll-O'Gara's investigative and
intelligence services, and clients may reduce their reliance on certain of
Kroll-O'Gara's services during periods when there is a decline in these
activities. See "The Kroll-O'Gara Company -- Business -- Seasonality, Backlog
and Related Matters" and "The Kroll-O'Gara Company -- Management's Discussion
and Analysis of Financial Condition and Results of Operations."
RISK OF LOSSES ON FIXED PRICE CONTRACTS
Fixed price contracts are used for a substantial portion of Kroll-O'Gara's
projects, particularly in its Security Products and Services Group. Kroll-O'Gara
attempts to cover anticipated increases in labor, material and other costs in
the original prices of these contracts. However, due to unexpected events over
the life of a fixed-price contract, the results actually realized often will
vary from that originally expected. Depending on the size of a contract, these
variations from estimated contract performance could have a material adverse
effect on Kroll-O'Gara's results of operations for any quarter or year.
POSSIBLE NEGATIVE ADJUSTMENTS RELATED TO PERCENTAGE-OF-COMPLETION ACCOUNTING
Kroll-O'Gara recognizes net sales from government contracts and most
commercial contracts in its Security Products and Services Group using the
percentage-of-completion method. Under this method, Kroll-O'Gara accrues
estimated contract revenues based generally on the percentage that costs to date
bear to total estimated costs and recognizes estimated contract losses in full
when determined. 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 a reduction or an elimination of
previously reported contract revenues, Kroll-O'Gara would recognize a charge
against current earnings, which could be material. See "The Kroll-O'Gara
Company -- Management's Discussion and Analysis of Financial Condition and
Results of Operations."
POLITICAL AND ECONOMIC RISKS OF DOING SIGNIFICANT BUSINESS OUTSIDE THE UNITED
STATES
In addition to its U.S. facilities, Kroll-O'Gara has operations and assets
in Argentina, Australia, Brazil, Canada, China, Colombia, France, Germany,
India, Italy, Japan, Mexico, the Philippines, Russia, Saudi Arabia, Singapore,
Switzerland and the United Kingdom. Kroll-O'Gara also sells its products and
services in other foreign countries and is seeking to increase its level of
international business activity. Kroll-O'Gara's international business exposes
it to various risks, including exchange rate fluctuations, foreign currency
restrictions, U.S. imposed embargoes of sales to specific countries,
expropriation of assets, war, civil uprisings and riots, government instability
and the vagaries of foreign legal systems. Kroll-O'Gara also may be subject to
unanticipated taxes, duties, or other governmental assessments. These risks
could result in a loss of business, significant unexpected write-offs of assets
or other unexpected costs which could have a material adverse effect on
Kroll-O'Gara. See "The Kroll-O'Gara Company -- Business -- Government
Regulation."
INABILITY TO COMPLY WITH STRINGENT GOVERNMENTAL REGULATIONS AND LICENSING
REQUIREMENTS
As a contractor with agencies of the U.S. Government, Kroll-O'Gara must
comply with a variety of regulations governing aspects of its operations and the
workplace. These agencies also may, and routinely do, conduct audits of
Kroll-O'Gara's facilities and operations. Kroll-O'Gara may be subject to
investigations as a result of an audit or for other causes. Adverse findings in
an audit or other investigation, including violations of environmental or labor
laws, could result in fines or other penalties
22
<PAGE> 28
up to and including disqualification as a U.S. Government contractor. In
addition, U.S. Government contracts may contain specific delivery requirements.
Kroll-O'Gara could incur penalties or lost profits if it fails to meet these
requirements.
Regulations promulgated by the U.S. Commerce Department require
Kroll-O'Gara to obtain a general destination license in connection with the sale
of certain commercial products in foreign countries, and U.S. State Department
regulations require Kroll-O'Gara to file an export license in connection with
sales of military equipment in foreign countries. Foreign countries in which
Kroll-O'Gara does business or into which it expects to expand also have laws and
regulations which may restrict Kroll-O'Gara's business.
The services provided by Kroll-O'Gara's Investigations and Intelligence
Group are subject to various federal, state, local and foreign laws, including
privacy laws. Subsidiaries of Kroll-O'Gara hold private investigative licenses
from, and their investigative activities are regulated by, government agencies
in various jurisdictions. Kroll-O'Gara also utilizes certain data from outside
sources, including data from third party vendors and various government and
public record services, in performing its services. To date, applicable laws and
regulations have not interfered materially with the manner in which Kroll-O'Gara
obtains information and conducts its operations, including Kroll-O'Gara's access
to data used in its business. However, changes in these laws and regulations,
particularly those relating to privacy, could have a material adverse effect on
Kroll-O'Gara.
Additionally, the laboratory of Kroll-O'Gara's drug testing subsidiary is
certified on the federal level and licensed in a number of states. If the
subsidiary fails to continue to meet all applicable requirements, its
certification could be suspended or lost, which would have a material adverse
effect on this aspect of Kroll-O'Gara's business. See "The Kroll-O'Gara
Company -- Business -- Government Regulation."
RETENTION OF KEY PERSONNEL
Kroll-O'Gara believes that its business success has been, and for the
foreseeable future will continue to be dependent on the leadership of its
executive officers, particularly Jules B. Kroll, its Chairman and Chief
Executive Officer, Thomas M. O'Gara, its Vice Chairman, and Wilfred T. O'Gara,
its President and Chief Operating Officer, each of whom has substantial
experience and expertise in one or more significant areas of Kroll-O'Gara's
business. Although Kroll-O'Gara's employment agreements with its executive
officers are designed to provide a measure of protection against competition,
neither the employment agreements nor their covenants-not-to-compete are long
term. Kroll-O'Gara also is highly dependent on the quality and efforts of its
senior managers and its professional and technical staff, including particularly
those in its Information Security Group, to provide services and to attract and
retain clients. Competition for qualified management, professional and technical
employees is intense. Kroll-O'Gara's business could be materially and adversely
affected if its executive officers unexpectedly become unable or decide not to
continue in their present positions, or if a number of senior managers fail to
continue with Kroll-O'Gara and Kroll-O'Gara is unable to attract and retain
qualified replacements. See "The Kroll-O'Gara Company -- Management."
LIABILITY TO CLIENTS AND OTHERS
The very nature of Kroll-O'Gara's business exposes it to potential
liability claims in instances in which its clients suffer losses in spite of
Kroll-O'Gara's efforts to mitigate their risks. Kroll-O'Gara maintains
environmental consulting, product liability and professional liability insurance
policies with limits of $5 million, $25 million and $15 million, respectively;
however, a successful claim could result in liability in excess of coverage
limits and have a material adverse effect on Kroll-O'Gara. Also, in the
23
<PAGE> 29
ordinary course of its business, Kroll-O'Gara is subject to claims of third
parties other than clients alleging trespass, invasion of privacy and other
tortious conduct by its investigators and other personnel. Although Kroll-O'Gara
endeavors to minimize the risk of such claims, they could have a material
adverse effect on Kroll-O'Gara. See "The Kroll-O'Gara
Company -- Business -- Legal Proceedings."
FAILURE OF THIRD PARTIES TO RESOLVE THEIR YEAR 2000 ISSUES
Kroll-O'Gara has implemented a Year 2000 program intended to ensure that
its computer systems and applications will function properly beyond 1999.
Kroll-O'Gara currently expects to complete its own Year 2000 conversions on a
timely basis and without costs that are material to its financial condition or
results of operations. However, many of Kroll-O'Gara's operations, especially in
the Voice and Data and the Investigations and Intelligence Groups, rely on third
party computer systems and data bases. The failure of third parties to address
adequately their Year 2000 issues could have a material adverse effect on
Kroll-O'Gara. See "The Kroll-O'Gara Company -- Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
POTENTIAL ADVERSE EFFECTS OF KROLL-O'GARA GOVERNING DOCUMENTS AND OHIO LAW
Provisions of Kroll-O'Gara's governing documents and of Ohio law, together
or separately, could discourage potential acquisition proposals, delay or
prevent a change in control of Kroll-O'Gara and limit the price that certain
investors might be willing to pay in the future for Kroll-O'Gara common stock.
The Board of Directors of Kroll-O'Gara has authority to issue up to
1,000,000 preferred shares without further shareholder approval. Preferred
shares could have dividend, liquidation, conversion, voting and other rights and
privileges that are superior or senior to Kroll-O'Gara common stock. If
Kroll-O'Gara were to issue preferred shares, it could dilute the voting power of
Kroll-O'Gara common stock, adversely affect holders of Kroll-O'Gara common stock
in the event of liquidation of Kroll-O'Gara or delay, defer or prevent a change
in control of Kroll-O'Gara.
In addition, Ohio law requires shareholder approval of any proposed
"control share acquisition" of an Ohio corporation at any of three ownership
thresholds (20%, 33-1/2% and 50%) and restricts certain business combinations
and other transactions between an Ohio corporation and interested shareholders.
See "Description of Kroll-O'Gara Capital Stock -- Provisions Affecting Business
Combinations and Changes in Control."
24
<PAGE> 30
THE SPECIAL MEETING
Background America, Inc., a Tennessee corporation, is mailing this Proxy
Statement/Prospectus to holders of shares of its common stock and its Series A
Preferred Stock, on or about , 1999, together with a notice of a
Special Meeting of Shareholders and a form of proxy solicited by the Board of
Directors of Background America for use at the Special Meeting.
TIME AND PLACE; PURPOSE
The Special Meeting will be at 1900 Church Street, Suite 400, Nashville,
Tennessee, on , 1999, starting at , local time. At
the Special Meeting, you will be asked to approve an Agreement and Plan of
Merger (the "MERGER AGREEMENT") dated as of January 21, 1999 among The
Kroll-O'Gara Company, an Ohio corporation, Kroll-O'Gara Tennessee, Inc., a
wholly owned subsidiary of Kroll-O'Gara, and Background America. If the proposed
merger is approved and completed, Background America will become a wholly owned
subsidiary of Kroll-O'Gara.
PROXIES
Voting and Revocation of Proxies. You may use the accompanying proxy card
if you are unable to attend the Special Meeting in person or wish to have your
shares voted by proxy even if you do attend the Special Meeting. You may revoke
any proxy that you give at any time before it is exercised, either by submitting
a written notice of revocation or a properly executed proxy of a later date, or
by attending the Special Meeting and voting in person. You should address
written notice of revocation and other communications with respect to the
revocation of Background America proxies to Background America, Inc., 1900
Church Street, Suite 400, Nashville, Tennessee 37203, Attention: Corporate
Secretary.
All shares of Background America common stock and Background America
preferred stock represented by properly executed proxies received prior to or at
the Special Meeting and not revoked before they are exercised will be voted in
accordance with the instructions indicated in such proxies. If you do not
specify how your proxy is to be voted, it will be voted "FOR" the Merger
Agreement.
SOLICITATION OF PROXIES
Background America will pay the expenses of solicitation of proxies for the
Special Meeting. In addition to solicitation by mail, proxies may be solicited
in person by directors, officers and employees of Background America without
additional compensation and by telephone, teletype, facsimile or similar method.
RECORD DATE AND VOTING RIGHTS
Record Date. Background America's Board of Directors has fixed the close
of business on , 1999 as the record date for determining the
Background America shareholders entitled to notice of and to vote at the Special
Meeting. You will be entitled to vote at the Special Meeting if you were a
shareholder of record on the close of business on the record date. As of the
record date, there were shares of Background America common stock
outstanding and entitled to vote and 1,143,700 shares of Background America
preferred stock outstanding and entitled to vote.
Voting Rights. Each share of Background America common stock entitles its
holder to one vote. Each share of Background America preferred stock entitles
its holder to one vote.
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<PAGE> 31
Vote Required and Voting Agreement. The Merger Agreement must be approved
by:
(1) the affirmative vote of the holders of a majority of the shares of
Background America common stock and Background America preferred stock
outstanding on the record date and voting together, and
(2) the affirmative vote of at least two-thirds (66-2/3%) of the
outstanding shares of Background America preferred stock voting as a
separate class.
Three of the holders of Background America common stock, who together own
83.21% of those shares, and six of the holders of Background America preferred
stock, owning 85.94% of those shares, have entered in a voting agreement
committing themselves to vote FOR the merger. These percentages include shares
held by Michael D. Shmerling, Background America's Chief Executive Officer, who
owns 51.38% of the Background America common stock and 16.66% of the Background
America preferred stock, and shares held by Alan Wernick, a director, who owns
4.55% of the Background America common stock and 1.22% of the Background America
preferred stock. Each person also has granted officers of Kroll-O'Gara an
irrevocable power of attorney to vote his shares of Background America common
stock and Background America preferred stock. In addition, based upon the
unanimous recommendation of the Background America Board, it currently is
expected that Background America's other directors and executive officers, who
own approximately 4% of the Background America common stock and 1% of the
Background America preferred stock, also will vote their shares for approval of
the Merger Agreement. Accordingly, Background America expects the merger to be
approved regardless of the vote by other shareholders.
Approval of the Merger Agreement by the holders of Background America
preferred stock constitutes a waiver of the preferred stock's liquidation
rights. See "Rights of Holders of Background America Preferred Stock."
If you do not properly exercise and perfect dissenters' rights in
connection with the merger, you will be deemed to have agreed to the escrow of a
total of 12% of the shares of Kroll-O'Gara common stock into which your shares
of Background American common stock and/or Background America preferred stock
will convert in the merger. In this regard, you should read and consider the
information provided under the captions "The Merger Agreement -- Terms of the
Merger -- The Escrow Funds" and "The Merger -- Dissenters' Rights."
Abstentions. A properly executed proxy marked "abstain" will not be voted
on the Merger Agreement proposal and will have the same effect as a vote against
the merger.
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THE MERGER
BACKGROUND OF THE MERGER
In September 1998, officers of Background America were approached by
representatives of Kroll-O'Gara regarding a possible acquisition of Background
America. Discussions between these representatives regarding a possible business
combination continued from that date until January 1999.
During that time, Kroll-O'Gara and Background America conducted various due
diligence activities and negotiated the terms and conditions to be included in a
definitive agreement. At a meeting held on December 30, 1998, the Board of
Directors of Background America reviewed and considered the Merger Agreement.
All of the directors of Background America present at the meeting then voted to
approve the merger and the Merger Agreement, with such changes as the proper
officers of Background America determined would be appropriate. The Merger
Agreement was executed on January 21, 1999, and Kroll-O'Gara announced the
merger after the close of business on that same day. Holders of 83.2% of
Background America's common stock and 85.9% of its preferred stock have entered
into an agreement committing themselves to vote for the merger. In addition, all
of the directors and officers of Background America who are not parties to the
voting agreement have informally advised Background America that, as of the date
of this Proxy Statement/Prospectus, they intend to vote for the approval of the
Merger Agreement.
The 0.2689628 of a share of Kroll-O'Gara common stock to be exchanged for
each share of Background America common stock and Background America preferred
stock reflect prices that were negotiated on an arm's-length basis between
representatives of Background America and representatives of Kroll-O'Gara. There
was no affiliation, relationship, understanding or transaction between
Background America and its affiliates, on one hand, and Kroll-O'Gara and its
affiliates, on the other hand, prior to the execution of the Merger Agreement.
REASONS FOR AND ADVANTAGES OF THE MERGER
The Board of Directors of Background America considered a variety of
factors in evaluating and approving the merger and the Merger Agreement,
including the following:
(1) the fact that shareholders of Background America will receive
equity securities of Kroll-O'Gara in the merger, which will allow them to
maintain an indirect interest in the business of Background America through
their ownership of Kroll-O'Gara common stock;
(2) the closing sale price of the Kroll-O'Gara common stock of $38.50
per share on December 29, 1998 (the day prior to the approval of the merger
by the Board of Directors), compared to the book value of the Background
America common stock of a negative $1.27 per share and the redemption price
of the Background America preferred stock of $5.93 per share on September
30, 1998, and the fact that the equivalent assumed value of the Background
America common stock of $10.36 per share (giving effect to its conversion
into Kroll-O'Gara common stock) represented a premium of $11.36 and the
equivalent assumed value of Background America preferred stock of $10.36
per share (giving effect to its conversion into Kroll-O'Gara common stock)
represented a premium of $4.43;
(3) the anticipated tax-free status of the merger;
(4) the active trading market for Kroll-O'Gara common stock, as
opposed to the lack of a public market for Background America common and
preferred stock, which will provide Background America shareholders with
liquidity which did not exist previously; and
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(5) the diversification of the business enterprises and operations of
Kroll-O'Gara compared to Background America's focus on employment
screening.
The Board of Directors of Background America did not assign any relative
weights to the above factors, but it considered all of them to be material. The
Board of Directors believes that it appropriately addressed all of the relevant
concerns in the proposed transaction with Kroll-O'Gara, and it concluded that
the terms of the transaction with Kroll-O'Gara are fair to the shareholders of
Background America from a financial point of view. Based on these factors, the
Board of Directors of Background America determined that the merger is in the
best interests of the shareholders of Background America and approved the Merger
Agreement.
DISADVANTAGES OF THE MERGER
Upon consummation of the merger, you and the other shareholders of
Background America will own a maximum of approximately % of the issued and
outstanding shares of Kroll-O'Gara. By comparison, Kroll-O'Gara's officers and
directors will control approximately % of Kroll-O'Gara common stock and
effectively will be able to control most matters requiring approval by
shareholders, including the election of directors. See "The Kroll-O'Gara
Company -- Principal Shareholders and Holdings of Management." Additionally, if
you own Background America preferred stock, you have certain preferential rights
as a preferred stock owner which you will lose as a holder of Kroll-O'Gara
common stock. See "Rights of Holders of Background America Preferred Stock."
In considering the merger, you should consider, in addition to the
advantages described above, the risks associated with the merger and with
Kroll-O'Gara's business which are discussed in "Risk Factors." Of course, after
the merger, Background America will be owned by Kroll-O'Gara. Therefore the
various risks involved in Background America's business will be assumed by
Kroll-O'Gara and its shareholders. There is no certainty regarding the effect of
consummation of the merger upon the market price of the Kroll-O'Gara common
stock.
RECOMMENDATION OF THE BACKGROUND AMERICA BOARD OF DIRECTORS
The Background America Board of Directors unanimously recommends that you
vote "FOR" approval of the Merger Agreement. We will vote your proxy accordingly
unless you specify a contrary choice.
MANAGEMENT OF KROLL-O'GARA AFTER THE MERGER
The directors and executive officers of Kroll-O'Gara will not change as a
result of the merger. See "The Kroll-O'Gara Company -- Management" for
information on Kroll-O'Gara's current directors and executive officers.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Some of the officers and members of the Board of Directors of Background
America have interests in the merger that are in addition to their interests as
shareholders of Background America generally. Certain of these persons
participated in the negotiation of the Merger Agreement.
Most of the officers and directors of Background America own options (and,
in the case of Nick Manis, warrants) to purchase shares of Background America
common stock, the terms of which provide for the acceleration of vesting in
connection with the consummation of a fundamental corporate event to
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which Background America is a party, including the merger. The following table
describes the associated realizable value to each such officer and director with
respect to the options owned by him:
<TABLE>
<CAPTION>
NUMBER AVERAGE
NAME OF SHARES EXERCISE PRICE REALIZABLE VALUE(1)
- ---- ---------------- -------------- -------------------
<S> <C> <C> <C>
Directors:
Alan L. Wernick............................. 14,000 $ 1.25 $131,001
Tom Martin.................................. 4,500 $ 0.75 $ 44,357
William Denny............................... 2,500 $ 1.91 $ 21,743
Nick Manis
(options)................................ 400 $ 2.00 $ 3,443
(warrants)............................... 2,000 $ 3.25 $ 14,714
Officers:
Marc C. Curvin.............................. 120,202 $2.456 $979,791
A. Michael Rosen............................ 19,000 $2.063 $162,340
Benny Ball.................................. 18,000 $2.389 $147,928
Tim Davison................................. 5,350 $1.761 $ 47,327
Tom Ellis................................... 12,900(2) $2.016 $110,833
Robert Schlossnagle......................... 12,000 $2.292 $ 99,782
</TABLE>
- ---------------
(1) Calculated based on the closing price for Kroll-O'Gara common stock of
$39-7/16, as reported on the Nasdaq National Market at the close of trading
on December 31, 1998, less the applicable average exercise price.
(2) Includes options to purchase an aggregate of 1,700 shares of Background
America common stock which will be issued after the merger in the form of
options to purchase Kroll-O'Gara common stock.
It is currently anticipated that the officers of Background America after
the merger will be substantially the same as those who are serving immediately
before the merger. Additional officers also may be designated by Kroll-O'Gara.
Michael D. Shmerling, Marc C. Curvin, A. Michael Rosen and Benny Ball have
entered into employment agreements with Background America which will become
effective at the time of the merger and will expire on December 31, 2001. Each
employment agreement contains terms and provisions customary in an executive
employment agreement, including a covenant by the employee not to compete with
Background America or Kroll-O'Gara for two years following termination of
employment and a provision for the payment of severance benefits to each
employee upon the occurrence of certain events, including the employee's
termination of employment by Background America without cause. The annual
salaries payable to Messrs. Shmerling, Curvin, Rosen and Ball under the
employment agreements are $150,000, $125,000, $100,000 and $100,000,
respectively. Additionally, each of Messrs. Rosen and Ball will be paid a
one-time "stay bonus" of $50,000, and Mr. Tim Davison will be paid a one-time
"stay bonus" of $20,000, if he continues to be employed by Background America on
June 30, 1999. Finally, each person is eligible to participate in the incentive
compensation plans of Kroll-O"Gara during the term of his employment by
Background America.
Mr. Shmerling is the indirect owner, through two limited liability
companies controlled by him, of approximately 10,000 square feet of office space
occupied by Background America in Nashville, Tennessee. It is currently
anticipated, and it is a condition precedent to Kroll-O'Gara's obligation to
consummate the merger, that Mr. Shmerling will cause the companies controlled by
him to enter into leases with Kroll-O'Gara, on mutually agreeable terms, to
insure Kroll-O'Gara's continued ability to occupy the premises following the
merger. It is anticipated that any lease between Kroll-O'Gara and
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either of the companies controlled by Mr. Shmerling would reflect terms
negotiated on an arms-length basis. The current annual rent paid by Background
America to the companies is $236,895.
Each of Michael D. Shmerling, Alan L. Wernick, Marc C. Curvin, A. Michael
Rosen and Tim Davison is an officer or director of Background America and is
also a former shareholder of AMICUS Staffing, Inc., a corporation engaged in the
business of providing professional and support personnel on a temporary or
permanent basis in the legal industry. Each of those persons sold his stock in
AMICUS in May 1997 in exchange for a cash payment and the contingent right to
receive additional cash payments based on the future financial performance of
AMICUS. Currently, AMICUS is subleasing office space from Background America at
an annual rental rate of $49,816. Background America and AMICUS also are sharing
expenses associated with telephone systems and a receptionist. Background
America's portion of the total annual shared expenses is approximately $10,000.
It is currently anticipated that these arrangements will continue following the
merger.
Each of Michael D. Shmerling and Marc C. Curvin is an owner of System-X,
LLC, a company engaged in the business of providing technology related services.
Currently, System-X provides system maintenance for Background America's
computer systems in exchange for forgiveness of rental costs associated with
office space. Background America estimates the value of rental space forgiven in
calendar year 1998 to be approximately $24,868. It is not currently anticipated
that Kroll-O'Gara will require the services of System-X following the merger,
and, if any System-X services are purchased by Kroll-O'Gara, it is anticipated
that all System-X services would be obtained on terms negotiated on an
arms-length basis. In any event, it is anticipated that System-X will execute a
"work-made-for-hire" agreement for the benefit of Background America to insure
that any intellectual property developed for Background America by System-X is
the property of Background America.
The Board of Directors of Background America was aware of the interests of
the directors and officers in the merger and took them into account in approving
the Merger Agreement.
ACCOUNTING TREATMENT
Kroll-O'Gara will account for the merger as a pooling of interests. Under
this method of accounting, the assets and liabilities of Background America will
be carried forward to the Kroll-O'Gara financial statements at their recorded
amounts; the income of Kroll-O'Gara will include income of Background America
for the entire fiscal year in which the merger occurs; and the reported income
of Background America for prior periods will be combined with and restated as
income of Kroll-O'Gara on a consolidated basis. It is a condition to the merger
that Kroll-O'Gara receive an opinion from Arthur Andersen LLP, its independent
public accountants, confirming the appropriateness of this accounting treatment
under generally accepted accounting principles. Another condition of the merger,
which is included in order to preserve pooling of interests accounting, is that
holders of no more than 7.5% of Background America's outstanding stock exercise
dissenters' rights. See "The Merger Agreement -- Conditions to the Merger."
UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material U.S. federal income
tax consequences of the merger to holders of Background America common stock,
Preferred Stock, stock options and warrants. This discussion is based on the
Internal Revenue Code, Treasury regulations, administrative rulings and
pronouncements and judicial decisions as of the date of this Proxy
Statement/Prospectus, all of which are subject to change, possibly with
retroactive effect.
The discussion is for general information only and does not address the
state, local or foreign tax consequences of the merger. In addition, the
discussion relates to persons who hold Background
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America common stock or Background America preferred stock as capital assets.
Your tax treatment may vary depending upon your particular situation. Certain
shareholders (for example, insurance companies, tax-exempt organizations,
financial institutions and broker-dealers, and individuals who received
Background America common stock pursuant to the exercise of employee stock
options or otherwise as compensation) may be subject to special rules not
discussed. You are urged to consult your own tax advisor concerning the United
States federal, state and local and any foreign tax consequences of the merger
to you.
We expect that the material U.S. federal income tax consequences that will
result from the merger are as follows:
a. You will not recognize any income, gain or loss as a result of the
exchange of your Background America stock for Kroll-O'Gara stock in the
merger, except in connection with any cash received instead of a fractional
share of Kroll-O'Gara common stock. If, however, you hold options or
warrants which you exercise at the time of or after the merger, you may
have tax liability related to the exercise of those options or warrants.
b. Your tax basis in the Kroll-O'Gara common stock received in the
merger, including any fractional share of Kroll-O'Gara common stock for
which cash is received, will equal your tax basis in the Background America
common stock or Background America preferred stock exchanged.
c. The holding period for the Kroll-O'Gara common stock which you
receive in the merger will include your holding period of the Background
America common stock or Background America preferred stock surrendered.
d. If you receive cash instead of a fractional share of Kroll-O'Gara
common stock in the merger, you will recognize gain or loss in an amount
equal to the difference between the cash received and your basis in the
Background America common stock or Background America preferred stock
allocable to the fractional share.
e. No income, gain or loss will be recognized by Kroll-O'Gara or
Background America as a result of the merger.
f. If you hold warrants to acquire Background America common stock,
you will not recognize gain or loss upon the conversion of the warrants
into warrants to purchase Kroll-O'Gara common stock.
g. If you hold unexercised options to acquire Background America
common stock, you will not recognize income upon the conversion of those
options into options to purchase Kroll-O'Gara common stock.
FEDERAL SECURITIES LAW CONSEQUENCES
Generally, all shares of Kroll-O'Gara common stock received by Background
America shareholders in the merger will be freely transferable. If, however, you
are an "affiliate" (as defined under the Securities Act of 1933) of Background
America prior to the merger or of Kroll-O'Gara after the merger, you may resell
the Kroll-O'Gara common stock which you receive in the merger only in compliance
with the volume, manner-of-sale and notice requirements of Rules 144 and 145
under the Securities Act. You may be deemed to be an affiliate of Kroll-O'Gara
or Background America if you control, are controlled by, or are under common
control with, either company. Officers, directors and principal shareholders are
often deemed affiliates of a company.
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Under Rules 144 and 145, an affiliate may sell Kroll-O'Gara common stock in
ordinary brokers' transactions. The maximum number of shares which may be sold
within a three-month period is the greater of 1% of the Kroll-O'Gara common
stock then outstanding or the average weekly reported volume of trading in the
common stock during the four calendar weeks preceding the sale. In addition, it
is a condition of the merger that each Background America affiliate agree not to
sell, transfer or dispose of any Kroll-O'Gara common stock until Kroll-O'Gara
has announced results of operation that include at least 30 days of combined
operations with Background America. If the merger is completed during
, 1999, this means that affiliates will not be able to resell
Kroll-O'Gara common stock until Kroll-O'Gara has announced results of operation
for the six months ending June 30, 1999, which probably will happen in late July
or early August 1999.
DISSENTERS' RIGHTS
The following is a summary of the principal steps which you must take to
perfect dissenters' rights under Chapter 23 of the Tennessee Business
Corporation Act. Because this is a summary, it does not contain all the
information that may be important to you if you want to exercise dissenters'
rights. You should review this discussion and Chapter 23 carefully if you wish
to exercise dissenters' rights, or wish to preserve the right to do so, since
failure to comply with the required procedures will result in the loss of those
rights. The full text of Chapter 23 is attached as Appendix B to this Proxy
Statement/Prospectus.
If you dissent from the merger and demand and perfect dissenters' rights
under Chapter 23 and if the merger is approved and becomes effective, your
shares of Background America common stock and/or Background America preferred
stock will not be converted into Kroll-O'Gara common stock. Instead, you will
have the right to receive the "fair value" of your Background America shares. If
you are considering dissenting, you should consult with your legal advisor. If
your Background America shares are held of record in the name of another person
and you desire to perfect dissenters' rights, you must obtain the record
shareholder's written consent to the dissent and must file it with Background
America along with your own notice (as described in the next paragraph).
To exercise dissenters' rights, you (1) must file with Background America,
before the class votes on the Merger Agreement at the Special Meeting, a written
notice of your intent to demand payment for your shares if the Merger Agreement
is approved, and (2) must not vote in favor of the Merger Agreement.
A vote in favor of the Merger Agreement will waive your dissenters' rights.
Holders of Background America preferred stock must not vote in favor of the
Merger Agreement in either the combined vote with the common stock or the
separate preferred stock class vote. Your failure to vote on the Merger
Agreement will not in itself waive your dissenters' rights. However, a vote
against the Merger Agreement or a failure to vote does not, alone, constitute a
demand. If you dissent and demand payment, you must do so as to all the shares
of Background America common stock and Background America preferred stock
beneficially owned by you.
If you comply with (1) and (2) above, within 10 days after the earlier of
the date the merger becomes effective or the date of the Special Meeting,
Background America must send you a dissenters' notice which
(a) tells you by when and to where you must send your payment demand,
(b) tells you when and where to deposit your certificates for
Background America common stock and Background America preferred stock,
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(c) requires you to certify as to your ownership of Background America
shares prior to announcement of the proposed merger, and
(d) includes a form for demanding payment.
Once you have filed a demand for payment, it cannot be withdrawn unless
Background America and Kroll-O'Gara consent to the withdrawal.
If you timely file a payment demand with Background America, Background
America must notify you of what it considers to be the "fair value" of your
Background America shares. Background America must then pay you that amount,
plus accrued interest. If you are dissatisfied with Background America's
determination of "fair value," within one month you must either notify
Background America of your own estimate of "fair value" or reject Background
America's offer in accordance with Chapter 23. If you and Background America
cannot agree on the "fair value" of your Background America shares, you will
have the right to receive the "fair value" as determined by a Tennessee court.
If you exercise dissenters' rights under Chapter 23, you will not have any
rights as a shareholder of Background America or Kroll-O'Gara after the merger.
However, if you subsequently withdraw your payment demand or otherwise lose your
dissenters' rights, your shares of Background America common stock and
Background America preferred stock will be converted into shares of Kroll-O'Gara
common stock in accordance with the Merger Agreement. You will lose your
dissenters' rights:
- if you fail to file a written objection before the vote on the Merger
Agreement,
- if you vote in favor of approval of the Merger Agreement in either class
vote,
- if you do not send in your demand for payment within the specified time
period, or
- if you fail to deposit the certificates for your shares.
THE MERGER AGREEMENT
The description of the Merger Agreement set forth below is not complete.
For full information, you should read the Merger Agreement, a copy of which is
attached to this Proxy Statement/Prospectus as Appendix A.
TERMS OF THE MERGER
The Merger. In the merger, a wholly owned subsidiary of Kroll-O'Gara,
which was established for purposes of the merger and essentially has no assets
or liabilities, will merge into Background America. As a result, Background
America will continue as the surviving corporation and will be a wholly owned
subsidiary of Kroll-O'Gara.
Effective Time. As promptly as practicable after the satisfaction or
waiver of the conditions set forth in the Merger Agreement, Kroll-O'Gara and
Background America will complete the merger by filing a Certificate of Merger
with the Secretary of State of the State of Tennessee. The merger will become
effective when the Certificate of Merger is filed.
Conversion of Background America Stock in the Merger. When the merger
becomes effective, each then outstanding share of Background America common and
preferred stock (excluding shares as to which dissenters' rights have been
exercised) will be converted into the right to receive 0.2689628 of a share of
Kroll-O'Gara common stock. Initially, however, a total of 12% of the shares of
Kroll-O'Gara common stock into which each holder's shares of Background American
common stock and Background America preferred stock are converted will be
escrowed. 10% of these shares will be subject to return to
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Kroll-O'Gara while 2% of these shares will be subject to liquidation to pay
additional expenses of the merger. SEE "THE ESCROW FUNDS" BELOW. YOU MAY NOT
RECEIVE ANY SHARES OF KROLL-O'GARA COMMON STOCK BEYOND THOSE ISSUED TO YOU AT
THE TIME OF THE MERGER, AND YOU MAY INCUR LIABILITY FOR EXPENSES OF THE MERGER
THAT ARE NOT PAID BY BACKGROUND AMERICA.
Outstanding Stock Options and Warrants. The merger agreement requires that
the holders of all options and warrants to purchase Background America common
stock must consent to amending these options and warrants so that, unless
previously exercised, they survive the merger and become exercisable for
Kroll-O'Gara common stock. In addition, holders of stock options and warrants
will be asked to decide whether their options and/or warrants should be
exercised at the time of the merger or remain outstanding as options and
warrants to purchase Kroll-O'Gara common stock. If you hold options and/or
warrants to purchase Background America common stock and you elect to exercise
them at the time of the merger, 12% of the shares of Kroll-O'Gara common stock
that you receive in the merger which are attributable to those options and
warrants will be subject to escrow. Additionally, although you previously may
not have been a Background America shareholder, Kroll-O'Gara then may be
entitled to proceed against you for any excess expenses of the merger. If you do
not exercise your options and warrants until after the merger, the shares of
Kroll-O'Gara common stock that you receive upon exercise will not be subject to
escrow.
Each outstanding stock option and warrant to purchase Background America
common stock that is not exercised before or at the time of the merger will
become exercisable after the merger for the number of shares of Kroll-O'Gara
common stock that the holder would have been entitled to receive in the merger
had he or she exercised the option or warrant before the merger, at a price per
share equal to (x) the aggregate exercise price for Background America common
stock purchasable pursuant to the stock option or warrant divided by (y) the
number of shares of Kroll-O'Gara common stock deemed purchasable pursuant to the
stock option or warrant. The number of shares of Kroll-O'Gara common stock that
may be purchased upon exercise of a stock option or warrant will not include any
fractional share, and any fractional share will be rounded up to the nearest
whole number.
The shares of Kroll-O'Gara common stock issuable upon exercise of the stock
options and warrants are included in the shares of Kroll-O'Gara common stock
registered under the Securities Act through this Proxy Statement/Prospectus.
Kroll-O'Gara will use its best efforts to maintain the effectiveness of that
registration for so long as the stock options and warrants remain outstanding.
Fractional Shares. No fractional shares of Kroll-O'Gara common stock will
be issued in the merger. Instead, Kroll-O'Gara will pay each Background America
shareholder who would otherwise have been entitled to a fractional share of
Kroll-O'Gara common stock an amount equal to the fraction multiplied by the
"Market Value" on the closing date of the merger. "MARKET VALUE" means, on any
day, the average of the last sale prices per share of Kroll-O'Gara common stock
on the Nasdaq National Market for the five consecutive trading days ending four
days prior to that date.
THE ESCROW FUNDS
A total of 12% of the shares of Kroll-O'Gara common stock otherwise
issuable to each Background America shareholder in the merger will be placed
into two escrow funds.
The 10% Escrow. One escrow fund, the "10% ESCROW," will hold 10% of the
total number of shares of Kroll-O'Gara common stock into which each Background
America shareholder's shares are converted in the merger. The 10% Escrow will
provide security and indemnification for any claims which Kroll-O'Gara and its
affiliates (including, after the merger, Background America) have for damages
arising from (1) breaches by Background America of its representations,
warranties, covenants and obligations in the Merger Agreement and (2) any claim
for brokerage or finder's fees in connection
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with the merger. The 10% Escrow is the only source of indemnification for
Kroll-O'Gara and its affiliates for these damages.
Kroll-O'Gara may not recover from the 10% Escrow for any breach or series
of related breaches as to which the damages are less than $25,000. Also, amounts
otherwise payable from the 10% Escrow must be offset by any insurance proceeds
received by Kroll-O'Gara, and certain claims first must be satisfied from an
escrow fund established by Background America in connection with an earlier
acquisition.
The representations, warranties, covenants and obligations of the parties
to the Merger Agreement will survive for one year after the merger, and
Kroll-O'Gara must assert any claims against the 10% Escrow during that time
period. The 10% Escrow will terminate on the first anniversary of the merger
unless there is ongoing litigation relating to claims by Kroll-O'Gara against
the 10% Escrow. When the 10% Escrow terminates, any shares of Kroll-O'Gara
common stock remaining in the 10% Escrow will be distributed to former
Background America shareholders in proportion to the shares originally withheld
from each to fund the 10% Escrow.
Shares of Kroll-O'Gara common stock which are returned to Kroll-O'Gara in
satisfaction of claims against the 10% Escrow will be valued at the Market Value
at the time of the merger.
Any Background America shareholder who does not properly exercise and
perfect dissenters' rights in connection with the merger (see "The
Merger -- Dissenters' Rights") agrees to accept the terms and conditions of the
10% Escrow, consents to the appointment of Russell R. French as Shareholder
Representative in connection with the 10% Escrow and agrees to indemnify the
Shareholder Representative for any costs and expenses which he incurs in that
capacity.
The Shareholder Representative will have the right to vote all shares of
Kroll-O'Gara common stock held in the 10% Escrow.
The Escrow Agreement for the 10% Escrow is included as Exhibit A to the
Merger Agreement (beginning on page A-48 of this Proxy Statement/Prospectus) and
you are encouraged to read it.
The 2% Escrow. The other escrow fund, the "2% ESCROW," will hold 2% of the
total number of shares of Kroll-O'Gara common stock into which each Background
America shareholder's shares are converted in the merger. Each party to the
Merger Agreement has agreed to pay its own expenses in connection with the
merger. However, Background America also has agreed that its out-of-pocket
expenses will not exceed $450,000 and that any expenses in excess of that amount
will be borne by its shareholders. The purpose of the 2% Escrow is to provide
Background America shareholders with a means of reimbursement if Background
America's expenses in connection with the merger exceed $450,000.
Kroll-O'Gara may be entitled to proceed against any Background America
shareholder for some or all excess expenses and is not limited in its claims to
the value of the 2% Escrow. Although Background America currently believes that
its expenses in connection with the merger may exceed $450,000, it does not
expect these expenses to exceed the value of the 2% Escrow. A Background America
shareholder will need to look to the 2% Escrow for reimbursement. The 2% Escrow
will terminate no later than six months after the completion of the merger and
any shares of Kroll-O'Gara common stock then remaining in the 2% Escrow will be
distributed to former Background America shareholders in proportion to the
shares originally withheld from each to fund the 2% Escrow. However,
Kroll-O'Gara is not required to make its claims for reimbursement of expenses
within any time period. Therefore, Kroll-O'Gara could seek to recover expenses
after the 2% Escrow has been terminated, and a Background America shareholder
may have no readily available source of funds for amounts owed to Kroll-O'Gara.
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Michael D. Shmerling, Background America's Chief Executive Officer, will be
escrow agent for the 2% Escrow. Mr. Shmerling will determine the time at which
the 2% Escrow terminates within its six month life.
Any Background America shareholder who does not perfect dissenters' rights
in connection with the merger agrees to the expense reimbursement provisions of
the Merger Agreement.
Voting rights with respect to shares of Kroll-O'Gara common stock held in
the 2% Escrow will be exercised by the beneficial owners of those shares.
Distributions With Respect to Escrowed Shares. If Kroll-O'Gara makes any
non-cash distributions on the Kroll-O'Gara common stock during the life of the
10% Escrow, the distributions relating to shares in that Escrow will be paid
into the escrow account and will be subject to claims against the escrow
account. Any non-cash distributions on the Kroll-O'Gara common stock held in the
2% Escrow will be treated the same way. Any cash dividends relating to shares in
the 10% Escrow or the 2% Escrow will be redistributed as promptly as practicable
to former Background America shareholders in proportion to their interests in
each Escrow.
EXCHANGE OF CERTIFICATES
Exchange Agent. The Fifth Third Bank, Cincinnati, Ohio will act as
Exchange Agent for the merger.
Exchange Procedures. As soon as reasonably practicable after the merger,
the Exchange Agent will mail each record holder of Background America shares at
the time of the merger a letter of transmittal and instructions for exchanging
certificates representing Background America common stock and Background America
preferred stock for certificates evidencing Kroll-O'Gara common stock. You will
have to follow the instructions and surrender your certificates for Background
America common stock and Background America preferred stock, together with the
properly executed letter of transmittal, and any other required documents, to
the Exchange Agent. You then will be entitled to receive (a) certificates for
that number of whole shares of Kroll-O'Gara common stock which you have the
right to receive in the merger (less shares which are escrowed), (b) any
dividends or other distributions on the Kroll-O'Gara common stock declared or
made after the merger to which you may be entitled, and (c) cash in lieu of any
fractional share of Kroll-O'Gara common stock. Until so surrendered, each
outstanding certificate that, prior to the merger, represented shares of
Background America common stock or Background America preferred stock (other
than Background America shares as to which dissenters' rights have been
exercised) will be deemed to evidence the ownership of the number of whole
shares of Kroll-O'Gara common stock into which your Background America shares
have been converted (less shares which are escrowed).
Distributions With Respect to Unexchanged Shares. If any dividends or
other distributions are declared or made after the merger on shares of
Kroll-O'Gara common stock, you will not receive them until you surrender your
Background America share certificates. When you do surrender your certificates,
Kroll-O'Gara will pay you, without interest, any dividends or other
distributions with a record date after the merger previously paid to holders of
Kroll-O'Gara common stock. Any dividends or distributions on escrowed shares
will be paid into the escrow funds.
Transfers of Ownership. If you want a certificate for shares of
Kroll-O'Gara common stock to be issued in a name other than that in which the
Background America certificate surrendered in exchange is registered, your
Background America certificate must be properly endorsed and otherwise in proper
form for transfer. You also must pay to Kroll-O'Gara or its agent any resulting
transfer (or other) tax, or establish to the satisfaction of Kroll-O'Gara that
the tax has been paid or is not payable.
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Any shares of Kroll-O'Gara common stock released to you from either the 10%
Escrow or the 2% Escrow will be registered in your name and may not be issued in
a different name.
Escheat and Withholding. Neither Kroll-O'Gara nor Background America will
be liable to you for any shares of Kroll-O'Gara common stock and cash in lieu of
any fractional share delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. Kroll-O'Gara or the Exchange Agent
will deduct from the shares of Kroll-O'Gara common stock and cash in lieu of any
fractional share paid to you any amounts that Kroll-O'Gara or the Exchange Agent
is required to withhold under federal, state, local or foreign tax law.
Lost, Stolen or Destroyed Certificates. If you are the owner of a lost,
stolen or destroyed Background America stock certificate, the Exchange Agent
will issue a certificate for Kroll-O'Gara common stock in exchange for your
lost, stolen or destroyed Background America stock certificate upon receipt from
you of an affidavit of that fact. However, in its discretion, Kroll-O'Gara may
require you to deliver a reasonable indemnity bond against any claim that may be
made against Kroll-O'Gara or the Exchange Agent with respect to a certificate
alleged to have been lost, stolen or destroyed.
DETAILED INSTRUCTIONS, INCLUDING A TRANSMITTAL LETTER, WILL BE MAILED TO
BACKGROUND AMERICA SHAREHOLDERS PROMPTLY FOLLOWING THE MERGER EXPLAINING HOW TO
EXCHANGE BACKGROUND AMERICA CERTIFICATES FOR KROLL-O'GARA CERTIFICATES. YOU
SHOULD NOT SEND IN YOUR BACKGROUND AMERICA SHARE CERTIFICATES UNTIL YOU RECEIVE
YOUR TRANSMITTAL LETTER.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement contains various representations and warranties of
Background America and of Kroll-O'Gara. Those relate, among other things, to the
following matters (which, in certain cases, are subject to specified
exceptions):
Corporate Status. The organization, good standing, qualification and
capitalization of each party are as described in the Merger Agreement and
there are no commitments by Background America to issue capital stock;
Approvals and Filings. There are no governmental or regulatory
approvals or filings required to complete the merger;
Absence of Conflict. The merger will not conflict with charter
documents, laws or agreements to which the party is subject, or contravene
any governmental permit or license relating to the business of the party;
Accuracy of Reports and Financial Statements. Kroll-O'Gara has filed
its required reports and documents with the Securities and Exchange
Commission and there are no material misstatements or omissions contained
in these filings. Background America's financial statements have been
prepared fairly and in accordance with generally accepted accounting
principles and there are no undisclosed liabilities that would have a
material adverse effect on the business, assets, prospects, results of
operations or condition (a "MATERIAL ADVERSE EFFECT") of Background
America;
Conduct of Business. There has been no material adverse change in the
business, assets, prospects, results of operations or condition (financial
or otherwise) of either party;
Absence of Material Untrue Statements. There are no material untrue
statements or omissions in this Proxy Statement/Prospectus or the
Registration Statement filed with the SEC of which it is a part; and
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Other Matters. The Merger Agreement also includes representations and
warranties of Background America dealing with the conduct of its business
in the ordinary course, employee relations, benefit plans, title to
properties, compliance with laws, the absence of litigation that could
reasonably be expected to have a Material Adverse Effect, intellectual
property rights, contracts, the validity and standing of any required
permits and authorizations, compliance with environmental laws, maintenance
of books and records, Year 2000 compliance, customers, taxes, private
investigation licenses and relationships and transactions with affiliates.
CONDUCT OF BUSINESS BY BACKGROUND AMERICA PENDING THE MERGER
Prior to the merger, Background America will conduct its business only in
the ordinary course of business and in a manner consistent with past practice.
Background America also will use reasonable commercial efforts to preserve
substantially intact its business organization, to keep the services of its
principal employees and to preserve its present relationships with material
customers and suppliers. For all of these purposes, and those described below,
Background America's agreements cover actions by its subsidiaries. Without the
prior consent of Kroll-O'Gara, except as permitted by the Merger Agreement:
Amendments. Background America will not amend its Charter or Bylaws;
Changes in Capital Structure or Assets. Background America will not
change its capital structure, including issuing or repurchasing stock, or
mortgage, sell, pledge or otherwise dispose of its assets, declare or pay
any dividend or distribution or amend the terms of any of its securities;
Indebtedness, Capital Expenditures and Acquisitions. Background
America will not incur or guarantee any additional indebtedness, make any
loans, make any capital expenditures or acquire any other business;
Employment Matters. Background America will not increase the
compensation of any of its employees or increase any employee benefits;
Accounting Changes. Background America will not change its accounting
policies or procedures except as required by generally accepted accounting
principles;
Satisfaction of Claims or Liabilities. Background America will not
pay any material obligation, discharge or satisfy any encumbrance,
institute or settle any legal proceedings, or cancel or waive any material
debt, claim or right;
Contracts. Background America will not enter into any contracts or
terminate or modify any material contract or commit to provide services for
a period of more than twelve months; and
Commitments. Background America will not commit to do any of the
foregoing.
The Merger Agreement contains a number of exceptions to the prohibitions listed
above which are designed to permit Background America to operate its business in
the ordinary course.
ADDITIONAL AGREEMENTS
Consents; Approvals. Background America and Kroll-O'Gara have agreed to
use their best efforts to obtain all consents, waivers, approvals,
authorizations or orders, and to make all required filings, necessary to
complete the merger.
Tax Treatment. Each of Kroll-O'Gara and Background America has agreed not
to take any action that would reasonably be expected to adversely affect the
qualification of the merger as a tax-free reorganization under the provisions of
Section 368 of the Internal Revenue Code.
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Treatment of Options and Warrants. Background America will use its
reasonable best efforts to obtain the consents of holders of its stock options
and warrants to amendments to those options and warrants to negate actions which
would interfere with Kroll-O'Gara's ability to account for the merger as a
pooling of interests.
Other Agreements. Background America will use its reasonable best efforts
to enter into agreements, which are reasonably satisfactory to Kroll-O'Gara,
relating to the lease of two office buildings and, if desired by Kroll-O'Gara,
relating to System-X.
Pooling Accounting Treatment. Each of Kroll-O'Gara and Background America
has agreed not to take any action that would reasonably be expected to affect
adversely the ability of Kroll-O'Gara to treat the merger as a pooling of
interests. Additionally, Background America has agreed to use its best efforts
to negate any past actions which would reasonably be expected to impact
adversely Kroll-O'Gara's ability to account for the merger as a pooling of
interests.
CONDITIONS TO THE MERGER
Conditions to Obligation of Each Party to Effect the Merger. The
obligations of Kroll-O'Gara and Background America to complete the merger are
subject to various conditions, including:
(1) the Merger Agreement must have been approved by the requisite
votes of the shareholders of Background America;
(2) there must not be any pending or threatened action, proceeding or
inquiry by any court or governmental authority, or any other legal
restraint, preventing or seeking to prevent or invalidate the merger or
Kroll-O'Gara's ownership or operation of the business of Background
America;
(3) in each case, the representations and warranties of the other
party contained in the Merger Agreement must be complete and correct in all
material respects;
(4) in each case the other party must have performed or complied in
all material respects with all of its agreements and covenants required by
the Merger Agreement; and
(5) for Kroll-O'Gara there must have been no event or series of events
which has had, or is reasonably likely to have, a Material Adverse Effect
on Background America since October 31, 1998 and, for Background America,
there must have been no event or series of events which has had, or is
reasonably likely to have, a Material Adverse Effect on Kroll-O'Gara since
September 30, 1998.
Additional Conditions to Obligations of Kroll-O'Gara. The obligations of
Kroll-O'Gara to complete the merger are subject to additional conditions,
including:
(1) Background America must have obtained all material required
consents, waivers, approvals, authorizations or orders, and made all
required filings, except where the failure to do so would not reasonably be
expected to have a Material Adverse Effect;
(2) Kroll-O'Gara must have received an opinion of Arthur Andersen LLP,
in form and substance reasonably satisfactory to Kroll-O'Gara, regarding
the qualification of the merger for pooling of interests accounting
treatment and Background America must have received an opinion of its
accountants, in form and substance reasonably satisfactory to Kroll-O'Gara,
regarding the poolability of Background America;
(3) with the consents of their holders, Background America's stock
options and warrants must have been amended or otherwise dealt with on
terms and conditions reasonably satisfactory to Kroll-O'Gara;
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(4) Kroll-O'Gara must have received from each "affiliate" of
Background America an agreement to comply with the restrictions on
affiliates under Rule 145 under the Securities Act and under pooling of
interests accounting treatment;
(5) the holders of no more than 7.5% of Background America's
outstanding shares may have exercised dissenters' rights in connection with
the merger; and
(6) the agreement for the 10% Escrow must have been executed by
Background America.
TERMINATION
The Merger Agreement may be terminated at any time prior to its
effectiveness, notwithstanding its approval by the shareholders of Background
America:
(1) by mutual written consent authorized by the Boards of Directors of
Kroll-O'Gara and Background America; or
(2) by either Kroll-O'Gara or Background America if the merger is not
completed by June 30, 1999 (except that a party whose failure to fulfill a
material obligation under the Merger Agreement has prevented consummation
of the merger by that date cannot terminate the Merger Agreement for this
reason); or
(3) by Kroll-O'Gara if there has been a material misrepresentation,
breach or failure to comply with its obligations by Background America; or
(4) by Background America if there has been a material
misrepresentation, breach or failure to comply with its obligations by
Kroll-O'Gara.
MARKET PRICES AND DIVIDENDS
MARKET PRICES
Kroll-O'Gara common stock trades on the Nasdaq National Market under the
symbol "KROG." Trading in Kroll-O'Gara common stock began on November 13, 1996,
at the time of Kroll-O'Gara's initial public offering. On , 1999,
there were approximately beneficial owners of Kroll-O'Gara common
stock.
There is no public trading market for Background America's common or
preferred stock. There are 19 holders of Background America common stock and 17
holders of Background America preferred stock.
The table below sets forth the high and low sale prices for Kroll-O'Gara
common stock as reported by The Nasdaq Stock Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1997
First Quarter............................................. 13.25 9.00
Second Quarter............................................ 13.00 9.00
Third Quarter............................................. 15.00 10.25
Fourth Quarter............................................ 20.00 16.00
</TABLE>
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<TABLE>
<CAPTION>
HIGH LOW
----- -----
<S> <C> <C>
1998
First Quarter............................................. 19.25 16.50
Second Quarter............................................ 22.00 17.00
Third Quarter............................................. 26.00 18.50
Fourth Quarter............................................ 40.50 20.00
1999
First Quarter (through , 1999)................
</TABLE>
DIVIDENDS
Kroll-O'Gara expects that any future earnings will be retained to finance
its operations and for the growth and development of its business. Accordingly,
Kroll-O'Gara currently does not expect to pay cash dividends on its shares of
common stock in the foreseeable future. Additionally, the terms of
Kroll-O'Gara's Senior Notes and the credit agreement with its bank require
maintenance of certain financial ratios which may limit the funds available for
cash dividends. The payment of any future dividends will be subject to the
discretion of the Board of Directors of Kroll-O'Gara and will depend on
Kroll-O'Gara's results of operations, financial position and capital
requirements, general business conditions, restrictions imposed by financing
arrangements, if any, legal restrictions on the payment of dividends and other
factors its Board of Directors deems relevant.
Background America has never paid a cash dividend on its common stock.
Background America's dividend policy has been to retain any earnings to support
the expansion of operations. If the merger is not completed, Background
America's Board of Directors currently does not intend to pay cash dividends on
the Background America common stock in the foreseeable future. Any future cash
dividends would depend on earnings, capital requirements, Background America's
financial condition and other factors then deemed relevant by the Background
America Board. No dividends accrue or are payable on the Background America
preferred stock until June 2000.
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THE KROLL-O'GARA COMPANY
MANAGEMENT'S DISCUSSIONS AND ANALYSES OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Two Management's Discussions and Analyses are set forth in this section.
The first, beginning on this page, is based upon Kroll-O'Gara's historical
Consolidated Financial Statements and Notes which begin on page F-7. This
information has not been restated or adjusted to give effect to transactions
which occurred after it was prepared. The second, which begins on page 57, is
based upon Kroll-O'Gara's Supplemental Consolidated Financial Statements which
begin on page F-90. During 1998, Kroll-O'Gara acquired several companies in
transactions which were accounted for as poolings of interests. The Supplemental
Consolidated Financial Statements restate Kroll-O'Gara's historical Consolidated
Financial Statements to present financial information as if these acquired
companies had been a part of Kroll-O'Gara for the periods covered.
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. Historically, Kroll-O'Gara reported its revenue through three
groups. The Security Products and Services Group markets ballistic and blast
protected vehicles to businesses, individuals, and governments. It also offers
security services such as training, risk and crisis management services, and
site security systems. The Investigations and Intelligence Group offers business
intelligence and investigation services to clients worldwide. The Voice and Data
Communications Group offers secure satellite communication equipment and
satellite navigation systems. With the acquisition of Securify Inc.,
Kroll-O'Gara established a new Information Security Group.
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, resulting in net proceeds to
Kroll-O'Gara of $60.4 million. A portion of the net proceeds was used to pay off
$14.8 million of the 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 Kroll-O'Gara common stock in conjunction with the
offering. The offering followed Kroll-O'Gara's initial public offering, which
was completed on November 15, 1996 and resulted in the issuance of 2,048,000
shares of Common Stock.
Merger with Kroll Holdings. The merger with Kroll Holdings, Inc. ("KHI")
was completed on December 1, 1997. In the KHI merger, 6,098,561 shares of Common
Stock were issued and an aggregate of $14.5 million in outstanding indebtedness
of KHI was repaid. Approximately 550,000 additional shares of Kroll-O'Gara
common stock were reserved for issuance upon the exercise of options held by KHI
employees, which were assumed by Kroll-O'Gara. Revenues of KHI comprise all of
those reported by the Investigations and Intelligence Group as well as certain
revenues in the other two Groups.
Acquisitions -- 1997. On February 5, 1997, Kroll-O'Gara completed the
acquisition of all of the shares of Next Destination, Ltd of Salisbury, the
United Kingdom, a distributor of high technology products for the global
positioning satellite and satellite communication markets. The purchase price
consisted of 170,234 shares of Kroll-O'Gara common stock (valued at
approximately $1.9 million or $10.88 per share) and $1.6 million in
seller-provided financing, in the form of secured, three-year 6% notes. Next
Destination, which had been selling the portable satellite terminal offered by
Kroll-O'Gara, reports revenue through the Voice and Data Communications Group.
For accounting purposes, the
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acquisition was effective February 1, 1997, and the results of operations of
Next Destination are included in the consolidated results of operations of
Kroll-O'Gara from that date forward.
On February 12, 1997, Kroll-O'Gara completed the acquisition of all of the
shares of Labbe, S.A. a leading armorer of commercial and private vehicles
headquartered in Lamballe, France. The purchase price consisted of $10.7 million
in cash and 376,597 shares of Kroll-O'Gara common stock (valued at approximately
$3.5 million or $9.29 per share). The acquisition of Labbe increased
substantially the level of commercial revenue generated by the Security Products
and Services Group and enhanced Kroll-O'Gara's competitive position due to an
expanded product line, which includes cash-in-transit vehicles, and penetration
into new markets, such as Europe and Africa. For accounting purposes, the
acquisition was effective January 1, 1997, and the results of operations of
Labbe are included in the consolidated results of operations of Kroll-O'Gara
from that date forward.
On March 24, 1997, Kroll-O'Gara completed the acquisition of all the shares
of International Training, Inc., a provider of advanced security training
headquartered near Washington, D.C. The purchase price consisted of $0.5 million
in cash, 68,086 shares of Kroll-O'Gara common stock (valued at approximately
$0.8 million or $11.89 per share) and $1.2 million in seller-provided financing
in the form of unsecured, two-year 10% notes. ITI, which reports revenue through
the Security Products and Services Group, added a number of new services, such
as evasive and defensive driver training, terrorist surveillance training, force
protection consulting and advanced weapons training, not previously available
from Kroll-O'Gara. For accounting purposes, the acquisition was effective March
1, 1997, and the results of operations of ITI are included in the consolidated
results of operations of Kroll-O'Gara from that date forward.
Effective December 2, 1997, Kroll-O'Gara acquired all of the shares of ZAO
IMEA, as well as certain work in process of, and an agreement not to compete in
Russia by, Acorn Communications Group, Inc. IMEA and Acorn had substantially
common ownership prior to the acquisition. The purchase price of $3.0 million
consisted of $0.6 million in cash and 138,889 shares of Kroll-O'Gara common
stock (valued at approximately $2.4 million or $18.00 per share). IMEA is
engaged in the business of selling cash-in-transit vehicles and other commercial
bank equipment, such as safes, money counters and counterfeit detectors,
throughout Russia; it reports revenue through the Security Products and Services
Group. For accounting purposes, the acquisition was effective December 1, 1997,
and the results of operations of IMEA are included in the consolidated results
of operations of Kroll-O'Gara from that date forward.
Acquisitions -- 1998. On March 16, 1998, Kroll-O'Gara acquired all of the
shares of Corplex, Inc., a provider of investigative and executive protection
services based in New York, New York. The purchase price consisted of 29,207
shares of Kroll-O'Gara common stock (valued at approximately $0.5 million or
$17.98 per share). Corplex, which reports revenue through the Investigations and
Intelligence Group, allows Kroll-O'Gara to streamline its use of subcontract
investigators in the New York metropolitan area and to offer certain new
products, such as executive protection and electronic countermeasure expertise,
that are natural extensions of existing service areas. For accounting purposes,
the acquisition was effective March 1, 1998, and the results of operations of
Corplex are included in the consolidated results of operations of Kroll-O'Gara
from that date forward.
On June 15, 1998, Kroll-O'Gara acquired all of the capital stock of
Lindquist Avey MacDonald Baskerville, Inc., a provider of forensic and
investigative accounting services headquartered in Toronto, Canada. The purchase
price consisted of $4.7 million in cash and 278,340 shares of Kroll-O'Gara
common stock (valued at approximately $6.0 million or $21.52 per share). The
acquisition of Lindquist Avey expands Kroll-O'Gara's forensic and investigative
accounting service product line and establishes Kroll-O'Gara in a new geographic
market. For accounting purposes, the acquisition was effective June 1,
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<PAGE> 49
1998, and the results of operations of Lindquist Avey are included in the
consolidated results of operations of Kroll-O'Gara from that date forward.
Lindquist Avey reports revenue through the Investigations and Intelligence
Group.
On September 1, 1998, Kroll-O'Gara acquired all of the capital stock of
Kizorek, Inc. of Naperville, Illinois, now renamed InPhoto Surveillance, Inc.
The purchase price consisted of $0.8 million in cash and 352,381 shares of
Kroll-O'Gara common stock (valued at approximately $8.2 million or $23.35 per
share). InPhoto is a leading claims investigation agency which primarily
provides video surveillance services to insurance companies, corporations and
government agencies in connection with investigating exaggerated disability
claims and other fraud. It reports revenue through the Investigations and
Intelligence Group. For accounting purposes, the acquisition was effective 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.
On September 22, 1998, O'Gara-Hess & Eisenhardt de Colombia, a wholly owned
subsidiary of Kroll-O'Gara, acquired all of the assets of Protec S.A. of Bogota,
Colombia. Protec was engaged in the business of armoring cars in Colombia, South
America, and also operated a facility for the manufacture of bullet-and
smash-resistant glass for its own use and for sale to third parties. The
purchase price consisted of $3.2 million in cash and 38,788 shares of
Kroll-O'Gara common stock (valued at approximately $0.9 million or $22.95 per
share). OHE de Colombia will report revenue through the Security Products and
Services Group. For accounting purposes, the acquisition was effective September
30, 1998, and the results of operations of OHE de Colombia will be included in
the consolidated results of operations of Kroll-O'Gara from that date forward.
On November 18, 1998, Kroll-O'Gara entered into a definitive agreement to
acquire all of the capital stock of Holder Associates, S.A. of Buenos Aires,
Argentina, for a purchase price of $6.0 million, payable $4.5 million in cash
and $1.5 million in Kroll-O'Gara common stock. Holder Associates provides
investigative, security consulting and litigation support services, as well as
special escort and general protective services, primarily in Argentina. The
transaction has been completed, pending receipt of approval from the Argentine
Federal Police and the City of Buenos Aires, and was deemed effective October 1,
1998. Holder Associates reports revenue through Kroll-O'Gara's Investigations
and Intelligence Group.
On December 7, 1998, Kroll-O'Gara acquired all of the capital stock of
Laboratory Specialists of America, Inc. Laboratory Specialists owns and operates
an independent drug testing laboratory which is certified by the federal
Substance Abuse and Mental Health Services Administration and provides pre-and
post-employment drug testing services to corporate and institutional customers.
Kroll-O'Gara issued approximately 1,209,000 shares of Kroll-O'Gara common stock
(valued at approximately $35.7 million or $29.54 per share) in the transaction
and assumed options and warrants to issue an additional 63,480 shares of
Kroll-O'Gara common stock. The transaction has been accounted for as a pooling
of interests. Laboratory Specialists reports revenue through the Investigations
and Intelligence Group.
Laboratory Specialists completed several acquisitions prior to its
acquisition by Kroll-O'Gara. On January 2, 1996, Laboratory Specialists
completed the acquisition of National Psychopharmacology Laboratory, Inc. for
$3.4 million in common stock, cash, promissory notes and real estate. National
Psychopharmacology was engaged in forensic drug testing and clinical testing and
analysis. Laboratory Specialists consolidated and assimilated the forensic drug
testing operations of National Psychopharmacology with its own during the first
quarter of 1996. Laboratory Specialists discontinued the clinical testing and
analysis operations of National Psychopharmacology during the fourth quarter of
1996 after several attempts to dispose of the clinical testing and analysis
operations.
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On January 31, 1997, Laboratory Specialists paid approximately $2.4 million
to Pathology Laboratories, Ltd. for its customer list and all related assets,
and all assets owned by Pathology Laboratories in connection with its
Greenville, South Carolina laboratory. The purchase price consisted of cash,
debt and the assumption of certain obligations of Pathology Laboratories.
In addition, in 1997 and 1998 Laboratory Specialists paid approximately
$3.3 million to acquire customer lists and intangible assets from Harrison
Laboratories, Inc., Accu-Path Medical Laboratory, Inc. and TOXWORX Laboratories,
Inc. The purchase price for all customer lists and intangible assets were
recorded as intangible assets by Laboratory Specialists and will be amortized
over 15 years.
On December 18, 1998, Kroll-O'Gara acquired Fact Finders Limited of Hong
Kong and an affiliated company for a purchase price, payable in cash, of
approximately $3.2 million, plus an earn-out over three years based upon
attaining specified profits. Fact Finders' primary line of business is
investigating intellectual property cases in Hong Kong and the Peoples Republic
of China. Fact Finders will report revenue through the Investigations and
Intelligence Group. For accounting purposes, the acquisition was effective
November 1, 1998, and the results of operations of Fact Finders will be included
in the consolidated results of operations of Kroll-O'Gara from that date
forward.
On December 31, 1998, Kroll-O'Gara acquired all of the capital stock of
Securify Inc. of Mountain View, California. Securify provides comprehensive
security services in the areas of e-commerce and business and government
applications. Kroll-O'Gara issued 1,430,936 shares of Kroll-O'Gara common stock
(valued at approximately $52.7 million or $36.85 per share) in the transaction
and assumed options to purchase an additional 179,877 shares of Kroll-O'Gara
common stock. The transaction has been accounted for as a pooling of interests.
Securify reports revenue through Kroll-O'Gara's new Information Security Group.
Also on December 31, 1998, Kroll-O'Gara acquired all of the capital stock
of Schiff & Associates, Inc. of Austin, Texas, in exchange for 169,521 shares of
Kroll-O'Gara common stock (valued at approximately $6.2 million or $36.85 per
share). This acquisition also has been accounted for as a pooling of interests.
Schiff & Associates provides integrated security consulting and engineering
solutions to corporations, governments, architects, owners and developers for
projects in North America, Europe and Asia. It reports revenue through the
Investigations and Intelligence Group.
Acquisitions -- 1999. On March 1, 1999, Kroll-O'Gara acquired all of the
capital stock of Financial Research, Inc. of Fort Washington, Pennsylvania, in
exchange for 101,555 shares of Kroll-O'Gara common stock (valued at
approximately $ million or $ per share). The acquisition has been accounted
for as a pooling of interests. Financial Research provides business valuation
and economic damage analysis services throughout the United States. It reports
revenue through Kroll-O'Gara's Investigations and Intelligence Group.
Revenue recognition. Kroll-O'Gara recognizes net sales from government and
most commercial armoring contracts using the percentage-of-completion method
calculated utilizing the cost-to-cost approach. Under this method, Kroll-O'Gara
accrues estimated contract revenues based generally on the percentage that costs
to date bear to total estimated costs and recognizes estimated contract losses
in full when it becomes likely that a loss will occur. Accordingly, Kroll-O'Gara
periodically reviews and revises contract revenues and total cost estimates as
the work progresses and as change 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 would recognize a credit or a charge against current
earnings, which could be material. Contract costs include all direct material
and labor costs, along with certain overhead costs allocated to contract
production. Kroll-O'Gara records provisions for any estimated total contract
losses on uncompleted contracts in the period
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<PAGE> 51
in which it concludes that such losses will occur. Changes in estimated total
contract costs will 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.
Kroll-O'Gara recognizes revenue related to telecommunications equipment and
services as equipment is shipped or as services are provided. It records revenue
and related direct costs of brokered satellite time when payments are received
from customers.
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<PAGE> 52
RESULTS OF OPERATIONS -- HISTORICAL
The following discussion of results of operations and financial condition
is based upon and should be read in conjunction with Kroll-O'Gara's historical
Consolidated Financial Statements and Notes. As a result of acquisitions made by
Kroll-O'Gara in 1996, 1997 and 1998, which were accounted for as purchases,
financial results from period-to-period may lack comparability.
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE NINE
MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Security products and services
Military......................................... 17.4% 35.5% 23.0% 21.8% 24.7%
Commercial....................................... 23.2 16.0 32.5 31.7 31.6
Intelligence and investigations.................... 57.0 43.4 35.4 36.8 35.4
Voice and data communications...................... 2.4 5.1 9.1 9.7 8.3
----- ----- ----- ----- -----
Total net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 72.4 72.5 69.1 68.1 67.1
----- ----- ----- ----- -----
Gross profit.................................. 27.6 27.5 30.9 31.9 32.9
Operating expenses
Selling and marketing............................ 11.0 6.4 7.5 7.1 6.8
General and administrative and amortization...... 22.0 15.6 14.8 14.7 13.8
Merger related costs............................. -- -- 3.8 -- --
----- ----- ----- ----- -----
Operating income (loss)............................ (5.4) 5.5 4.7 10.0 12.3
Other income (expense)
Interest expense................................. (3.3) (2.0) (2.5) (2.5) (1.9)
Other, net....................................... (0.4) 0.2 (0.2) (0.0) 0.3
----- ----- ----- ----- -----
Income (loss) before minority interest, provision
(benefit) for income taxes, extraordinary item
and cumulative effect of change in accounting
principle........................................ (9.1) 3.7 2.0 7.6 10.7
Minority interest.................................. -- -- 0.1 0.1 --
----- ----- ----- ----- -----
Income (loss) before provision (benefit) for income
taxes, extraordinary item and cumulative effect
of change in accounting principle................ (9.1) 3.7 1.9 7.5 10.7
Provision (benefit) for income taxes............. (1.5) (0.1) 1.2 3.0 4.3
----- ----- ----- ----- -----
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle........................................ (7.6) 3.8 0.7 4.5 6.5
Extraordinary item, net............................ -- -- (0.1) (0.1) --
----- ----- ----- ----- -----
Income (loss) before cumulative effect of change in
accounting principle............................. (7.6) 3.8 0.6 4.4 6.5
----- ----- ----- ----- -----
Cumulative effect of change in accounting
principle........................................ -- -- (0.2) -- --
----- ----- ----- ----- -----
Net income (loss).................................. (7.6)% 3.8% 0.4% 4.4% 6.5%
===== ===== ===== ===== =====
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
NET SALES. Net sales for the nine months ended September 30 increased
$42.6 million, or 31%, to $178.9 million in 1998 from $136.4 million in the same
period in 1997.
Security Products and Services Group. For the nine months ended September
30, net sales for the Security Products and Services Group increased $27.8
million, or 38%, from $73.0 million in 1997 to $100.8 million in 1998. The
increase included net sales of commercial armoring products and services, which
increased $13.5 million, or 31%, from $43.2 million for the nine months ended
September 30,
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<PAGE> 53
1997 to $56.6 million in 1998. The increase in commercial net sales was
primarily due to continued growth in Kroll-O'Gara's international armoring
divisions. During 1996, 1997 and 1998, Kroll-O'Gara initiated start-up armoring
operations in Mexico, Brazil and the Philippines, and acquired Labbe and IMEA
and the assets of Protec. Kroll-O'Gara will continue in its efforts to expand
the operations of its existing foreign subsidiaries along with evaluating new
acquisition opportunities and additional new markets.
Increases in net sales for security services contributed to the increase in
net sales for commercial products and services contained within the Security
Products and Services Group. Net sales increased $1.0 million, or 18%, for the
nine months ended September 30, 1998 in comparison with 1997.
Also included in net sales for the Security Products and Services Group are
sales of military products and services, which increased $14.4 million, or 48%,
from $29.8 million for the nine months ended September 30, 1997 to $44.2 million
in 1998. In April 1998, Kroll-O'Gara began work on a new contract with the U.S.
Military to supply 738 armored HMMWVs to the U.S. Army and the U.S. Air Force
(the "738 CONTRACT"). Production on Kroll-O'Gara's previous contract with the
U.S. Military for 360 Up-Armored HMMWV's (the "360 CONTRACT") continued through
July 1998. The combination of production on the two contracts was a factor in
the increase in net sales. In future periods, HMMWV production will be based
solely on the 738 Contract.
Based on certain internal requirements, the U.S. Air Force has dictated an
aggressive delivery schedule for the 738 Contract. This delivery schedule will
require Kroll-O'Gara to maintain an increased level of production for the
Up-Armored HMMWV in comparison with production levels in previous periods. This
increase in production will result in an increase in net sales of military
products over levels experienced in 1997 and the first quarter of 1998.
Management expects to maintain the increased level of production throughout the
balance of 1998, with decreases in production and net sales as the 738 Contract
nears completion in 1999.
Investigations and Intelligence Group. For the nine months ended September
30, net sales for the Investigations and Intelligence Group increased $13.1
million, or 26%, from $50.2 million in 1997 to $63.3 million in 1998. The
increases in 1998 were primarily due to the inclusion of net sales from the
acquisition of Lindquist Avey, InPhoto and Corplex. Excluding net sales reported
by these acquired entities, net sales for the Investigations and Intelligence
Group would have been $54.3 million for the nine months ended September 30,
1998, in comparison with $50.2 million for the nine months ended September 30,
1997, an increase of 8%.
Voice and Data Communications Group. For the nine months ended September
30, net sales for the Voice and Data Communications Group increased $1.6
million, or 12%, from $13.2 million in 1997 to $14.8 million in 1998. Late in
the second quarter of 1998 and throughout a majority of the third quarter,
Kroll-O'Gara was approached by a third party interested in purchasing the Voice
and Data Communications Group. The Group's management during this time period
was focused on negotiations, due diligence requests, and related demands on
their time. The diversion resulted in a decrease in net sales in the third
quarter of 1998. Due to several factors, the potential buyer decided not to
complete the transaction, and all discussions have been abandoned. Kroll-O'Gara
does not expect to incur any material charges associated with these discussions.
Management expects that the fourth quarter results from the Voice and Data
Communications Group will return to the levels experienced in the first half of
1998.
COST OF SALES. For the nine months ended September 30, cost of sales
increased $27.2 million, or 29%, from $92.9 million in 1997 to $120.1 million in
1998. The increase in cost of sales was due to the increased level of business
activity experienced in 1998. For the nine months ended September 30, gross
profit as a percent of net sales was 32.9% and 31.9% for 1998 and 1997,
respectively.
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<PAGE> 54
Kroll-O'Gara has historically experienced its highest level of gross profit
as a percent of net sales in the Investigations and Intelligence Group and its
lowest level in the Voice and Data Communications Group. Gross profit as a
percentage of net sales for the Investigations and Intelligence Group increased
approximately 5% (from approximately 39% in 1997 to 44% in 1998) for the nine
months ended September 30, 1998. This increase was primarily due to a more
efficient use of subcontract services and certain high margin engagements booked
in the third quarter which are historically infrequent in nature.
Because these engagements are historically infrequent, management does not
expect to maintain the level of gross profit as a percent of net sales reflected
in the results of the Investigations and Intelligence Group. As always, the
gross profit percent will vary on the mix of sales from the three groups. As
revenue from the Investigations and Intelligence Group increases as a percent of
total net sales, the gross profit percent should increase as well.
OPERATING EXPENSES. For the nine months ended September 30, 1998,
operating expenses increased $7.1 million, or 24%, to $36.9 million from $29.8
million for the same period in 1997. The increase was attributable primarily to
an increase in the level of personnel and professional services required to
administer the growth experienced by Kroll-O'Gara in 1997 and 1998.
As a percent of net sales, operating expenses for the nine months ended
September 30 decreased from 22% in 1997 to 21% in 1998. As a result of
investments made by Kroll-O'Gara in facilities and personnel in previous
periods, Kroll-O'Gara did not require an additional commitment of fixed cost to
achieve growth in net sales in 1998. As sales increase further, Kroll-O'Gara
will be required to commit additional amounts of fixed cost to secure increased
incremental net sales.
INTEREST EXPENSE. For the nine months ended September 30, interest expense
decreased from $3.4 million in 1997 to $3.3 million in 1998, a decrease of 2%.
With the completion of the May 1998 offering, a significant portion of
Kroll-O'Gara's indebtedness was paid off (approximately $14.8 million). As a
result, Kroll-O'Gara experienced lower interest expense in the third quarter of
1998 and expects interest expense to be lower in comparison with 1997 for the
remainder of 1998.
Additionally, the agreement governing Kroll-O'Gara's Senior Notes (see
"Liquidity and Capital Resources") contained a provision for a reduction of the
interest rate if certain criteria were met. Kroll-O'Gara complied with the
specified criteria and the reduction of rates commenced in the second quarter of
1998. The reduction, which changed the interest rate from 9.56% to 8.56%,
contributed to the decrease in interest expense in 1998.
INTEREST INCOME. For the nine months ended September 30, interest income
increased from $0.3 million in 1997 to $0.8 million in 1998, an increase of
193%. Net proceeds of the May 1998 offering that were not used to pay down debt
were invested in short-term instruments with maturities of three months or less.
The return on these investments was responsible for the increase in interest
income in 1998. Management anticipates that it will continue to have funds
available for investment in the foreseeable future. As a result, Kroll-O'Gara
anticipates it will continue to experience higher levels of interest income in
1998 in comparison with 1997.
PROVISION FOR INCOME TAXES. For the nine months ended September 30, the
provision for taxes was $7.6 million and $4.0 million in 1998 and 1997,
respectively. The effective tax rate for the first three quarters of 1998 and
1997 was 40%.
49
<PAGE> 55
YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
1997 COMPARED TO 1996
NET SALES. Net sales increased $36.7 million, or 24%, from $153.7 million
in 1996 to $190.4 million in 1997. The primary reasons for this increase were
the acquisitions made in Kroll-O'Gara's Security Products and Services Group and
Voice and Data Communications Group in 1997.
Security Products and Services Group. Net sales for the Security Products
and Services Group increased $26.4 million, or 33%, from $79.2 million in 1996
to $105.6 million in 1997.
The Group's net sales for 1997 from commercial products and services were
$61.8 million, an increase of $37.3 million, or 152%, over 1996. This increase
was due to several factors, including primarily the incorporation of net sales
from Labbe and ITI in the Group's results. Excluding acquisitions, net sales
from commercial products and services increased $12.7 million, or 52%. Kroll-
O'Gara experienced significant growth in its Brazilian and Mexican armoring
subsidiaries, a trend management believes will continue for the foreseeable
future. With the purchase of IMEA and the initiation of a start-up armoring
operation in the Philippines, the Security Products and Services Group continued
its expansion in existing and new markets. Kroll-O'Gara will continue to seek
out new acquisition opportunities and additional new markets for its security
products and services.
In 1996, the U.S. Military requested accelerated production of Up-Armored
HMMWVs. This resulted in net sales of $54.6 million in 1996. Military net sales
returned to a non-accelerated level in 1997, resulting in net sales from
military products decreasing by $10.9 million, or 20%, to $43.7 million in 1997.
Management expects net sales from military products to remain at a level
comparable to 1997 for the foreseeable future.
Investigations and Intelligence Group. Net sales of the Investigations and
Intelligence Group in 1997 were derived from the activities of KHI. Throughout
1997, KHI was actively involved in various strategic discussions that
contemplated a sale of the company. Pending the outcome of such discussions, KHI
delayed implementation of its internal growth plans. Furthermore, uncertainties
regarding the outcome of the discussions resulted in the departure of certain
KHI managers prior to the merger with The O'Gara Company. Finally, in connection
with the KHI merger and in an effort to improve its cost structure, Kroll-O'Gara
reduced personnel in certain markets. As a result of these factors, net sales
for the Investigations and Intelligence Group increased only $0.7 million, or
1%, from $66.7 million in 1996 to $67.4 million in 1997. The change in 1997 was
attributable primarily to an increase in net sales from business intelligence
services, which includes due diligence work and services related to corporate
mergers and acquisitions, offset by a decline in net sales from investigations.
During the fourth quarter, the Investigations and Intelligence Group
reactivated its growth plan to open offices in Boston, Mexico City and Dallas
and to pursue related acquisitions. Kroll-O'Gara expects these initiatives will
have a favorable impact on growth of net sales in 1998.
Voice and Data Communications Group. During 1997, Kroll-O'Gara replaced
its primary wholesale distributor, acquired Next Destination, a subdistributor,
and reconfigured its distribution product mix to focus on the sale of satellite
communications equipment in addition to satellite navigation equipment. As a
result, Kroll-O'Gara experienced a growth rate in 1997 approximately five to six
times higher than normal. Net sales for the Voice and Data Communications Group
were $17.4 million in 1997, an increase of $9.7 million, or 124%, from $7.8
million in 1996. Kroll-O'Gara expects growth in this segment to return to a more
normal rate in 1998.
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<PAGE> 56
COST OF SALES AND GROSS PROFIT. Cost of sales for 1997 increased $20.2
million, or 18%, from $111.5 million in 1996 to $131.6 million in 1997. The
increase in cost of sales was due to increases in Kroll-O'Gara's level of
business activity as result of the acquisitions made in 1997.
Security Products and Services Group. Gross profit as a percent of net
sales for the Security Products and Services Group increased from 25.8% in 1996
to 28.4% in 1997. As revenues and costs are recognized using the
percentage-of-completion method of accounting, actual cost and gross profit may
be revised from previously estimated amounts.
Historically Kroll-O'Gara has experienced a higher gross profit percent
related to net sales of commercial armoring products in comparison with those of
military armoring products. In the future, Kroll-O'Gara expects to increase its
percentage of sales from commercial armoring products. However, because
Kroll-O'Gara's gross profit percentage was affected favorably by adjustments
resulting from performance on certain contracts in 1997, Kroll-O'Gara does not
expect to maintain the 1997 gross profit percentage level in 1998.
Investigations and Intelligence Group. Gross profit as a percent of net
sales for the Investigations and Intelligence Group increased from 29.4% in 1996
to 38.0% in 1997. Gross profit percent in 1996 was unfavorably affected by a
write-off of $5.0 million in uncollectible accounts receivable relating to
services provided in earlier periods. Without the write-off, the gross profit
percentages would have been comparable between periods.
Voice and Data Communications Group. Prior to the acquisition of Next
Destination, Kroll-O'Gara's Voice and Data Communications Group realized a
higher gross profit percentage due to a higher mix of integrated products versus
distributed products. As a distributor, Next Destination's gross profit
percentages were relatively lower. Gross profit as a percent of net sales for
the Voice and Data Communications Group decreased from 27.6% in 1996 to 17.9% in
1997. Management expects the level of gross profit percentage experienced in
1997 to be maintained in future periods.
OPERATING EXPENSES. Excluding expenses of $7.2 million related to the KHI
merger, operating expenses increased $8.9 million, or 26%, from $33.7 million in
1996 to $42.6 million in 1997. The $7.2 million in expenses related to the KHI
merger consisted of approximately $4.6 million in professional fees and expenses
and approximately $2.6 million relating to the integration of the operations of
the two companies. Included in the integration expenses were bonuses paid to
certain key employees as incentives to remain with Kroll-O'Gara and severance
payments made to employees who left employment of Kroll-O'Gara in connection
with the merger. Also included was a charge made as result of the acceleration
of the vesting of certain shares of restricted KHI stock immediately prior to
that merger. All of the costs related to the KHI merger were recognized in 1997
and will have no effect on the earnings of Kroll-O'Gara in future periods.
The primary reason for the increase in operating expenses, exclusive of
expenses related to the KHI merger, was the inclusion of operations from the
acquisitions made in 1997. In addition, the increase in operating expenses
reflects Kroll-O'Gara's efforts to expand into new markets, both in the Security
Products and Services Group and the Investigations and Intelligence Group.
Excluding expenses related to the KHI merger, operating expenses as a percent of
net sales stayed constant at 22% in both 1996 and 1997.
Prior to the KHI merger, KHI was involved in merger discussions with
Choicepoint, Inc., a subsidiary of Equifax, Inc. Choicepoint and KHI did not
reach a final agreement and, as a result, did not consummate the transaction.
Certain professional fees, which totaled approximately $0.5 million, associated
with the Choicepoint transaction are included in Kroll-O'Gara's operating
expenses in 1997.
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<PAGE> 57
INTEREST EXPENSE. Interest expense for 1997 increased $1.7 million, or
53%, to $4.8 million, compared to $3.1 million in 1996. The increase in 1997 was
the result of increased borrowing to finance Kroll-O'Gara's 1997 acquisitions.
Kroll-O'Gara retired a portion of its debt with proceeds of the May 1998
offering. As a result, interest expense is expected to be lower in 1998 than in
1997.
OTHER, NET. Other income (expense), net decreased from $0.3 million of
income in 1996 to $0.4 million in expense in 1997. The change was due primarily
to an increase in foreign currency translation losses recognized in 1997.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) for income
taxes increased from a benefit of $(0.2) million in 1996 to a provision of $2.4
million in 1997. Kroll-O'Gara's O'Gara-Hess & Eisenhardt Armoring Company
("OHE") subsidiary did not book a tax provision for the first ten months of 1996
due to OHE's S Corporation status, which was terminated on October 28, 1996 in
conjunction with a reorganization in advance of Kroll-O'Gara's initial public
offering.
Kroll-O'Gara incurred taxes at the effective rate of 65% in 1997 due to the
non-deductibility of certain expenses related to the KHI merger in the period
and the impact of foreign losses for which no benefit can be provided.
Management believes that the rate is substantially higher than Kroll-O'Gara will
experience in 1998 and for future periods.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Kroll-O'Gara had
previously capitalized costs related to the reengineering of certain information
systems. The capitalized amount, approximately $0.6 million before tax, was
expensed in 1997 in accordance with Emerging Issues Task Force Issue No. 97-13
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reengineering and Information Technology
Transformation." The amount expensed is shown net of applicable tax benefit of
$0.2 million.
1996 COMPARED TO 1995
NET SALES. Net sales increased $67.8 million, or 79%, from $85.8 million
in 1995 to $153.7 million in 1996. The primary reasons for this change were the
acceleration of the HMMWV contract and increases in the level of business
activity in the Investigations and Intelligence Group and Voice and Data
Communications Group discussed below.
Security Products and Services Group. Net sales for the Security Products
and Services Group increased $44.3 million, or 127%, from $34.9 million in 1995
to $79.2 million in 1996. 1996 net sales reflect the U.S. Government's request
to accelerate the production of Up-Armored HMMWVs and HMMWV armor kits. In
addition, the level of military net sales in 1995 was significantly impacted by
an unanticipated six-month delay in the delivery of HMMWV chassis from a
supplier, leading to production of substantially fewer Up-Armored HMMWVs.
Commercial revenue for 1996 was $24.6 million, an increase of $4.6 million,
or 23% over 1995. This increase was primarily due to the inclusion of net sales
from start-up operations in Russia, Mexico and Brazil.
Investigations and Intelligence Group. Net sales for the Investigations
and Intelligence Group increased $17.8 million, or 36%, from $48.9 million in
1995 to $66.7 million in 1996. The increase in 1996 was attributable primarily
to an increase in net sales from corporate investigation and business
intelligence services, which increased $12.3 million and $4.0 million,
respectively. These increases were the result of expansion into new geographic
areas and an enhanced marketing program, including a Vendor Integrity Program,
which accounted for approximately $1.0 million of the increase in net sales.
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<PAGE> 58
Voice and Data Communications Group. Net sales for the Voice and Data
Communications Group increased $5.7 million, or 280%, from $2.0 million in 1995
to $7.8 million in 1996. The increase in net sales was attributable primarily to
the addition of the Compact-M portable satellite terminal, initially marketed by
Kroll-O'Gara in 1996.
COST OF SALES AND GROSS PROFIT. Cost of sales for 1996 increased $49.3
million, or 79%, from $62.1 million in 1995 to $111.5 million in 1996. The
increase in cost of sales was due to increases in Kroll-O'Gara's level of
business activity.
Security Products and Services Group. Gross profit as a percent of net
sales for the Security Products and Services Group increased from 23.3% in 1995
to 25.8% in 1996. This increase was due to revenue recognized on new military
contracts, both U.S. and foreign, with a higher gross profit percent than
previously experienced. Also contributing to the increase in gross profit as a
percent of sales was the effect of the start-up operations in Brazil, Mexico and
Russia, which experienced higher gross margins for their products than
Kroll-O'Gara had experienced previously. These higher margins were the result of
lower direct costs and less developed competition in the markets where these
start-up operations exist.
Investigations and Intelligence Group. Gross profit as a percent of net
sales decreased from 31.1% in 1995 to 29.4% in 1996. Cost of sales in 1996
included a write-off of $5.0 million in uncollectible accounts receivable
relating to services provided in earlier periods. Without the effect of the
write-off, gross margin as a percent of net sales would have increased 5.8% over
1995 to 36.9%.
Voice and Data Communications Group. Gross profit as a percent of net
sales increased from 20.0% in 1995 to 27.6% in 1996. This increase was due
primarily to new products marketed by Kroll-O'Gara in 1996, that were sold at a
higher gross margin than Kroll-O'Gara had experienced with other products.
OPERATING EXPENSES. Operating expenses in 1996 increased $5.3 million, or
19%, from $28.4 million in 1995 to $33.7 million in 1996. As a percent of net
sales, operating expenses decreased from 33% in 1995 to 22% in 1996, as result
of increases in net sales which did not require a commitment of additional
marketing and administrative resources.
Selling and marketing expenses increased approximately $0.3 million, or 3%,
from $9.4 million in 1995 to $9.7 million in 1996. Certain costs, primarily
personnel and advertising, increased $1.2 million due to Kroll-O'Gara's growth
into its new Brazilian, Mexican and Russian markets. This increase was offset by
a $0.9 million reduction primarily attributable to the use of lower cost
information services for pre-marketing purposes in the Investigations and
Intelligence Group.
General and administrative expenses increased $5.0 million, or 27%, from
$18.9 million in 1995 to $23.9 million in 1996. This increase was attributable
primarily to the addition of professional employees and associated
infrastructure to support Kroll-O'Gara's increased level of business activity.
These increases included the addition of personnel and facilities to support
expansion into new product lines, such as risk and crisis management services,
and new geographic regions, such as Asia and Latin America.
INTEREST EXPENSE. Interest expense increased $0.3 million, or 12%, from
$2.8 million in 1995 to $3.1 million in 1996. The increase was due primarily to
increased borrowings necessary to finance increased production levels and new
operations in Kroll-O'Gara's Security Products and Services Group. This increase
was offset partially by a reduction in interest expense paid on long-term debt
outstanding to certain shareholders. The amount outstanding to those
shareholders was reduced due to principal payments made in 1996.
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<PAGE> 59
OTHER, NET. Other income (expense), net increased $0.7 million, from
$(0.4) million in 1995 to $0.3 million in 1996. This increase was due primarily
to a gain on the sale of marketable securities and a realized foreign currency
transaction gain.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) decreased
from a benefit of $1.3 million in 1995 to a benefit of $0.2 million in 1996. The
lower benefit for income taxes in 1996 in comparison with 1995 was related to
KHI's losses before taxes, which were lower in 1996. OHE booked no provision for
income taxes prior to the termination of its S Corporation status in October
1996.
LIQUIDITY AND CAPITAL RESOURCES -- HISTORICAL
General. Kroll-O'Gara historically has met its operating cash needs by
utilizing borrowings under its credit arrangements to supplement cash provided
by operations, excluding non-cash charges such as depreciation and amortization.
Public Offering. A portion of the net proceeds of the May 1998 offering
(approximately $60.4 million) was used to pay off certain indebtedness of
Kroll-O'Gara ($14.8 million). The remaining amounts were invested in short-term
instruments and are being used as necessary for acquisitions, working capital
and other general corporate purposes.
Senior Notes. On May 30, 1997, Kroll-O'Gara issued and sold $35.0 million
worth of Senior Notes, maturing on May 30, 2004, to certain institutional
investors. The Senior Notes bear interest at 8.56% and impose covenant
restrictions on Kroll-O'Gara's operations. These restrictions include
limitations on dividends and priority debt, and constraints on specific
investments, as well as requirements relating to Kroll-O'Gara's net worth, fixed
charge coverage ratio and level of outstanding debt.
Credit Facility. Kroll-O'Gara has a revolving credit facility with KeyBank
National Association, which was entered into in May 1997 and amended in October
1998. This agreement provides for a revolving line of credit of $7.0 million and
a letter of credit facility of approximately $7.7 million. The revolving credit
facility bears interest which fluctuates between the prime rate less 1.75% and
prime less 2.25%, or, at Kroll-O'Gara's option, between the LIBOR rate plus
0.75% and LIBOR plus 1.50%. The Credit Agreement imposes requirements on
Kroll-O'Gara's reported fixed charge coverage ratio, net worth and debt
capitalization, along with certain restrictions on investments, acquisitions,
intangibles and capital expenditures.
As of March 1, 1999, there were no borrowings under the revolving line of
credit. The remaining proceeds from the May 1998 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 foreseeable future.
Kroll-O'Gara will continue to pursue its strategy of acquiring security
related companies in an effort to consolidate its position in the risk
mitigation industry. To that end, Kroll-O'Gara will continue to review
additional sources of working capital as they become necessary.
Cash flows from operating activities. Net cash used in operating
activities was $11.7 million and $4.9 million for the nine months ended
September 30, 1998 and 1997, respectively. Since the inception of Kroll-O'Gara's
contract with the U.S. Government to armor the HMMWV through the second quarter
of 1998, Kroll-O'Gara was designated a Small Business according to U.S.
Government procurement regulations. Thereafter, Kroll-O'Gara's designation was
changed to Large Business for government procurement purposes.
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The change in designation affects progress payments made by the government
to Kroll-O'Gara over the course of a contract, and Kroll-O'Gara's cash flow, in
two ways. First, the progress payments will be determined using a smaller
percentage of total cost committed than they have in the past. Second,
Kroll-O'Gara will only be reimbursed for vendor invoices paid instead of
expenses incurred. Although these changes will not affect the total amount
ultimately collected, they will defer certain amounts previously included as
part of a progress payment until the vehicles are delivered.
The majority of these adjustments to the way Kroll-O'Gara is reimbursed for
its military business were applied to the HMMWV contracts on a cumulative basis
in the second quarter of 1998. This resulted in a significant increase in the
balance of Cost and Estimated Earnings in Excess of Billings on Uncompleted
Contracts and its related effect on cash flows from operating activities.
Kroll-O'Gara initiated discussions with the government in the third quarter of
1998 in an attempt to alleviate the significant negative cash flow position
Kroll-O'Gara had been put in due to the change in designation. The result of
these discussions was an agreement that the new payment guidelines would be
applied to Kroll-O'Gara on a prospective basis (effective in the second quarter
of 1998) only. As a result, Kroll-O'Gara received a payment for approximately
$11.0 million in the third quarter and had approximately $8.0 million of
outstanding receivables with the government as of September 30, 1998.
Kroll-O'Gara will continue to absorb the effect of the change in
procurement designation throughout the life of the HMMWV contract. Although
there will be no effect on Cash Flows from Operating Activities on a cumulative
basis, the change in payment terms will impact accounts receivable and cost and
estimated earnings in excess of billings on uncompleted contracts from
period-to-period.
Additionally, due to provisions of the purchase agreement, Kroll-O'Gara did
not record any accounts receivable on the opening balance sheet in connection
with the acquisition of Lindquist Avey. As of September 30, 1998, Lindquist Avey
had approximately $2.7 million recorded in accounts receivable, helping to
explain the significant amount of cash used by changes in accounts receivable.
Cash flows from investing activities. Historically, Kroll-O'Gara has
limited its capital expenditure requirements by leasing certain assets. Capital
expenditures totaled $3.5 million for the nine months ended September 30, 1998,
and $3.1 million for the same period in 1997. Additions to databases totaled
$3.1 million and $3.0 million for the nine months ended September 30, 1998 and
1997, respectively.
In addition to capital expenditures, 1997 investing activities included the
acquisitions of Labbe and ITI, which required a total cash outlay of $7.6
million, net of cash acquired. In 1998, the acquisitions of Lindquist Avey and
InPhoto and the assets of Protec required cash of approximately $8.3 million,
net of cash acquired. Management anticipates that, as Kroll-O'Gara continues to
pursue strategic acquisitions, additional cash outlays will be required.
Cash flows from financing activities. Net cash provided by financing
activities was $52.4 million and $24.1 million for nine months ended September
30, 1998 and 1997, respectively. Cash from financing activities in 1998 includes
the net proceeds from the May 1998 offering (approximately $60.4 million). The
amount in 1997 reflects borrowing under the Senior Notes that was used to
finance certain acquisitions and working capital requirements.
Foreign operations. Kroll-O'Gara attempts to mitigate the risks of doing
business in foreign countries by separately incorporating its operations in such
countries, maintaining reserves for credit losses, maintaining insurance on
equipment to protect against losses related to political risks and terrorism,
and using financial instruments to hedge 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 its exposure to foreign currency rate fluctuations.
At September 30, 1998 five such contracts were outstanding in connection with
intercompany demand notes with Labbe and Lindquist Avey. These
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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 were $17.9 million and $0.5 million, respectively.
These contracts mature between January 1999 and September 2000. Gains or losses
on existing forward instruments are offset against the translation effects
reflected in shareholders' equity. The fair value of forward contracts is not
recognized in the consolidated financial statements since they are accounted for
as hedges. Kroll-O'Gara does not hold or issue derivative financial instruments
for trading purposes.
Year 2000 Issues. Kroll-O'Gara has initiated a program to prepare for the
year 2000. During 1997, Kroll-O'Gara began the process of replacing the
enterprise systems at its two largest subsidiaries, both for the purpose of
making the systems Year 2000 compliant and to enhance the information systems
capabilities of these subsidiaries. The new systems are scheduled to be
operational by mid-1999.
Additionally, Kroll-O'Gara is implementing a plan to prepare its remaining
systems for Year 2000. Kroll-O'Gara has completed an inventory of all its
computer software and embedded technology and has prepared a master database of
all technology potentially impacted by the Year 2000 issue. In conjunction with
outside consultants, Kroll-O'Gara now is in the process of evaluating the
findings from its inventory and formulating plans of action. Kroll-O'Gara
anticipates that it will have taken all the necessary steps to ensure no
interruption in services as a result of the Year 2000 issue by the third quarter
of 1999. Total Year 2000 compliance cost is estimated to be approximately $4.0
million, of which approximately $3.6 relates to the new enterprise systems and
will be capitalized. The remaining approximately $0.4 million will be charged to
expense over several reporting periods in accordance with established accounting
pronouncements and is not expected to be material to Kroll-O'Gara's results of
operations or cash flows.
If systems are not in place or if all appropriate actions have not been
taken, Kroll-O'Gara's ability to administer and report revenue will be greatly
compromised. Both of Kroll-O'Gara's largest revenue groups are, for the most
part, manual operations. The manufacture of bullet resistant vehicles and the
investigation and intelligence services provided by Kroll-O'Gara are not largely
dependent on embedded technology. Barring a catastrophic collapse from third
party sources, such as a lack of electrical power, Kroll-O'Gara should be able
to maintain production in its main revenue producing groups, although at a
reduced level.
Many operations Kroll-O'Gara maintains, especially in the Voice and Data
Communications and the Investigations and Intelligence Groups, rely on third
party compliance with the Year 2000 issue to ensure Kroll-O'Gara can continue to
operate in these areas. Limited services in Kroll-O'Gara's Investigations and
Intelligence Group, including certain intelligence gathering services, rely
solely on third party sources, such as Lexis-Nexis, for their continued
operation. The satellite and global positioning equipment marketed by the Voice
and Data Communications Group is exclusively dependent on the compliance of the
manufacturers of the equipment and the agencies that maintain the satellites for
its revenue. Lack of compliance by third parties would significantly impact
Kroll-O'Gara in these areas.
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.
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Forward-Looking Statements. Forward-looking statements, within the meaning
of Section 21E of the Securities and Exchange Act of 1934, are made throughout
this Management's Discussion and Analysis of Financial Condition and Results of
Operations. 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 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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RESULTS OF OPERATIONS -- SUPPLEMENTAL
The following discussion of results of operations and financial condition
is based upon and should be read in conjunction with Kroll-O'Gara's Supplemental
Consolidated Financial Statements and Notes. As a result of acquisitions made by
Kroll-O'Gara in 1996, 1997 and 1998, which were accounted for as purchases,
financial results from period-to-period may lack comparability.
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- --------------
1995 1996 1997 1997 1998
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Security Products and Services
Military......................................... 15.7% 33.1% 21.2% 20.1% 22.7%
Commercial....................................... 21.0 14.9 30.0 29.3 29.1
Investigations and intelligence.................... 61.1 47.3 40.3 41.7 40.6
Information security............................... -- -- -- -- 0.0
Voice and data communications...................... 2.2 4.7 8.5 8.9 7.6
----- ----- ----- ----- -----
Total net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales...................................... 70.3 71.1 67.8 66.7 65.8
----- ----- ----- ----- -----
Gross profit.................................. 29.7 28.9 32.2 33.3 34.2
Operating expenses:
Selling and marketing............................ 10.6 6.3 7.3 6.9 6.6
General and administrative....................... 22.9 16.6 15.8 15.8 15.3
Merger related costs............................. -- -- 3.5 -- --
Asset impairment................................. -- 0.1 -- -- --
----- ----- ----- ----- -----
Operating income (loss)............................ (3.8) 5.9 5.6 10.6 12.3
Other income (expense):
Interest expense................................. (3.0) (1.9) (2.5) (2.4) (1.8)
Interest income.................................. 0.1 0.0 0.0 0.2 0.5
Other, net....................................... (0.1) 0.2 (0.2) (0.2) (0.1)
----- ----- ----- ----- -----
Income (loss) from continuing operations before
provision (benefit) for income taxes,
extraordinary item and cumulative effect of
accounting change................................ (6.8) 4.2 2.9 8.1 10.9
Provision for income taxes....................... 0.9 0.2 1.6 3.3 4.4
----- ----- ----- ----- -----
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
accounting change................................ (5.9) 4.0 1.3 4.8 6.5
Loss from operations of discontinued clinical
business......................................... -- (0.3) -- -- --
Loss on disposal of clinical business.............. -- (0.5) -- -- --
----- ----- ----- ----- -----
Income (loss) before extraordinary item and
cumulative effect of accounting change........... (5.9) 3.2 1.3 4.8 6.5
Cumulative effect of accounting change............. -- -- (0.2) -- --
Extraordinary item................................. -- -- (0.1) (0.1) --
----- ----- ----- ----- -----
Net income (loss).................................. (5.9)% 3.2% 1.0% 4.7% 6.5%
===== ===== ===== ===== =====
</TABLE>
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NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1997
NET SALES. Net sales for the nine months ended September 30, 1998 increased
$46.7 million, or 32%, to $194.6 million from $147.9 million for the nine months
ended September 30, 1997.
Security Products and Services Group. For the nine months ended September
30, net sales for the Security Products and Services Group increased $27.8
million, or 38%, from $73.0 million in 1997 to $100.8 million in 1998. The
increase included net sales of commercial armoring products and services, which
increased $13.5 million, or 31%, from $43.2 million for the nine months ended
September 30, 1997 to $56.6 million in 1998. The increase in commercial net
sales was primarily due to continued growth in Kroll-O'Gara's international
armoring divisions. During 1996, 1997, and 1998, Kroll-O'Gara initiated start-up
armoring operations in Mexico, Brazil and the Philippines, and acquired Labbe
and IMEA and the assets of Protec. Kroll-O'Gara will continue in its efforts to
expand the operations of its existing foreign subsidiaries along with evaluating
new acquisition opportunities and additional new markets.
Increases in net sales for security services contributed to the increase in
net sales for commercial products and services contained within the Security
Products and Services Group. Net sales increased $1.0 million, or 18%, for the
nine months ended September 30, 1998 in comparison with 1997.
Also included in net sales for the Security Products and Services Group are
sales of military products and services, which increased $14.4 million, or 48%,
from $29.8 million in 1997 to $44.2 million in 1998. In April 1998, Kroll-O'Gara
began work on a new contract with the U.S. Military to supply 738 armored HMMWVs
to the U.S. Army and the U.S. Air Force (the "738 CONTRACT"). Production on
Kroll-O'Gara's previous contract with the U.S. Military for 360 Up-Armored
HMMWV's (the "360 CONTRACT") continued through July 1998. The combination of
production on the two contracts was a factor in the increase in net sales. In
future periods, HMMWV production will be solely based on the 738 Contract.
Based on certain internal requirements, the U.S. Air Force has dictated an
aggressive delivery schedule for the 738 Contract. This delivery schedule will
require Kroll-O'Gara to maintain an increased level of production for the
Up-Armored HMMWV in comparison with production levels in previous periods. This
increase in production will result in an increase in net sales of military
products over levels experienced in 1997 and the first quarter of 1998.
Management expects to maintain the increased level of production throughout the
balance of 1998, with decreases in production and net sales as the 738 Contract
nears completion in 1999.
Investigations and Intelligence Group. For the nine months ended September
30, net sales for the Investigations and Intelligence Group increased $17.2
million, or 28%, from $61.7 million in 1997 to $78.9 million in 1998. The
increases in 1998 were primarily due to the inclusion of net sales from the
acquisitions of Lindquist Avey, InPhoto, and Corplex. Excluding net sales
reported by these acquired entities, net sales for the Investigations and
Intelligence Group would have been $69.9 million for the nine months ended
September 30, 1998, in comparison with $61.7 million for the nine months ended
September 30, 1997, an increase of 13%.
Voice and Data Communications Group. For the nine months ended September
30, net sales for the Voice and Data Communications Group increased $1.6
million, or 12%, from $13.2 million in 1997 to $14.8 million in 1998. Late in
the second quarter of 1998, and throughout a majority of the third quarter,
Kroll-O'Gara was approached by a third party interested in purchasing the Voice
and Data Communications Group. The Group's management during this time period
was focused on negotiations, due diligence requests, and related demands on
their time. The diversion resulted in a decrease in net
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sales in the third quarter of 1998. Due to several factors, the potential buyer
decided not to complete the transaction, and all discussions have been
abandoned. Kroll-O'Gara does not expect to incur any material charges associated
with these discussions. Management expects that the fourth quarter results from
the Voice and Data Communications Group will return to the levels experienced in
the first half of 1998.
COST OF SALES. For the nine months ended September 30, cost of sales
increased $29.3 million, or 30%, from $98.7 million in 1997 to $128.0 million in
1998. The increase in cost of sales was due to the increased level of business
activity experienced in 1998. Gross profit as a percentage of net sales for the
nine months ended September 30 was 34.2% and 33.3% for 1998 and 1997,
respectively. This increase is primarily due to an increase in gross profit as a
percent of net sales experienced in the Investigations and Intelligence Group.
This increase, approximately 4%, was due to a more efficient use of subcontract
services and certain high margin engagements booked during the year which are
historically infrequent in nature.
Because these engagements are historically infrequent, management does not
expect to maintain the level of gross profit as a percent of net sales reflected
in the results of the Investigations and Intelligence Group for the nine months
ended September 30, 1998. As always, the gross profit percent will vary on the
mix of sales from the three groups. Kroll-O'Gara historically has experienced
its highest levels of gross profit as a percent of net sales in the
Investigations and Intelligence Group and its lowest in the Voice and Data
Security Group. As revenue from the Investigations and Intelligence Group
increases as a percent of total net sales, the gross profit percent should
increase as well.
OPERATING EXPENSES. For the nine months ended September 30, 1998, operating
expenses increased $9.0 million, or 27%, to $42.6 million from $33.6 million for
the same period in 1997. The increase was primarily attributable to an increase
in the level of personnel and professional services required to administer the
growth experienced by Kroll-O'Gara in 1998.
As a percent of net sales, operating expenses for the nine months ended
September 30 decreased from 23% in 1997 to 22% in 1998. As a result of
investments made by Kroll-O'Gara in facilities and personnel in previous
periods, Kroll-O'Gara did not require an additional commitment of fixed cost to
achieve growth in net sales in 1998. As sales increase further, Kroll-O'Gara
will be required to commit additional amounts of fixed cost to secure increased
incremental net sales.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
1998 decreased $0.1 million, or 3%, to $3.5 million, compared to $3.6 million
for the same period in 1997. With the completion of the May 1998 offering, a
significant portion of Kroll-O'Gara's indebtedness was paid off (approximately
$14.8 million). As a result, Kroll-O'Gara experienced lower interest expense in
the third quarter of 1998 and expects interest expense to be lower in comparison
with 1997 for the remainder of 1998.
Additionally, the agreement governing Kroll-O'Gara's Senior Notes (see
"Liquidity and Capital Resources") contained a provision for a reduction of the
interest rate if certain criteria were met. Kroll-O'Gara complied with the
specified criteria and the step down of rates commenced in the second quarter of
1998. The reduction, which changed the interest rate from 9.56% to 8.56%,
contributed to the decrease in interest expense in 1998.
INTEREST INCOME. Interest income for the nine months ended September 30,
1998 increased $0.6 million, or 213%, to $0.9 million, compared to $0.3 million
in the same period in 1997. Net proceeds of the May 1998 offering that were not
used to pay down debt were invested in short-term instruments with maturities of
three months or less. The return on these investments was responsible for the
increase in interest income in 1998. Management anticipates that it will
continue to have funds
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available for investment in the foreseeable future. As a result, Kroll-O'Gara
anticipates it will continue to experience higher levels of interest income in
1998 in comparison with 1997.
Provision for income taxes. The provision for income taxes was $8.7 million
for the nine months ended September 30, 1998 in comparison with $4.8 million for
the same period in 1997. The effective tax rate for the first three quarters of
1998 and 1997 was 40%.
1997 COMPARED TO 1996
NET SALES. Net sales increased $41.2 million, or 25%, from $164.9 million
in 1996 to $206.1 million in 1997. The primary reasons for this change were the
acquisitions made in Kroll-O'Gara's Security Products and Services Group and
Voice and Data Communications Group in 1997.
Security Products and Services Group. Net sales for the Security Products
and Services Group increased $26.4 million, or 33%, from $79.2 million in 1996
to $105.6 in 1997.
The Group's net sales for 1997 from commercial products and services were
$61.8 million, an increase of $37.3 million, or 152%, over 1996. This increase
was due to several factors, including primarily the incorporation of net sales
from Labbe and ITI in the Group's results. Excluding acquisitions, net sales
from commercial products and services increased $12.7 million or 52%. Kroll-
O'Gara experienced significant growth in its Brazilian and Mexican armoring
subsidiaries, a trend management believes will continue for the foreseeable
future. With the purchase of IMEA and the initiation of a start-up armoring
operation in the Philippines, the Security Products and Services Group continued
its expansion in existing and new markets. Kroll-O'Gara will continue to seek
out new acquisition opportunities and additional new markets for its security
products and services.
In 1996, the U.S. Military requested accelerated production of Up-Armored
HMMWV's. This resulted in net sales of $54.6 million in 1996. Military net sales
returned to a non-accelerated level in 1997, resulting in net sales from
military products decreasing by $10.9 million, or 20%, to $43.7 million in 1997.
Management expects net sales from military products to remain at a level
comparable to 1997 for the forseeable future.
Investigations and Intelligence Group. Net sales for the Investigations
and Intelligence Group increased $5.1 million, or 7%, from $78.0 million in 1996
to $83.1 million in 1997. This increase was primarily due to an increase in
specimens analyzed by Laboratory Specialists, Kroll-O'Gara's drug testing
division. This increase in specimens analyzed was due to certain asset purchases
made by Kroll-O'Gara in early 1997, along with additional accounts obtained
through normal sales and marketing efforts.
Most of the revenue reported by the Investigations and Intelligence Group
is generated by KHI. Throughout 1997, KHI was actively involved in various
strategic discussions that contemplated the sale of the company. Pending the
outcome of such discussions, KHI delayed implementation of its internal growth
plans. In addition, uncertainties surrounding the outcome of the discussions
resulted in the departure of certain KHI managers prior to the merger with The
O'Gara Company. Finally, in connection with the KHI merger and in an effort to
improve its cost structure, Kroll-O'Gara reduced personnel in certain markets.
As result, revenue growth at KHI was flat in comparison with 1996.
During the fourth quarter of 1997, the Investigations and Intelligence
Group reactivated its growth plan to open offices in Boston, Mexico City, and
Dallas and to pursue related acquisitions. Kroll-O'Gara expects these
initiatives will have a favorable impact on growth of net sales in future
periods.
Voice and Data Communications Group. During 1997, Kroll-O'Gara replaced
its primary wholesale distributor, acquired Next Destination, a subdistributor,
and reconfigured its distribution
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product mix to focus on the sale of satellite communications equipment in
addition to satellite navigation equipment. As a result, Kroll-O'Gara
experienced a higher than normal growth rate in 1997. Net sales for the Voice
and Data Communications Group were $17.4 million in 1997, an increase of $9.7
million, or 124%, from $7.8 million in 1996. Kroll-O'Gara expects growth in this
segment to return to a more normal rate in 1998.
COST OF SALES AND GROSS PROFIT. Cost of sales for 1997 increased $22.5
million, or 19%, to $139.8 million from $117.3 million in 1996. The increase in
cost of sales was due to increases in Kroll-O'Gara's level of business activity
as result of the acquisitions made in 1997.
Security Products and Services Group. Gross profit as a percentage of net
sales for the Security Products and Services Group improved from 25.8% in 1996
to 28.4% in 1997. As revenues and costs are recognized using the
percentage-of-completion method of accounting, actual cost and gross profit may
be revised from previously estimated amounts. Historically Kroll-O'Gara has
experienced a higher gross profit percent related to net sales of commercial
armoring products in comparison with those of military armoring products. In the
future, Kroll-O'Gara expects to increase its percentage of sales from commercial
armoring products. However, because Kroll-O'Gara's gross profit percentage was
affected favorably by adjustments resulting from performance on certain
contracts in 1997, Kroll-O'Gara does not expect to maintain the 1997 gross
profit percentage level in 1998.
Investigations and Intelligence Group. Gross profit as a percent of net
sales for the Investigations and Intelligence Group increased from 32.1% in 1996
to 40.0% in 1997. Gross profit percent in 1996 was unfavorably affected by a
write-off of $5.0 million in uncollectible accounts receivable relating to
services provided in earlier periods. Without the write-off, the gross profit
percentages would have been comparable between periods.
Voice and Data Communications Group. Prior to the acquisition of Next
Destination, Kroll-O'Gara's Voice and Data Communications Group realized a
higher gross profit percentage due to its mix of integrated products versus
distributed products. As a distributor, Next Destination's gross profit
percentages were relatively lower. As result, the inclusion of revenue from Next
Destination caused a decrease in gross profit as a percent of net sales for the
Voice and Data Communications Group from 27.6% in 1996 to 17.9% in 1997.
Management expects the level of gross profit percentage experienced in 1997 to
be maintained in future periods.
OPERATING EXPENSES. Excluding expenses of $7.2 million related to the KHI
merger, operating expenses increased $9.8 million, or 26%, from $37.8 million in
1996 to $47.6 million in 1997. The $7.2 million in expenses related to the KHI
merger consisted of approximately $4.6 million in professional fees and expenses
and approximately $2.6 million relating to the integration of the operations of
the two companies. Included in the integration expenses were bonuses paid to
certain key employees as incentives to remain with Kroll-O'Gara and severance
payments made to employees who left Kroll-O'Gara in connection with the merger.
Also included is a charge made as a result of the acceleration of the vesting of
certain shares of restricted KHI stock immediately prior to that merger. All of
the costs related to the KHI merger were recognized in 1997 and will have no
effect on the earnings of Kroll-O'Gara in future periods.
The primary reason for the increase in operating expenses, exclusive of
expenses related to the KHI merger, was the inclusion of operations from the
acquisitions made in 1997. In addition, the increase in operating expenses
reflects Kroll-O'Gara's efforts to expand into new markets, both in the Security
Products and Service Group and the Investigations and Intelligence Group.
Excluding expenses related to the KHI merger, operating expenses as a percent of
net sales stayed essentially constant between the periods at 23.1% in 1997 and
22.9% in 1996.
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Prior to the KHI merger, KHI was involved in merger discussions with
Choicepoint, Inc., a subsidiary of Equifax, Inc. Choicepoint and KHI did not
reach a final agreement and, as a result, did not consummate the transaction.
Certain professional fees, which totaled approximately $0.5 million, associated
with the Choicepoint transaction are included in Kroll-O'Gara's operating
expenses in 1997.
INTEREST EXPENSE. Interest expense for 1997 increased $1.8 million, or
56%, to $5.1 million, compared to $3.3 million in 1996. The increase in 1997 was
the result of increased borrowing to finance Kroll-O'Gara's 1997 acquisitions.
Kroll-O'Gara retired a portion of its debt with proceeds from the May 1998
offering. As a result, interest expense is expected to be lower in 1998 than in
1997.
OTHER, NET. Other income (expense), net decreased from $0.3 million of
income in 1996 to $0.4 million in expense in 1997. The change was primarily due
to an increase in foreign currency translation losses recognized in 1997.
PROVISION FOR INCOME TAXES. The provision for income taxes was increased
from $0.4 million in 1996 to $3.3 million in 1997. Kroll-O'Gara's O'Gara-Hess &
Eisenhardt Armoring Company ("OHE") subsidiary did not book a tax provision for
the first ten months of 1996 due to OHE's S Corporation status, which was
terminated on October 28, 1996 in conjunction with a reorganization in advance
of Kroll-O'Gara's initial public offering.
Kroll-O'Gara incurred taxes at the effective rate of 56% in 1997 due to the
non-deductibility of certain expenses related to the KHI merger in the period
and the impact of foreign losses for which no benefit can be provided.
Management believes that the rate is substantially higher than Kroll-O'Gara will
experience in 1998 and for future periods.
DISCONTINUED OPERATIONS. In connection with the acquisition of National
Psychopharmacology Laboratory, Inc., Kroll-O'Gara's Laboratory Specialists
subsidiary attempted to sell the clinical testing and analysis lines of business
of National Psychopharmacology without success. In the fourth quarter of 1996,
Laboratory Specialists discontinued these operations resulting in a loss from
the discontinued operation of $0.5 million and a loss on the disposal of $0.8
million, after giving effect to tax benefit of $0.3 million and $0.5 million,
respectively.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Kroll-O'Gara had
previously capitalized costs related to the reengineering of certain information
systems. The capitalized amount, approximately $0.6 million before tax, was
expensed in 1997 in accordance with Emerging Issues Task Force No. 97-13
"Accounting for Costs Incurred in Connection with a Consulting Contract that
Combines Business Process Reegineering and Information Technology
Transformation." The amount expensed is shown net of applicable tax benefit of
$0.2 million.
1996 COMPARED TO 1995
NET SALES. Net sales increased $69.9 million, or 74%, from $95.0 million
in 1995 to $164.9 million in 1996. The primary reasons for this change were the
acceleration of the HMMWV contract and increases in the level of business
activity in the Intelligence and Investigation Group and Voice and Data
Communications Group discussed below.
Security Products and Services Group. Net sales for the Security Products
and Services Group increased $44.3 million, or 127%, from $34.9 million in 1995
to $79.2 million in 1996. 1996 net sales reflect the U.S. Government's request
to accelerate the production of Up-Armored HMMWVs and HMMWV armor kits. In
addition, the level of military revenue in 1995 was significantly impacted by an
unanticipated six-month delay in the delivery of HMMWV chassis from a supplier,
leading to production of substantially fewer Up-Armored HMMWVs.
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Commercial revenue for 1996 was $24.6 million, an increase of $4.6 million,
or 23%, over 1995. This increase was primarily due to the inclusion of revenue
from start-up operations in Russia, Mexico and Brazil.
Investigations and Intelligence Group. Net sales for the Investigations
and Intelligence Group increased $19.9 million, or 34%, from $58.1 million in
1995 to $78.0 million in 1996. The increase in 1996 was attributable primarily
to an increase in net sales from corporate investigation and business
intelligence services, which increased $12.3 million and $4.0 million,
respectively. These increases were the result of expansion into new geographic
areas and an enhanced marketing program, including a Vendor Integrity Program,
which accounted for approximately $1.0 million of the increase in net sales.
Voice and Data Communications Group. Net sales for the Voice and Data
Communications Group increased $5.7 million, or 280%, from $2.0 million in 1995
to $7.8 million in 1996. The increase in net sales was attributable primarily to
the addition of the Compact-M portable satellite terminal, initially marketed by
Kroll-O'Gara in 1996.
COST OF SALES AND GROSS PROFIT. Cost of sales for 1996 increased $50.5
million, or 76%, to $117.3 million from $66.8 million in 1995. The increase in
cost of sales was due to increases in Kroll-O'Gara's level of business activity.
Security Products and Services Group. Gross profit as a percentage of net
sales for the Security Products and Services Group increased from 23.3% in 1995
to 25.8% in 1996. This increase was due to revenue recognized on new military
contracts, both U.S. and foreign, with a higher gross profit percentage than
previously experienced. Also contributing to the increase in gross profit as a
percent of sales was the effect of the start-up operations in Brazil, Mexico and
Russia, which experienced higher gross margins for their products than
Kroll-O'Gara had experienced previously. These higher margins were the result of
lower direct costs and less developed competition in the markets where these
start-up operations exist.
Investigations and Intelligence Group. As a percent of net sales, gross
profit decreased from 33.9% in 1995 to 32.1% in 1996. Cost of sales in 1996
included a write-off of $5.0 million in uncollectible accounts receivable
relating to services provided in earlier periods. Without the effect of the
write-off, gross margin as a percent of net sales would have increased 4.6% over
1995 to 38.5%.
Voice and Data Communications Group. Gross profit as a percent of net
sales increased from 20.0% in 1995 to 27.6% in 1996. This increase was primarily
due to new products marketed by Kroll-O'Gara in 1996, that were sold at a higher
gross margin than Kroll-O'Gara had experienced with other products.
OPERATING EXPENSES. Operating expenses in 1996 increased $6.0 million, or
19%, from $31.8 million in 1995 to $37.8 million in 1996. As a percent of net
sales, operating expenses decreased from 33% in 1995 to 23% in 1996, as a result
of increases in net sales which did not require a commitment of additional
marketing and administrative resources.
Selling and marketing expenses increased approximately $0.4 million, or 4%,
from $10.0 million in 1995 to $10.4 million in 1996. Certain costs, primarily
personnel and advertising, increased $1.2 million due to Kroll-O'Gara's growth
into its new Brazilian, Mexican and Russian markets. This increase was offset by
a $0.8 million reduction primarily attributable to the use of lower cost
information services for pre-marketing purposes in the Investigations and
Intelligence Group.
General and administrative expenses increased $5.5 million, or 25%, from
$21.8 million in 1995 to $27.3 million in 1996. This increase was attributable
primarily to the addition of professional employees and associated
infrastructure to support Kroll-O'Gara's increased level of business activity.
These
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increases included the addition of personnel and facilities to support expansion
into new product lines, such as risk and crisis management services, and new
geographic regions, such as Asia and Latin America.
INTEREST EXPENSE. Interest expense increased $0.4 million, or 13%, from
$2.9 million in 1995 to $3.3 million in 1996. The increase was primarily due to
increased borrowings necessary to finance increased production levels and new
operations in Kroll-O'Gara's Security Products and Services Group. This increase
was partially offset by a reduction in interest expense paid on long-term debt
outstanding to certain shareholders. The amount outstanding with those
shareholders was reduced due by principal payments made in 1996.
OTHER, NET. Other income (expense), net increased $0.4 million, or 417%,
from $(0.1) million in 1995 to $0.3 million in 1996. This increase was primarily
due to a gain on the sale of marketable securities and a realized foreign
currency translation gain.
PROVISION (BENEFIT) FOR INCOME TAXES. The provision (benefit) increased
from a benefit of $0.8 million in 1995 to a provision of $0.4 million in 1996.
The lower benefit for income taxes in 1996 in comparison with 1995 was related
to KHI's losses before taxes, which were lower in 1996. OHE booked no provision
for income taxes prior to the termination of its S Corporation status which
terminated in October 1996.
LIQUIDITY AND CAPITAL RESOURCES -- SUPPLEMENTAL
General. Kroll-O'Gara historically has met its operating cash needs by
utilizing borrowings under its credit arrangements to supplement cash provided
by operations, excluding non-cash charges such as depreciation and amortization.
Public Offering. A portion of the net proceeds of the May 1998 offering
(approximately $60.4 million) was used to pay off certain indebtedness of
Kroll-O'Gara ($14.8 million). The remaining amounts were invested in short-term
instruments and are being used as necessary for acquisitions, working capital
and other general corporate purposes.
Senior Notes. On May 30, 1997, Kroll-O'Gara issued and sold $35.0 million
worth of Senior Notes, maturing on May 30, 2004, to certain institutional
investors. The Senior Notes bear interest at 8.56% and impose covenant
restrictions on Kroll-O'Gara's operations. These restrictions include
limitations on dividends and priority debt, and constraints on specific
investments, as well as requirements relating to Kroll-O'Gara's net worth, fixed
charge coverage ratio and level of outstanding debt.
Credit Facility. Kroll-O'Gara has a revolving credit facility with KeyBank
National Association, which was entered into in May 1997 and amended in October
1998. This agreement provides for a revolving line of credit of $7.0 million and
a letter of credit facility of approximately $7.7 million. The revolving credit
facility bears interest which fluctuates between the prime rate less 1.75% and
prime less 2.25%, or, at Kroll-O'Gara's option, between the LIBOR rate plus
0.75% and LIBOR plus 1.50%. The Credit Agreement imposes requirements on
Kroll-O'Gara's reported fixed charge coverage ratio, net worth and debt
capitalization, along with certain restrictions on investments, acquisitions,
intangibles and capital expenditures.
As of March 1, 1999, there were no borrowings under the revolving line of
credit. The remaining proceeds from the May 1998 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 foreseeable future.
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Kroll-O'Gara will continue to pursue its strategy of acquiring security
related companies in an effort to consolidate its position in the risk
mitigation industry. To that end, Kroll-O'Gara will continue to review
additional sources of working capital as they become necessary.
Cash flows from operating activities. Net cash used in operating
activities was $10.6 million and $3.0 million for the nine months ended
September 30, 1998 and 1997, respectively. Since the inception of Kroll-O'Gara's
contract with the U.S. Government to armor the HMMWV through the second quarter
of 1998, Kroll-O'Gara was designated a Small Business according to U.S.
Government procurement regulations. Thereafter, Kroll-O'Gara's designation was
changed to Large Business for government procurement purposes.
The change in designation affects progress payments made by the government
to Kroll-O'Gara over the course of a contract, and Kroll-O'Gara's cash flow, in
two ways. First, the progress payments will be determined using a smaller
percentage of total cost committed than they have in the past. Second,
Kroll-O'Gara will only be reimbursed for vendor invoices paid instead of
expenses incurred. Although these changes will not affect the total amount
ultimately collected, they will defer certain amounts previously included as
part of a progress payment until the vehicles are delivered.
The majority of these adjustments to the way Kroll-O'Gara is reimbursed for
its military business were applied to the HMMWV contracts on a cumulative basis
in the second quarter of 1998. This resulted in a significant increase in the
balance of Cost and Estimated Earnings in Excess of Billings on Uncompleted
Contracts and its related effect on cash flows from operating activities.
Kroll-O'Gara initiated discussions with the government in the third quarter of
1998 in an attempt to alleviate the significant negative cash flow position
Kroll-O'Gara had been put in due to the change in designation. The result of
these discussions was an agreement that the new payment guidelines would be
applied to Kroll-O'Gara on a prospective basis (effective in the second quarter
of 1998) only. As a result, Kroll-O'Gara received a payment for approximately
$11.0 million in the third quarter and had approximately $8.0 million of
outstanding receivables with the government as of September 30, 1998.
Kroll-O'Gara will continue to absorb the effect of the change in
procurement designation throughout the life of the HMMWV contract. Although
there will be no effect on Cash Flows from Operating Activities on a cumulative
basis, the change in payment terms will impact accounts receivable and cost and
estimated earnings in excess of billings on uncompleted contracts from
period-to-period.
Additionally, due to provisions of the purchase agreement, Kroll-O'Gara did
not record any accounts receivable on the opening balance sheet in connection
with the acquisition of Lindquist Avey. As of September 30, 1998, Lindquist Avey
had approximately $2.7 million recorded in accounts receivable, helping to
explain the significant amount of cash used by changes in accounts receivable.
Cash flows from investing activities. Historically, Kroll-O'Gara has
limited its capital expenditure requirements by leasing certain assets. Capital
expenditures totaled $4.2 million for the nine months ended September 30, 1998,
and $6.5 million for the same period in 1997. Additions to databases totaled
$3.1 million and $3.0 million for the nine months ended September 30, 1998 and
1997, respectively.
In addition to capital expenditures, 1997 investing activities included the
acquisitions of Labbe and ITI, which required a total cash outlay of $7.6
million, net of cash acquired. In 1998, the acquisitions of Lindquist Avey,
InPhoto, the assets of Protec, Pathology Laboratories, Harrison Laboratories,
Accu-Path and TOXWORX Laboratories required cash of approximately $11.4 million,
net of cash acquired. Management anticipates that, as Kroll-O'Gara continues to
pursue strategic acquisitions, additional cash outlays will be required.
Cash flows from financing activities. Net cash provided by financing
activities was $59.6 million and $25.5 million for the nine months ended
September 30, 1998 and 1997, respectively. Cash from
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financing activities in 1998 includes the net proceeds from the May 1998
offering (approximately $60.4 million) completed in the second quarter. In
addition, Laboratory Specialists completed a private offering of its stock in
June 1998 with proceeds of approximately $2.3 million. A portion of the proceeds
from these transactions was used to pay off certain indebtedness of Kroll-O'Gara
(approximately $14.8 million). The amounts not used to pay off debt were
invested in short-term instruments and are being used as necessary for
acquisitions, working capital and other general corporate purposes.
Cash flows from financing activities also include convertible preferred
stock issued by Securify in 1998 (which was converted into Kroll-O'Gara common
stock in Kroll-O'Gara's acquisition of Securify). The net proceeds to Securify
associated with the sale of these shares were approximately $5.5 million.
The amount in 1997 reflects borrowing under the Senior Notes that was used
to finance certain acquisitions and working capital requirements.
Foreign operations. Kroll-O'Gara attempts to mitigate the risks of doing
business in foreign countries by separately incorporating its operations in such
countries, maintaining reserves for credit losses, maintaining insurance on
equipment to protect against losses related to political risks and terrorism,
and using financial instruments to hedge 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 its exposure to foreign currency rate fluctuations.
At September 30, 1998 five such contracts were outstanding in connection with
intercompany demand notes with Labbe and Lindquist Avey. These contracts are
intended to hedge 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 were $17.9 million and $0.5 million, respectively. These
contracts mature between January 1999 and September 2000. Gains or losses on
existing forward instruments are offset against the translation effects
reflected in shareholders' equity. The fair value of forward contracts is not
recognized in the consolidated financial statements since they are accounted for
as hedges. Kroll-O'Gara does not hold or issue derivative financial instruments
for trading purposes.
Year 2000 Issues. Kroll-O'Gara has initiated a program to prepare for the
year 2000. During 1997, Kroll-O'Gara began the process of replacing the
enterprise systems at its two largest subsidiaries, both for the purpose of
making the systems Year 2000 compliant and to enhance the information systems
capabilities of these subsidiaries. The new systems are scheduled to be
operational by mid-1999.
Additionally, Kroll-O'Gara is implementing a plan to prepare its remaining
systems for Year 2000. Kroll-O'Gara has completed an inventory of all its
computer software and embedded technology and has prepared a master database of
all technology potentially impacted by the Year 2000 issue. In conjunction with
outside consultants, Kroll-O'Gara now is in the process of evaluating the
findings from its inventory and formulating plans of action. Kroll-O'Gara
anticipates that it will have taken all the necessary steps to ensure no
interruption in services as result of the Year 2000 issue by the third quarter
of 1999. Total Year 2000 compliance cost is estimated to be approximately $4.0
million, of which approximately $3.6 million relates to the new enterprise
systems and will be capitalized. The remaining approximately $0.4 million will
be charged to expense over several reporting periods in accordance with
established accounting pronouncements and is not expected to be material to
Kroll-O'Gara's results of operations or cash flows.
If systems are not in place or if all appropriate actions have not been
taken, Kroll-O'Gara's ability to administer and report revenue will be greatly
compromised. Both of Kroll-O'Gara's largest revenue Groups are, for the most
part, manual operations. The manufacture of bullet resistant vehicles and the
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investigation and intelligence services provided by Kroll-O'Gara are not largely
dependent on embedded technology. Barring a catastrophic collapse from third
party sources, such as a lack of electrical power, Kroll-O'Gara should be able
to maintain production in its main revenue producing groups, although at a
reduced level.
Many operations Kroll-O'Gara maintains, especially in the Voice and Data
Communications and Investigations and Intelligence Groups, rely on third party
compliance with the Year 2000 issue to ensure Kroll-O'Gara can continue to
operate in these areas. Limited services in Kroll-O'Gara's Investigations and
Intelligence Group, including certain intelligence gathering services, rely
solely on third party sources, such as Lexis-Nexis, for their continued
operation. The satellite and global positioning equipment marketed by the Voice
and Data Communications Group is exclusively dependent on the compliance of the
manufacturers of the equipment and the agencies that maintain the satellites for
its revenue. Lack of compliance by third parties would significantly impact
Kroll-O'Gara in these areas.
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 and Information Security Groups and its
ability to generate net sales is dependant upon obtaining many new projects each
year, most of which are of a relatively short duration. Period-to-period
comparisons within a given year or between years may not be meaningful or
indicative of operating results over a full fiscal year.
Forward-Looking Statements. Forward-looking statements, within the meaning
of Section 21E of the Securities and Exchange Act of 1934, are made throughout
this Management's Discussion and Analysis of Financial Conditions and Results of
Operations. 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 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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BUSINESS
DEVELOPMENTS SINCE SEPTEMBER 30, 1998.
Since September 30, 1998, Kroll-O'Gara has made four significant
acquisitions. Laboratory Specialists of America, Inc., owns and operates an
independent, federally-certified drug testing laboratory and provides pre- and
post-employment drug testing services. Fact Finders Limited investigates
intellectual property cases in Hong Kong and the People's Republic of China.
Schiff & Associates, Inc. provides security consulting and engineering services.
Securify Inc. provides objective information security services to businesses and
government agencies, including network and system review and repair, product
assessment, creation and implementation of security policies, architecture and
design, and training. The businesses of Laboratory Specialists, Fact Finders and
Schiff & Associates will expand Kroll-O'Gara's Investigations and Intelligence
Group. Securify will form the basis of a fourth business group, the Information
Security Group. Future descriptions of Kroll-O'Gara's business will reflect
these acquisitions. However, except where specifically noted, the business
discussion which follows reflects activities through September 30, 1998, and
does not include information relating to the activities of these acquired
companies.
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. Worldwide, governments, businesses and individuals increasingly
are recognizing the need for products and services that mitigate the growing
risks associated with fraud, electronic threats, physical threats and uninformed
decisions based upon incomplete or inaccurate information. Through its network
of 60 offices located in 19 countries, Kroll-O'Gara is meeting these needs by
providing information, analysis, training, advice and products to its customers.
Kroll-O'Gara's operations have been divided among the following three
business segments:
Investigations and Intelligence. Kroll-O'Gara's Investigations and
Intelligence Group provides: (1) investigative services designed to mitigate or
determine financial fraud, theft of trade secrets, infringement of trademarks or
other intellectual property rights, and employee misconduct; (2) litigation or
arbitration assistance in preparation for legal proceedings; (3) forensic
auditing and asset tracing services and financial profiles in connection with
matters such as bankruptcy cases and loan defaults; (4) due diligence
investigations and background information for business decisions; and (5)
monitoring and special inquiry assistance in the discovery and assessment of
legal and ethical misconduct and the development and installation of appropriate
systems to assist in ensuring future compliance with relevant standards.
Security Products and Services. Kroll-O'Gara's Security Products and
Services Group provides: (1) armoring products, including ballistic and blast
protected armoring systems for commercial and military vehicles, aircraft and
missile components; and (2) security services, including advanced driver
training, force protection training, risk and crisis management and turn-key
site security systems.
Voice and Data Communications. Kroll-O'Gara's Voice and Data
Communications Group has provided: (1) planning, design, and hardware and
software integration services which are customized to meet specific portable
satellite communications or navigation needs; and (2) computer hardware and
software security consulting services. The computer security services provided
by this Group are being shifted to Kroll-O'Gara's new Information Security
Group.
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PRODUCTS AND SERVICES
The following table presents the net sales of Kroll-O'Gara's products and
services by Group for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Security Products and Services Group................ $34,883 $ 79,156 $105,557
Investigations and Intelligence Group............... 48,914 66,735 67,419
Voice and Data Communications Group................. 2,044 7,770 17,437
------- -------- --------
$85,841 $153,661 $190,413
======= ======== ========
</TABLE>
In addition to the information presented above, see Notes to Kroll-O'Gara's
Consolidated Financial Statements included elsewhere in this Proxy
Statement/Prospectus for business segment data and for information concerning
foreign and domestic operations and export sales.
SECURITY PRODUCTS AND SERVICES GROUP
The Security Products and Services Group has three product categories: (1)
commercial products, (2) military products, and (3) security services. Net sales
for the Security Products and Services Group totaled $105.6 million for fiscal
year 1997. The following table presents the aggregate net sales for each of the
three product categories for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Commercial products.................................. $15,818 $18,304 $ 54,541
Military products.................................... 14,955 54,596 43,719
Security services.................................... 4,110 6,256 7,297
------- ------- --------
$34,883 $79,156 $105,557
======= ======= ========
</TABLE>
Commercial Products
Kroll-O'Gara armors a variety of vehicles including limousines, sedans,
sport utility vehicles, commercial trucks and money transport vehicles that
protect against varying degrees of ballistic and blast threats. The armoring
process begins with the disassembly of a base vehicle which is purchased new
from a dealership or directly from the factory. This disassembly normally
involves the removal of the interior trim, seats, doors and windows. The
passenger compartment then is armored with both opaque armor (metallic, fibrous
and ceramic materials) and transparent armor (glass/plastic laminate) and other
features, such as run flat tires and non-exploding gas tanks are added. Finally,
the vehicle is reassembled as close to its original appearance as possible. The
types of commercial products produced by Kroll-O'Gara are described below.
During 1997, Kroll-O'Gara shipped approximately 1,000 armored vehicles.
Armored vehicles. Kroll-O'Gara produces fully armored vehicles and light
armored vehicles. Fully armored vehicles, such as limousines, large sedans (such
as a Cadillac, Mercedes Benz S600 or Volvo S90) or sport utility vehicles (such
as the GMC/Chevrolet Suburban), typically are armored to protect against attacks
from military assault rifles such as AK-47s and M16s and from certain underbody
explosives. Certain vehicles also are blast protected by incorporating the
ballistic and underbody protection with proprietary materials and installation
methods that protect the occupants against a defined blast threat.
Blast-protected vehicles defend against threats such as pipe bombs attached to
the
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exterior of the vehicle and nondirectional charges of 20 kg of TNT detonated
approximately five meters from the vehicle. Fully armored vehicles typically
sell for $50,000 to $200,000 exclusive of the cost of the base vehicle.
Fully armored vehicles also include Parade Cars, which are formal
limousines used predominantly for official functions by a president or other
head of state. These vehicles are usually customized based upon a commercially
available chassis which Kroll-O'Gara essentially rebuilds from the ground up.
Because the threat of organized assassination attempts is greater for heads of
state, these vehicles normally incorporate more advanced armor and sophisticated
protection systems and have special features such as supplemental air and oxygen
systems, air purification systems to protect against chemical or biological
contamination, underbody fire suppressant systems, tear gas launchers, anti-
explosive self-sealing fuel tanks, electric deadbolt door locks, gun ports and
bomb scanners. Parade Cars normally sell for $300,000 to in excess of $1.0
million inclusive of the cost of the base vehicle.
Light armored vehicles are similar in all respects to fully armored
vehicles except that substantially less total-weight of armoring is added.
Therefore, it is possible to armor smaller vehicles such as the Volkswagen Jetta
and the General Motors Omega, as well as larger vehicles such as the Mercedes
Benz S600 and the Jeep Cherokee. Light armored vehicles are designed to protect
against attacks from handguns, such as a 9 mm or .357 Magnum. The price of a
light armored vehicle ranges from $5,000 to $60,000 exclusive of the cost of the
base vehicle.
Other vehicles. Kroll-O'Gara also produces specialty vehicles,
cash-in-transit money transport vehicles and commercial truck bodies. Specialty
vehicles are custom built for a specific mission, such as Escort Cars (usually a
convertible) and Chase Cars (usually a closed-top vehicle) in which security
personnel ride while in a head of state motorcade. Kroll-O'Gara's Labbe and IMEA
subsidiaries produce cash-in-transit vehicles which are used by banks or other
businesses to transport currency and other valuables. After starting with a van
or small truck, Kroll-O'Gara modifies the base vehicle to provide protection for
the cargo and passengers from ballistic and blast threats. Kroll-O'Gara believes
that conditions in many emerging growth countries will promote high demand for
these vehicles. Labbe also builds commercial truck bodies. The truck bodies are
manufactured primarily for 3.5 ton trucks and are installed on chassis produced
by a variety of manufacturers.
Military Products
Up-Armored HMMWVs. Kroll-O'Gara is the prime contractor to the U.S.
Military for the supply of armoring and blast protection for HMMWVs. The HMMWV
chassis are produced by AM General Corporation and shipped directly to
Kroll-O'Gara's facility in Fairfield, Ohio where armor and blast protection
components are added. These Up-Armored HMMWVs provide protection against 7.62 mm
armor-piercing ammunition (such as that fired by the AK-47 military assault
rifle), overhead airburst protection against a 155'mm shell, front underbody
blast protection against a 12 lb. anti-tank mine and rear underbody blast
protection against a 4'lb. antipersonnel mine. In addition, Kroll-O'Gara
installs other features designed to enhance crew safety, comfort and
performance, such as air conditioning, weapon turrets and mounts, door locks and
shock-absorbing seats. Kroll-O'Gara charges its customers $70,000 to $100,000
for these ballistic and blast protective systems, which is in addition to the
cost of the vehicle. During 1997, Kroll-O'Gara shipped 366 Up-Armored HMMWVs.
Kroll-O'Gara also supplies engineering design and prototype services in support
of the Up-Armored HMMWV Program, supplies spare parts and logistic support and
produces field-installable armoring kits.
Other armor systems. Kroll-O'Gara markets armor sub-systems for other
tactical wheeled vehicles, such as .5 ton and 5.0 ton trucks. Kroll-O'Gara also
produces various armor systems as a subcontractor to larger defense contractors,
such as Lockheed Martin Corporation and The Boeing
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Company. These products include armor for containers for fuels and missile
launchers and for pilot protection, and typically involve the use of materials
or methods which are unique to Kroll-O'Gara.
Security Services
Kroll-O'Gara provides a variety of services designed to protect and help
its clients manage risks and respond to crisis situations. These services
include training, risk and crisis management and site security systems.
Training. Kroll-O'Gara offers comprehensive training programs in advanced
driving, ballistics, security and counterintelligence, and surveillance. Driver
training programs are offered primarily through Kroll-O'Gara's ITI subsidiary.
ITI utilizes various facilities around the world including its Force Protection
Institute in San Antonio, Texas, which offer a full range of advanced driver and
force protection training. Kroll-O'Gara offers ballistics training in a
progressive and realistic 360 degree, .223 caliber ballistic shooting house,
encompassing 6,800 square feet of training space, at its facility near
Washington, DC. Ballistics training consists of a wide spectrum of combat
marksmanship skills which focuses on realistic situations, exposing students to
stress while under difficult firing situations. Kroll-O'Gara also offers
security and counterintelligence training courses for both U.S. Government
agencies and clients in the private sector. These courses provide a history of
U.S. counterintelligence efforts and current issues in the field, such as force
protection, protection of intellectual property rights and information security.
The training includes instruction on methods of recognizing and deterring
political and business intelligence risks. Additionally, Kroll-O'Gara provides
training in the detection of and responses to surveillance. Students learn
methodologies utilized by terrorists, what information is needed by terrorists
in order to plan an attack and how to block or manipulate this flow of
intelligence.
Risk and crisis management. Kroll-O'Gara provides a variety of consulting
services to assist businesses in managing diverse risks to their personnel and
assets and in meeting and managing unexpected crises. Kroll-O'Gara's crisis
management services are provided in a variety of contexts, including the crisis
response to a kidnapping of a company's executive, the safety of consumers, the
contamination of a consumer product or the environment or the potential damage
to the reputation of a corporate client as a result of disclosure of adverse
events. Kroll-O'Gara maintains a crisis management center in Vienna, Virginia
where personnel are on duty 24 hours a day, 365 days a year, to handle requests
for information and provide initial advice and immediate contact with members of
Kroll-O'Gara's professional staff specializing in the particular crisis
presented.
As part of its risk and crisis management service, Kroll-O'Gara furnishes
periodic information that includes: reports providing city-specific advisories
to business travelers on conditions and other relevant information with respect
to almost 300 cities around the world; a comprehensive country security risk
assessment service that includes daily intelligence briefings containing early
warnings of events and up-to-date information about political unrest, terrorist
activities, product contaminations, health emergencies and other similar events;
a monthly bulletin that reviews and analyzes safety and security issues relating
to air travel around the world; a monthly intelligence review that provides a
global survey of political risk development in countries around the world; and
special reports on relevant topics, such as kidnappings or specific regions or
countries that are relevant to business travelers.
Site security systems. Kroll-O'Gara offers comprehensive planning, design
and hardware and software integration services customized to meet the
requirements of customers for physical site protection. Primarily intended for
perimeter security around business facilities and plant operations, Kroll-O'Gara
also offers its services to embassies, VIPs' homes and public facilities.
Generally, such a systems integration project begins with a site survey, which
identifies areas of vulnerability and recommends methods for securing the entire
area surveyed. Specific pieces of hardware are ordered and
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installed, processes and procedures are outlined, engineering documentation is
provided and control centers are established. Although each job is unique, the
methodology used to develop the system is similar in most cases.
INVESTIGATIONS AND INTELLIGENCE GROUP
The Investigations and Intelligence Group has three product categories: (1)
investigations, (2) business intelligence, and (3) other services.
Kroll-O'Gara's investigative and intelligence services are provided by
professionals with backgrounds in law, finance, business, consulting, law
enforcement, accounting, journalism, environmental science and technology.
Kroll-O'Gara believes that its blend of talent and expertise is important to the
success of this Group. The following table presents the aggregate net sales for
each of the Group's three product categories for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Investigations........................................ $35,244 $45,737 $40,675
Business intelligence................................. 8,834 11,925 19,148
Other services........................................ 4,836 9,073 7,596
------- ------- -------
$48,914 $66,735 $67,419
======= ======= =======
</TABLE>
Investigations
Kroll-O'Gara provides a variety of investigative services including
financial fraud investigations, corporate investigations, litigation services,
asset tracing and analysis, vendor investigations and corporate security.
Financial fraud investigations. Kroll-O'Gara's investigators, including
forensic accountants and computer specialists, work with corporations and
governmental entities to detect and curtail fraudulent and illegal activities by
a client's employees, vendors or contractors. When a company's senior management
or a board of directors suspects their company is being victimized by such
conduct, they must act quickly to confirm their suspicions, safeguard the
company's assets, halt the undesired activity and prevent recurrences. This must
be accomplished without disrupting the normal business flow. To this end,
Kroll-O'Gara personnel collect and analyze information about the suspected
conduct, thereby maximizing the client's ability to assess the extent of losses,
attempt to recover assets and contain or prevent damaging financial impact on
the company. Kroll-O'Gara's investigators have extensive experience in detecting
and solving misappropriations of corporate assets, violations of fiduciary
duties, business frauds and insolvency and bankruptcy fraud.
Corporate investigations. Working closely and confidentially with
management and/or legal counsel, Kroll-O'Gara's investigators and forensic
accountants help to devise a strategy to solve such problems as thefts of trade
secrets, threats and hostile acts, gray market and counterfeit products, patent
and trademark infringements, and sexual harassment and other employee issues.
Businesses have encountered growing numbers of disgruntled employees, vengeful
ex-employees and ruthless competitors and distributors. This has resulted in a
growing need for corporate investigations. Kroll-O'Gara attempts to determine
the source and extent of the problem, develop information about the parties
responsible, minimize damage to the client and propose effective measures to
prevent further losses.
Litigation services. Kroll-O'Gara provides litigation support services to
a client's outside counsel and in-house lawyers in preparation for litigation or
arbitration proceedings and designing settlement strategies. These services
include developing evidence to support a claim or a defense, identifying and
locating material witnesses, investigating adverse witnesses, locating and
evaluating recoverable or
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relevant assets of adverse parties, assessing the strategic goals and financial
commitment of the opposition and helping to assess whether an adequate recovery
can be obtained if a lawsuit is successful. Kroll-O'Gara's wide-ranging
information gathering can help businesses and legal strategists decide whether
to sue, go to trial or employ alternative dispute resolution, and whether, and
at what level, to negotiate a settlement. In complex litigation, Kroll-O'Gara's
sophisticated link-analysis software can track and process voluminous
documentation, as well as extensive database material, in order to identify
elusive connections and produce investigative leads.
Asset tracing and analysis. Kroll-O'Gara's asset tracing services consist
of tracing and locating assets anywhere in the world and developing financial
profiles and life style assessments in connection with bankruptcy cases, loan
defaults, internal investigations and other due diligence requests by clients.
In many cases, Kroll-O'Gara has worked with trustees in bankruptcy and
insolvency, creditors' committees, bankers in workout and restructuring
departments, litigators and bankruptcy attorneys, conducting searches for
concealed or undisclosed assets. In other contexts, clients may be interested in
a financial profile or asset analysis of a person in connection with a potential
business relationship, lawsuit or internal investigation. Kroll-O'Gara's asset
searching and analysis techniques are effective both in uncovering assets and in
bringing debtors to the negotiating table. Kroll-O'Gara's strategies for
identifying assets rely both on a range of investigative techniques and on the
highly sophisticated use of electronic databases. Tactics employed include
searching through sometimes obscure but publicly available local records,
reviewing financial documents and conducting discreet interviews with people
associated with the subject.
Vendor qualification. Kroll-O'Gara has recently developed a vendor
integrity program that provides profiles of a client's vendors, using
information provided by the vendors and obtained from independent sources. A
client utilizes these profiles to insure that its vendors adhere to the client's
standards for ethical business practices. The fees for this service may be paid
either through nominal fees charged to each participating vendor or billed
directly to the client.
Disability claims investigations. As a result of its acquisition of
InPhoto in September 1998, Kroll-O'Gara provides video surveillance services to
insurance companies, corporations and government agencies in connection with
investigating exaggerated disability claims and other fraud. These services are
provided to clients throughout the United States and in Western Europe and South
Africa.
Corporate security services. Kroll-O'Gara designs corporate security
programs that help to safeguard clients' operations and premises. Security
programs and systems are designed to protect the safety of key executives,
preserve assets and protect the integrity of computer and telecommunications
systems.
Business Intelligence
Kroll-O'Gara provides business intelligence services to clients requiring
reliable insight into the strengths, vulnerabilities and strategies of
competitors and potential business partners. Kroll-O'Gara's professionals
provide sophisticated business intelligence on companies and individuals,
reporting on their market position, technical capabilities, strategic direction
and the industries and countries in which they operate. The due diligence and
background information and analysis furnished by Kroll-O'Gara is intended to be
useful for clients considering significant operating or strategic decisions,
such as proposed acquisitions or unsolicited offers to acquire corporate
control, possible business arrangements with particular partners and proposed
entries into new markets.
Business intelligence services are utilized by lenders, underwriters,
potential acquirers and other businesses concerned with assessing and attempting
to minimize the risks related to major financial and other business decisions.
These services include pre-transaction intelligence, due diligence
investigations,
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competitor intelligence and analysis, intelligence in contests for corporate
control, new market entry intelligence and intelligence on business partners,
customers and critical vendors.
Other Services
Monitoring services and special inquiries. Kroll-O'Gara provides
monitoring services and special inquiries to clients that require an independent
fact finder to end fraud and install systems that monitor compliance.
Kroll-O'Gara's lawyers, forensic accountants, investigators, analysts and
industry experts seek to identify violations of federal or state regulatory
requirements or corporate policies and consult with clients with respect to
establishing systems to audit and ensure compliance with such regulatory
requirements or policies. Kroll-O'Gara serves as an objective fact finder, one
whose work product might well be turned over to a questioning government
regulator or a skeptical and vocal segment of the public. In addition,
Kroll-O'Gara's fact finding efforts have been enlisted by management or by audit
committees concerned about problems that need to be resolved within an
enterprise.
VOICE AND DATA COMMUNICATIONS GROUP
Satellite communication integration. Kroll-O'Gara offers comprehensive
design and hardware and software integration services customized to meet
specific satellite communication requirements of its customers. This involves
the integration of portable satellite terminals, mobile antennas and software-
based air time. Usually these systems are designed for remote or security
intensive operations. The portable satellite terminals, which are manufactured
by third party suppliers and distributed by Kroll-O'Gara, allow the user to make
voice and data transmissions via satellite link anywhere in the world.
Navigation systems. Kroll-O'Gara distributes Global Positioning Satellite
(common known as GPS) systems primarily in the United Kingdom and Europe. The
GPS products enable users to identify their exact location throughout the world.
Computer hardware and software security. Kroll-O'Gara offers computer
hardware and software consulting services. Businesses face a variety of risks
from both employees and outsiders who infiltrate computer systems by various
means including e-mail and internet access points. For example, disgruntled
employees or competitors may cause unauthorized changes to a company's website,
redirect message traffic to an alternative website or create "hate sites"
containing negative and often untrue information about a business.
Kroll-O'Gara's investigators are able to track down the perpetrators of these
activities, analyze how the incident occurred and offer countermeasures to
prevent future security breaches. Kroll-O'Gara also can help a client locate
information vital to a lawsuit, and do so in a manner that assists in proving
the admissability of such evidence. Such information is located by the use of
forensic software that allows Kroll-O'Gara to recover previously deleted
computer files, obtain access to password protected files, and search a hard
drive for up to 256 words or phrases simultaneously. The services provided by
this portion of the Voice and Data Communications Group are being shifted to
Kroll-O'Gara's new Information Security Group.
CUSTOMERS
SECURITY PRODUCTS AND SERVICES GROUP
Commercial products. Kroll-O'Gara's armored commercial vehicle customers
include governmental and private buyers. U.S. and foreign governmental buyers
purchase both fully and light-armored vehicles. Governmental buyers also
comprise the market for Parade Cars. Typically, governmental buyers consist of
ministries of foreign affairs, defense and internal affairs and offices of
presidential security. Such customers are not constrained in their purchasing
decisions by considerations such as import duties
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and taxes and are free to search globally for the best product available. The
procurement cycles of governmental buyers can range from relatively rapid, when
the vehicles are for the use of the head of state or in response to a particular
crisis, to prolonged bureaucratic bids and evaluations for normally budgeted
items. Kroll-O'Gara's private customers for armored commercial vehicles include
corporations and individuals. Private buyers are much more sensitive to cost (of
which import duties and taxes may be a substantial part) and, therefore, often
will buy a locally produced product, if one exists. Local servicing of the
vehicle is also a critical concern to private buyers. Kroll-O'Gara's customers
for cash-in-transit vehicles are generally financial institutions, and
purchasing decisions depend on many criteria including the ownership of the
institution (private or governmental), insurance requirements and costs. The
geographic distribution of 1997 sales of Kroll-O'Gara's commercial armored
vehicles, as a percentage of total 1997 sales for those products, was as
follows:
1997 COMMERCIAL SALES
BY GEOGRAPHIC AREA
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMERCIAL SALES
----------------
<S> <C>
Central and South America................................... 38
Europe...................................................... 33
North America............................................... 10
Middle East................................................. 8
Far East.................................................... 6
Other....................................................... 5
</TABLE>
Military products. Kroll-O'Gara's market for military hardware products is
worldwide in scope, including the U.S. Military and foreign defense forces.
Kroll-O'Gara's major contracts for delivery of Up-Armored HMMWVs are with the
U.S. Military. Additionally, Kroll-O'Gara provides protected container systems,
typically used to protect missile systems from small arms fire, to the U.S.
Military under a subcontract with Lockheed Martin. Kroll-O'Gara has sold
Up-Armored HMMWVs to Qatar and Luxembourg, either directly or through the U.S.
Foreign Military Sales Program and is seeking to expand its sales of these
vehicles to foreign defense forces.
Training. Kroll-O'Gara began offering advanced driver training, firearms
training and surveillance detection training courses after its acquisition of
ITI, which had an established customer base of U.S. and foreign governmental
agencies and corporate customers. Many private sector clients are drawn to
Kroll-O'Gara's training courses due to Kroll-O'Gara's reputation of providing
these services to various governmental agencies. Kroll-O'Gara markets its
various courses to its armored commercial vehicle customers and vice versa.
Risk and crisis management. A significant portion of Kroll-O'Gara's
customers for investigating and negotiating ransom demands in connection with
kidnappings and for investigating incidents of product tampering or
disparagement arise from a contract with American International Group, Inc.
("AIG"), an international multi-risk insurance company, under which Kroll-O'Gara
investigates certain claims by AIG's insureds. Although Kroll-O'Gara is paid by
AIG after claims are made for such occurrences, Kroll-O'Gara's client is the
affected person or entity. Kroll-O'Gara's customers for its information services
relating to travel safety are multinational corporations and individuals.
Kroll-O'Gara markets its information services to many of its customers for other
products and services.
Site security systems. Since it began offering site protection systems
integration services in early 1996, Kroll-O'Gara has obtained numerous contracts
with both Russian and multinational companies to provide integrated site
security systems. Currently, Kroll-O'Gara is marketing these products primarily
in
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Russia. Corporate and governmental buyers of integrated security systems
normally purchase through their corporate security officer, a governmental
department responsible for the particular facility's security, a facility
manager or a construction project manager. Purchases generally are made on
project-specific proposals and include the cost of the hardware, transportation
costs to the site, engineering integration and documentation.
INVESTIGATIONS AND INTELLIGENCE GROUP
From 1994 through 1997, Kroll-O'Gara provided investigative and
intelligence services to approximately 2,100 clients located in the United
States and approximately 1,200 clients located in other parts of the world.
Kroll-O'Gara's clients for these services include multinational corporations,
leading law firms, financial institutions, government agencies and individuals
in a wide range of business sectors. The financial institutions to which
Kroll-O'Gara provides services include many of the largest international
investment banks, numerous commercial banks, insurance companies and other
significant credit institutions. Kroll-O'Gara's governmental clients include
agencies of the U.S. Government, state and local governments in the United
States and a number of foreign governments and ministries.
Kroll-O'Gara classifies its investigative and intelligence sales by where
the services are delivered; international sales are services delivered outside
the United States. For the years ended December 31, 1995, 1996 and 1997, 71%,
73% and 67%, respectively, of this Group's net sales were attributable to
services delivered in the United States; the balance were attributable to
services delivered outside the United States.
Although many of Kroll-O'Gara's clients utilize these services on a
periodic basis, relatively few clients utilize Kroll-O'Gara's services each year
and the clients that account for a material percentage of net sales in any year
may vary widely.
Generally, in the United States Kroll-O'Gara charges for its investigative
and intelligence services on an hourly basis at varying rates, depending upon
the type of service being provided and the competition that exists in providing
the service. Kroll-O'Gara also provides these services, particularly outside the
United States, on a negotiated project, or fixed fee, basis. Providing services
on a fixed fee basis enhances the potential for higher profit margins. However,
such arrangements can also result in unexpected losses on a particular project.
Kroll-O'Gara believes that this risk is reduced by the large number of its fixed
fee arrangements.
VOICE AND DATA COMMUNICATIONS GROUP
Satellite communication integration. Principal customers for satellite
communications services include private corporations and individuals,
governmental agencies, peacekeeping forces and disaster relief organizations
which operate in lesser-developed countries that lack a telecommunications
infrastructure, in rural areas of developed countries or in disaster scenarios
in which the traditional forms of telecommunications are rendered inoperable.
Increasingly, customers are demanding that the satellite communication channels
provided be secure. Depending on the level of security desired, satellite
communication systems can be implemented using a variety of encryption methods
up to and including fully secure U.S. Government STU-III telephones. Most of
Kroll-O'Gara's satellite communication customers are located outside of the
United States because the U.S. Federal Communications Commission does not permit
private corporations or individuals to use terminals in the United States which
do not utilize the American Mobile Satellite Corp. satellite network. The
terminals marketed by Kroll-O'Gara access the INMARSAT network rather than the
American Mobile Satellite network.
Navigation systems. Kroll-O'Gara resells GPS equipment through
approximately 1,270 independent distributors and retailers in the United Kingdom
and France. Marine GPS units are sold generally
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through distributors and retailers which specialize in marine electronics and
others that sell general boat equipment. Outdoor (general recreational) GPS
units are sold through sporting goods retailers, camping and outdoor stores and
general electronics stores. Aviation GPS equipment is sold through aviation
equipment retailers.
Computer hardware and software security. Kroll-O'Gara markets its computer
hardware and software security to its corporate customers. These customers
either are concerned about potential infiltration of their proprietary databases
or have had their databases infiltrated by employees or third parties.
MARKETING AND SALES
Commercial. Kroll-O'Gara believes that it enjoys excellent name
recognition and a strong reputation in the security industry. The central
element of Kroll-O'Gara's commercial marketing strategy is to leverage the name
recognition and reputation of its products and services by positioning
Kroll-O'Gara as a global provider of one-stop risk mitigation services and
products. Kroll-O'Gara believes that by positioning itself in this manner it can
capitalize on its existing customer base, maximize the benefits of its long
history of supplying security-related products and services around the world and
leverage its leadership niche in the risk mitigation market. Kroll-O'Gara
tailors its marketing strategy to each geographic area of the world and often
will tailor its product and services offering by country. There is strong
cross-marketing of its products and services which Kroll-O'Gara believes
strengthens the image of each product group.
On a worldwide basis, Kroll-O'Gara employs 46 full-time sales professionals
in its Security Products and Services Group who operate out of Los Angeles,
California; Washington, D.C.; Miami, Florida; Fairfield, Ohio; Sao Paulo,
Brazil; Lamballe, France; Paris, France; Mexico City, Mexico; Subic Bay, the
Philippines; Moscow, Russia; and Geneva, Switzerland. All personnel have a
geographic and/or product-specific responsibility. In most cases, these sales
personnel also maintain and recruit sales agents or distributors. The agents or
distributors have geographic and product-specific agreements, and compensation
in most cases is based upon a commission arrangement. The sales personnel use a
consultative approach when offering solutions to the customers security
problems. Sales cycles for commercial physical security products can range from
several months to a matter of days, depending upon the product and the urgency
associated with the security problem being addressed. Physical security products
which are readily available, such as the fully armored Standard Suburban, allow
Kroll-O'Gara to assist customers who have, or believe they have, developed an
immediate threat.
In its Investigations and Intelligence Group, Kroll-O'Gara relies on its
professionals not only to provide services to existing clients, but also for
business development. Kroll-O'Gara's professionals are principally responsible
for the marketing of services and for establishing relationships with clients.
Kroll-O'Gara obtains engagements from a client's board of directors, chief
executive and chief financial officers, general counsel and a variety of other
corporate officials, including business development officers, security managers,
risk managers and human resource personnel. Kroll-O'Gara's senior professionals
act as relationship managers for Kroll-O'Gara's major clients, and a significant
amount of Kroll-O'Gara's marketing consists of maintaining and developing these
personal relationships. In addition, Kroll-O'Gara has a professional staff in
New York City and in each of its regional headquarters that includes marketing,
sales and public relations professionals who support and coordinate
Kroll-O'Gara's marketing efforts on a worldwide basis. These marketing efforts
include seminars, briefings, receptions, breakfast and lunch meetings, direct
mail and selected advertising in trade and other journals. Kroll-O'Gara's
services and marketing events are promoted through its Internet website and a
publication mailed periodically to approximately 20,000 clients and prospective
clients.
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Kroll-O'Gara's marketing efforts attempt to increase business with existing
clients by expanding clients' awareness of the range of services offered by
Kroll-O'Gara and by broadening the decision makers within a client's
organization that are aware of the range of services offered by Kroll-O'Gara.
Kroll-O'Gara's business development staff periodically conducts surveys of
clients to assess their perception of the range and quality of its services and,
after the completion of an assignment, clients are often asked to complete a
quality control questionnaire.
Because most of the product sales of Kroll-O'Gara's Voice and Data
Communications Group are through independent distributors and retailers,
Kroll-O'Gara employs only eight sales professionals in that Group, most of whom
operate out of its Deer Park, New York and Salisbury, United Kingdom facilities.
Military. Kroll-O'Gara continues to position itself in the marketplace as
a commercial company with a military production capability and to emphasize its
ability to develop new products, or product adaptations, quickly and more
cost-effectively than traditional defense contractors. In marketing its products
to the military, Kroll-O'Gara also places strong emphasis on its superior
antitank and antipersonnel mine protection for the occupants of tactical wheeled
vehicles. Kroll-O'Gara markets its military products through a combination of
trade show exhibitions, print advertising in military-related periodicals and
direct customer visits. Kroll-O'Gara emphasizes the cross-marketing of military
and commercial products, which it believes strengthens the image of each product
group. Kroll-O'Gara also has entered into exclusive teaming and joint marketing
agreements with AM General Corporation, the manufacturer of the basic HMMWV, for
sales in the military and commercial arenas. These agreements designate
Kroll-O'Gara as the exclusive armorer to AM General for HMMWVs and allow
Kroll-O'Gara to benefit from the AM General distribution network and save on
certain costs, such as exhibitions where AM General and Kroll-O'Gara otherwise
would both show products.
Kroll-O'Gara's military sales activities are directed toward identifying
contract bid opportunities with various U.S. Government agencies, private
enterprises acting as prime contractors on government contracts, sales through
the Foreign Military Sales Program, and military sales directly to foreign
military organizations. Kroll-O'Gara has two full-time business development
managers who are responsible for this activity and also has contractual
arrangements with several outside consultants who assist the business
development managers in their activities. Proposal preparation and presentation
for government projects is done by a proposal team which normally consists of
program managers who have specific project responsibilities, a contracting
officer, a cost accountant and various manufacturing and engineering personnel.
ENGINEERING AND DEVELOPMENT
Kroll-O'Gara's engineering and development activities are centered on
products offered by its Security Products and Services Group. Kroll-O'Gara
emphasizes engineering excellence and has an extensive engineering staff. Design
engineers use state-of-the-art two-dimensional and three-dimensional computer
aided design and engineering (CAD/CAE) systems in conjunction with coordinate
measuring machines to develop electronic models which generally are converted to
solid models or prototypes. Manufacturing engineers concentrate on the ability
of Kroll-O'Gara to manufacture a product design, on improvements in the
production process and overall cost reductions from better methods, fewer
components and less expensive materials with equal or superior quality and on
materials handling issues. Applying these techniques, in the last several years
Kroll-O'Gara has been able to produce savings in both the time and cost
necessary to produce its armored vehicles.
Quality engineering is responsible for assuring that manufacturing and
design plans are consistent with a reliable, quality product that meets the
specifications of the customer. Quality engineers also are
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responsible for identifying in-process quality inspection points in the work
orders. Kroll-O'Gara's ballistic engineer, in conjunction with its design and
manufacturing engineers, develops new ballistic and blast protection systems
that meet ever-changing threats. The ballistic engineer also is responsible for
the ballistic testing required by customers, the assignment of ballistic
specifications to final products and the issuance of ballistic specifications
for internal quality control. Advanced engineering is responsible for new
product development in conjunction with design engineering, manufacturing
engineering and ballistic engineering. Kroll-O'Gara estimates that it expended
approximately $2.0 million, $2.8 million and $2.9 million in 1995, 1996 and
1997, respectively, on its engineering and development efforts. The amount for
1997 includes expensed amounts reimbursed under a Systems Technical Support
Contract described under "U.S. Government Contracts."
U.S. GOVERNMENT CONTRACTS
Kroll-O'Gara serves as the U.S. Military's sole source contractor for
armoring the HMMWV fleet. Since its initial contract in August 1993 to armor 59
HMMWVs, Kroll-O'Gara has been awarded contracts to armor a total of 1,993
HMMWVs. Of these, 1,323 Up-Armored HMMWVs have been shipped, as follows:
<TABLE>
<CAPTION>
NUMBER OF
HMMWVS
YEAR SHIPPED
- ---- ---------
<S> <C>
1993........................................................ 0
1994........................................................ 139
1995........................................................ 26
1996........................................................ 507
1997........................................................ 366
1998 (through September 30)................................. 285
-----
Total.................................................. 1,323
=====
</TABLE>
Kroll-O'Gara's most recent contract with the U.S. Military covers 738
Up-Armored HMMWVs for the U.S. Army and the U.S. Air Force, to be delivered from
August 1998 through June 2000. The contract for 378 of those vehicles for the
U.S. Air Force was signed in March 1998, with the remaining amount contracted
for in April 1998. The award includes an option for an additional 216 vehicles.
As the Up-Armored HMMWV fleet grows, Kroll-O'Gara is experiencing continued
growth in sales of spare parts and related fleet management activity, including
a $2.0 million annual contract to support field requirements. This contract was
most recently renewed in March 1998.
In January 1997, Kroll-O'Gara signed a Systems Technical Support ("STS")
Contract with the U.S. Military to support continued research and development on
the Up-Armored HMMWV program. The four year contract, three of which are option
years, was budgeted for $2.5 million in 1997, with $2.5 million options in such
of 1998 and 1999 and a $2.0 million option in 2000. In September 1997, the U.S.
Military exercised its options for 1998 and 1999. The STS Contract, in part,
allows Kroll-O'Gara to make new design improvements, to conduct additional
testing of materials, components and vehicles and to explore alternate and more
advanced armor configurations. The contract requires Kroll-O'Gara to provide
25,000 hours per year of engineering and development time to the U.S. Military.
Kroll-O'Gara believes that the knowledge gained from STS Contract work can be
applied to its commercial manufacturing programs.
As a subcontractor to Lockheed Martin Corporation, Kroll-O'Gara has
provided armoring for certain missile weapons systems. Kroll-O'Gara was first
engaged in September 1993 by Lockheed Martin to armor launch systems of
missiles. Kroll-O'Gara was most recently engaged by Lockheed
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Martin in March 1997 to provide such armoring and believes that it is well
positioned for future engagements.
COMPETITION
The markets for Kroll-O'Gara's products and services are highly
competitive. Kroll-O'Gara competes in a variety of fields, with competitors
ranging from small businesses to multinational corporations.
SECURITY PRODUCTS AND SERVICES GROUP
Kroll-O'Gara believes that its design, engineering and production expertise
in providing fully integrated ballistic and blast protected vehicles gives it a
competitive advantage over those competitors who provide protection against only
selected ballistic threats. The largest competitor on a worldwide basis in the
production of armored commercial vehicles is Mercedes-Benz Aktiengesellschaft,
which sells its product through its worldwide dealer distribution system. In
addition, there are a number of other vehicle armorers in Europe, the Middle
East and Latin America which armor primarily locally manufactured automobiles.
U.S. based protected passenger automobile armorers include the Pittston Company
(owner of Brinks armored vehicles), Moloney Coachbuilders, Inc., Armor Holdings,
Inc., and Armet Armored Vehicles, Inc. The principal competitive factors are
price, quality of engineering and design, production capability and capacity,
ability to meet delivery schedules and reputation in the industry. There are a
large number of companies, such as Simula, Inc., that provide specific armoring
packages for tactical wheeled vehicles, helicopters and selected other military
applications. Kroll-O'Gara believes that, as the size of the Up-Armored HMMWV
requirement continues to grow, competition from major defense contractors may
increase.
With regard to the security services provided by this Group, Kroll-O'Gara
competes with numerous local integrators and small consultant-type businesses,
such as Control Risks Group Ltd., and also with large suppliers of
security-related equipment such as Western Resources, Inc., Pinkerton's, Inc.,
The Wackenhut Corporation, Borg-Warner Security Corporation, Pittway
Corporation, Armor Holdings, Inc., ICTS International, N.V. and Tyco
International Ltd. The principal competitive factors are the best approach to
solving the problems, expertise, price, trust, availability and the company or
individual reputation.
INVESTIGATIONS AND INTELLIGENCE GROUP
In this area, Kroll-O'Gara competes with local, regional, national and
international firms, including investigative and security firms, guard companies
and specialized consultants in specific areas such as kidnapping. Kroll-O'Gara
believes that it is one of the largest companies in the world providing a broad
array of corporate investigation, risk and crisis management and business
intelligence services on a global basis and enjoys strong name recognition in
its industry. Nevertheless, Kroll-O'Gara faces significant, and increasing,
competition in the United States and elsewhere in the world from a variety of
companies that provide some of the services offered by Kroll-O'Gara. In most
service areas in which Kroll-O'Gara operates, there is at least one competitor
that is significantly larger or more established than Kroll-O'Gara. Many of the
national and international accounting firms, along with other companies such as
Decision Strategies/Fairfax International, LLC and Investigations Group, Inc.,
provide consulting services similar to some of the services provided by
Kroll-O'Gara. Some of these firms have indicated an interest in providing
corporate investigation and business intelligence services on a broader scale.
The accounting firms have significantly larger financial and other resources
than Kroll-O'Gara and have long-established relationships with their clients,
which also are likely to be clients or prospective clients of Kroll-O'Gara. In
addition, large multinational security product and service providers have
indicated an
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interest in expanding their services to include value-added services such as
certain of the investigation and consulting services provided by Kroll-O'Gara.
VOICE AND DATA COMMUNICATIONS GROUP
In this Group, the products distributed by Kroll-O'Gara compete with those
offered by many companies, including STN Atlas Elektronik, GmbH and Nera AS.
Kroll-O'Gara believes that the competitive factors in this portion of its
business include product reliability, the incorporation of advanced
technological features, price, ease of installation, availability and service.
With respect to secure custom communications systems integration services and
computer hardware and software security services, Kroll-O'Gara competes with
small and large communications and computer security systems integrators.
SEASONALITY, BACKLOG AND RELATED MATTERS
Approximately 23% of Kroll-O'Gara's net sales during 1997 were derived from
U.S. Military contracts and an additional 5% were derived from commercial
contracts with U.S. governmental agencies or foreign governments. For 1996,
these percentages were 36% and 6%, respectively. Military and governmental
contracts generally are awarded on a periodic or sporadic basis. Kroll-O'Gara
frequently receives substantial orders in one quarter, the revenues from which
will not be recognized until one or more subsequent quarters. As a result,
Kroll-O'Gara generally has significant fluctuations from time to time in its
business. Historically, these fluctuations have not been seasonal. Kroll-O'Gara
does not believe that its business is seasonal overall, although historically
the first quarter has been weaker than the other three. Period-to-period
comparisons within a given year or between years may not be meaningful or
indicative of operating results over a full fiscal year.
Kroll-O'Gara's backlog at December 31, 1996 and 1997 was approximately
$28.8 million and $50.0 million, respectively. Backlog consists of net sales
value for firm orders not previously included in net sales on the basis of
percentage-of-completion accounting. Because many factors affect the conclusion
of definitive agreements for contracts awarded and the production and delivery
of Kroll-O'Gara's products, no assurance can be given as to when or whether net
sales will be recognized from Kroll-O'Gara's backlog. Year-to-year comparisons
of backlog are not necessarily indicative of future operating results.
Kroll-O'Gara's net sales from government contracts and most commercial
contracts for its armoring products are recognized using the
percentage-of-completion method. Under this method, estimated contract revenues
are accrued based generally on the percentage that costs to date bear to total
estimated costs. Estimated contract losses are recognized in full in the period
in which it becomes likely that a loss will occur. Accordingly, contract
revenues and total cost estimates are reviewed and revised periodically as the
work progresses and as change orders are approved, and adjustments based upon
the percentage-of-completion are reflected in contract revenues in the period
when such estimates are revised. See "The Kroll-O'Gara Company -- Management's
Discussion and Analysis of Financial Condition and Results of Operations."
PROPERTIES AND FACILITIES
Kroll-O'Gara maintains executive offices in New York, New York, and
Fairfield, Ohio, and regional headquarters in London, England; Hong Kong; Miami,
Florida; and New York, New York. In addition, Kroll-O'Gara maintains 29 domestic
offices or facilities in 15 states and 33 foreign offices or facilities
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in 18 foreign countries around the world. Kroll-O'Gara's principal properties
and facilities as of September 30, 1998 were as follows:
<TABLE>
<CAPTION>
BUILDING
LOCATION SQUARE FOOTAGE STATUS
- -------- -------------- -------------
<S> <C> <C>
Fairfield, Ohio......................................... 130,000 owned
Lamballe, France........................................ 125,000 leased
Subic Bay, the Philippines.............................. 85,000 subcontractor
Sao Paulo, Brazil....................................... 50,000 leased
New York, New York...................................... 36,900 leased
Mexico City, Mexico..................................... 20,000 owned
Washington, D.C. area................................... n/a leased
San Antonio, Texas...................................... n/a owned
</TABLE>
Fairfield, Ohio. In addition to executive offices, this facility contains
full production and assembly facilities for Kroll-O'Gara's armored commercial
vehicles and the manufacturing and distribution of Up-Armored HMMWVs. The
facility is financed through tax-exempt debt and is pledged to secure the
repayment of such debt. The facility includes a complete fabrication and machine
shop equipped with a computer controlled plasma cutter, a computer controlled
press break, mills, automated grinders, a robotic welder and two coordinate
measuring machines, paint booths and ancillary equipment for both military and
commercial painting.
Lamballe, France. This facility houses the management, sales and
accounting functions of Labbe. The site contains facilities for production of
armored commercial and cash-in-transit vehicles, design studios for development
of prototypes, integrated computer systems, and areas for parts, fabrication,
painting and quality control. This facility also contains a ballistics range.
Labb has occupied the site since 1948. It currently is leased for a term
expiring in September 2000. For accounting purposes, this is treated as an
operating lease.
Subic Bay, the Philippines. This facility is owned by a subcontractor, but
is supervised by Kroll-O'Gara's personnel and performs installation of armoring
kits engineered in the Fairfield, Ohio facility.
Sao Paulo, Brazil. This facility, which was expanded to include a second
facility on an adjacent location in December 1996, is used for manufacturing and
sales of a full product line of armored commercial vehicles. It currently is
leased for a term expiring in March 2000. For accounting purposes, this lease is
treated as an operating lease.
New York, New York. This facility contains executive offices and serves as
the headquarters for Kroll-O'Gara's Investigations and Intelligence Group. The
space is leased for a term expiring in December 2007. For accounting purposes,
this lease is treated as an operating lease.
Mexico City, Mexico. This facility is used for manufacturing and sales of
armored commercial vehicles. The facility currently is installing armoring kits
which have been engineered in the Fairfield, Ohio facility. Kroll-O'Gara expects
the facility to have the capability to build a complete product line once it has
fully trained its production work force.
Washington D.C. area. This facility is used for advanced security training
and includes a portion of an abandoned airport runway that is used specifically
for advanced driver training. The facility is leased for a term expiring in May
1999. For accounting purposes, this lease is treated as an operating lease.
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San Antonio, Texas. This facility, which was acquired in 1997, consists of
165 acres of land used for advanced driver and force protection training.
Kroll-O'Gara's manufacturing capabilities include fully integrated
manufacturing programs which link production control, materials control, quality
control and accounting, thus allowing Kroll-O'Gara to issue work orders, update
and track inventories, implement quality assurance procedures, schedule and
track production and report, on a daily basis, costs accumulated to a job.
Kroll-O'Gara's non-executive offices range from approximately 320 square feet to
approximately 8,800 square feet and are subject to leases expiring through May
2002. Kroll-O'Gara believes that its facilities are adequate for its current
needs and that its properties, including machinery and equipment, are generally
in good condition, well maintained and suitable for intended current and
foreseeable uses.
EMPLOYEES
As of September 30, 1998, Kroll-O'Gara had 1,311 employees (not including
177 temporary employees), comprised of 103 in marketing and sales, 467 in
manufacturing, 376 in professional services, 28 in engineering and 337 in
general and administrative. Kroll-O'Gara's U.S. employees are not represented by
any union and are not covered by any collective bargaining agreements.
Approximately 25 employees of Labb are employed under agreements with the
Confederation Francaise Democratique du Travail. Wage increase parameters are
set twice a year by Kroll-O'Gara's local management in consultation with the
union. Kroll-O'Gara has not experienced any work stoppages or employee related
slowdowns and believes that its relationship with its employees is good.
GOVERNMENT REGULATION
Kroll-O'Gara's services are subject to various federal, state, local and
foreign laws, including laws designed to protect the privacy of persons.
Subsidiaries of Kroll-O'Gara hold private investigative licenses from, and their
investigative activities are subject to regulation by, the state and local
licensing authorities in the locations where such subsidiaries do business.
Kroll-O'Gara also utilizes certain data from outside sources, including data
from third party vendors and various government and public record services, in
performing its services. Such utilization is subject to compliance with
applicable law.
Additionally, the laboratory of Kroll-O'Gara's drug testing subsidiary is
certified on the federal level and licensed in a number of states. If the
subsidiary fails to continue to meet all applicable requirements, its
certification could be suspended or lost.
As a contractor with agencies of the U.S. Government, Kroll-O'Gara is
obligated to comply with a variety of regulations governing aspects of its
operations and the workplace. Additionally, Kroll-O'Gara's contracts give the
contracting agency the right to conduct audits of Kroll-O'Gara's facilities and
operations, and such audits occur routinely. An audit involves a governmental
agency's review of Kroll-O'Gara's compliance with the prescribed procedures
established in connection with the government contract.
Regulations promulgated by the U.S. Commerce Department require
Kroll-O'Gara to obtain a general destination license in connection with the sale
of certain commercial products in foreign countries, and U.S. State Department
regulations require Kroll-O'Gara to file an export license in connection with
sales of military equipment in foreign countries. Furthermore, the U.S. State
Department prohibits all sales of military equipment to certain countries,
including, among others, China, Cuba, Iran, Iraq, Libya and Syria. Additionally,
foreign countries in which Kroll-O'Gara does business or into which it expects
to expand have laws and regulations which may restrict Kroll-O'Gara's business.
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Kroll-O'Gara's foreign operations are subject to the laws and regulations
of the various countries in which they are conducted, including licensing,
labor, environmental and currency control restrictions.
ENVIRONMENTAL MATTERS
Kroll-O'Gara and its operations are subject to a number of environmental
laws, regulations and ordinances, both in the U.S. and various foreign
countries, that govern activities or operations that may have adverse
environmental effects, such as discharges to air and water, as well as handling,
storage and disposal practices regarding solid and hazardous materials, and
impose liability for the cost of remediating, and certain damages resulting
from, sites of past releases of hazardous materials. Environmental laws continue
to change rapidly, and it is likely that Kroll-O'Gara will be subject to
increasingly stringent environmental standards in the future. Kroll-O'Gara
believes that it currently conducts its activities and operations in substantial
compliance with applicable environmental laws. Kroll-O'Gara is implementing
recommendations of an environmental consulting company designed to address
certain air pollution, hazardous waste, underground storage tank and hazard
communication matters at its Fairfield, Ohio facility. No notices of violation
have been issued to Kroll-O'Gara by any regulatory agency with respect to
environmental matters which remain uncorrected. Kroll-O'Gara believes that its
potential liability under the environmental laws, if any, would not have a
material adverse effect, individually or in the aggregate, on its results of
operations, financial condition or cash flows.
LEGAL PROCEEDINGS
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 the aggregate, that is likely to have a
material adverse effect on its business or financial condition.
PATENTS, TRADEMARKS AND COPYRIGHTS
Kroll-O'Gara currently has four issued U.S. patents relating to its
armoring business. Kroll-O'Gara currently has three federally registered
trademarks and a pending application for a fourth trademark. Kroll-O'Gara has no
federally registered copyrights. Although Kroll-O'Gara does not believe that its
ability to compete in any of its product markets is dependent on its
intellectual property, Kroll-O'Gara does believe that the protection afforded by
its "Armoring Assembly" and "Vehicle Mine Protection Structure" patents, both of
which relate to vehicle underbody blast protection, provides Kroll-O'Gara with
important technological advantages over its competitors. Although Kroll-O'Gara
has protected its technologies to the extent that it believes appropriate, there
can be no assurance that Kroll-O'Gara's measures to protect its proprietary
rights will deter or prevent unauthorized use of Kroll-O'Gara's technologies. In
other countries, Kroll-O'Gara's proprietary rights may not be protected to the
same extent as in the United States.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information as of September 30, 1998
concerning each of Kroll-O'Gara's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Jules B. Kroll............................ 57 Chairman of the Board, Chief Executive
Officer and Director
Thomas M. O'Gara.......................... 47 Vice Chairman of the Board and Director
Wilfred T. O'Gara......................... 41 President, Chief Operating Officer and
Director
Nicholas P. Carpinello.................... 48 Controller and Treasurer
Michael G. Cherkasky...................... 48 Chief Operating Officer -- Investigations
and Intelligence Group and Director
Marshall S. Cogan......................... 61 Director
Abram S. Gordon........................... 35 Vice President, General Counsel and
Secretary
Michael J. Lennon......................... 42 Chief Operating Officer -- Security
Products and Services and Director
Raymond E. Mabus.......................... 49 Director
Nazzareno E. Paciotti..................... 52 Chief Financial Officer
Hugh E. Price............................. 61 Director
Jerry E. Ritter........................... 63 Director
William S. Sessions....................... 68 Director
Howard I. Smith........................... 53 Director
</TABLE>
JULES B. KROLL has been Chairman of the Board and Chief Executive Officer
of Kroll-O'Gara since the KHI merger on December 1, 1997. He founded
Kroll-O'Gara's Kroll Associates, Inc. ("Kroll") subsidiary in 1972 and has been
the Chairman of the Board and Chief Executive Officer of Kroll and KHI since
their foundings. Mr. Kroll also is a director of United Auto Group, Inc. He has
been a director of Kroll-O'Gara since December 1997.
THOMAS M. O'GARA has been Vice Chairman of the Board of Kroll-O'Gara since
the KHI merger. He served as Chairman of the Board of Kroll-O'Gara from August
1996 until December 1997. Mr. O'Gara has also been Chairman of the Board of OHE
since 1990 and was OHE's Chief Executive Officer from 1990 until 1995. He has
been a director of Kroll-O'Gara since August 1996 and a director of OHE since
1988. Mr. O'Gara has held numerous executive officer and director positions with
Kroll-O'Gara, its subsidiaries and its predecessors since 1975. From 1984 until
1986, Mr. O'Gara also was Honorary Consul General for the Sultanate of Oman.
Thomas M. O'Gara and Wilfred T. O'Gara are brothers.
WILFRED T. O'GARA is President and Chief Operating Officer of Kroll-O'Gara.
He served as Kroll-O'Gara's Chief Executive Officer from August 1996 until the
KHI merger. Mr. O'Gara has been associated with Kroll-O'Gara, its subsidiaries
and its predecessors since 1983 and has held numerous executive officer and
director positions, including serving as Chief Executive Officer of OHE since
January 1996, President and Chief Operating Officer of OHE from 1991 through
1995 and Vice President -- Sales and Marketing of OHE from 1988 until 1991. Mr.
O'Gara has been a director of Kroll-O'Gara since August 1996 and a director of
OHE since 1991.
NICHOLAS P. CARPINELLO has been Controller and Treasurer of Kroll-O'Gara
since the KHI merger. From August 1996 until December 1997 he served as
Kroll-O'Gara's Executive Vice President, Chief Financial Officer and Treasurer,
positions he also has held with OHE since 1993. Mr. Carpinello has been
associated with Kroll-O'Gara and its predecessors since 1984. From 1975 until
1984, he was
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employed by Arthur Andersen LLP where he served as a manager in the audit and
small business consulting divisions.
MICHAEL G. CHERKASKY became Chief Operating Officer of Kroll-O'Gara's
Investigations and Intelligence Group in December 1997. Prior to the KHI merger
he had been an Executive Managing Director of KHI since April 1997 and Chief
Operating Officer of KHI since January 1997. From November 1995 to January 1997,
he was the head of KHI's North American Region and from February 1994 to
November 1995 he was the head of KHI's Monitoring Group. From June 1993 to
November 1993, Mr. Cherkasky was a candidate for public office. From 1978 to
June 1993, Mr. Cherkasky was with the District Attorney's office for New York
County, his last position being Chief of the Investigation Division. He became a
director of Kroll-O'Gara in December 1997.
MARSHALL S. COGAN has been Vice Chairman of Foamex International, Inc., a
manufacturer of polyurethane foam products, since May 1997 and Chairman and
Chief Executive Officer of United Auto Group, a franchisor of car and light
truck dealerships, since April 1997. Mr. Cogan was Chairman of the Board and
Chairman of the Executive Committee of Foamex International from 1993 until 1997
and was Chief Executive Officer of Foamex International from 1994 until 1997.
Since 1974, Mr. Cogan has been the principal shareholder, Chairman or
Co-Chairman of the Board of Directors, and Chief Executive Officer or Co-Chief
Executive Officer, of Trace International Holdings, Inc., a holding company
operating businesses in the auto sales, foam, textile and publishing industries.
Mr. Cogan has been a director of Kroll-O'Gara since December 1997.
ABRAM S. GORDON is Vice President, General Counsel and Secretary of
Kroll-O'Gara. Prior to joining Kroll-O'Gara in January 1997, he was with the law
firm of Taft, Stettinius & Hollister LLP, Cincinnati, Ohio, from October 1987
until December 1996.
MICHAEL J. LENNON became Chief Operating Officer of Kroll-O'Gara's Security
Products and Services Group in December 1997. He also has been the President and
Chief Operating Officer of OHE since January 1996. Mr. Lennon joined OHE in
February 1994 as Manager of Commercial and Military Programs; he became Vice
President for Sales, Marketing and Program Management in October 1994 and served
OHE in that capacity through 1995. Prior to joining OHE, Mr. Lennon had 15
years' experience in engineering, manufacturing, quality control and marketing
with General Electric Company, which he joined in 1979. From 1990 to 1994, he
was Manager of Advanced Technology Marketing for their G.E. Aircraft Engines
business. He became a director of Kroll-O'Gara in March 1998.
RAYMOND E. MABUS is of counsel to the law firm of Baker, Donaldson, Bearman
and Caldwell and also manages a family timber business. He served as the United
States' Ambassador to the Kingdom of Saudi Arabia from 1994 until 1996, as a
consultant to Mobil Telecommunications Technology from 1992 until 1994 and as
Governor of the State of Mississippi from 1988 until 1992. Mr. Mabus has been a
director of Kroll-O'Gara since November 1996.
NAZZARENO E. PACIOTTI has been Chief Financial Officer of Kroll-O'Gara
since the KHI merger. Prior to the KHI merger he had been the Chief Financial
Officer of KHI since 1992. From 1990 to 1992, he was a Managing Director and the
Controller of the Henley Group (the parent of PneumoAbex Inc. and Fisher
Scientific, a laboratory supply company) and from 1988 to 1990, he was a Vice
President and the Controller of PneumoAbex Inc., an aerospace contractor
specializing in the manufacture of landing gear and flight actuating systems.
HUGH E. PRICE is engaged in business development activities for
Kroll-O'Gara. During 1995 and 1996, prior to joining Kroll-O'Gara, he was a
consultant to various businesses and organizations. Until his retirement in
1995, Mr. Price had been employed by the Central Intelligence Agency since 1964.
His positions with the Agency included Deputy and Associate Deputy Director for
Operations (1991-1995),
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Chief and Deputy Chief for Counterintelligence (1988-1990) and Director of
Personnel (1986-1988). Mr. Price became a director of Kroll-O'Gara in October
1996.
JERRY E. RITTER is currently a consultant to Anheuser-Busch Companies,
Inc., a company engaged in the brewing and family entertainment businesses. He
also is Chairman of the Board of Clark Enterprises, Inc., the general partner of
the Kiel Center and the St. Louis Blues Hockey Club. From 1990 until 1996, Mr.
Ritter served as Executive Vice President and Chief Financial and Administrative
Officer for Anheuser-Busch Companies, Inc. Prior to that time, he served
Anheuser-Busch in various other managerial and executive capacities. Mr. Ritter
also is a director of The Earthgrains Company, Brown Group, Inc. and OmniQuip
International, Inc. He became a director of Kroll-O'Gara in January 1997.
WILLIAM S. SESSIONS is a partner in the law firm of Sessions & Sessions
L.C. and is a consultant to various public and private businesses. From 1987
until 1993, Mr. Sessions was Director of the Federal Bureau of Investigation. He
served as a United States District Judge for the Western District of Texas from
1974 until 1987. Mr. Sessions is a director of Zenith National Insurance
Company. He has been a director of Kroll-O'Gara since November 1996.
HOWARD I. SMITH has been Executive Vice President, Chief Financial Officer
and Comptroller of AIG since 1996. From 1984 until 1996, Mr. Smith was Senior
Vice President and Comptroller of AIG. From 1975 until 1984 Mr. Smith was a
partner in the independent public accounting firm of Coopers & Lybrand. Mr.
Smith also is a director of AIG, 20th Century Industries, International Lease
Finance Corporation and Transatlantic Holdings, Inc. He became a director of
Kroll-O'Gara in December 1997.
Directors of Kroll-O'Gara are elected annually. Officers of Kroll-O'Gara
are elected annually and serve at the discretion of the Board of Directors.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
SUMMARY INFORMATION
The following table sets forth, for the fiscal years indicated, amounts of
cash and certain other compensation paid by Kroll-O'Gara and its subsidiaries,
for services in all capacities, to (i) Jules B. Kroll and Wilfred T. O'Gara,
each of whom served as Chief Executive Officer of Kroll-O'Gara for a portion of
1997, (ii) Michael G. Cherkasky and Nazzareno E. Paciotti, who became executive
officers at the time of the KHI merger, and (iii) each of Kroll-O'Gara's four
other most highly compensated executive officers who received compensation in
excess of $100,000 during 1997. These persons are sometimes referred to as the
"named executive officers."
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ------------------------
---------------------------- SECURITIES
OTHER UNDERLYING
ANNUAL RESTRICTED STOCK
COMPEN- STOCK OPTION ALL OTHER
NAME AND SALARY BONUS SATION AWARD GRANTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- ------------------ ---- ------- ------ ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jules B. Kroll(1)......... 1997 489,583 -- -- -- -- 32,965(2)
Chairman and Chief
Executive 1996 500,000 75,000 -- -- -- 31,715
Officer 1995 500,000 -- -- -- -- 30,395
Thomas M. O'Gara.......... 1997 252,083 -- -- -- 23,150 4,568(3)
Vice Chairman 1996 379,081 7,000 -- -- -- 4,912
1995 410,631 -- -- -- -- 1,218
</TABLE>
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<TABLE>
<CAPTION>
LONG TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION ------------------------
---------------------------- SECURITIES
OTHER UNDERLYING
ANNUAL RESTRICTED STOCK
COMPEN- STOCK OPTION ALL OTHER
NAME AND SALARY BONUS SATION AWARD GRANTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)
- ------------------ ---- ------- ------ ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Wilfred T. O'Gara......... 1997 240,000 45,000 -- -- 98,150 4,898(3)
President and Chief
Operating 1996 200,231 45,000 -- -- 17,000 4,240
Officer 1995 140,550 -- -- -- -- 462
Michael G. Cherkasky(1)... 1997 400,000 -- -- 1,904,578 25,000 28,914(2)
Chief Operating Officer -- 1996 300,000 75,000 898 -- 68,647 26,767
Investigations and
Intelligence 1995 260,000 -- 898 -- 21,882 25,971
Group
Michael J. Lennon......... 1997 148,333 70,000 -- -- 20,000 5,401(3)
Chief Operating Officer -- 1996 128,334 60,317 -- -- 17,000 4,258
Security Products and
Services 1995 89,977 20,000 -- -- -- 277
Group
Nazzareno E.
Paciotti(1)............. 1997 275,520 66,667 -- 229,714 15,000 26,984(2)
Chief Financial Officer 1996 225,520 50,000 -- -- 68,647 24,984
1995 225,520 -- -- -- 21,882 22,797
Gary W. Allen(1).......... 1997 116,666 60,000 -- -- 4,000 6,063(3)
Vice President, OHE 1996 100,666 47,784 -- -- 15,000 3,817
1995 88,239 -- -- -- -- 414
Richard L. Curotto(1)..... 1997 110,000 35,000 -- -- 3,000 9,006(3)
Vice President, OHE 1996 100,833 47,392 -- -- 15,000 8,184
1995 98,433 17,000 -- -- -- 2,223
</TABLE>
- ---------------
(1) Messrs. Kroll, Cherkasky and Paciotti were unaffiliated with Kroll-O'Gara
prior to the KHI merger on December 1, 1997; however, their compensation
information is given on a pooling of interests basis, as if they had been
executive officers of Kroll-O'Gara throughout the periods presented. Messrs.
Allen and Curotto served as executive officers of Kroll-O'Gara until the KHI
merger; their 1997 information includes compensation for the entire year.
(2) Represents pension contributions and profit-sharing contributions of $20,000
and $500, respectively, for each person and supplemental disability plan
benefits of $12,465 for Mr. Kroll, $8,414 for Mr. Cherkasky and $6,484 for
Mr. Paciotti.
(3) Represents profit-sharing contributions to Kroll-O'Gara's 401(k) Plan of
$1,218 for Mr. Thomas M. O'Gara, $714 for Mr. Wilfred T. O'Gara, $714 for
Mr. Lennon, $602 for Mr. Allen and $2,520 for Mr. Curotto and executive
disability insurance plan benefits of $3,350 for Mr. Thomas M. O'Gara,
$4,184 for Mr. Wilfred T. O'Gara, $4,687 for Mr. Lennon, $5,461 for Mr.
Allen and $6,486 for Mr. Curotto.
EMPLOYMENT AGREEMENTS
Commencing December 1, 1997, Kroll-O'Gara has employment agreements, or
amendments to existing employment agreements, which expire on November 30, 2000,
with each of Messrs. Kroll, Thomas M. O'Gara, Wilfred T. O'Gara, Lennon,
Paciotti, Nicholas P. Carpinello and Abram S. Gordon, providing for annual base
salaries in the amounts set forth in the table below. Each executive officer,
including Mr. Cherkasky (who does not have an employment agreement), also is
entitled to participate in an annual bonus plan established by the Compensation
Committee of the Board and to receive up to 50% of the bonus in shares of
Kroll-O'Gara's Common Stock. These employment agreements provide that employment
may be terminated by Kroll-O'Gara at any time with or without cause. In a case
of termination without cause, the employee is entitled to receive compensation
for the greater of the
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balance of the term of the agreement or one year. The agreements also provide
that if Kroll-O'Gara does not renew the agreement for one year or more at the
end of the term, the employee will receive an amount equal to one year's base
salary. Each employment agreement restricts the executive officer from competing
with Kroll-O'Gara during the term of the agreement, and for two years thereafter
if termination of employment is for cause or at the volition of the employee.
Each of Messrs. Thomas M. and Wilfred T. O'Gara has further agreed that during
his employment and for a period of 10 years thereafter he will not directly or
indirectly own any interest in or perform any services for any entity which uses
the word "O'Gara" as a business or trade name and competes with Kroll-O'Gara.
Additionally, Mr. Kroll has agreed that during his employment with Kroll-O'Gara
and for a period of 10 years thereafter he will not directly or indirectly own
any interest in or perform any services for any entity which uses the word
"Kroll" as a business or trade name and competes with Kroll-O'Gara. Mr.
Cherkasky's base salary, as established by Kroll-O'Gara's Board of Directors,
also is listed below. Additionally, at the time of the KHI merger, the executive
officers were granted options to purchase shares of Kroll-O'Gara's Common Stock,
in the amounts listed below; each option has an exercise price equal to 100% of
the fair market value of the Common Stock on December 1, 1997 (i.e., $17.25 per
share).
<TABLE>
<CAPTION>
OPTIONS TO PURCHASE
SHARES
NAME BASE SALARY OF COMMON STOCK
- ---- ----------- -------------------
<S> <C> <C>
Jules B. Kroll.............................................. $375,000 -0-
Thomas M. O'Gara............................................ 275,000 -0-
Wilfred T. O'Gara........................................... 350,000 75,000
Michael G. Cherkasky........................................ 400,000 25,000
Michael J. Lennon........................................... 185,000 15,000
Nazzareno E. Paciotti....................................... 275,000 15,000
Nicholas P. Carpinello...................................... 140,000 10,000
Abram S. Gordon............................................. 135,000 10,000
</TABLE>
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<PAGE> 96
STOCK OPTIONS
The following table presents information on option grants to the named
executive officers during 1997 pursuant to Kroll-O'Gara's 1996 Stock Option
Plan. The Plan does not provide for the grant of stock appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
------------------------------------------------------ POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE PRICE APPRECIATION FOR
OPTIONS GRANTED TO OR OPTION TERM
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION ----------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Jules B. Kroll.......... -- -- -- -- -- --
Thomas M. O'Gara........ 23,150 4.8 12.10 3/24/07 176,163 446,431
Wilfred T. O'Gara....... 23,150 4.8 11.00 3/24/07 160,148 405,847
75,000 15.6 17.25 12/01/07 813,632 2,061,404
Michael G. Cherkasky.... 25,000 5.2 17.25 12/01/07 271,211 687,301
Michael J. Lennon....... 5,000 1.0 11.00 3/24/07 34,589 87,656
15,000 3.1 17.25 12/01/07 162,726 412,381
Nazzareno E. Paciotti... 15,000 3.1 17.25 12/01/07 162,726 412,381
Gary W. Allen........... 4,000 0.8 11.00 3/24/07 27,671 70,125
Richard L. Curotto...... 3,000 0.6 11.00 3/24/07 20,754 52,594
</TABLE>
- ---------------
(1) All options vest one-third per year beginning one year after the date of
grant. The exercise price of all options may be paid in cash or by the
transfer of shares of Kroll-O'Gara's Common Stock valued at their fair
market value on the date of exercise. Each option becomes exercisable in
full in the event of the execution of an agreement of merger, consolidation
or reorganization pursuant to which Kroll-O'Gara is not to be the surviving
corporation or the execution of an agreement of sale or transfer of all or
substantially all of the assets of Kroll-O'Gara.
With respect to each named executive officer, the following table sets
forth information concerning unexercised stock options held at December 31,
1997. No options were exercised during 1997.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
VALUE UNEXERCISED IN-THE-MONEY
REALIZED($) OPTIONS AT OPTIONS AT
---------------- FY-END(#) FY-END($)
(MARKET PRICE ON ------------- ---------------
SHARES ACQUIRED EXERCISE LESS EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) EXERCISE PRICE) UNEXERCISABLE UNEXERCISABLE
---- --------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Jules B. Kroll............... -- -- -- --
Thomas M. O'Gara............. -- -- 7,716/15,434 42,631/85,273
Wilfred T. O'Gara............ -- -- 24,716/90,434 197,744/130,375
Michael G. Cherkasky......... -- -- 90,529/25,000 1,290,776/9,375
Michael J. Lennon............ -- -- 18,666/18,334 157,662/27,713
Nazzareno E. Paciotti........ -- -- 90,529/15,000 1,290,776/5,625
Gary W. Allen................ -- -- 16,333/2,667 138,206/17,669
Richard L. Curotto........... -- -- 16,000/2,000 136,000/13,250
</TABLE>
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<PAGE> 97
DIRECTORS' COMPENSATION
Directors who are not employees of Kroll-O'Gara receive annually a $15,000
fee, plus options to purchase 2,000 shares of Common Stock, for serving as
directors. These directors are paid $1,000 for each Board of Directors meeting
attended in person and $750 for Board meetings held by telephone. Each committee
Chairman receives an annual fee of $1,600 and committee members, including the
Chairman, receive $750 per meeting attended, whether in person or by telephone,
unless the meeting occurs on the same day as a Board meeting, in which case no
separate fee is paid. Employee directors are not separately compensated for
their services as directors.
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
In connection with its initial public offering, the Board of Directors of
Kroll-O'Gara adopted a policy requiring that any future transactions, including
loans, between Kroll-O'Gara and its officers, directors, principal shareholders
and their affiliates be on terms no less favorable to Kroll-O'Gara than could be
obtained from unrelated third parties and that any such transactions be approved
by a majority of the disinterested members of the Board.
Described below are certain transactions and relationships between
Kroll-O'Gara and certain of its officers, directors and shareholders which have
occurred during the last three fiscal years. Except with respect to interest
rates charged on certain of the intercompany notes and accounts
payable/receivable, Kroll-O'Gara believes that the material terms of the various
transactions were as favorable as could have been obtained from unrelated third
parties.
GENERAL
Prior to October 28, 1996, Kroll-O'Gara's business was conducted by a group
of companies affiliated by substantially common ownership and control. The
armoring business was carried out primarily by OHE. Certain foreign armoring
operations, and foreign sales for OHE, were carried out by Overseas Limited
(formerly O'Gara-Hess & Eisenhardt Armoring Company, Limited), an Irish
corporation ("LIMITED"), and its subsidiaries. Satellite communications
operations were carried out by O'Gara Satellite Networks Limited, an Irish
corporation ("OSN"), and OSN, Inc., a Delaware corporation. On October 28, 1996,
certain of these companies and their businesses were reorganized and combined
(the "REORGANIZATION").
Longline Leasing, Inc. and Excel Armor Products, Inc. (together
"LONGLINE/EXCEL"), each a Delaware corporation, merged as of December 31, 1996;
Messrs. Thomas M. O'Gara, Wilfred T. O'Gara and Carpinello own approximately
92%, 1% and 1%, respectively, of the outstanding capital stock of
Longline/Excel.
LONGLINE LEASING/EXCEL ARMOR
Lease agreements. OHE has a Master Equipment Lease with Longline/Excel,
entered into in July 1995, pursuant to which OHE leases various items of
equipment from Longline/Excel. As of December 31, 1997, OHE had approximately
$1,250,000 of equipment under lease for 12 and 36-month terms, beginning on
various dates between July 1995 and April 1996. Rental expenses were $17,000,
$381,446 and $396,005 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Supplier arrangements. During 1995 and 1996, OHE purchased the dual-hard
steel required for certain aspects of its vehicle armoring from Longline/Excel,
which distributed the steel for an unrelated third party. Purchases by OHE from
Longline/Excel were $520,700 and $960,231 during 1995 and 1996, respectively,
and accounted for 90% and 99% of Longline/Excel's sales revenues for the same
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<PAGE> 98
periods. In connection with these purchases, OHE advanced $160,390 to
Longline/Excel during 1995 to fund Longline/Excel's initial purchase commitments
and guaranteed a $150,000 letter of credit furnished by Longline/Excel to the
third party. OHE now purchases its dual-hard steel directly from the third
party. At December 31, 1996 and 1997, OHE had receivables of $210,659 and
$282,345, respectively, from Longline/Excel in connection with the prior
arrangement, which sum is guaranteed by the shareholders of Longline/Excel. All
other aspects of the arrangement have been terminated. Also, in August 1995,
Longline/Excel and OHE entered into an agreement under which OHE manufactured
certain parts needed by Longline/Excel in connection with a contract with a
third party. Total revenue recognized in 1995 and 1996 in association with this
contract was $113,000.
Corporate aircraft. In February 1995, OHE entered into a lease for a
Gulfstream G-II aircraft owned by Longline/Excel. The Gulfstream aircraft was
purchased by Longline/Excel for a price of $4,060,000 (represented by an
exchange of a prior jet leased by Kroll-O'Gara from Longline/Excel and new
financing). In connection with the cancellation of the prior jet's lease,
$400,493, representing the unamortized portion of OHE's $504,000 deposit on that
lease, was transferred as the deposit on the Gulfstream lease. As amended in
August 1996, the Gulfstream lease has provided for minimum lease payments of
$35,200 per month, allowed OHE 23 hours of usage per month and provided for
charges of $1,500 per hour thereafter. Rental expense related to the Gulfstream
lease (including amortization of the deposit) was $414,160, $422,349 and
$233,939 for 1995, 1996 and 1997, respectively. Additionally, Kroll-O'Gara paid
Longline/Excel $327,000 in 1996 and $576,000 in 1997 relating to usage of the
aircraft in connection with the initial public offering and the merger with KHI.
Kroll-O'Gara believes that these rates were equivalent to those charged by
Longline/Excel to other unrelated companies for similar services and compared
favorably to rates charged by another unrelated charter service for similar
aircraft.
Kroll-O'Gara has reached agreement with Longline/Excel to terminate the
aircraft lease as of July 1, 1998. Commencing July 1, 1998, Longline/Excel will
provide OHE a $700 per hour discount, to a maximum of 604 hours, on
Longline/Excel's normal commercial rates. This discount will end on July 1,
2003, irrespective of whether the 604 hours have been utilized. The discount
will be used to amortize the remaining portion of the OHE's deposit under the
lease, as well as unused prepaid hours of usage of the plane, which together
aggregate $422,556.
INTERCOMPANY NOTES AND ACCOUNTS PAYABLE/RECEIVABLE AND CERTAIN LOANS
OHE held promissory notes, for money borrowed, in the principal amounts of
$100,000 and $130,000 from Mr. Thomas M. O'Gara. Each note bore interest at the
rate of 8.75% per annum and was due on December 31, 1996. In December 1996, Mr.
O'Gara repaid in full the $251,834 of principal and accrued interest outstanding
under these notes. Mr. Thomas M. O'Gara also was indebted, for money borrowed,
to OHE in the amount of $242,242, not represented by a promissory note. As of
December 31, 1997, $120,191 of this indebtedness remained outstanding; the full
amount outstanding was repaid in June 1998.
OSN held a promissory note, for money borrowed, from Excel Metal Products,
Inc., a corporation wholly owned by Mr. Thomas M. O'Gara, in the principal
amount of $310,000, which bore interest at the rate of 8.5% and was due on
February 11, 1997. All principal and accrued interest outstanding pursuant to
this note, totalling $331,224, was repaid in December 1996.
During 1995 and 1996, OHE paid Silver Springs Land and Cattle Company, a
Nevada corporation of which Mr. Thomas M. O'Gara is the President and sole
shareholder, $11,082 and $3,177, respectively, for the use of its facilities for
corporate meetings. The use of these facilities by Kroll-O'Gara has been
discontinued.
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<PAGE> 99
Until the Reorganization, OHE held a 49% beneficial interest in O'Gara
Overseas Services, S.A., a Swiss corporation ("OOS"), with the remaining 51%
held by Limited. As part of the Reorganization, OHE's interest in OOS was
exchanged for certain assets and liabilities of Limited, with the result being
that OOS is no longer affiliated with Kroll-O'Gara. In addition, OHE fulfilled a
demand note, bearing interest at 3% per annum, that had been outstanding with
OOS in the amount of $90,930, which represented $88,685 in principal and $2,245
in interest. Also, subsequent to the Reorganization, Mr. Thomas M. O'Gara made
full payment on a 3% promissory note, which totalled $302,803 including
interest, held by OOS. OOS also had provided sales and marketing services for
OHE and OSN. During 1995 and 1996, $377,144 and $363,583, respectively, were
paid to OOS for these services. All arrangements with OOS were terminated in
connection with the Reorganization.
From its incorporation in 1988 until 1996, O'Gara Protective Services, a
Nevada corporation in which the former shareholders of OHE (including Messrs.
Thomas M. O'Gara, Wilfred T. O'Gara, Carpinello and Curotto) previously owned
approximately a 47% interest, but which was and is controlled by Mr. Edward F.
O'Gara, the brother of Messrs. Thomas M. and Wilfred T. O'Gara, was provided
certain medical and general liability insurance coverage under OHE's insurance
policies. These insurance programs were paid for by O'Gara Protective Services
through monthly and annual premiums established by OHE's insurance provider.
These arrangements were terminated upon the consummation of Kroll-O'Gara's
initial public offering.
Immediately prior to the KHI merger, KHI owed $6,349,813 to Mr. Kroll,
representing unpaid principal of $4,761,958 and accrued interest of $242,356 on
open account advances and loans which had been made by him to KHI from time to
time since 1989. An additional $286,308 previously had been repaid. Also
immediately prior to the KHI merger, Mr. Kroll owed KHI $1,420,756, representing
aggregate borrowings from KHI of $1,345,499 plus $75,257 in accrued interest. Of
the outstanding principal amounts, $4,380,849 owed by KHI to Mr. Kroll and
$748,000 owed by Mr. Kroll to KHI bore interest at an annual rate equal to the
prime rate plus 1%, $1,129,109 owed by KHI to Mr. Kroll bore interest at an
annual rate equal to the brokers' loan rate (7.625% at December 1, 1997) and
$597,499 owed by each of KHI and Mr. Kroll to the other bore interest at an
annual rate of 7% (equal to the prime rate at the date of the loan plus 1%).
Immediately prior to the KHI merger, the principal and accrued interest on all
outstanding loans from KHI to Mr. Kroll were repaid in full and loans (plus all
accrued interest) from Mr. Kroll to KHI were repaid to the extent of the amounts
owed to KHI by Mr. Kroll. The remaining amount owed Mr. Kroll is represented by
a promissory note, issued by a subsidiary of KHI at the time of the KHI merger,
in the principal amount of $309,500, bearing interest at an annual rate 1/2%
below the prime rate. Also, upon consummation of the KHI merger, all $6,040,313
of principal and accrued interest owed by KHI to Mr. Kroll for open account
advances was repaid.
In July 1995 AIG loaned $2,000,000 to KHI. These loans were evidenced by
demand promissory notes bearing interest at an annual rate equal to the Citibank
N.A. base rate in effect from time to time plus 2%. As of December 1, 1997,
principal and accrued interest in the aggregate amount of $2,035,583 was
outstanding under these notes. These notes were repaid in full upon the
consummation of the KHI merger.
During 1995, 1996 and 1997, Kroll-O'Gara rendered risk management services,
including marketing support, and claims investigations services to AIG and its
subsidiaries. Kroll-O'Gara billed AIG and its subsidiaries $3,868,967,
$5,325,559 and $6,412,244 in 1995, 1996 and 1997, respectively, for such
services. Included in the 1996 and 1997 amounts are payments pursuant to an
agreement under which Kroll-O'Gara provides certain AIG subsidiaries with crisis
management and marketing services through November 30, 1998. The agreement
provides for an annual retainer ($2,288,640 for 1997),
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<PAGE> 100
subject to certain adjustments, and is payable quarterly in advance. The
accounts receivable balance for AIG was $897,361 at December 31, 1997. Since
1995, Kroll-O'Gara has purchased certain of its liability insurance, including
Professional Errors and Omissions and Directors and Officers liability
insurance, from AIG's subsidiaries. AIG's subsidiaries billed Kroll-O'Gara
$485,807, $824,348 and $814,154 for this insurance during 1995, 1996 and 1997,
respectively. Kroll-O'Gara obtains the coverage through an independent insurance
broker and where possible obtains competitive proposals from unrelated third
parties.
BUILDING LEASE
OLG, Limited, an Ohio limited liability company of which Messrs. Thomas M.
O'Gara, Wilfred T. O'Gara, Allen, Carpinello, Curotto and Lennon own
approximately 91%, 5%, 1%, 1%, 1% and 1% of the outstanding capital stock, was
formed in March 1996 for the purpose of acquiring and leasing to OHE a facility
located at 4175 Mulhauser Road, Fairfield, Ohio. The building was purchased for
approximately $1.8 million and was leased to OHE for one year, ending March 31,
1997, for $468,000 (plus taxes, insurance and maintenance costs). OHE exercised
an option to renew the lease, at a base rent of $21,000 per month, through July
1997. Since August 1997, OHE has continued to utilize the facility on a month to
month basis. In August 1998, OLG, Limited sold the building to an unrelated
third party. OHE continues to lease the building from the third party.
CONSULTING AGREEMENTS
Excel Metal Products. OSN, Inc. had a consulting agreement with Excel
Metal Products under which Excel Metal Products provided management consulting
services to OSN, Inc. during calendar year 1996 for a fee of $6,000 per month
plus reimbursement of expenses. The arrangement terminated upon consummation of
Kroll-O'Gara's initial public offering.
William S. Sessions. From time to time, Mr. Sessions has provided
consulting services to Kroll-O'Gara or OHE. During 1995, 1996 and 1997, he
received $25,000, $5,000 and $7,500, respectively, for sales development
assistance related to OHE's commercial armored products.
Neil P. Saldin. Mr. Saldin was an executive officer of Kroll-O'Gara until
June 30, 1997. Prior to becoming an executive officer of Kroll-O'Gara, Mr.
Saldin was a consultant to OSN from October 1994 through September 1995. The
consulting services, which were managerial and related to the start up of OSN's
operations, were provided through a company controlled by Mr. Saldin, which was
paid $180,000.
Edward F. O'Gara. In 1995 and 1996, OHE guaranteed certain consulting
agreements between Longline/Excel and Cirrus Systems, Inc., a Delaware
corporation owned by Mr. Edward F. O'Gara. These agreements were for one year
terms for a total of $120,000 per year and expired December 31, 1996. Mr. Thomas
M. O'Gara has agreed to indemnify OHE for any claims made under the guarantees.
EXERCISE OF STOCK OPTIONS AND SALE OF SHARES
On August 23, 1996, Messrs. Thomas M. O'Gara, Wilfred T. O'Gara, Carpinello
and Curotto exercised options previously granted on December 31, 1993 to
purchase 138, 131, 91 and 85 shares of the common stock of OHE, respectively, at
a price of $1.00 per share. Giving effect to the Reorganization, the
corresponding numbers of shares of Kroll-O'Gara common stock were 37,667,
35,756, 24,838 and 23,201, respectively, at a price of $0.0037 per share.
On August 23, 1996, Mr. Thomas M. O'Gara sold 10 shares of the common stock
of OHE to Mr. Carpinello for a price of $468.00 per share (equivalent to 2,730
shares of Kroll-O'Gara common
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<PAGE> 101
stock for a price of $1.71 per share). Kroll-O'Gara incurred a non-recurring,
non-cash expense of approximately $19,890 in the fourth quarter of 1996 in
connection with this sale. This expense resulted in a corresponding increase in
additional paid-in capital, and no change in total shareholders' equity. This
expense was not tax deductible and represented the difference between the net
offering price and the net sales price of these shares as if issued directly by
Kroll-O'Gara.
PRINCIPAL SHAREHOLDERS AND HOLDINGS OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Kroll-O'Gara common stock on September 30, 1998 by (i) each
beneficial owner of more than five percent of the common stock, (ii) each
director and named executive officer individually, and (iii) all directors and
executive officers of Kroll-O'Gara as a group. Unless otherwise indicated, all
shares are owned directly and the indicated owner has sole voting and
dispositive power with respect to such shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
------------------------
NAME NUMBER PERCENT
- ---- ----------- ---------
<S> <C> <C>
Jules B. Kroll(2)(3)........................................ 2,879,991 16.7
Thomas M. O'Gara(2)......................................... 2,425,935 14.0
Wilfred T. O'Gara........................................... 253,146 1.5
Gary W. Allen(4)............................................ 18,768 *
Michael G. Cherkasky........................................ 153,939 *
Marshall S. Cogan........................................... -- --
Richard L. Curotto(4)....................................... 41,087 *
Michael J. Lennon........................................... 21,741 *
Raymond E. Mabus............................................ 2,000 *
Nazzareno E. Paciotti....................................... 103,845 *
Hugh E. Price............................................... 17,500 *
Jerry E. Ritter............................................. 2,000 *
William S. Sessions......................................... 2,000 *
Howard I. Smith(2)(5)....................................... 1,444,212 8.4
All directors and current executive officers as a group (14
persons)(4)(6)............................................ 7,384,608 42.0
American International Group, Inc.(2)....................... 1,444,212 8.4
</TABLE>
- ---------------
* Less than 1% of the outstanding common stock.
(1) Includes the following numbers of shares of Kroll-O'Gara common stock which
may be acquired through the exercise of currently exercisable stock options
or stock options which become exercisable within 60 days after September 30,
1998: Mr. Kroll, none; Mr. Thomas M. O'Gara, 7,716 shares; Mr. Wilfred T.
O'Gara, 19,716 shares; Mr. Allen, 16,333 shares; Mr. Cherkasky, 90,529
shares; Mr. Cogan, none; Mr. Curotto, 16,000 shares; Mr. Lennon, 18,666
shares; Mr. Mabus, 2,000 shares; Mr. Paciotti, 90,529 shares; Mr. Price,
17,500 shares; Mr. Ritter, 1,000 shares; Mr. Sessions, 2,000 shares; Mr.
Smith, none; and all directors and current executive officers as a group,
270,989 shares.
(2) Mr. Kroll's address is 900 Third Avenue, New York, New York 10022. Mr.
O'Gara's address is 9113 LeSaint Drive, Fairfield, Ohio 45014. Mr. Smith's
and AIG's address is 70 Pine Street, New York, New York 10270.
(3) Does not include 192,561 shares held by trusts for the benefit of Mr.
Kroll's adult children, in which Mr. Kroll disclaims any beneficial
interest.
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<PAGE> 102
(4) Messrs. Allen and Curotto ceased to be executive officers of Kroll-O'Gara on
December 1, 1997. Their shares are not included in those listed as held by
all directors and current executive officers as a group.
(5) Consists of 1,444,212 shares held by AIG. Mr. Smith disclaims any beneficial
interest in these shares.
(6) Includes 1,444,212 shares held by AIG which are deemed to be owned by Mr.
Smith and in which he disclaims any beneficial interest.
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<PAGE> 103
BACKGROUND AMERICA, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto of Background America appearing elsewhere in this
Proxy Statement/Prospectus.
GENERAL
Background America and its wholly owned subsidiaries, Concord Security
Services, Inc., a Maryland corporation, Quality Facts, Inc., an Alabama
corporation, and Background America of Florida, Inc., a Tennessee corporation,
deliver background investigation services to government, corporate, not-
for-profit, professional and other clients. Background America was incorporated
in Tennessee on September 8, 1995.
Background America offers five primary types of services: Conventional
Contract Services, Automated Contract Services, Telephony Services, Database
Services and Due Diligence Services. In providing Conventional Contract
Services, Background America delivers, in response to a specific background
inquiry, a report based upon manual research of public and non-public sources
utilizing mail, facsimile or courier for communication to and from the customer.
Background America provides services similar to Conventional Contract Services
by means of its Automated Contract Services, which integrates the report
request, data gathering and report delivery functions with the information
transfer capabilities of the internet. Background America's Telephony Services
provide customers with automated human resources functions, such as
pre-screening and recruitment of potential employees. Another proposed feature
of Background America's Telephony Services is an information delivery system
providing access, by means of computer telephony services, to educational and
employment records that have been downloaded to a Background America file
server. Background America also provides Database Services, which permit
customers to perform their own searches of public information maintained by
Background America on its central file server, and Due Diligence services which
consist of more involved background searches.
Quality Facts Stock Purchase. On January 31, 1996, Background America
acquired all of the issued and outstanding stock of Quality Facts, Inc. Prior to
the acquisition, Quality Facts was engaged in the business of providing
background checks and pre-employment screening. In the acquisition, Background
America (i) paid $300,000 cash, (ii) issued 12,000 shares of Background America
common stock, and (iii) agreed to pay 50% of the federal income taxes payable by
each Quality Facts shareholder, and $500 to each Quality Facts shareholder for
state income taxes, relating to the sale of the shareholder's Quality Facts
stock. In addition, Background America issued to the Quality Facts shareholders
options to purchase a total of 10,200 shares of Background America common stock
at per share exercise prices ranging from $0.75 to $2.00, with a weighted
average exercise price of $1.55 per share. In conjunction with the acquisition
of Quality Facts, Background America entered into employment agreements with
each of the three shareholders of Quality Facts, guaranteeing each employment
for a period of two years (ending in February 1998) at an annual salary of
$36,000. Background America continues to employ two of these shareholders and
has entered into new employment agreements with them.
Background Source Asset Purchase. Effective June 27, 1996, Background
America acquired substantially all of the assets and assumed certain liabilities
of Background Source, Inc., a Tennessee corporation. The assets purchased
included all of the tangible and intangible assets of Background Source used in
its business of performing background searches. In connection with the purchase
of these
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<PAGE> 104
assets, Background America paid $110,000 and assumed some current liabilities of
Background Source incurred in the ordinary course of business. Background
America also issued to the majority shareholder of Background Source a stock
purchase warrant to purchase 500 shares of Background America common stock at an
exercise price of $3.50 per share.
Concord Stock Purchase. Background America acquired all of the issued and
outstanding stock of Concord Security Services, Inc. effective June 1, 1996.
Concord was engaged in the business of performing background searches and
pre-employment screening. Background America issued 128,572 shares of Background
America common stock in the acquisition and granted to each Concord shareholder
the right to put to Background America all (but not less than all) of the shares
of Background America common stock issued to that shareholder at a price of
$3.85 per share. The put right expired in May 1997, without being exercised by
any former shareholder of Concord. So long as the former Concord shareholders
own at least 128,572 shares of Background America common stock, they are
entitled to recommend one person for election to the Background America Board of
Directors, and Background America is required to use its reasonable efforts to
cause the nominee to be elected to the Board of Directors. It is anticipated
that this right will be waived in connection with the merger with Kroll-O'Gara.
In connection with the Concord acquisition, Background America also entered into
a three-year employment agreement with one of the principals of Concord to serve
as Director of Maryland Operations. The employment agreement provides for an
annual compensation package comprised of salary, benefits, car allowance, taxes
and all other costs attributed to employment in an aggregate amount not to
exceed $80,000.
TCIC Asset Purchase. As of December 9, 1996, Background America acquired
substantially all of the assets of Tennessee Criminal Information Center, a
Tennessee general partnership. The assets purchased included all of the tangible
and intangible assets of TCIC used in its business of performing background
searches and maintaining a computerized database of criminal arrest records. In
connection with the asset purchase, Background America paid $183,678 and assumed
liabilities of TCIC with respect to prepaid customer credits.
1997 Issuance of Preferred Stock. In June 1997, Background America issued
1,143,700 shares of Series A Preferred Stock to various purchasers at a price of
$5.25 per share. In connection with the issuance of the Preferred Stock,
Background America, the Preferred Stock purchasers and selected employees of
Background America (the "MANAGERS") entered into a Shareholders' Agreement
providing some of the Preferred Stock purchasers rights regarding representation
on Background America's Board of Directors, and rights of first refusal and
co-sale with respect to Background America common stock owned by some of the
Managers. As a condition to the purchase of the Preferred Stock, each of the
Managers also executed a covenant-not-to-compete with Background America.
Profiles Plus Merger. On March 26, 1998, Profiles Plus, Inc., a Florida
corporation engaged in the business of performing background searches and
pre-employment screening, merged into Background America of Florida, Inc., a
wholly owned subsidiary of Background America. In connection with the Profiles
Plus merger, 83,334 shares of Background America common stock were issued,
approximately $140,000 of indebtedness of Profiles Plus was repaid, and
Background America granted each of the shareholders of Profiles Plus the right
to put to Background America all (but not less than all) of the shareholder's
Background America common stock at a price of $6.00 per share. A put option
relating to 27,778 shares issued in the acquisition was exercised; the remaining
put options expired unexercised. Background America paid $133,996 to the
Profiles Plus shareholders in consideration of agreements not to compete and
entered into an independent contractor agreement with one Profiles Plus
shareholder providing for, over a period of 48 months, guaranteed payments
$175,000 and allowing him to earn commissions. In addition, Background America
entered into two-year employment agreements with two
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non-shareholder employees providing for annual salaries of $48,000 and $38,000,
respectively, and providing bonuses based upon the net operating income derived
from the activities of the Clearwater, Florida office. Background America
granted the non-shareholder employees stock options to purchase (i) 5,000 shares
of Background America common stock at an exercise price of $3.00 per share and
(ii) 500 shares of Background America common stock at an exercise price of $6.00
per share.
Accounting Treatment. The acquisitions and the merger described above were
accounted for using the purchase method. Accordingly, the purchase prices paid
by Background America have been allocated to the assets purchased and
liabilities assumed based upon their estimated fair values at the date of
acquisition. The excess of the purchase price over the estimated fair value of
all net assets acquired is being amortized on a straight-line basis over 12
years.
RESULTS OF OPERATIONS
COMPARISON OF THE NINE MONTHS ENDING SEPTEMBER 30, 1997 AND 1998
The following table sets forth selected results of operations for the nine
months ending September 30, 1997 and September 30, 1998.
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1997 1998
----------- ----------
<S> <C> <C>
REVENUES.................................................... $ 3,075,604 $5,027,994
COSTS OF SALES.............................................. 2,554,981 3,359,593
----------- ----------
Gross operating profit................................. 520,623 1,668,400
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 1,362,891 2,150,348
Depreciation and amortization............................. 204,811 318,947
----------- ----------
Operating loss............................................ (1,047,078) (800,895)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (79,189) (9,139)
Interest income........................................... 51,919 76,694
Other, net................................................ 14,308 16,692
----------- ----------
NET LOSS.................................................... $(1,060,041) $ (716,648)
=========== ==========
</TABLE>
Revenues. Background America recognizes revenues at the time services are
completed using the accrual method. Revenues increased $1,952,390, or 63%, from
$3,075,604 for the nine months ended September 30, 1997 to $5,027,994 for the
nine months ended September 30, 1998. The primary reasons for this increase were
approximately $785,000 in sales contributed during the nine months ended
September 30, 1998 due to the acquisition of Profiles Plus and growth of
Background America's client base.
Cost of Sales and Gross Profit. Costs of sales for the nine months ended
September 30, 1998 increased $804,612, or 31%, from $2,554,981 for the nine
months ended September 30, 1997 to $3,359,593. Gross operating profit as a
percent of revenues increased from 17% for the nine months ended September 30,
1997 to 33% for the nine months ended September 30, 1998. The increase in cost
of sales was due to increases in Background America's business activities as
discussed above in "Revenues." The increase in gross profit percentage was
primarily due to a reduction in labor costs resulting from the further
implementation of Background America's automated background report development
system. Background America expects continued reduction in labor costs throughout
1999 as a result of broader implementation of the report development system
inclusive of additional system
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refinements which should decrease cost of goods sold to about 60% and increase
gross margin to approximately 60% of revenues.
Operating Expenses. Operating expenses increased $901,593 or 58%, from
$1,567,702 for the nine months ended September 30, 1997 to $2,469,295 for the
nine months ended September 30, 1998. Operating expenses as a percentage of
revenues decreased from 51% in 1997 to 49% in 1998. The primary reasons for the
increase in operating expenses were additional operating costs associated with
1997 acquisitions and increased depreciation and amortization associated with
the expansion of Background America's computer system and additional
amortization associated with the 1998 acquisition of Profiles Plus.
Other Income and Expense. Interest expense decreased $70,050, or 88%, from
$79,189 for the nine months ended September 30, 1997 to $9,139 for the nine
months ended September 30, 1998. Interest expense, primarily from notes payable
to shareholders, was significantly reduced beginning in July 1997 as a result of
$1,053,735 of the notes payable and related accrued interest being canceled in
exchange for the sale of the Series A Preferred Stock with a further reduction
in the notes payable from cash provided from the sale of the Series A Preferred
Stock. Interest income increased $24,775, or 48%, from $51,919 for the nine
months ended September 30, 1997 to $76,694 for the nine months ended September
30, 1998. Interest income was generated as a result of availability of liquid
assets derived from the sale of Series A Preferred Stock in June 1997. The
increase resulted from an increase in the average balance of liquid assets
available for investment during the respective periods. Other income increased
$2,384, or 17%, from $14,308 for the nine months ended September 30, 1997 to
$16,692 for the nine months ended September 30, 1998 resulting primarily from an
increase in rental income due to annual rental rate adjustments.
COMPARISON OF FISCAL 1996 AND 1997
The following table sets forth selected results of operations for the
fiscal years ended December 31, 1996 and 1997, which are derived from the
audited consolidated financial statements of Background America appearing
elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
REVENUES.................................................... $ 1,775,815 $ 4,221,059
COSTS OF SALES.............................................. 1,624,319 3,447,569
----------- -----------
Gross operating profit................................. 151,496 773,490
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 1,118,116 1,899,086
Depreciation and amortization............................. 118,624 279,214
----------- -----------
Operating loss............................................ (1,085,244) (1,404,810)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (41,801) (84,463)
Interest income........................................... -- 93,106
Other, net................................................ (1,874) 59,523
----------- -----------
NET LOSS.................................................... $(1,128,919) $(1,336,644)
=========== ===========
</TABLE>
Revenues. Revenues increased $2,445,244, or 138%, from $1,775,815 in 1996
to $4,221,059 in 1997. The primary reasons for this increase were contributions
to revenues provided by the companies acquired by Background America during
1996, as well as increases in the number of customers attributable to increased
sales efforts.
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Cost of Sales and Gross Profit. Costs of sales for 1997 increased
$1,823,250, or 112%, from $1,624,319 in 1996 to $3,447,569 in 1997. Gross
operating profit as a percent of revenues increased from 8% in 1996 to 18% in
1997. The increase in cost of sales was due to increases in Background America's
business activities as discussed above in "Revenues." The increase in gross
profit percentage was primarily due to reduction of labor costs resulting from
Background America's automated background report development system.
Operating Expenses. Operating expenses for 1997 increased $941,560, or
76%, from $1,236,740 in 1996 to $2,178,300 in 1997. Operating expenses as a
percentage of revenues decreased from 70% to 52% from 1996 to 1997. The primary
reasons for the increase in operating expenses were additional operating costs
associated with the acquisitions during 1996, increased sales and marketing
costs, increased depreciation and amortization associated with the expansion of
Background America's computer system, and the impact of a full year's
amortization of the goodwill associated with the 1996 acquisitions.
Other Income and Expense. In 1996, Background America incurred a net other
expense of $43,675, consisting primarily of interest expense in the amount of
$41,801. Interest expense of $39,600 was incurred on notes payable to Michael D.
Shmerling and Alan Wernick, who were shareholders, officers and directors of
Background America at the time the loans were made. In 1997, Background America
received net other income of $68,166, comprised of interest expense of $84,463,
interest income of $93,106 and other income of $59,523. The increased interest
expense was due to increased borrowings to support an increased level of
operations and expenses associated with Background America's automated
background report development system, including the expansion of Background
America's computer system. The interest income in 1997 was due to interest
earned on the proceeds derived from the sale of Series A Preferred Stock. The
other income of $59,523 in 1997 was comprised of (i) payroll and accounting
services provided to companies with common ownership with Background America and
(ii) rental income from subleasing a portion of the building in which Background
America's corporate headquarters is located. The payroll and accounting services
were discontinued in July 1998.
Pro Forma Effect of Stock-Based Compensation
Background America has historically used stock options to retain and
compensate officers, directors, employees and others. During 1996 and 1997,
Background America granted options for the purchase of 59,952 and 189,125
shares, respectively, of Background America common stock to officers, directors
and employees and others. SFAS No. 123, Accounting for Stock-Based Compensation,
encourages, but does not require, companies to adopt the fair value method of
accounting for stock-based compensation. Background America has chosen to
continue to account for stock-based employee compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees and Related Interpretations. If compensation cost for stock-based
compensation had been determined based on the fair value of the options at the
grant dates consistent with the methodology prescribed under SFAS No. 123,
Background America's pro forma loss for 1996 would have increased to $1,134,412,
an increase of $5,493 over the reported loss, and Background America's pro forma
loss for 1997 would have increased to $1,383,360, an increase of $46,716 over
the reported loss.
ACCOUNTING STANDARDS ISSUED BUT NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
Disclosures about Segments of an Enterprise and Related Information, which
modifies segment reporting requirements and establishes certain criteria for
reporting disclosures concerning a company's products and services,
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geographic areas and major customers in annual and interim financial statements.
This statement is effective for financial statements of Background America for
the year ended December 31, 1998. Management of Background America believes that
adoption of SFAS No. 131 will not have a material effect on Background America's
results of operations.
LIQUIDITY AND CAPITAL RESOURCES
Capital Sources. To supplement cash generated from operations, Background
America has borrowed money pursuant to various credit arrangements and, in June
1997, issued shares of Series A Preferred Stock. During 1996, 1997 and 1998,
certain shareholders of Background America made loans to Background America
payable on demand, bearing interest at annual rates ranging from 8.50% to 8.75%.
The shareholder loans have been repaid in full. From the Preferred Stock sale,
Background America received cash proceeds of $4,914,317, net of issuance costs
totaling $36,373, and cancelled $1,053,735 of principal and accrued interest
under the shareholder loans. On April 4, 1997, Background America entered into a
credit agreement with NationsBank of Tennessee, N.A., which provides for a line
of credit of up to $1,000,000. The outstanding principal balance of the
NationsBank line of credit bears interest at a floating rate equal to
NationsBank index rate. The NationsBank line of credit matures in April 1999 and
is guaranteed by certain shareholders of Background America. As of March 1,
1999, no amounts were outstanding under the NationsBank line of credit. As of
September 30, 1998, Background America had approximately $1,058,328 remaining
from the Preferred Stock sale, all in the form of highly liquid investments with
original maturities of three months or less.
Cash Flow and Working Capital. Net cash used in operating activities
totaled $1,139,886 for the nine months ending September 30, 1998 as compared to
$1,294,011 for the nine months ended September 30, 1997. As of September 30,
1998, Background America had working capital of $2,022,979, compared to working
capital of $3,331,689 as of September 30, 1997.
Future Operations and Liquidity. Background America leases certain office
space under noncancelable operating lease agreements. Total estimated rents for
1999 are $222,814. Certain of these office leases are between Background America
and Michael D. Shmerling, an executive officer of Background America and member
of its board of directors. Background America believes that the terms of these
leases are comparable to terms that would be obtained in arms' length
transactions with unaffiliated third parties. Background America is also
obligated to make payments on various agreements executed in connection with
acquisitions previously consummated in an estimated aggregate amount of $60,400
for 1999. Background America intends to continue to increase its revenues, both
by acquisitions and penetration of new markets, and such growth will likely
require additional capital. The NationsBank line of credit will be terminated
prior to the merger. Background America has approximately $1,000,000 available
from the proceeds of the June 1997 sale of Series A Preferred Stock to fund its
operations, and Background America believes that it has sufficient liquidity to
fund its operations through the foreseeable future.
Year 2000 Issues. Background America created a formal Y2K committee in
August 1998. The Y2K committee established goals and deadlines for obtaining
compliance and divided Y2K compliance issues into three categories: (1)
infrastructure and hardware, (2) operating systems and applications, and (3)
external factors.
With respect to Infrastructure and hardware, Background America installed a
Y2K compliant core networking infrastructure in February 1999. Y2K compliant
application and file servers also have been installed. Currently, analytical
polling software is being used to record and diagnose Y2K compliance problems on
all Background America work stations.
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With respect to operating systems and applications, Background America has
been developing code in four-digit year format since its formation in 1995.
Therefore, Background America does not anticipate any material problems with
internally developed software. Background America believes that it has replaced
or updated externally developed accounting and office software that is not Y2K
compliant, but is currently utilizing analytical polling software to record and
diagnose Y2K compliance problems.
With respect to external factors, in October 1998 Background America
requested, by means of surveys, information from its vendors regarding their
year 2000 compliance and is in the process of reviewing the responses to the
surveys. Formal compliance requests will be issued to all vendors and clients by
March 1, 1999. Background America is studying alternate sources for vendors who
will not be Y2K compliant. Background America is working with the information
systems departments of vendors with whom it exchanges data electronically.
Many of the databases of public records that Background America access in
its business of performing background searches utilize a two-digit year format.
If some portion of these databases, or the information provided by other
vendors, are not available due to year 2000 noncompliance, the timeliness of
Background America's service may be impacted, and Background America may have to
resort to manual searches which would be more expensive and time consuming and
likely would decrease earnings.
Quarterly Fluctuations. Background America normally does not have long
term contracts with its clients, and, accordingly, net sales are dependent upon
the initiation of new engagements, many of which may be for a short duration.
Period-to-period comparisons within a year or between years may not be
indicative of results for a full fiscal year, and results of operations for a
particular quarter may not be indicative of the results to be expected for other
quarters.
Forward-Looking Statements. Forward-looking statements are made throughout
this Management's Discussion and Analysis of Financial Conditions and Results of
Operations. Background America's results may differ materially from those in the
forward-looking statements. Forward-looking statements are based on management's
current views and assumptions, and involve risks and uncertainties that could
significantly affect expected results. For example, operating results may be
affected by external factors such as actions of competitors, changes in laws and
regulations, customer demand, effectiveness of programs, strategic relations,
fluctuations in the cost and availability of resources.
BUSINESS
GENERAL
Background America provides background investigation services to
government, corporate, not-for-profit, professional and other clients.
Background America was incorporated in Tennessee on September 8, 1995.
Background America of Florida was incorporated in Tennessee on March 19, 1998,
as a wholly owned subsidiary of Background America, to act as the acquiring
company in a merger with Profiles Plus, Inc. of Clearwater, Florida. Prior to
its acquisition by Background America, Concord Security Services, Inc. was
incorporated in Maryland on March 21, 1991. Prior to its acquisition by
Background America, Quality Facts, Inc., was incorporated in Alabama on December
1, 1992. The corporate headquarters of Background America is located at 1900
Church Street, Suite 400, Nashville, Tennessee 37203.
Background America's founders established Background America in response to
a perceived need for faster access to background investigation services. The
core of Background America's senior management team was previously part of a
private criminal justice firm specializing in correctional
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facility management. Recognizing the importance of pre-employment screening for
potential employees in correctional facilities management, Background America
researched the industry and the existing providers of background services. As a
result, Background America developed an automated system to obtain and report
relevant background information. In addition to traditional means of
communication, such as mail, fax and telephone, Background America's system
utilizes the internet, asynchronous dial-up and a computer telephony integration
system to receive, produce and report its findings to its customers, providing
them with background reports.
SERVICES
Background America's corporate headquarters is located in Nashville,
Tennessee, and Background America maintains operations centers and sales offices
in Hampstead, Maryland; Clearwater, Florida; and Nashville, Tennessee. In
addition, Background America has regional sales representatives located in
Birmingham, Alabama; Jacksonville, Florida; Memphis, Tennessee; Chicago,
Illinois; Omaha, Nebraska; and Annapolis, Maryland. Background America markets
five primary types of services: Conventional Contract Services, Automated
Contract Services, Telephony Services, Database Services and Due Diligence
Services.
Conventional Contract Services. In providing Conventional Contract
Services, Background America delivers, in response to each background inquiry,
background reports specifically tailored for a particular client. The
information provided by Background America in each report is based on research
of both public and non-public sources of information. Historically, Background
America has performed Conventional Contract Services using conventional methods
of communication with the client and with Background America's information
sources, such as mail, fax and telephone.
Automated Contract Services. In February 1997, Background America
initiated its first internet client, bringing into first use its Automated
Contract Services, which it markets under the brand name BAI Online(sm).
Automated Contract Services are essentially a means of providing background
investigation services formerly available only under Background America's
Conventional Contract Services by more efficient methods. Automated Contract
Services simplify the Conventional Contract Services process and eliminate
duplication of effort (multiple faxes and redundant data entry, for instance) by
integrating the report request, data gathering and report delivery functions
with the information transfer capabilities of the internet.
Background America expects Automated Contract Systems to become its largest
revenue generator over the next two to four years. As discussed above, Automated
Contract Systems, by automating the order entry, file transfer, information
procurement, report generation and integrated billing functions, significantly
increase efficiencies in operation by reducing human capital requirements.
Background America believes that these efficiencies will result in a higher
gross margin than services provided under Conventional Contract Services.
Telephony Services. In late 1997, Background America invested in a
computer telephony integration system, which Background America offers under the
brand name TelApply(sm). TelApply(sm)enables clients to screen respondents to
media advertisements for employment. Applicants are initially screened through a
series of questions asked by the computer telephony system, with the actual
format and questions established by the client. Candidates who satisfy the
client's initial screening requirements may be invited to a personal interview
with the client company. Background America intends to offer the TelApply(sm)
service by means of internet access in the future, through the U.R.L.
selectsuccess.com. In the future, Background America intends to offer clients
the ability to outsource verification of employment and educational history as a
part of its Telephony Services, as well.
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Database Services. Database Services permit customers to search public
information maintained and regularly updated by Background America on its
central file server. The information available from this database includes local
arrest records and state felony records. Background America anticipates that
additional information will be added to this database in the future. Database
Services can be accessed directly by the client via the internet, allowing
Background America's customers to formulate and perform their own ad hoc
searches of available data. Background America also searches the information
available through its Database Services to assist in generating background
reports offered through its Conventional Contract and Automated Contract
Services. Database Services have a very low marginal service cost component,
with the majority of costs attributable to in-house technical support by
management information systems personnel. Costs of sales associated with the
provision of Database Services result from supplier costs incurred in the
pass-through of data.
Due Diligence Services. Background America offers its more comprehensive
background searches through the Capital Intelligence(TM) brand name. Capital
Intelligence(TM) services are marketed to banks, investors and lawyers for
assistance with high level executive decisions. In addition to the information
provided by means of Conventional Contract Services, Capital Intelligence(TM)
services include a ten-year comprehensive search of tax liens, civil litigation
and periodical articles regarding individuals and business entities.
CUSTOMERS AND CONTRACTUAL ARRANGEMENTS
Background America's has approximately 3500 clients nationwide, including
large, publicly held companies, small, private businesses, non-profit
organizations and governmental entities. Significant clients include Mariner
Post-Acute Health Network, Gaylord Entertainment, American General Life &
Accident Insurance, Aerotek, SouthTrust Bank, Genesis Elder Care and Sylvan
Learning Centers. Background America has written service agreements with its
clients, but these agreements do not provide for any minimum level of usage and
typically may be terminated upon relatively short notice by either Background
America or the client. Approximately one-third of Background America's 1998
revenues were derived from only three clients, and the loss of one or more of
such clients could have a material, adverse effect on Background America's
results of operations. In particular, one client, Aerotek, generated over 10% of
Background America's revenues during 1998.
Background America relies upon outside vendors to retrieve public records
from remote sources. These vendors include individuals, private investigation
firms and large public record retrieval companies. Background America is not
able to direct the search methodology of its vendors or confirm that, in
conducting a particular search, the vendor has (1) conducted an actual search,
(2) searched properly, (3) deciphered public information correctly, and (4)
returned search information to Background America with all required information.
Background America has entered into written contracts with the majority of its
vendors which require the vendors to indemnify Background America against any
claims by a consumer or customer based on inaccurate or incomplete public record
information.
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MARKETING AND SALES
Background America has focused its marketing efforts on emphasizing its
transition to an information technology company. Background America strategy is
to grow by means of:
- forging strategic alliances with companies who can feed Background
America's core business;
- making strategic acquisitions of companies who offer a technological,
geographic or specific product advantage;
- developing internal systems to provide higher quality products requiring
less labor that may be delivered more quickly to the client;
- developing internal products and databases that allow Background America
to create new sources of revenue, providing Background America
opportunities to participate earlier in the hiring process, thereby
creating more demand for its core products;
- developing a cost-effective telephony system to automate data access and
permit Background America to access such data for its own core business
uses and for marketing to others; and
- earning a reputation for quality, fairness in pricing and staying on the
cutting edge of technology.
COMPETITION
Background America believes that the market for its services is crowded
with, and fragmented by, providers of various services. Background America
believes that one major vendor -- a spin-off of a credit bureau -- controls a
significant portion of the background investigation market. Background America
believes that a large segment of the market is occupied by thousands of "mom and
pop" competitors, that are often operated by a former law enforcement officer or
other individual with substantial courthouse contacts in a single locality who
can locate the records for a background report. Many of these businesses are
suppliers of public records to Background America.
Background America believes that the principal methods of competition in
its industry consist of differentiation based upon price, quality of service
(including both timeliness and accuracy), the ability to offer clients automated
solutions to information needs, and the ability to offer ancillary research and
information to permit clients to comply with legal requirements. Background
America believes that it is highly competitive within its industry when
evaluating these factors.
CERTIFICATION AND GOVERNMENT REGULATION
Background America's services are subject to various federal, state and
local laws, including laws designed to protect the privacy of persons and laws
requiring licensure of private investigators. Individuals who are the subject of
a background check are entitled by federal law to a reinvestigation. Background
America is licensed as a private investigation firm in Tennessee and Maryland,
and Background America of Florida is licensed as a private investigation firm in
the State of Florida. If the officers of Background America change following the
merger, the State of Tennessee requires notification, and the States of Florida
and Maryland require notification and application by the new officers. Various
officers and employees of Background America and/or its subsidiaries are
licensed as private investigators in Tennessee, Florida or Maryland. In some
cases, notification of a change in ownership of the employer of a private
investigator is required.
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ENVIRONMENTAL MATTERS
Background America is subject to various federal, state and local
environmental laws and regulations. Background America has obtained a Phase I
environmental report on its headquarters site in Nashville, Tennessee which
indicates that the site is "acceptable." Background America's Uninterrupted
Power Source backup system, maintained at its headquarters, contains sealed
batteries, the use and disposal of which are subject to environmental laws and
regulations. Since its formation in 1995, Background America has not received
any notices that it or its properties are not in compliance with environmental
laws and regulations.
EMPLOYEES
As of March 1, 1999, Background America had approximately 100 full-time
employees and approximately 25 part-time employees, none of whom are represented
by a labor organization. Background America considers its relations with its
employees to be good.
PROPERTIES
Background America does not own any real property. Background America
leases approximately 15,000 square feet at its headquarters site in Nashville,
Tennessee, and approximately 5,000 square feet in Hampstead, Maryland.
Background America of Florida leases approximately 4,000 square feet at its
location in Clearwater, Florida. Certain of these office leases are between
Background America and companies controlled by Michael D. Shmerling, the
President, Chief Executive Officer and a director of Background America.
Background America believes that the terms of its leases with Mr. Shmerling are
comparable to terms that would be obtained in arms-length transactions with
unaffiliated third parties. Background America believes that its properties,
including equipment, are adequate for its current needs, in generally good
condition and well maintained.
LEGAL PROCEEDINGS
From time to time, Background America is involved in litigation in the
ordinary course of its business. Background America currently does not believe
that there is any pending or overtly threatened litigation, individually or in
the aggregate, that is likely to have a material adverse effect on its business
or financial condition.
INTELLECTUAL PROPERTY
Background America has registered the trademark BACKGROUND AMERICA, INC.
(name and logo) with the United States Patent and Trademark Office. Background
America has also filed intent-to-use applications for the following marks:
TELAPPLY, HR INFOSOURCE, SELECTSUCCESS.COM, CAPITAL INTELLIGENCE, BAI ONLINE,
and ALIAS. Background America believes that it has taken adequate steps to
protect its intellectual property. There can be no assurance, however, that any
of the intent-to-use applications will be registered or that Background America
will be able to adequately protect its proprietary rights.
PRINCIPAL SHAREHOLDERS AND HOLDINGS OF MANAGEMENT
The following table sets forth certain information as to the beneficial
ownership of Background America common and preferred stock as of March 1, 1999,
by (i) each director and executive officer,
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(ii) all current executive officers and directors as a group, and (iii) each
beneficial owner of more than five percent of Background America stock.
<TABLE>
<CAPTION>
NAME COMMON STOCK (%)(1) PREFERRED STOCK (%) TOTAL (%)(2)
- ---- -------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Michael D. Shmerling(3)........... 1,130,267 (51.4%) 190,500 (16.7%) 1,320,767 (39.5%)
Jacob May(3)...................... 600,000 (27.3%) -- 600,000 (17.9%)
Noro-Moseley Partners III,
LP(3)........................... -- 285,700 (25.0%) 285,700 (8.5%)
Franklin Capital Associates III,
LP(3)........................... -- 238,100 (20.8%) 238,100 (7.1%)
R-H Capital Partners, LP(3)....... -- 190,500 (16.7%) 190,500 (5.7%)
Alan Wernick(3)................... 100,000 (4.5%) 14,000 (1.2%) 114,000 (3.4%)
Marc Curvin(3).................... -- 1,000 (*) 1,000 (*)
Robert Schlossnagle............... 51,428 (2.3%) -- 51,428 (1.5%)
Michael Rosen..................... 20,000 (*) 5,000 (*) 25,000 (*)
Dana Caro......................... 19,286 (*) -- 19,286 (*)
Benny Ball........................ -- -- --
Thomas Ellis...................... 4,000 (*) -- 4,000 (*)
William Denny..................... -- 5,000 (*) 5,000 (*)
Tom Martin........................ -- 2,000 (*) 2,000 (*)
Tim Davison....................... -- -- --
Nicholas Manis.................... -- -- --
Russell French(3)(4).............. -- 285,700 (25.0%) 285,700 (8.5%)
James Hoffman(3)(5)............... -- 238,100 (20.8%) 238,100 (7.1%)
Stacey Garrett.................... -- -- --
All directors and executive
officers as a group (15
persons)........................ 1,324,981 (60.2%) 741,300 (64.8%) 2,066,281 (61.8%)
</TABLE>
- ---------------
* Less than 1%.
(1) Does not include shares of Background America common stock which may be
acquired through the exercise of stock options or warrants which are not
currently exercisable or which will not become exercisable within 60 days
after March 1, 1999, but will become exercisable at the time of the merger,
as described under "The Merger -- Interests of Certain Persons in the
Merger."
(2) Gives effect to the conversion, on a one-for-one basis, of all shares of
Background America preferred stock to shares of Background America common
stock.
(3) The address of Messrs. Shmerling, May, Wernick, and Curvin is 1900 Church
Street, Nashville, Tennessee 37203. The address of Noro-Moseley Partners
III, LP and Mr. French is 9 North Parkway Square, 4200 Northside Parkway,
Atlanta, Georgia 30327. The address of Franklin Capital Associates III, LP
and Mr. Hoffman is 237 Second Avenue South, Franklin, Tennessee 37067. The
address of R-H Capital Partners, LP is 3333 Peachtree Road, Atlanta, Georgia
30326.
(4) Shares voting power with respect to stock owned by Noro-Moseley Partners
III, LP.
(5) Shares voting power with respect to stock owned by Franklin Capital
Associates III, LP.
DESCRIPTION OF KROLL-O'GARA CAPITAL STOCK
Kroll-O'Gara's authorized capital stock consists of 50,000,000 shares of
common stock $.01 par value per share, of which shares were outstanding at
March 1, 1999 and 1,000,000 shares of undesignated preferred stock, $.01 par
value per share, none of which is issued or outstanding. The following
description is only a summary of the material terms of the capital stock of
Kroll-O'Gara. Your rights as a shareholder of Kroll-O'Gara will be governed by
the provisions of Kroll-O'Gara's Amended
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and Restated Articles of Incorporation and Code of Regulations and by the
provisions of Ohio law, including the Ohio General Corporation Law ("OGCL").
COMMON STOCK
You will be entitled to one vote for each share held of record by you on
all matters submitted to a vote of shareholders. You will not have the right to
cumulate your votes in the election of directors.
Subject to preferences which may be granted to holders of any preferred
stock which is issued, you will be entitled to share in any dividends that the
Board of Directors, in its discretion, validly declares from funds legally
available. In the event of liquidation, each outstanding share of Kroll-O'Gara
common stock entitles its holder to participate ratably in the assets remaining
after payment of liabilities and any preferred stock liquidation preferences.
You will have no preemptive or other rights to subscribe for or purchase
additional shares of any class of stock or any other securities of Kroll-O'Gara.
There are no redemption or sinking fund provisions with regard to the
Kroll-O'Gara common stock. All outstanding shares of Kroll-O'Gara common stock
are fully paid, validly issued and nonassessable.
The vote of holders of a majority of all outstanding shares of Kroll-O'Gara
common stock is required to amend the Kroll-O'Gara Articles and to approve
mergers, reorganizations, and similar transactions.
PREFERRED STOCK
Kroll-O'Gara may issue up to 1,000,000 authorized shares of preferred stock
from time to time in series having such designations, preferences and rights,
qualifications and limitations as the Board of Directors may determine, without
any need for your approval. Preferred stock could be given rights which would
adversely affect your equity and could have preference to your Kroll-O'Gara
common stock with respect to dividend and liquidation rights. Issuance of
preferred stock could have the effect of acting as an anti-takeover device to
prevent a change of control of Kroll-O'Gara.
PROVISIONS AFFECTING BUSINESS COMBINATIONS AND CHANGES IN CONTROL
Ohio law governs the rights of shareholders of Kroll-O'Gara. Chapter 1704
of the Ohio Revised Code (the "ORC") may be viewed as having an anti-takeover
effect. This statute, in general, prohibits an "issuing public corporation" (the
definition of which includes Kroll-O'Gara) from entering into a "Chapter 1704
Transaction" with the beneficial owner (or affiliates of such a beneficial
owner) of 10% or more of the outstanding shares of the corporation (an
"interested shareholder") for at least three years following the date on which
the interested shareholder attains such 10% ownership, unless the board of
directors of the corporation approves, prior to the person becoming an
interested shareholder, either the transaction or the acquisition of shares
resulting in the 10% ownership position. A "Chapter 1704 Transaction" is broadly
defined to include, among other things, a merger or consolidation with, a sale
of substantial assets to, or the receipt of a loan, guaranty or other financial
benefit (which is not proportionately received by all shareholders) from the
interested shareholder. After the expiration of the three-year period, a Chapter
1704 Transaction with the interested shareholder is permitted only if either (1)
the transaction is approved by the holders of at least two-thirds of the voting
power of the corporation (or such different proportion as is set forth in the
corporation's articles of incorporation), including a majority of the
outstanding shares excluding those owned by the interested shareholder, or (2)
the business combination results in the shareholders other than the interested
shareholder receiving a prescribed "fair price" for their shares. One
significant effect of Chapter 1704 is
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to encourage a person to negotiate with the board of directors of a corporation
prior to becoming an interested shareholder.
In addition, Section 1707.043 of the ORC requires a person or entity that
makes a proposal to acquire the control of a corporation to repay to that
corporation any profits made from trades in the corporation's stock within 18
months after making the control proposal.
Section 1701.831 of the OGCL, Ohio's Control Share Acquisition Statute,
requires shareholder approval of any proposed "control share acquisition" of an
Ohio corporation. A "control share acquisition" is the acquisition, directly or
indirectly, by any person (including any partnership, corporation or other
association of two or more persons who have a joint or common interest) of
shares of a corporation that, when added to all other shares of the corporation
that may be voted, directly or indirectly, by the acquiring person, would
entitle the person to exercise or direct the exercise of (a) 20% or more (but
less than 33 1/3%) of the voting power of the corporation in the election of
directors or (b) 33 1/3% or more (but less than a majority) of such voting power
or (c) a majority or more of such voting power. The control share acquisition
must be approved in advance by the holders of a majority of the outstanding
voting shares represented at a meeting at which a quorum is present and by the
holders of a majority of the portion of the outstanding voting shares
represented at such a meeting excluding the voting shares owned by the acquiring
shareholder and certain "interested shares," including shares owned by officers
elected or appointed by the directors of the corporation and by directors of the
corporation who are also employees of the corporation.
The purpose of the Control Share Acquisition Statute is to give
shareholders of Ohio corporations a reasonable opportunity to express their
views on a proposed shift in control, thereby reducing the coercion inherent in
an unfriendly takeover. The provisions of the Control Share Acquisition Statute
grant shareholders of Kroll-O'Gara the assurance that they will have adequate
time to evaluate the proposal of an acquiring person, that they will be
permitted to vote on the issue of authorizing the acquiring person's purchase
program to go forward in the same manner and with the same proxy information
that would be available to them if a proposed merger of Kroll-O'Gara were before
them and, most importantly, that the interests of all shareholders will be taken
into account and the probability will be increased that they will be treated
equally regarding the price to be offered for their common shares if the
proposal is approved.
The Control Share Acquisition Statute applies not only to traditional
offers but also to open market purchases, privately negotiated transactions and
original issuances by an Ohio corporation, whether friendly or unfriendly. The
procedural requirements of the Control Share Acquisition Statute could render
approval of any control share acquisition difficult in that the transaction must
be authorized at a special meeting of shareholders, at which a quorum is
present, by the affirmative vote of the majority of the voting power represented
and by a majority of the portion of that voting power excluding interested
shares. Any corporate defense against persons seeking to acquire control may
have the effect of discouraging or preventing offers which some shareholders
might find financially attractive. On the other hand, the need on the part of
the acquiring person to convince the shareholders of Kroll-O'Gara of the value
and validity of his offer may cause such offer to be more financially attractive
in order to gain shareholder approval.
In addition, Section 1701.59 of the OGCL provides that in determining what
such director reasonably believes to be in the best interests of the corporation
the director may consider, in addition to the interests of the corporation's
shareholders, any of the interests of the corporation's employees, suppliers,
creditors and customers, the economy of the State of Ohio and the U.S.,
community and societal considerations and the long-term as well as the short-
term interests of the corporation and its
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shareholders, including the possibility that these interests may be best served
by the continued independence of the corporation.
Although Kroll-O'Gara believes that these provisions are in its best
interests, you should be aware that such provisions could be disadvantageous to
you because the overall effect of these statutes may be to render more difficult
or discourage the removal of incumbent management or the assumption of effective
control by other persons.
TRANSFER AGENT AND REGISTRAR
The registrar and transfer agent for Kroll-O'Gara's common stock is The
Fifth Third Bank, Cincinnati, Ohio.
COMPARISON OF RIGHTS OF HOLDERS OF KROLL-O'GARA COMMON STOCK
AND BACKGROUND AMERICA COMMON STOCK
Your rights as a shareholder of Background America currently are governed
by the Tennessee Business Corporation Act ("TBCA") and by Background America's
Charter and Bylaws. Because Kroll-O'Gara is an Ohio corporation, your
shareholder rights after the merger will be governed by Ohio law and by
Kroll-O'Gara's Articles and Code of Regulations. The following discussion
summarizes some of the material differences between Ohio and Tennessee law and
between Kroll-O'Gara's and Background America's governing documents which may
affect your rights as a shareholder.
Authorized Capital. For the authorized capital of Kroll-O'Gara see
"Description of Kroll-O'Gara Capital Stock." The total number of authorized
shares of capital stock of Background America is 25,000,000, consisting of
20,000,000 shares of Background America common stock, no par value, and
5,000,000 shares of Background America preferred stock, $1.00 par value per
share.
Directors. There are no material differences in shareholder rights in this
area.
Amendment of Code of Regulations and Bylaws. Kroll-O'Gara's Code may be
amended by the vote of Kroll-O'Gara shareholders entitled to exercise a majority
of the voting power of Kroll-O'Gara. Background America's Bylaws may be amended
by the affirmative vote of a majority of the outstanding shares entitled to vote
at any regular or special meeting of shareholders. Background America's Board
also may amend the Background America Bylaws, except to change the number of
directors.
Amendment of Charter Documents. There are no material differences in
shareholder rights in this area.
Cumulative Voting. Neither Background America nor Kroll-O'Gara
shareholders may vote cumulatively in the election of directors.
Filling Vacancies on the Board of Directors. There are no material
differences in shareholder rights in this area.
Shareholder Meetings and Provisions for Notices. Kroll-O'Gara's Code
provides that special meetings of shareholders may be called by the Chairman of
the Board, the President, a majority of directors, or person or persons holding
50% of all voting power who would be entitled to vote at such meeting.
Background America's Bylaws provide that a special meeting of shareholders may
be called by the President, the Board of Directors or at the written request of
the holder or holders of 10% or more of the shares entitled to vote at the
meeting.
Under Kroll-O'Gara's Code, written notice of any meeting of shareholders
stating the time and place of the meeting must be given to each shareholder
entitled to vote at the meeting between seven
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and sixty days before the date of the meeting. Written notice of a special
meeting also must include the purpose or purposes for which the meeting is
called, and only the business stated in the notice may be acted upon. Under
Background America's Bylaws, notice of the time and place of annual or special
meetings of shareholders, and in the case of a special meeting the purpose(s)
for which the meeting is called and the person(s) calling the meeting, must be
given between ten and sixty days before the date of the meeting.
Notice of Director Nominations and New Business. Kroll-O'Gara's Code
provides that, with respect to an annual meeting of shareholders, nominations of
persons for election to the Kroll-O'Gara Board and the proposal of business to
be considered at the annual meeting must be (1) specified in the notice of
annual meeting given by or at the direction of Kroll-O'Gara's Board, (2) brought
before the annual meeting by or at the direction of Kroll-O'Gara's Board, or (3)
brought before the annual meeting by a shareholder who has complied with advance
notice procedures set forth in Kroll-O'Gara's Code. There is no similar
provision in Background America's Charter or Bylaws.
Quorum. Under Kroll-O'Gara's Code, a quorum for the transaction of
business at any regular or special meeting of the Kroll-O'Gara Board consists of
not less than one-half of the whole authorized number of directors. Under
Background America's Bylaws, a quorum for the transaction of business at any
regular or special meeting of the Background America Board consists of a
majority of the directors of the Board.
The quorum required for the transaction of business at shareholder meetings
of Kroll-O'Gara and Background America is essentially the same, i.e., a majority
of the shares entitled to vote.
Preemptive Rights. Neither the Kroll-O'Gara shareholders nor the holders
of Background America common or preferred stock have preemptive rights.
Voting by Shareholders. There are no material differences in shareholder
rights in this area.
Anti-takeover Statutes. Part 2 of Chapter 35 of the TBCA (the "Business
Combination Act") applies to a broad range of business combinations between a
Tennessee corporation and an "interested shareholder." The Business Combination
Act's definition of "business combination" includes mergers; sales, leases,
exchanges, mortgages, pledges or transfers of assets; exchanges of shares;
issuance of voting stock; and almost any related party transaction.
The Business Combination Act prohibits a corporation from engaging in a
business combination with an interested shareholder for a period of five years
following the date on which the shareholder became an "interested shareholder"
unless (1) the board of directors approved the business combination before the
shareholder became an "interested shareholder," (2) the corporation did not have
a class of voting stock registered or traded on a national securities exchange
or registered with the SEC or (3) the interested shareholder became an
interested shareholder inadvertently. An "interested shareholder" is defined as
any person who owns, directly or indirectly, 10% or more of the outstanding
voting stock of a corporation. A person "owns" voting stock if such person
individually or with or through any of its affiliates or associates (a)
beneficially owns such stock, directly or indirectly, (b) has the right to
acquire or vote such stock pursuant to any agreement (except that a person who
has the right to vote such stock pursuant to an agreement which arises solely
from a revocable proxy given in response to a proxy solicitation is not deemed
to be an owner for purposes of the Business Combination Act) or (c) has any
agreement for the purposes of acquiring, holding, voting or disposing of such
stock with any other person who beneficially owns such stock, directly or
indirectly. A corporation may elect in the charter not to be governed by the
Business Combination Act. Background America has not taken action to opt out of
the Business Combination Act.
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Ohio's anti-takeover statutes are described under "Description of
Kroll-O'Gara Capital Stock -- Provisions Affecting Business Combinations and
Changes in Control."
Mergers, Consolidations and Other Corporate Transactions. Under the OGCL,
an agreement of merger or consolidation must be approved by the directors of
each constituent corporation and adopted by shareholders of each constituent
Ohio corporation (other than the surviving corporation) holding at least
two-thirds of the corporation's voting power, or a different proportion, but not
less than a majority of the voting power, as provided in the articles of
incorporation. In the case of a merger, the agreement must, in certain
situations, also be adopted by the shareholders of the surviving corporation by
a similar vote. Kroll-O'Gara's Articles provide that any such agreement must be
adopted by shareholders holding at least a majority of the voting power.
Holders of a majority of Kroll-O'Gara shares must approve (1) combinations
and majority share acquisitions involving the transfer or issuance of that
number of shares as would entitle their holders to exercise at least one-sixth
of the voting power of the corporation in the election of directors immediately
after the consummation of the transaction, (2) the disposition of all or
substantially all of the corporation's assets other than in the regular course
of business and (3) voluntary dissolutions.
Under the TBCA, an agreement of merger or consolidation must be approved by
the directors of each constituent corporation, or each corporation whose charter
is to be amended or adopted, by the affirmative vote of the holders of a
majority of the outstanding shares entitled to vote on the proposal. The
separate vote of any class of shares is required, whether or not otherwise
entitled to vote, if the agreement of merger or consolidation provides for the
acquisition of all or part of the shares of the class. No vote of the
shareholders of the surviving corporation is required to approve the merger if
(a) the agreement of merger does not amend in any respect the corporation's
charter, (b) each share outstanding immediately before the effective date is to
be an identical outstanding or treasury share of the surviving corporation after
the effective date, and (c) the number of shares of the surviving corporation's
common stock to be issued in the merger plus the number of shares of common
stock into which any other securities to be issued in the merger are initially
convertible does not exceed 20% of its common stock outstanding immediately
before the effective date of the merger.
Class Voting. There are no material differences in shareholder rights in
this area.
Dissenters' Rights. Under the OGCL, shareholders are entitled to
dissenters' rights in connection with the lease, sale, exchange, transfer or
other disposition of all or substantially all of the assets of a corporation and
in connection with certain amendments to its articles of incorporation. In
addition, shareholders of an Ohio corporation being merged into a new
corporation are also entitled to dissenters' rights. Shareholders of an
acquiring corporation are entitled to dissenters' rights in a merger,
combination or majority share acquisition in which the shareholders are entitled
to voting rights.
Under the TBCA, dissenting shareholders are entitled to dissenters' rights
in the event of several corporate actions. These include:
(1) consummation of a plan of merger to which the corporation is a
party, if shareholder approval is required and the shareholder is entitled
to vote on the merger, or if the corporation is a subsidiary that is merged
with its parent;
(2) consummation of a plan of share exchange where the corporation is
the party whose shares are being acquired, if the shareholder is
entitled to vote on the plan;
(3) consummation of a sale or exchange of all, or substantially all,
of the property of the corporation, if the shareholder is entitled to vote
on the sale or exchange; and
(4) certain amendments to a corporation's charter.
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Dividends. Kroll-O'Gara may pay dividends out of surplus, however created,
but must notify its shareholders if a dividend is paid out of surplus other than
earned surplus. Kroll-O'Gara does not pay dividends on its common stock and
currently does not expect to do so in the foreseeable future. See "Market Prices
and Dividends -- Dividends." Background America may pay dividends out of any
surplus and, if it has no surplus, out of any net profits for the fiscal year in
which the dividend was declared or for the preceding fiscal year unless the
payment would prevent it from paying its debts as they become due in the usual
course of business or cause its total assets to be less than the sum of its
total liabilities plus the amount needed to satisfy all classes of shares having
a preference upon the distribution of assets.
Repurchases. Kroll-O'Gara may purchase or redeem its own shares unless its
assets would be less than its liabilities plus its stated capital, if any, or if
it is insolvent or would be rendered insolvent by such a purchase or redemption.
Background America may repurchase or redeem its shares unless it would be unable
to pay its debts as they come due in the ordinary course of business or if its
total assets would be less than the amount needed on dissolution to satisfy its
total liabilities and to make any preferential distributions to shareholders.
Indemnification and Limitation of Liability. Kroll-O'Gara's Code provides
that Kroll-O'Gara shall indemnify to the fullest extent permitted by law any
person who was or is made or is threatened to be made a party or is otherwise
involved in any action, suit or proceeding because he or she is or was a
director, officer, employee or agent of Kroll-O'Gara, or is or was serving at
the request of an executive officer of Kroll-O'Gara as a director, officer,
employee or agent of another entity, against all expense, liability and loss
actually incurred or suffered by the indemnitee.
Under the OGCL a director is liable for damages for any action or failure
to act only if it is proved by clear and convincing evidence that the action or
failure to act involved an act or omission undertaken with deliberate intent to
cause injury to the corporation or undertaken with reckless disregard for the
best interests of the corporation.
Background America's Bylaws provide that Background America shall indemnify
to the maximum extent permitted by law, and in the manner provided by law, any
person made, or threatened to be made, a party to any threatened, pending, or
completed action, suit or proceeding (whether civil, criminal, administrative,
or investigative, including an action by or in the right of the corporation)
because he or she is or was a director or officer of Background America or
because such person, at the request of Background America, is or was serving
such other organization in any capacity against expenses (including reasonable
attorney fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred if he or she acted in good faith and reasonably believed
that:
(1) in the case of conduct in the officer's or director's official
capacity with Background America, his or her conduct was in Background
America's best interests;
(2) in all other cases, his or her conduct was at least not opposed to
Background America's best interests; and
(3) in the case of any criminal proceeding, the officer or director
had no reasonable cause to believe his or her conduct was unlawful.
Under the TBCA Background America may not indemnify a director or officer
until a determination has been made by Background America's Board of Directors
or by independent special legal counsel that indemnification is permissible in
the circumstances because the director has met the standard of conduct set forth
in the preceding paragraph.
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Background America's Charter provides that, to the fullest extent
authorized or permitted by law, no director shall be personally liable for money
damages for breach of fiduciary duties, except for liability for any breach of
the director's duty of loyalty to Background America or its shareholders or for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law.
RIGHTS OF HOLDERS OF BACKGROUND AMERICA
PREFERRED STOCK
As a holder of Background America preferred stock, some of your rights are
superior to the rights of holders of Background America common stock. You will
lose these preferential rights when your Background America preferred stock
converts to Kroll-O'Gara common stock in the merger. Additionally, your rights
as a shareholder of Background America currently are governed by the TBCA and by
Background America's Charter and Bylaws. After the merger, your shareholder
rights will be governed by the OGCL and by Kroll-O'Gara's Articles and Code. The
following discussion summarizes your current rights as a holder of Background
America preferred stock. Please see the discussion of the rights of holders of
Kroll-O'Gara common stock on page and the discussion of the differences
between Background America common stock and Kroll-O'Gara common stock on page
to understand what your rights will be after the merger.
Dividends. Dividends accrue beginning in June, 2000, the third anniversary
of the original issue date of the Background America preferred stock, and are
payable at an annual rate of $0.2625 per share until March 19, 2002 and at an
annual rate of $0.525 per share after that date.
Liquidation Rights. Unless the holders of a majority of the outstanding
shares of Background America preferred stock vote as a class to exclude a sale
or merger from triggering liquidation rights, you have the right to receive, in
the event of a sale or merger, in exchange for and in redemption of your
Background America preferred stock and in lieu of any other consideration, a
portion of the net proceeds of the sale or merger equal to the number of your
votes divided by the aggregate of votes of all holders of Background America
preferred and common stock.
Approval of the Merger Agreement by the holders of Background America
preferred stock constitutes a vote to exclude the merger from triggering
liquidation rights.
A sale or merger includes a merger or consolidation of Background America
after which the shareholders of Background America own less than 50% of the
voting securities of the surviving corporation or the sale, transfer or lease of
all or substantially all of the assets of Background America.
Voting Rights. At any time, you are entitled to that number of votes equal
to the number of shares of Background America common stock into which your
shares of Background America preferred stock are convertible. You have voting
rights and powers equal to the voting rights and powers of the holders of
Background America common stock and vote with the holders of Background America
common stock on any matter submitted to a vote of shareholders, except those
required, either by law or by the terms of the Background America preferred
stock, to be submitted to a separate class vote. In the event of a sale or
merger, you vote both with the holders of Background America common stock and in
a separate class vote with the holders of Background America preferred stock.
If Background America fails for any reason to comply with the terms of the
Background America preferred stock, and this failure continues for thirty (30)
days after written notice to Background America, then the holders of Background
America preferred stock will be entitled to elect that number of directors
necessary to constitute a majority of the full Board of Directors and also will
have the right
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to fill any vacancies that may occur in the directors that they elect. This
right will continue until the failure is cured.
Conversion. You may convert your shares of Background America preferred
stock into Background America common stock at any time. At present this is on a
one-for-one basis. Also, upon the affirmative vote of 60% of the then
outstanding shares of Background America preferred stock, each share of
Background America preferred stock will automatically be converted into
Background America common stock.
Redemption. You have no redemption rights prior to March 19, 2002. After
that date, if the holders of a majority of the Background America preferred
stock so vote or request, Background America must redeem the Background America
preferred stock as follows: one quarter (1/4) of all then outstanding shares
within 90 days of the vote or request; one-third (1/3) of the then remaining
shares 6 months after the initial redemption; one-half (1/2) of the then
remaining shares on or before the first anniversary of the initial redemption;
and all then remaining shares on or before 18 months after the initial
redemption. Payment for redeemed shares must be made in cash at the fair market
value of the shares as established by Background America's Board of Directors.
Protective Provisions. Holders of a majority of the Background America
preferred stock must approve the sale, assignment, lease or other disposal of
any of Background America's assets or those of any subsidiary other than in the
ordinary course of business. Holders of a majority of the Background America
preferred stock also must approve the payment of any dividend with respect to
the Background America common stock.
Holders of two-thirds (66-2/3%) of the Background America preferred stock
must approve any alteration or change in the preferences, rights, privileges or
powers of the Background America preferred stock. Holders of two-thirds
(66-2/3%) of the Background America preferred stock also must approve Background
America entering into any sale or merger agreement.
LEGAL MATTERS
The validity of the Kroll-O'Gara common stock to be issued in connection
with the merger will be passed upon by Taft, Stettinius & Hollister LLP,
Cincinnati, Ohio.
EXPERTS
The consolidated financial statements and supplemental consolidated
financial statements of Kroll-O'Gara as of December 31, 1996 and 1997 and for
each of the three years in the period ended December 31, 1997, included in this
Proxy Statement/Prospectus, have been audited by Arthur Andersen LLP,
independent public accountants, as set forth in their reports. In those reports,
that firm states that with respect to certain subsidiaries, its opinion is based
on the reports of other independent public accountants, namely Deloitte & Touche
LLP for the year ended December 31, 1996 and KPMG LLP for the year ended
December 31, 1995. Reference is made to said reports, which include an
explanatory paragraph with respect to the change in the method of accounting in
1997 for costs incurred in connection with business process reengineering
activities. The audited consolidated financial statements referred to above are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
The consolidated financial statements of Kroll Holdings, Inc. and
subsidiaries as of December 31, 1996 and for the year then ended (not presented
separately herein) have been audited by Deloitte &
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Touche LLP, independent auditors, as stated in their report appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The consolidated financial statements of Background America as of December
31, 1996 and 1997 and for the years then ended, included in this Proxy
Statement/Prospectus, have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and are included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The audited financial statements of Securify Inc. as of December 30, 1998
and for the period from inception (February 10, 1998) to December 30, 1998,
included in this Proxy Statement/Prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their report with
respect thereto, and are included in reliance upon the authority of said firm as
experts in giving said reports.
The audited financial statements of Kizorek, Inc. as of October 31, 1997
and for the year ended October 31, 1997, included in this Proxy
Statement/Prospectus, have been audited by Crowe, Chizek and Company LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included in reliance upon the authority of said firm as experts
in giving said reports.
It is expected that representatives of Deloitte & Touche LLP will be
present at the Special Meeting, where they will have an opportunity to respond
to appropriate questions of shareholders and to make a statement if they so
desire.
OTHER BUSINESS
We are not aware of any matters which properly may be presented at the
Special Meeting other than those discussed above. However, if other matters do
come before the Special Meeting, proxies will be voted on those matters in
accordance with the recommendation of the Background America Board of Directors.
WHERE YOU CAN FIND MORE INFORMATION
Kroll-O'Gara files annual, quarterly and special reports, proxy statements
and other information with the SEC. These SEC filings are available to the
public over the Internet at the SEC's web site at http://www.sec.gov. You also
may read and copy any document filed by Kroll-O'Gara at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms.
Kroll-O'Gara has filed a Registration Statement with the SEC covering the
shares of Kroll-O'Gara common stock to be issued in the Background America
merger. This Proxy Statement/Prospectus does not contain all of the information
set forth in the Registration Statement. The full Registration Statement is on
the SEC's web site and is available at the SEC's public reference rooms.
You should rely only on the information provided in this Proxy
Statement/Prospectus. No one is authorized to provide you with different
information. Kroll-O'Gara is not making an offer of its Common Stock in any
state where the offer is not permitted. You should not assume that the
information in this Proxy Statement/Prospectus is accurate as of any date other
than the date on the front of this document.
118
<PAGE> 124
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
THE KROLL-O'GARA COMPANY
Reports of Independent Public Accountants
Report of Arthur Andersen LLP............................. F-4
Report of Deloitte & Touche LLP........................... F-5
Report of KPMG LLP........................................ F-6
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-7
Consolidated Statements of Operations for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-9
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1995, 1996 and 1997.............. F-10
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1995, 1996 and 1997.......................... F-11
Notes to Consolidated Financial Statements.................. F-12
Consolidated Balance Sheet as of September 30, 1998
(unaudited)............................................... F-38
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1997 and 1998 (unaudited)............. F-40
Consolidated Statement of Shareholders' Equity for the Nine
Months Ended September 30, 1998 (unaudited)............... F-41
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1998 (unaudited)............. F-42
Notes to Consolidated Unaudited Financial Statements........ F-43
BACKGROUND AMERICA, INC.
Independent Auditors' Report................................ F-49
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-50
Consolidated Statements of Operations for the Years Ended
December 31, 1996 and 1997................................ F-51
Consolidated Statements of Common Shareholders' Deficit for
the Years Ended December 31, 1996 and 1997................ F-52
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996 and 1997................................ F-53
Notes to Consolidated Financial Statements.................. F-54
Consolidated Balance Sheet as of September 30, 1998
(unaudited)............................................... F-62
Consolidated Statements of Operations for the Nine Months
Ended September 30, 1997 and 1998 (unaudited)............. F-63
Consolidated Statements of Cash Flows for the Nine Months
Ended September 30, 1997 and 1998 (unaudited)............. F-64
Notes to Consolidated Financial Statements (unaudited)...... F-65
SECURIFY INC.
Report of Independent Public Accountants.................... F-66
Balance Sheet as of December 30, 1998....................... F-67
</TABLE>
F-1
<PAGE> 125
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Statement of Operations for the Period from Inception
(February 10, 1998) to December 30, 1998.................. F-68
Statement of Shareholders' Equity for the Period from
Inception (February 10, 1998) to December 30, 1998........ F-69
Statement of Cash Flows for the Period from Inception
(February 10, 1998) to December 30, 1998.................. F-70
Notes to Financial Statements............................... F-71
Balance Sheet as of September 30, 1998 (unaudited).......... F-76
Statement of Operations for the Period from Inception
(February 10, 1998) to September 30, 1998 (unaudited)..... F-77
Statement of Cash Flows for the Period from Inception
(February 10, 1998) to September 30, 1998 (unaudited)..... F-78
Notes to Financial Statements (unaudited)................... F-79
KIZOREK, INC.
Report of Independent Auditors.............................. F-81
Balance Sheet as of October 31, 1997........................ F-82
Statement of Income and Retained Earnings for the Year Ended
October 31, 1997.......................................... F-83
Statement of Cash Flows for the Year Ended October 31,
1997...................................................... F-84
Notes to Financial Statements............................... F-85
SUPPLEMENTAL FINANCIAL STATEMENTS -- THE KROLL-O'GARA
COMPANY
Report of Independent Public Accountants.................... F-88
Supplemental Consolidated Balance Sheets as of December 31,
1996 and 1997............................................. F-90
Supplemental Consolidated Statements of Operations for the
Years Ended December 31, 1995, 1996 and 1997.............. F-92
Supplemental Consolidated Statements of Shareholders' Equity
for the Years Ended December 31, 1995, 1996 and 1997...... F-93
Supplemental Consolidated Statements of Cash Flows for the
Years Ended December 31, 1995, 1996 and 1997.............. F-94
Notes to Supplemental Consolidated Financial Statements..... F-95
Supplemental Consolidated Balance Sheet as of September 30,
1998 (unaudited).......................................... F-128
Supplemental Consolidated Statements of Operations for the
Nine Months Ended September 30, 1997 and 1998
(unaudited)............................................... F-130
Supplemental Consolidated Statement of Shareholders' Equity
for the Nine Months Ended September 30, 1998
(unaudited)............................................... F-131
Supplemental Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 1997 and 1998
(unaudited)............................................... F-132
Notes to Supplemental Consolidated Unaudited Financial
Statements................................................ F-133
</TABLE>
F-2
<PAGE> 126
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Kroll-O'Gara and Background America Unaudited Pro Forma
Combining Condensed Financial Statements.................. F-141
Kroll-O'Gara and Background America Unaudited Pro Forma
Combining Condensed Balance Sheets as of September 30,
1998................................................... F-142
Kroll-O'Gara and Background America Unaudited Pro Forma
Combining Condensed Statements of Operations for the
Years Ended December 31, 1995, 1996 and 1997 and the
Nine Months Ended September 30, 1997 and 1998.......... F-143
Kroll-O'Gara and Background America Unaudited Pro Forma
Combining Condensed Financial Statements.................. F-144
Kroll-O'Gara and Kizorek Unaudited Pro Forma and
Background America Unaudited Pro Forma Combining
Condensed Statements of Operations for the Year Ended
December 31, 1997 and the Nine Months Ended September
30, 1998............................................... F-149
Kroll-O'Gara Supplemental and Background America Unaudited
Pro Forma Combining Condensed Balance Sheets as of
September 30, 1998..................................... F-153
Kroll-O'Gara Supplemental and Background America Unaudited
Pro Forma Combining Condensed Statements of Operations
for the Years Ended December 31, 1995, 1996 and 1997
and the Nine Months Ended September 30, 1997 and
1998................................................... F-154
Kroll-O'Gara Supplemental and Background America Unaudited
Pro Forma Combining Condensed Financial Statements of
Operations................................................ F-155
Kroll-O'Gara Supplemental and Kizorek Unaudited Pro Forma
and Background America Unaudited Pro Forma Combining
Condensed Statements of Operations for the Year Ended
December 31, 1997 and the Nine Months Ended September
30, 1998............................................... F-161
</TABLE>
F-3
<PAGE> 127
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Shareholders of
The Kroll-O'Gara Company:
We have audited the accompanying consolidated balance sheets of THE
KROLL-O'GARA COMPANY (Note 1) and subsidiaries as of December 31, 1996 and 1997
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the 1995 or 1996 financial statements of Kroll
Holdings, Inc., a company acquired during 1997 in a transaction accounted for as
a pooling of interests, as discussed in Note 1. Such statements are included in
the consolidated financial statements of The Kroll-O'Gara Company and reflect
total assets and total revenues of 46 percent and 46 percent, respectively, in
1996 and total revenues of 62 percent in 1995, of the consolidated totals. Those
statements were audited by other auditors whose reports have been furnished to
us and our opinion, insofar as it relates to the amounts included for Kroll
Holdings, Inc. for those years, is based solely on the reports of the other
auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Kroll-O'Gara Company and
subsidiaries as of December 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
As explained in Note 2(o) to the consolidated financial statements,
effective in the fourth quarter of 1997, the Company changed its method of
accounting for costs incurred in connection with business process reengineering
activities.
/S/ ARTHUR ANDERSEN LLP
Cincinnati, Ohio
March 13, 1998
F-4
<PAGE> 128
INDEPENDENT AUDITORS' REPORT
The Stockholders of
Kroll Holdings, Inc.
We have audited the consolidated balance sheet of Kroll Holdings, Inc. (the
"Company") and subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended (not presented separately herein). These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company and subsidiaries as
of December 31, 1996, and the results of their operations and their cash flows
for the year then ended in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 13, 1997
(August 8, 1997 as to Notes 7 and 17)
F-5
<PAGE> 129
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Kroll Holdings, Inc.:
We have audited the consolidated statements of operations, changes in
stockholders' equity and cash flows (not presented separately herein) of Kroll
Holdings, Inc. for the year ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of Kroll Holdings, Inc. and subsidiaries for the year ended December 31,
1995 in conformity with generally accepted accounting principles.
/s/ KPMG LLP
New York, New York
March 28, 1996
F-6
<PAGE> 130
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
---------------------------
1996 1997
----------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash...................................................... $ 4,761,464 $ 6,899,132
Marketable securities..................................... 47,500 22,969
Trade accounts receivable, net of allowance for doubtful
accounts of approximately $1,913,731 and $2,515,579 in
1996 and 1997, respectively (Notes 2 and 4)............ 22,941,065 37,649,259
Unbilled revenues (Note 2)................................ 4,150,307 3,081,481
Other receivables (Note 6)-
Advances to shareholders............................... 288,829 525,996
Affiliates............................................. 291,951 366,307
Employees.............................................. 490,881 47,591
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 4)......................... 15,326,548 12,078,464
Inventories (Note 4)...................................... 8,733,640 19,452,970
Prepaid expenses and other................................ 2,856,560 6,454,873
Deferred tax asset (Note 5)............................... -- 411,988
----------- ------------
Total current assets.............................. 59,888,745 86,991,030
----------- ------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2 and 8):
Land...................................................... 901,079 1,636,939
Buildings and improvements................................ 3,772,295 6,223,250
Leasehold improvements.................................... 5,186,648 5,242,607
Furniture and fixtures.................................... 3,741,384 4,629,796
Machinery and equipment................................... 8,488,348 11,290,146
Construction-in-progress.................................. -- 1,037,528
----------- ------------
22,089,754 30,060,266
Less -- accumulated depreciation.......................... (13,526,406) (15,448,045)
----------- ------------
8,563,348 14,612,221
----------- ------------
DATABASES, net of accumulated amortization of $16,568,473
and $19,505,625 in 1996 and 1997, respectively (Note 2)... 7,415,449 8,335,211
COSTS IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $88,752 and $772,401 in 1996 and 1997,
respectively (Notes 2 and 3).............................. 2,316,004 17,852,392
OTHER ASSETS (Note 4)....................................... 3,050,425 6,179,862
----------- ------------
12,781,878 32,367,465
----------- ------------
$81,233,971 $133,970,716
=========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-7
<PAGE> 131
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
-----------------------------
1996 1997
------------ -------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit (Note 7)........................ $ 9,935,947 $ 559,112
Current portion of long-term debt (Note 8)................ 4,461,420 3,200,925
Shareholder payable (Note 6).............................. 2,000,000 309,500
Accounts payable
Trade.................................................. 15,997,708 31,585,862
Affiliates (Note 6).................................... 532,998 874,939
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 4)......................... 1,330,402 320,662
Accrued liabilities....................................... 9,628,915 13,928,653
Income taxes currently payable............................ 514,871 845,753
Deferred income taxes (Note 5)............................ 1,703,377 --
Customer deposits......................................... 3,183,564 3,839,770
------------ -------------
Total current liabilities......................... 49,289,202 55,465,176
OTHER LONG-TERM LIABILITIES................................. 2,057,197 1,532,730
SHAREHOLDER PAYABLE......................................... 5,048,266 --
DEFERRED INCOME TAXES (Note 5).............................. 2,002,779 2,154,758
LONG-TERM DEBT, net of current portion (Note 8)............. 5,969,092 46,863,591
------------ -------------
Total liabilities................................. 64,366,536 106,016,255
------------ -------------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
SHAREHOLDERS' EQUITY (Note 1):
Preferred stock, $.01 par value, 1,000,000 shares
authorized; none issued................................ -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 12,593,432 and 13,590,525 shares issued and
outstanding in 1996 and 1997, respectively............. 125,934 135,905
Additional paid-in-capital................................ 37,788,430 50,589,966
Retained deficit.......................................... (20,903,110) (22,387,500)
Unrealized appreciation of marketable securities.......... 14,167 10,469
Cumulative foreign currency translation adjustment
(Note 2)............................................... (157,986) (394,379)
------------ -------------
Total shareholders' equity........................ 16,867,435 27,954,461
------------ -------------
$ 81,233,971 $ 133,970,716
============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-8
<PAGE> 132
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------------------
1995 1996 1997
----------- ------------ -------------
<S> <C> <C> <C>
NET SALES:
Security products and services.......................... $34,883,065 $ 79,155,974 $ 105,556,685
Investigations and intelligence......................... 48,914,120 66,734,775 67,419,256
Voice and data security................................. 2,044,115 7,770,000 17,437,408
----------- ------------ -------------
Net sales........................................ 85,841,300 153,660,749 190,413,349
COST OF SALES:
Security products and services.......................... 26,769,685 58,718,188 75,539,848
Investigations and intelligence......................... 33,709,055 47,116,851 41,781,284
Voice and data security................................. 1,635,329 5,623,423 14,323,254
----------- ------------ -------------
Cost of sales.................................... 62,114,069 111,458,462 131,644,386
----------- ------------ -------------
Gross profit..................................... 23,727,231 42,202,287 58,768,963
----------- ------------ -------------
OPERATING EXPENSES:
Selling and marketing................................... 9,448,495 9,762,911 14,371,081
General and administrative.............................. 18,888,556 23,897,014 27,538,443
Merger related costs.................................... -- -- 7,204,926
Amortization of costs in excess of assets acquired...... 26,939 43,660 683,649
----------- ------------ -------------
Operating expenses............................... 28,363,990 33,703,585 49,798,099
----------- ------------ -------------
Operating income (loss).......................... (4,636,759) 8,498,702 8,970,864
OTHER INCOME (EXPENSES):
Interest expense........................................ (2,812,455) (3,139,914) (4,806,036)
Other, net.............................................. (384,362) 336,810 (393,135)
----------- ------------ -------------
Income (loss) before minority interest, provision
(benefit) for income taxes, extraordinary item
and cumulative effect of change in accounting
principle...................................... (7,833,576) 5,695,598 3,771,693
Minority interest....................................... -- -- (156,223)
----------- ------------ -------------
Income (loss) before provision (benefit) for
income taxes, extraordinary item and cumulative
effect of change in accounting principle....... (7,833,576) 5,695,598 3,615,470
Provision (benefit) for income taxes.................... (1,297,837) (161,624) 2,351,729
----------- ------------ -------------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle...................................... (6,535,739) 5,857,222 1,263,741
Extraordinary loss, net of applicable tax benefit of
$129,250 (Note 7)..................................... -- -- (193,875)
----------- ------------ -------------
Income (loss) before cumulative effect of change
in accounting principle........................ (6,535,739) 5,857,222 1,069,866
Cumulative effect of change in accounting principle, net
of applicable tax benefit of $240,000 (Note 2(o))..... -- -- (360,000)
----------- ------------ -------------
Net income (loss)................................ $(6,535,739) $ 5,857,222 $ 709,866
=========== ============ =============
Earnings (loss) per share (Note 2):
Basic................................................. $ (0.65) $ 0.55 $ 0.05
=========== ============ =============
Diluted............................................... $ (0.65) $ 0.51 $ 0.05
=========== ============ =============
Weighted average shares outstanding (Note 2):
Basic................................................. 10,020,777 10,742,131 13,060,818
=========== ============ =============
Diluted............................................... 10,020,777 11,160,157 13,720,556
=========== ============ =============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-9
<PAGE> 133
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
CUMULATIVE
UNREALIZED FOREIGN
APPRECIATION CURRENCY
ADDITIONAL OF TRANSLATION
COMMON PAID-IN RETAINED MARKETABLE ADJUSTMENT
SHARES STOCK CAPITAL DEFICIT SECURITIES (NOTE 2) TOTAL
---------- -------- ----------- ------------ ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994, as
previously reported............. 3,568,008 $14,072 $ 2,482,140 $ (1,223,982) $ -- $ 493 $ 1,272,723
Adjustment for pooling of
interests....................... 5,529,894 55,299 19,309,745 (9,729,811) -- 167,320 9,802,553
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1994, as
restated........................ 9,097,902 69,371 21,791,885 (10,953,793) -- 167,813 11,075,276
Net loss.......................... -- -- -- (6,535,739) -- -- (6,535,739)
Aggregate translation
adjustment...................... -- -- -- -- -- 29,735 29,735
Incorporation of OSN.............. 922,375 1,163 248,837 -- -- -- 250,000
Distributions to shareholders..... -- -- -- (162,800) -- -- (162,800)
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1995........ 10,020,277 70,534 22,040,722 (17,652,332) -- 197,548 4,656,472
Net income........................ -- -- -- 5,857,222 -- -- 5,857,222
Aggregate translation
adjustment...................... -- -- -- -- -- (355,534) (355,534)
Distributions to shareholders,
prior to the offering........... -- -- -- (230,000) -- -- (230,000)
Sale of common stock between
shareholders prior to the
offering........................ -- -- 39,780 -- -- -- 39,780
Exercise of stock options, prior
to the offering (Note 11)....... 121,463 4 441 -- -- -- 445
Initial public offering of common
stock, net of issuance costs of
approximately $3,550,000 (Note
1).............................. 2,048,000 51,359 14,820,458 -- -- -- 14,871,817
Issuance of Kroll restricted stock
(Note 11(b)).................... 403,692 4,037 887,029 -- -- -- 891,066
Distribution of previously taxed S
Corp earnings to S Corp
shareholders (Note 1)........... -- -- -- (9,000,000) -- -- (9,000,000)
Forgiveness of affiliate
obligation (Note 1)............. -- -- -- 122,000 -- -- 122,000
Unrealized appreciation of
marketable securities (Note
2).............................. -- -- -- -- 14,167 -- 14,167
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1996........ 12,593,432 125,934 37,788,430 (20,903,110) 14,167 (157,986) 16,867,435
Net income........................ -- -- -- 709,866 -- -- 709,866
Aggregate translation
adjustment...................... -- -- -- -- -- (236,393) (236,393)
Issuance of stock bonus to certain
employees....................... 4,547 45 49,972 -- -- -- 50,017
Exercise of stock options (Note
11)............................. 4,200 42 43,152 -- -- -- 43,194
Issuance of stock in conjunction
with the acquisition of
businesses (Note 3)............. 753,806 7,538 8,452,231 -- -- -- 8,459,769
Issuance of stock in conjunction
with the purchase of minority
interest (Note 3(f))............ 69,565 696 1,242,778 -- -- -- 1,243,474
Issuance of Kroll restricted stock
(Note 11(b)).................... 424,011 4,240 1,352,040 -- -- -- 1,356,280
Tax benefit of restricted stock
vesting (Note 11(b))............ -- -- 2,160,341 -- -- -- 2,160,341
Purchase and retirement of common
stock (Note 11(d)).............. (259,036) (2,590) (498,978) (2,194,256) -- -- (2,695,824)
Unrealized depreciation of
marketable securities
(Note 2)........................ -- -- -- -- (3,698) -- (3,698)
---------- -------- ----------- ------------ ------- --------- -----------
BALANCE, December 31, 1997........ 13,590,525 $135,905 $50,589,966 $(22,387,500) $10,469 $(394,379) $27,954,461
========== ======== =========== ============ ======= ========= ===========
</TABLE>
The accompanying notes to consolidated financial statements are an
integral part of these consolidated statements.
F-10
<PAGE> 134
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 16)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(6,535,739) $ 5,857,222 $ 709,866
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization........................... 1,334,829 1,602,415 2,105,440
Amortization of databases............................... 2,470,696 2,949,134 2,937,152
Amortization of costs in excess of assets acquired...... 26,939 26,992 683,649
Bad debt expense........................................ 3,050,310 8,108,976 2,043,080
Shareholder stock compensation.......................... -- 930,846 1,356,280
Loss on write-off of notes receivable................... 55,966 -- 35,434
Share in net (income) loss of joint ventures............ 224,789 (19,224) (121,650)
Loss on sale of property and equipment.................. 6,245 1,872 --
Gain on sale of marketable securities................... -- (108,646) (14,503)
Change in assets and liabilities, net of effects of
acquisitions-
Receivables............................................. (1,511,151) (4,367,583) (10,337,879)
Unbilled revenues....................................... 1,391,221 (2,334,527) 1,068,826
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (3,957,287) (7,626,473) 3,499,084
Inventories............................................. (1,590,370) (3,806,141) (5,498,203)
Deferred tax asset...................................... -- -- (411,988)
Prepaid expenses and other assets....................... (3,001,541) 480,484 (1,967,307)
Accounts payable and income taxes currently payable..... 5,846,271 1,539,162 8,101,579
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (43,150) (375,640) (1,009,740)
Customer deposits....................................... (340,877) 1,767,785 509,540
Amounts due to/from employees........................... 19,820 (294,471) 443,290
Deferred income taxes payable........................... (875,312) (405,380) 151,979
Accrued liabilities..................................... 1,017,909 4,090,422 737,044
Long-term liabilities................................... 149,740 (651,660) (561,467)
----------- ----------- -----------
Net cash provided by (used in) operating
activities....................................... (2,260,692) 7,365,565 4,459,506
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net........... (1,127,676) (3,221,565) (4,417,574)
Proceeds from sale of property and equipment.............. 4,235 600 --
Additions to databases.................................... (2,985,409) (3,250,360) (3,856,914)
Decrease (increase) in notes receivable -- shareholder.... (233,253) 233,253 --
Acquisitions, net of cash acquired (Note 3)............... -- (814,710) (8,103,948)
Sale of marketable securities............................. -- 200,313 35,424
Other..................................................... (27,600) (66,711) 266,004
----------- ----------- -----------
Net cash used in investing activities.............. (4,369,703) (6,919,180) (16,077,008)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan financing fees....................................... -- -- (723,727)
Net borrowings (repayments) under revolving lines of
credit.................................................. 4,551,025 (252,818) (9,376,835)
Proceeds from long-term debt.............................. 41,608 50,899 42,406,179
Payments of long-term debt................................ (3,736,745) (5,000,668) (8,922,658)
Proceeds from notes payable -- shareholder................ 2,600,000 2,000,000 500,000
Repayment of notes payable -- shareholder................. (106,500) (803,745) (7,238,766)
Net proceeds from issuance of common stock................ 250,000 14,871,817 --
Purchase and retirement of common stock................... -- -- (2,695,824)
Foreign currency translation.............................. 922 (46,187) (160,462)
Distributions to shareholders............................. (162,800) (9,230,000) --
Proceeds from exercise of stock options................... -- 445 43,194
----------- ----------- -----------
Net cash provided by financing activities.......... 3,437,510 1,589,743 13,831,101
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH............................. (3,192,885) 2,036,128 2,213,599
Effects of foreign currency exchange rates on cash.......... -- 34,032 (75,931)
----------- ----------- -----------
CASH, beginning of year..................................... 5,884,189 2,691,304 4,761,464
----------- ----------- -----------
CASH, end of year........................................... $ 2,691,304 $ 4,761,464 $ 6,899,132
=========== =========== ===========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-11
<PAGE> 135
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(1) BASIS OF PRESENTATION
The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively the "Company"), is a leading global provider of a
broad range of specialized products and services that are designed to provide
solutions to a variety of security needs. The Company's Security Products and
Services Group markets ballistic and blast protected vehicles to businesses,
individuals and governments. It also offers security services such as training,
risk and crisis management services, and site security systems. The
Investigations and Intelligence Group offers business intelligence and
investigation services to clients worldwide. The Voice and Data Security Group
offers secure satellite communication equipment, satellite navigation systems
and computer hardware and software security.
In December 1997, a wholly owned subsidiary of The O'Gara Company (O'Gara)
was merged into Kroll Holdings, Inc. (Kroll). At the time of the merger, the
Company's name was changed from The O'Gara Company to The Kroll-O'Gara Company.
Effective upon the consummation of the merger, each then issued and
outstanding share of Kroll common stock, including shares issued under the Kroll
restricted stock plan (see Note 11), was converted into 62.52 shares of common
stock of the Company or 6,098,561 shares of Company common stock in total.
Outstanding employee stock options of Kroll were converted at the same exchange
factor into options to purchase 551,492 shares of Company common stock (see Note
11).
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows of Kroll as though it had always
been a part of the Company.
There were no transactions between O'Gara and Kroll prior to the
combination, and immaterial adjustments were recorded to conform Kroll's
accounting policies. Certain reclassifications were made to the Kroll financial
statements to conform to the Company's presentations. The results of operations
for the separate companies and the combined amounts presented in the
consolidated financial statements follow:
<TABLE>
<CAPTION>
O'GARA KROLL COMBINED
----------- ----------- ------------
<S> <C> <C> <C>
Nine months ended September 30, 1997 (unaudited)
Revenue........................................... $82,567,200 $53,823,958 $136,391,158
Extraordinary item................................ (193,875) -- (193,875)
Net income........................................ 4,181,387 1,796,124 5,977,511
Year ended December 31, 1996
Revenue........................................... 82,777,691 70,883,058 153,660,749
Net income (loss)................................. 6,658,962 (801,740) 5,857,222
Year ended December 31, 1995
Revenue........................................... 32,816,996 53,024,304 85,841,300
Net income (loss)................................. (1,122,052) (5,413,687) (6,535,739)
</TABLE>
In connection with the merger, the Company recorded, in the fourth quarter,
a charge to operating expenses of approximately $7.2 million ($5.7 million after
taxes, or $0.41 per diluted share) for direct and other merger-related costs
pertaining to the merger transaction. Merger transaction costs are
F-12
<PAGE> 136
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
nonrecurring and include $0.8 million for stock-based compensation costs
triggered by the change in control of Kroll, $1.8 million for stay bonuses and
severance and $4.6 million which consisted primarily of fees for investment
bankers, attorneys, accountants, financial printing, travel and other related
charges.
The Company was formed originally in 1996 for the purposes of becoming a
holding company, effecting a reorganization and a combination of certain
affiliated entities and carrying out an initial public offering of common stock.
On October 28, 1996, various O'Gara entities (primarily O'Gara-Hess & Eisenhardt
Armoring Company (OHE)) and their related shareholders (primarily one
shareholder who owned or controlled approximately 86% to 88% of each entity)
entered into the reorganization plan. Accordingly, the accompanying consolidated
financial statements present, as a combination of entities under common control
as if using the pooling method of accounting, the financial position and related
results of operations of the O'Gara entities on a consolidated basis for all
periods presented.
On November 15, 1996, the Company completed its initial public offering of
common stock. The proceeds from the sale of 2,048,000 shares of common stock
were used by the Company for retirement of bank debt, payment of the AAA notes
described below, purchase of a manufacturing facility in Mexico, acquisition of
Palmer net assets (Note 3) and transaction costs associated with the offering.
On October 28, 1996 OHE distributed to its shareholders a dividend of
$9,000,000 in the form of long-term notes (the "AAA Notes") which represented
the undistributed previously taxed income of OHE as an S Corporation through the
effective date of the reorganization. During 1996 the Company recognized
approximately $27,000 in interest expense related to the AAA Notes.
In conjunction with the reorganization discussed above, the shareholders of
an affiliated entity forgave $122,000 owed by OHE for no consideration. As this
affiliated entity was controlled by a shareholder of the Company, this
transaction has been reflected as a contribution of capital in the accompanying
consolidated statement of shareholders' equity.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Consolidation -- The consolidated financial statements include the
accounts of O'Gara and Kroll and all their majority-owned subsidiaries. All
material intercompany accounts and transactions are eliminated. Investments in
20% to 50% owned entities are accounted for on the equity method and investments
in less than 20% owned entities are accounted for on the cost method. Affiliated
entities are not included in the accompanying consolidated financial statements,
and include entities that are directly or indirectly owned by current
shareholders or former shareholders of OHE but which were not included in the
O'Gara reorganization and combination.
(b) Revenue Recognition -- Revenue related to contracts for security
products (both government and commercial) results principally from long-term
fixed price contracts and is recognized on the percentage-of-completion method
calculated utilizing the cost-to-cost approach. The percent deemed to be
complete is calculated by comparing the costs incurred to date to estimated
total costs for each contract. This method is used because management considers
costs incurred to be the best available measure of progress on these contracts.
However, adjustments to this measurement are made when management believes that
costs incurred materially exceed effort expended. Contract costs include all
direct material and labor costs, along with certain direct overhead costs
related to contract production.
F-13
<PAGE> 137
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Provisions for any estimated total contract losses on uncompleted contracts
are recorded in the period in which it becomes known that such losses will
occur. Changes in estimated total contract costs will result in revisions to
contract revenue. These revisions are recognized when determined.
Revenue from investigations and intelligence services and security services
is recognized as the services are performed. The Company records either billed
or unbilled accounts receivable based on case-by-case invoicing determination.
Revenue related to voice and data security equipment and services is
recognized as equipment is shipped or as services are provided. Revenue and
related direct costs of brokered satellite time are recorded when payments are
received from customers.
(c) Marketable Securities -- The Company adopted the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities," for the year ended December
31, 1996. Under SFAS 115, the Company must classify its debt and marketable
securities as either trading, available-for-sale or held-to-maturity. The
Company has classified all equity securities as available-for-sale.
Unrealized holding gains and losses, net of the related income tax effect
on the available-for-sale securities, are excluded from earnings and are
reported as a separate component of shareholders' equity until realized. The
Company recorded an unrealized gain (loss) of $14,167 and $(3,698) as of
December 31, 1996 and 1997, respectively.
(d) Concentrations of Credit Risk -- Financial instruments that subject the
Company to credit risk consist principally of trade receivables. Concentrations
of credit risk with respect to accounts receivable are limited by the number of
clients that comprise the Company's client base, along with the different
industries and geographic regions in which the Company's clients operate or
reside. The Company does not generally require collateral or other security to
support client receivables, although the Company does require retainers,
up-front deposits or irrevocable letters-of-credit in many situations. The
Company has established an allowance for doubtful accounts based upon facts
surrounding the credit risk of specific clients and past history. Management
does not anticipate incurring losses on its trade receivables in excess of
established allowances.
(e) Property, Plant and Equipment -- Property, plant and equipment are
stated at cost. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings and improvements............................. 5-40 years
Furniture and fixtures................................. 5-7 years
Machinery and equipment................................ 5-7 years
Leasehold improvements................................. Life of lease
</TABLE>
(f) Databases -- Databases are capitalized costs incurred to obtain
information from third party providers. The Company relies on this information
to create and maintain its proprietary and non-proprietary databases. Because of
the continuing accessibility of the information and its usefulness to future
investigative procedures, the cost of acquiring the information is capitalized
and amortized over a five year period.
(g) Costs in Excess of Assets Acquired -- Costs in excess of assets
acquired represent the excess of the purchase cost over the fair value of net
assets acquired in a purchase business combination. Amortization is recorded on
a straight-line basis over periods ranging from 15 to 40 years. The
F-14
<PAGE> 138
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company periodically reviews the carrying value of these assets and other
long-lived assets and impairments are recognized when the expected undiscounted
future cash flows are less than the carrying amount of the asset. Based on its
most recent analysis, the Company believes no impairment exists at December 31,
1997.
(h) Foreign Currency Translation -- Assets and liabilities of foreign
operations are translated using year-end exchange rates and revenues and
expenses are translated using exchange rates prevailing during the year, with
gains or losses resulting from translation included in a separate component of
shareholders' equity.
Gains or losses resulting from foreign currency transactions are translated
to local currency at the rates of exchange prevailing at the dates of the
transactions. Amounts receivable or payable in foreign currencies, other than
the subsidiary's local currency, are translated at the rates of exchange
prevailing at the balance sheet date. The effect of transactional gains or
losses is included in other income (expense) in the accompanying consolidated
statements of operations.
(i) Use of Estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(j) Research and Development -- Research and development costs are expensed
as incurred. The Company incurred approximately $91,000, $130,000 and $136,000
for the years ended December 31, 1995, 1996 and 1997, respectively, for research
and development. These costs are included in general and administrative expenses
in the accompanying consolidated statements of operations.
(k) Advertising -- The Company expenses the cost of advertising as
incurred. Advertising expenses for the years ended December 31, 1995, 1996 and
1997 were $340,000, $715,000 and $1,497,000, respectively.
(l) Earnings Per Share -- In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128 "Earnings Per Share" (SFAS 128). In
accordance with SFAS 128, basic earnings per share are computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share are computed by dividing net income
by the weighted average number of shares of common stock and equivalents
outstanding during the year. Dilutive common stock equivalents represent shares
issuable upon assumed exercise of stock options and upon assumed issuance of
restricted stock. The following is a reconciliation of the numerator and
F-15
<PAGE> 139
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
denominator for basic and diluted earnings per share for the years ended
December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
-----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ---------
<S> <C> <C> <C>
Basic EPS.............................................. $(6,535,739) 10,020,277 $(0.65)
======
Effect of dilutive securities:
Options.............................................. -- --
Restricted stock..................................... -- --
----------- -----------
Diluted EPS............................................ $(6,535,739) 10,020,277 $(0.65)
=========== =========== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ---------
<S> <C> <C> <C>
Basic EPS.............................................. $ 5,857,222 10,742,131 $ 0.55
======
Effect of dilutive securities:
Options.............................................. -- 130,544
Restricted stock..................................... (162,443) 287,482
----------- -----------
Diluted EPS............................................ $ 5,694,779 11,160,157 $ 0.51
=========== =========== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ -------------- ---------
<S> <C> <C> <C>
Basic EPS.............................................. $ 709,866 13,060,818 $ 0.05
======
Effect of dilutive securities:
Options.............................................. -- 216,586
Restricted stock..................................... -- 443,152
----------- -----------
Diluted EPS............................................ $ 709,866 13,720,556 $ 0.05
=========== =========== ======
</TABLE>
Basic and diluted earnings per share based on net income before
extraordinary item and cumulative effect of change in accounting principle were
$0.10 and $0.09 for the year ended December 31, 1997. The basic and diluted
earnings per share impact of the extraordinary item was $0.01 and the basic and
diluted earnings per share impact of the change in accounting principle was
$0.03.
(m) SFAS 130 "Reporting Comprehensive Income" -- In June 1997, the
Financial Accounting Standards Board issued Statement of Financial Standards No.
130, "Reporting Comprehensive Income" (SFAS No. 130), which requires
comprehensive income and the associated income tax expense or benefit be
reported in a financial statement that is displayed with the same prominence as
other financial statements with an aggregate amount of comprehensive income
reported in that same financial statement. "Other Comprehensive Income" refers
to revenues, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but not in net income. This
statement, which the Company intends to adopt in the first quarter of fiscal
1998, expands or modifies disclosures and, accordingly, will have no impact on
the Company's reported consolidated financial position, results of operations or
cash flows.
F-16
<PAGE> 140
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(n) Stock-Based Compensation -- The Company has elected to account for the
cost of its employee stock options and other forms of employee stock-based
compensation plans utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25) as allowed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). APB 25 requires compensation cost for stock-based compensation plans to be
recognized based on the difference, if any, between the fair market value of the
stock on the date of grant and the option exercise price. SFAS 123 established a
fair value-based method of accounting for compensation cost related to stock
options and other forms of stockbased compensation plans. SFAS 123 allows an
entity to continue to measure compensation cost using the principles of APB 25
if certain pro forma disclosures are made. The pro forma disclosures required by
SFAS 123 are presented in Note 11(f).
(o) Change in Accounting Principle -- In the fourth quarter of 1997, the
Company changed its method of accounting for costs incurred in connection with
business process reengineering activities relating to information technology
transformation. Consistent with a consensus reached by the Emerging Issues Task
Force (EITF) under Issue 97-13 in late November 1997, the Company expensed costs
previously capitalized in earlier quarters of 1997 (approximately $360,000, net
of tax benefit of $240,000) as a cumulative change in accounting principle.
(p) Reclassifications -- Certain reclassifications have been reflected in
1995 and 1996 to conform with the current period presentation.
(q) Derivative Financial Instruments -- Financial instruments in the form
of foreign currency exchange contracts are utilized by the Company to hedge its
exposure to movements in foreign currency exchange rates. The Company does not
hold or issue derivative financial instruments for trading purposes. Gains and
losses on foreign exchange contracts are deferred and amortized as an adjustment
to the cumulative foreign currency translation adjustment component of equity
over the terms of the agreements in accordance with hedge accounting standards.
The fair value of foreign currency exchange contracts is not recognized in the
consolidated financial statements since they are accounted for as hedges.
(3) ACQUISITIONS
The Company has completed the following acquisitions, all of which were
accounted for as purchases:
(a) Palmer Associates, S.C. -- In October 1996, the Company purchased
substantially all of the assets and certain liabilities of Palmer Associates,
S.C. (Palmer), a security services provider, for approximately $1,000,000, which
resulted in goodwill (amortized over fifteen years) and intangible assets equal
to the purchase price. The purchase price was payable $500,000 at the closing of
the Company's initial public offering and $250,000 each in November 1997 and
1998. The former owner also entered into a four year non-competition agreement,
payable in annual installments of $50,000, and a two year employment agreement.
(b) Next Destination Limited -- On February 5, 1997, the Company acquired
all of the shares of Next Destination Limited (Next) for $3.5 million,
consisting of approximately $1.9 million in shares of the Company's common stock
(170,234 shares) and approximately $1.6 million in seller-provided financing in
the form of secured three-year 6% notes. Next, headquartered in Salisbury, the
United Kingdom (UK), is a distributor of high technology communication equipment
for the consumer
F-17
<PAGE> 141
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
electronic, marine, aviation, professional and leisure markets in both the UK
and Europe. The former managing director and founder of Next agreed to continue
to manage the business and entered into a three year non-competition agreement.
For accounting purposes, the acquisition was effective on February 1, 1997 and
the results of operations of Next are included in the consolidated results of
operations of the Company from that date forward. The resulting goodwill from
this transaction is being amortized over fifteen years.
(c) Labbe, S.A. -- On February 12, 1997, the Company acquired all the
shares of Labbe, S.A. (Labbe) for approximately $14.2 million, consisting of
$10.7 million in cash and 376,597 shares of the Company's common stock valued at
approximately $3.5 million. Labbe, headquartered in Lamballe, France, provides
vehicle armoring systems for commercial customers located mainly in Western
Europe. The former shareholders are subject to certain non-competition
agreements upon their leaving the employment of the Company. For accounting
purposes, the acquisition was effective on January 1, 1997 and the results of
operations of Labbe are included in the consolidated results of operations of
the Company from that date forward. The resulting goodwill from this transaction
is being amortized over thirty years.
The following unaudited proforma combined results of operations for the
year ended December 31, 1996 assumes the Labbe acquisition occurred as of
January 1, 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Sales.............................................. $177,779
Net income......................................... $ 6,052
Earnings per share:
Basic............................................ $0.56
Diluted.......................................... $0.54
</TABLE>
(d) International Training, Incorporated -- On March 24, 1997, the Company
acquired all of the shares of International Training, Incorporated (ITI) for
approximately $2.5 million, consisting of approximately $800,000 in shares of
the Company's common stock (68,086 shares), $500,000 in cash and approximately
$1.2 million in seller-provided financing in the form of unsecured two-year 10%
notes. ITI, headquartered near Washington D.C., provides advanced security
training. For accounting purposes, the acquisition was effective on March 1,
1997 and the results of operations of ITI are included in the consolidated
results of operations of the Company from that date forward. The resulting
goodwill from this transaction is being amortized over fifteen years.
(e) ZAO IMEA -- On December 2, 1997, the Company acquired all of the shares
of ZAO IMEA (IMEA), a Russian corporation, and certain assets, liabilities and a
twenty year non-competition agreement in Russia from Acorn Communication Group,
Inc. (Acorn) for an aggregate of approximately $3.0 million, consisting of
$600,000 in cash and 138,889 shares of the Company's common stock valued at
approximately $2.4 million. IMEA provides vehicle armoring systems and other
equipment for commercial customers located in Russia. IMEA and Acorn had
substantially common ownership prior to the acquisition. The former shareholders
of IMEA also entered into employment agreements, which include non-competition
clauses, for periods of six months to three years. The allocation of the
purchase price was based on preliminary estimates and may be revised at a later
date pending the completion of certain appraisals and other analysis. For
accounting purposes, the acquisition was effective on
F-18
<PAGE> 142
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 1, 1997 and the results of operations of IMEA are included in the
consolidated results of operations of the Company from that date forward. The
resulting goodwill from this transaction is being amortized over fifteen years.
In connection with the acquisitions of Labbe, Next, ITI and IMEA, assets
were acquired and liabilities were assumed as follows:
<TABLE>
<CAPTION>
NEXT LABBE ITI IMEA
------- -------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash................................................. $ -- $ 3,501 $ 123 $ 2
Accounts receivable.................................. 1,830 4,689 231 11
Inventories.......................................... 1,276 3,392 -- 553
Costs and estimated earnings in excess of billings on
uncompleted contracts............................. -- 251 -- --
Prepaid expenses..................................... -- 65 4 7
Property, plant & equipment.......................... 80 3,360 216 82
Intangible assets.................................... -- 140 -- 1,467
Other non-current assets............................. -- 2,357 -- 4
Goodwill............................................. 3,459 7,662 2,061 1,820
------- -------- ------- -------
6,645 25,417 2,635 3,946
Less: Cash paid for net assets...................... -- (10,730) (500) (500)
Fair value of debt issued..................... (1,575) -- (1,231) (100)
Fair value of stock issued.................... (1,851) (3,431) (800) (2,378)
------- -------- ------- -------
$ 3,219 $ 11,256 $ 104 $ 968
======= ======== ======= =======
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition costs............ $ 3,219 $ 9,287 $ 85 $ 968
Debt................................................. -- 1,969 19 --
------- -------- ------- -------
$ 3,219 $ 11,256 $ 104 $ 968
======= ======== ======= =======
</TABLE>
(f) Purchase of Minority Interest -- During 1997, the Company exercised its
option to acquire the minority interest in its O'Gara Brazilian subsidiary for
69,565 shares of common stock valued at approximately $1.2 million.
F-19
<PAGE> 143
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(4) BALANCE SHEET ACCOUNTS
(a) Trade Accounts Receivable and Costs and Estimated Earnings in Excess of
Billings on Uncompleted Contracts -- The following summarizes the components of
trade accounts receivable and costs and estimated earnings in excess of billings
on uncompleted contracts:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
United States Military:
Billed receivables........................................ $ 1,461,491 $ 3,756,035
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 10,189,891 9,253,872
----------- -----------
Total United States Military...................... $11,651,382 $13,009,907
=========== ===========
Other contracts:
Billed receivables........................................ $21,479,574 $33,893,224
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 5,136,657 2,824,592
----------- -----------
Total other contracts............................. $26,616,231 $36,717,816
=========== ===========
Total trade accounts receivable............................. $22,941,065 $37,649,259
=========== ===========
Total costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $15,326,548 $12,078,464
=========== ===========
</TABLE>
Costs and estimated earnings in excess of billings on uncompleted contracts
are net of $66,180,434 and $89,875,813 of progress billings to the United States
Military at December 31, 1996 and 1997, respectively.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized on long-term contracts in excess of billings
because amounts were not billable at the balance sheet date. It is anticipated
such unbilled amounts attributable to the United States Military will generally
be billed over the next 180 days as contracts are substantially completed.
Amounts receivable on other contracts are generally billed as shipments are
made. It is estimated that substantially all of such amounts will be billed
within one year, although contract extensions may delay certain collections
beyond one year.
The following summarizes activity in the allowance for doubtful accounts on
trade accounts receivable:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31, 1995................... $3,189,798 $3,102,310 $(3,731,814) $2,560,294
Year ended December 31, 1996................... $2,560,294 $3,259,976 $(3,906,539) $1,913,731
Year ended December 31, 1997................... $1,913,731 $2,043,080 $(1,441,232) $2,515,579
</TABLE>
F-20
<PAGE> 144
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) Inventories -- Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method and include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Raw materials............................................... $4,782,321 $ 9,441,223
Vehicle costs and work-in-process........................... 3,951,319 10,011,747
---------- -----------
$8,733,640 $19,452,970
========== ===========
</TABLE>
The following summarizes activity in valuation reserves for inventory
obsolescence:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1995...................... $ -- $ -- $ -- $ --
Year ended December 31, 1996...................... $ -- $264,114 $ -- $264,114
Year ended December 31, 1997...................... $264,114 $113,567 $(23,782) $353,899
</TABLE>
(c) Other Assets -- Other assets are stated at cost less accumulated
amortization and are being amortized on a straight line basis over their
estimated useful lives, as applicable. Other assets consist of the following:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIFE ------------------------
DESCRIPTION (YEARS) 1996 1997
----------- ------- ---------- ----------
<S> <C> <C> <C>
Advance to vendor........................................... -- $1,825,207 $1,275,437
Deferred costs.............................................. -- -- 610,376
Security deposits........................................... -- 326,376 471,859
Long-term receivable........................................ -- -- 380,000
Non-refundable deposit on an equipment lease with a related
party..................................................... 10 503,858 297,025
Deferred financing fees..................................... 7-30 152,940 876,667
Non-compete agreements...................................... 5 165,000 1,581,667
Long-term investments....................................... -- 180,998 101,630
Other long-term assets...................................... -- 186,753 865,031
---------- ----------
3,341,132 6,459,692
(290,707) (279,830)
---------- ----------
$3,050,425 $6,179,862
========== ==========
</TABLE>
Costs applicable to bids in process are deferred when management believes
it is probable that future contracts will be obtained. These costs are
transferred to contract costs when contracts are awarded or are expensed when
the contract award is no longer considered probable.
F-21
<PAGE> 145
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) Accrued Liabilities -- Accrued liabilities consist of the following at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
DESCRIPTION 1996 1997
----------- ---------- -----------
<S> <C> <C>
Payroll and related benefits................................ $5,574,621 $ 7,794,598
Property, sales and other taxes payable..................... 590,648 773,846
Accrued interest............................................ 268,605 564,168
Accrued satellite time...................................... 680,835 1,009,162
Other accruals.............................................. 2,514,206 3,786,879
---------- -----------
$9,628,915 $13,928,653
========== ===========
</TABLE>
(5) INCOME TAXES
Prior to October 28, 1996, OHE was an S Corporation and generally was not
responsible for payment of income taxes. Rather, the respective OHE shareholders
were taxed on OHE's taxable income at the respective individual federal and
state income tax rates. Therefore, the income generated by OHE was not subject
to federal, state or certain foreign income taxes prior to the date of OHE's
reorganization on October 28, 1996. Accordingly, the accompanying consolidated
financial statements only reflect a provision (benefit) for income taxes for
Kroll, a C Corporation, for all periods prior to October 28, 1996.
The Company accounts for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred tax liabilities and assets are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities using enacted tax rates.
The Company's provision (benefit) for income taxes, excluding extraordinary
item and the cumulative effect of a change in accounting principle, for all
periods is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- --------- -----------
<S> <C> <C> <C>
Currently payable:
Federal............................................... $ (159,569) $(110,988) $ 2,109,804
State and local....................................... (262,956) 271,744 372,318
Foreign............................................... -- 83,000 1,364,873
----------- --------- -----------
(422,525) 243,756 3,846,995
----------- --------- -----------
Deferred:
Federal............................................... (576,910) (259,443) (1,270,976)
State and local....................................... (298,402) (145,937) (224,290)
Foreign............................................... -- -- --
----------- --------- -----------
(875,312) (405,380) (1,495,266)
----------- --------- -----------
$(1,297,837) $(161,624) $ 2,351,729
=========== ========= ===========
</TABLE>
F-22
<PAGE> 146
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ----- ----------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) for income
taxes at the federal
statutory rate............... $(2,663,416) (34.0)% $ 1,936,504 34.0% $1,229,260 34.0%
State and local income taxes,
net of federal benefit....... (370,496) (4.7) 82,756 1.5 155,895 4.3
Impact of S Corp income/loss,
prior to reorganization...... 381,498 4.9 (2,087,529) (36.6) -- --
Impact of foreign income, prior
to reorganization............ -- -- (199,095) (3.5) -- --
Nondeductible expenses......... -- -- -- -- 1,390,163 38.4
Change in valuation
allowance.................... 1,338,113 17.1 109,303 1.9 (755,044) (20.9)
Effect of foreign
income/loss.................. 105,693 1.3 (8,768) (0.2) 577,743 16.0
Other.......................... (89,229) (1.1) 5,205 0.1 (246,288) (6.8)
----------- ----- ----------- ----- ---------- -----
Provision (benefit)
for income taxes... $(1,297,837) (16.5)% $ (161,624) (2.8)% $2,351,729 65.0%
=========== ===== =========== ===== ========== =====
</TABLE>
The components of the Company's consolidated deferred income tax assets and
liabilities as of December 31 are summarized below:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts..................... $ 547,247 $ 648,773 $ 710,441
Fixed assets, depreciation and amortization
differences...................................... 591,319 576,996 606,777
Accrual for restricted stock plan................... 464,347 164,794 --
Net operating loss carryforwards.................... 1,365,895 1,423,336 1,839,743
Payroll and other benefits.......................... -- 220,000 594,401
Other accruals...................................... -- 206,000 278,253
Acquisition costs................................... -- -- 440,000
Other............................................... 65,087 394,000 981,610
----------- ----------- -----------
3,033,895 3,633,899 5,451,225
Valuation allowance................................. (1,338,113) (2,303,336) (2,126,035)
----------- ----------- -----------
Net deferred tax assets..................... 1,695,782 1,330,563 3,325,190
----------- ----------- -----------
Deferred tax liabilities:
Nonaccrual service fee receivable................... (219,560) (219,560) (212,079)
Deferred revenue.................................... (1,678,846) (2,072,590) (1,903,975)
Database capitalization............................. (2,644,120) (2,738,824) (2,779,790)
S to C conversion................................... (1,264,792) (5,745) (5,223)
Other............................................... -- -- (166,893)
----------- ----------- -----------
(5,807,318) (5,036,719) (5,067,960)
----------- ----------- -----------
Net deferred tax liability.................. $(4,111,536) $(3,706,156) $(1,742,770)
=========== =========== ===========
</TABLE>
The Company has certain foreign net operating loss carryforwards, primarily
in the United Kingdom and France, which approximate $1.4 million and $1.8
million at December 31, 1996 and 1997,
F-23
<PAGE> 147
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. The carryforwards expire beginning in 2001. A valuation allowance
for the full amount of all existing foreign carryforwards has been provided as
it is not certain that the tax benefit will be realized in the foreseeable
future. Adjustments to the valuation allowance, if any, will be recorded in the
periods in which it is determined the asset is realizable.
(6) RELATED PARTY TRANSACTIONS
(a) Advances to Shareholders -- The Company historically made advances to
certain employee-shareholders. Such advances are due on demand and are
non-interest bearing. An outstanding advance to a major shareholder of the
Company totalled $120,191 at both December 31, 1996 and 1997, respectively. At
December 31, 1996 and 1997, the Company also had advances to certain minority
shareholders in the amount of $168,638 and $405,805, respectively.
(b) Notes Payable -- Shareholders -- OHE had certain notes payable to
shareholders, which were repaid upon the completion of the Company's initial
public offering in 1996. Interest expense associated with these obligations
approximated $33,000 and $27,000 for the years ended December 31, 1995 and 1996,
respectively.
Kroll has certain amounts due to/from shareholders of the Company which
include the following amounts at December 31:
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C> <C>
Amounts due from a certain shareholder.............. $ 1,345,499 $ --
----------- ---------
Amounts due to certain shareholders................. (8,393,765) (309,500)
----------- ---------
Net due to shareholders................... $(7,048,266) $(309,500)
=========== =========
</TABLE>
Balances included in amounts due to/from shareholders are classified as
open advance accounts or term loans. The net due to shareholders under the term
loans was $2,309,500 at December 31, 1996. Substantially all amounts due to and
due from shareholders were paid off in connection with the merger except for a
loan payable of $309,500 which is due on demand and bears interest at prime less
0.5%.
(c) Sales -- Shareholder -- During 1995, 1996 and 1997, the Company
rendered services to a corporation which is also a shareholder of the Company.
Total revenue recognized for the years ended December 31, 1995, 1996 and 1997
was $3,868,967, $5,325,559 and $6,412,244, respectively. Additionally, this
corporation provided certain services to the Company which have been included in
cost of sales and operating expenses in the accompanying consolidated statements
of operations. These costs were approximately $485,807, $824,348 and $814,154
for the years ended December 31, 1995, 1996 and 1997, respectively. The year end
accounts receivable balance for this customer was approximately $857,820 and
$897,361 at December 31, 1996 and 1997, respectively.
(d) Purchases and Sales -- Affiliated Entities -- The Company had the
following purchase and sale transactions with affiliated entities:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
-------- ---------- --------
<S> <C> <C> <C>
Purchases from affiliated entities........................ $557,000 $1,176,000 $411,000
Sales to affiliated entities.............................. 208,000 236,000 21,000
</TABLE>
F-24
<PAGE> 148
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(e) Building and Equipment Leases -- Affiliated Entities -- The Company
currently leases a corporate aircraft from an affiliated entity under a ten year
lease agreement which began in February 1995. The lease stipulates minimum
monthly payments of $35,200, with additional charges accruing for usage in
excess of established base limits. The terms of the lease required a
non-refundable deposit. The original deposit of approximately $504,000 is being
amortized as rental expense over the existing lease period. Rental expense,
including amortization recognized, approximated $414,000, $422,000 and $234,000
for the years ended December 31, 1995, 1996 and 1997, respectively. The Company
also paid this affiliated entity $327,000 in fiscal 1996 for usage of the
aircraft during the roadshow for the initial public offering and included such
amount in issuance costs. Additionally, the Company paid $576,000 in fiscal 1997
for usage of the aircraft in connection with the merger with Kroll and included
such amount in merger-related costs. Management is of the opinion that the
hourly rate paid by the Company was equivalent to the rate charged by the
affiliated entity to other unrelated companies for similar services and it was
favorably comparable to rates charged by another unrelated charter service for
similar aircraft. Also, the Company has recorded $152,000 in prepaid expenses
related to payments made for the future use of the aircraft at December 31,
1997.
OHE is also currently leasing equipment and a manufacturing facility from
two affiliated entities under various three year and month-to-month lease
agreements which began in July 1995. Rental expense approximated $17,000,
$757,000 and $579,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
(f) Consulting and Commission Services -- Various affiliated entities and a
former minority shareholder of the Company provided certain consulting,
commission, sales and marketing services for the Company. Effective with the
reorganization (Note 1), these services were terminated. The Company recognized
expense of $526,000 and $466,000 for the years ended December 31, 1995 and 1996,
respectively, for these services.
In 1995, prior to joining the Company, a minority shareholder was paid
$135,000, in conjunction with a consulting agreement. These payments were
recognized in selling and marketing expenses in the accompanying consolidated
statements of operations.
(g) Sale of Receivables -- During the year ended December 31, 1995, Kroll
entered into agreements to sell, without recourse, accounts receivable in the
amount of $4,507,800 to a shareholder. A discount of $225,390, or 5%, was
applied to the sales. Under the terms of the agreements, a portion of the sales
proceeds was withheld by the purchaser subject to a final determination of the
specific account receivables to be included in the sale. At December 31, 1995,
all obligations to the purchaser, pursuant to the agreements, were satisfied.
(h) Other -- During 1995 and 1996, OHE recognized approximately $11,000 and
$3,000, respectively, in expense relating to payments made to an affiliated
entity for use of its facilities for corporate meetings. There were no such
payments in 1997.
F-25
<PAGE> 149
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Summary of Related Party Transactions -- The following summarizes
transactions with related parties:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Sales
to shareholder......................................... $3,868,967 $5,325,559 $6,412,244
to affiliated entities................................. 208,000 236,000 21,000
Purchases
from shareholder....................................... 485,807 824,348 814,157
from affiliated entities............................... 557,000 1,176,000 411,000
Lease expense to affiliated entities..................... 431,000 1,179,000 813,000
Consulting and commission services expense
provided by affiliated entities........................ 377,000 348,000 --
provided by minority shareholders...................... 284,000 118,000 --
Facility service fees paid to affiliated entity.......... 11,000 3,000 --
Receivables sale to shareholder.......................... 4,507,800 -- --
Charter fees included in offering or merger costs........ -- 327,000 576,000
</TABLE>
(7) REVOLVING LINES OF CREDIT
The Company had a $12,000,000 revolving line of credit with a bank at
December 31, 1996, which was replaced during 1997. Borrowings under this line of
credit were $9,935,947 at December 31, 1996.
On December 1, 1997 the Company amended and restated its credit agreement
to provide for a revolving line of credit of $7.0 million maturing on May 31,
1999, a letter of credit facility of approximately $7.7 million and a term note
of $7.0 million which matures on January 4, 1999. The revolving credit facility
bears interest at rates ranging from prime less 0.5% to prime or, at the
Company's option, at LIBOR plus 2.0% to LIBOR plus 2.5%, dependent upon amounts
outstanding. Average borrowings under the revolving line of credit and its
predecessors were $6,530,260, $9,915,663 and $4,568,994 during 1995, 1996 and
1997, respectively, at an approximate weighted average interest rate of 8.82%,
8.27% and 8.46%, respectively. The maximum borrowings outstanding during 1995,
1996 and 1997 were $8,216,000, $12,145,000 and $11,600,000, respectively.
Borrowings under this line of credit were $559,112 at December 31, 1997.
In connection with a refinancing in 1997, the Company fully amortized the
remaining deferred financing costs from a previous agreement, resulting in a one
time extraordinary charge to the Company's net income of $193,875, after income
tax benefits of $129,250, or $0.01 per diluted share.
The credit agreement includes certain financial covenants which, among
other restrictions, require the maintenance of certain financial ratios,
including fixed charge coverage and net worth, and impose limitations on foreign
investment, total intangible assets, additional indebtedness and capital
expenditures. The Company was not in compliance with certain of these covenants
as of December 31, 1997. These events of non-compliance have been waived by the
lender.
F-26
<PAGE> 150
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) LONG-TERM DEBT
The components of long-term debt are as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Senior unsecured notes payable to various institutions,
interest at 9.56% payable semi-annually, principal payable
at maturity in May 2004, subject to prepayment
penalties................................................. $ -- $35,000,000
Development Bonds, variable interest rate approximating 85%
of the bond equivalent yield of 13 week U.S. Treasury
bills (not to exceed 12%), which approximated 3.9% at
December 31, 1997, payable in scheduled installments
through September 2016, subject to optional tender by the
bondholders and a corresponding re-marketing agreement,
secured by the property, plant and equipment of OHE, and a
bank letter of credit (Note 12)........................... 1,525,000 1,432,224
Note payable to insurance company, interest payable
semi-annually at 10.95%, principal payable semi-annually
totaling at a minimum $2,500,000 subject to additional
principal payments based on cash flows, subject to certain
prepayment penalties, maturing December 15, 1999, repaid
in full in December, 1997................................. 8,125,000 --
Notes payable to former shareholders of Next, stated
interest at 6%, imputed interest at 10%, payable in
scheduled installments through February 2000, principal
due at maturity, secured by assets of Next................ -- 1,614,375
Note payable to bank, interest at prime or LIBOR plus 2.5%,
payable monthly, principal due upon maturity on January 4,
1999, secured by substantially all of the Company's
domestic personal property (Note 7)....................... -- 7,000,000
Note payable to former shareholder of Palmer, interest at
7%, payable in scheduled installments through November
1998...................................................... 505,834 500,000
Mortgage note to bank, interest at 8.68%, payable in monthly
installments of $2,349, including interest, through April
2003, secured by real estate and the guaranty of OHE's
former majority shareholder............................... 195,723 --
Note payable to former shareholder of the Company's Mexican
subsidiary, interest imputed at 9%, due October 1, 1997... 45,000 --
Note payable to former shareholder of Kroll, non-interest
bearing, maturing January 1998............................ -- 1,255,402
Notes payable to former shareholders of ITI, interest at
10%, payable in scheduled installments through July
1999...................................................... -- 1,231,614
Other notes payable, interest at 7.75% to 10.9%, payable in
scheduled installments through September 2007, a portion
of which is secured by various equipment.................. 33,955 2,030,901
---------- -----------
10,430,512 50,064,516
Less-current portion........................................ 4,461,420 3,200,925
---------- -----------
$5,969,092 $46,863,591
========== ===========
</TABLE>
The Company's $35 million of senior unsecured notes payable also contains
financial covenants, which among other restrictions, require the maintenance of
net worth and fixed charge coverage ratios.
F-27
<PAGE> 151
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 3,200,925
1999........................................................ 7,787,203
2000........................................................ 1,948,940
2001........................................................ 208,690
2002........................................................ 167,223
Thereafter.................................................. 36,751,535
-----------
$50,064,516
===========
</TABLE>
(9) OPERATING LEASES
The Company leases office space and certain equipment under agreements with
terms from one to ten years. The following is a schedule, by year, of
approximate future minimum rental or usage payments required under operating
leases that have initial or non-cancelable lease terms in excess of one year as
of December 31, 1997:
<TABLE>
<CAPTION>
AFFILIATED
ENTITIES OTHER TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
1998..................................................... $ 703,265 $ 4,574,331 $ 5,277,596
1999..................................................... 439,600 3,571,406 4,011,006
2000..................................................... 422,400 2,711,017 3,133,417
2001..................................................... 422,400 2,166,347 2,588,747
2002..................................................... 422,400 1,834,362 2,256,762
Thereafter............................................... 1,126,400 8,508,128 9,634,528
---------- ----------- -----------
$3,536,465 $23,365,591 $26,902,056
========== =========== ===========
</TABLE>
Rental expense charged against current operations amounted to approximately
$3,317,000, $4,595,000 and $4,115,000, for the years ended December 31, 1995,
1996 and 1997, respectively.
(10) DEFINED CONTRIBUTION AND BONUS PLANS
As of December 31, 1997, the Company had the following employee benefit
plans in place:
(a) Defined Contribution Plans -- The Company and its subsidiaries have
established various non-contributory profit sharing/401(k) plans covering
substantially all of the Company's employees. Contributions to the plans are
discretionary and are determined annually by the Company's Board of Directors.
Certain plans also offer a matching contribution whereby the Company will
contribute a percentage of the amount a participant contributes, limited to
certain maximum amounts. Plan contribution expense charged against current
operations for all such plans amounted to approximately $1,083,000, $1,243,000
and $1,211,140 for the years ended December 31, 1995, 1996 and 1997,
respectively.
(b) Profit and Revenue Sharing Plans -- In 1991, Kroll adopted a Profit and
Revenue Sharing Plan to give Kroll employees an annual cash incentive bonus
based on Kroll's performance. The plan made a portion of most employees'
compensation (except administrative personnel, who have a guaranteed bonus)
contingent upon the achievement of certain performance incentives. There were
two plans under
F-28
<PAGE> 152
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Profit and Revenue Sharing Plan umbrella -- the Profit and Revenue Sharing
Plan for Managing Directors and the Bonus Plan for Professionals and Senior
Administrative Employees.
Profit and Revenue Sharing Plan for Managing Directors
The managing directors' bonus plan is based on a matrix of Kroll revenue
and a percentage of operating profit. The maximum bonus opportunity for managing
directors was 50%, 15% and 35% of salary in 1995, 1996 and 1997, respectively.
The administrator may amend, modify or terminate the plan at any time.
Bonus Plan for Professional and Senior Administrative Staff
Similar to the managing directors' bonus plan, the plan for the
professional staff is based on a matrix of Kroll revenue and a percentage of
operating profit. The maximum bonus opportunity for this group ranged from 18%
to 26% of salary in 1995, from 15% of salary in 1996, and from 15% of salary in
1997, depending on the employee's level in Kroll. The administrator may amend,
modify or terminate the plan at any time.
The Company expensed approximately $314,000, $2,288,000 and $516,000
associated with the profit and revenue sharing plans in 1995, 1996 and 1997,
respectively.
(11) EQUITY ARRANGEMENTS
(a) Stock Option Plans -- In 1996, the Company adopted a stock option plan
(the 1996 Plan) for employees and nonemployee directors. The Company may grant
options for up to 836,000 shares under the 1996 Plan. Options for 180,000 and
482,050 shares were granted during 1996 and 1997, respectively. Options granted
under the 1996 Plan are generally granted at fair market value at the date of
grant and are exercisable over periods not exceeding ten years.
In January 1995, Kroll established the Kroll Holdings, Inc. Management
Stock Option Plan (the Management Stock Option Plan). Options granted under the
Management Stock Option Plan are nonqualified stock options. Options to purchase
380,747 and 33,448 shares of common stock were granted under the Management
Stock Option Plan in 1995 and 1996, respectively. In addition, during 1996,
options to purchase 137,294 shares of common stock were granted to two key
employees with an exercise price above market price. There were no option grants
under the Management Stock Option Plan during 1997.
(b) Restricted Stock Plan -- Kroll adopted a long-term incentive plan
designed to give managing directors and other key employees of the Kroll
division a stake in the long-term success of Kroll through grants of phantom
stock options. Each option gave the right to receive a payment equal to the
appreciation in the price of the option at the payment determination date.
Effective June 14, 1993, Kroll replaced the long-term incentive plan with a
restricted stock plan. The restricted stock plan provided for cliff vesting
after a five-year period from the date the stock was awarded. Participants who
were awarded stock under the long-term incentive plan prior to or in January
1991 vested in three years, as they received a two-year credit toward vesting.
Participants who were awarded stock under the long-term incentive plan after
January 1, 1991 and prior to, or in January 1992, vested in four years, as they
received a one-year credit toward vesting. Under the provisions of the plan, a
participant had the ability to put the stock back to Kroll and receive cash for
the then fair value of the
F-29
<PAGE> 153
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock. In addition, the plan included a provision which resulted in accelerated
vesting of all shares in the event of a change in control of Kroll. The Company
has accounted for this plan as a fixed plan and, accordingly, compensation
expense was based on the fair market value as determined by independent
appraisal at the date of grant.
During 1996, 259,271 shares of restricted stock fully vested and were
issued. Based on a valuation of Kroll, the total value assigned to these shares
was $572,286. As a result of the merger in December 1997, all remaining shares
associated with the restricted stock plan vested and all restrictions lapsed on
the merger date. In connection with this accelerated vesting, the Company
recognized compensation expense of approximately $800,000 in 1997, which is
included with merger related costs in the accompanying consolidated statement of
operations. In addition to the regular tax benefit based on compensation expense
recognized, the Company will also realize a tax benefit for the fair market
value of all restricted shares which became fully vested in 1997. This benefit
of approximately $2.2 million has been recognized as an increase to additional
paid-in-capital in the accompanying consolidated statement of shareholders'
equity. This balance represents the spread between cumulative compensation
expense recognized by the Company for accounting purposes and the cumulative
compensation expense recognized for tax purposes based on the fair market value
of the shares. No shares are outstanding under the plan as of December 31, 1997
and, effective January 2, 1998, further issuances under the plan were ceased by
a board resolution.
(c) Kroll Supplemental Executive Award Agreements -- The Company entered
into agreements with certain senior Kroll executives which provided additional
benefits to the participants. During 1996, all 144,421 previously granted shares
fully vested and were issued. Based on a valuation of the Company, the total
value assigned to the shares on the vesting date equaled $318,780.
(d) Purchase and Retirement of Common Stock -- In accordance with Kroll's
historical bylaws, restricted stock and stock option agreements, Kroll acquired
259,036 shares (representing shares and shares under options) of a former
director for approximately $2.7 million upon his leaving the employment of Kroll
in January 1997.
(e) OHE Executive Bonus Plan -- During 1993, OHE adopted an executive bonus
plan, which covered four individuals. The plan awarded a bonus based on the
attainment of goals stipulated in the five year business plan, ranging from 50%
to 120% of the executives' base compensation. The bonus amounts were distributed
50% in cash and 50% in non-qualified stock options to purchase stock of OHE.
Subject to the executives' ability to elect a decrease in the percentage of cash
payments and to increase the percentage of stock options, 50% of the bonus
amount was payable in cash, and the remainder in stock options. OHE issued
121,463 options in 1994 based on 1993's operating results. No options were
issued in 1995 or 1996. In August 1996 the 121,463 options were exercised for
121,463 shares of common stock of the Company for $445 and the executive bonus
plan was terminated.
(f) Stock Based Compensation Disclosure -- With respect to the 1996 Plan
and the Management Stock Option Plan, SFAS No. 123 requires, at a minimum, pro
forma disclosures of expense for stock-based awards based on their fair values.
Had compensation cost for these plans been determined
F-30
<PAGE> 154
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
consistent with SFAS 123, the Company's net income (loss) and diluted earnings
(loss) per share for the years ended December 31, 1996 and 1997 would have been
as follows:
<TABLE>
<CAPTION>
1996 1997
---------- --------
<S> <C> <C>
Net income (loss):
As reported............................................... $5,857,222 $709,866
Pro forma................................................. $5,834,572 $(81,481)
Diluted earnings (loss) per share:
As reported............................................... $ 0.52 $ 0.05
Pro forma................................................. $ 0.52 $ (0.01)
</TABLE>
Had compensation cost for the Company's stock options issued in 1995 and
1996 under the Management Stock Option Plan been determined consistent with SFAS
No. 123, there would have been no effect on the Company's net loss or diluted
loss per share as these options were determined to have a fair value of $0.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------ -------------
<S> <C> <C>
Dividend yield.............................................. 0% 0%
Expected volatility......................................... 39.3% 40.5%
Risk-free interest rate..................................... 6.5% 5.96% - 6.76%
Expected lives.............................................. 7.5 years 7.5 years
</TABLE>
At December 31, 1996, the 180,000 options granted during 1996 under the
1996 Plan to employees and non-employee directors have an exercise price of $9,
a fair value of $4.98 per option and remaining contractual lives of 9 years. The
482,050 options granted during 1997 to employees and non-employee directors have
exercise prices between $9.88 and $17.25, fair values ranging from $5.56 to
$9.48 per option and remaining contractual lives of 10 years.
A summary of the status of the Company's stock option plans at December 31,
1995, 1996 and 1997, and the change during the years then ended is presented in
the table below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------ ------------------ --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year.... -- $ -- 380,747 $6.40 731,489 $ 6.11
Granted........................... 380,747 6.40 350,742 5.79 482,050 15.52
Exercised......................... -- -- -- -- (4,200) 9.00
Forfeited/Expired................. -- -- -- -- (37,950) 9.46
------- ----- ------- ----- --------- ------
Outstanding, end of year.......... 380,747 $6.40 731,489 $6.11 1,171,389 $ 9.95
======= ===== ======= ===== ========= ======
Exercisable, end of year.......... 95,218 $6.40 235,263 $5.23 698,239 $ 6.16
======= ===== ======= ===== ========= ======
</TABLE>
F-31
<PAGE> 155
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(12) COMMITMENTS AND CONTINGENCIES
(a) Letters of Credit -- Under the terms of the Economic Development
Revenue Bonds Agreement, OHE is required to maintain a letter of credit
supporting the debt. The Company's lender is committed to providing this letter
of credit through September 1, 1999. As of December 31, 1997, the Company had an
outstanding letter of credit in the amount of $1,681,750.
At December 31, 1997, the Company had standby and purchase letters of
credit, issued by two financial institutions, in the aggregate amount of
$4,776,502.
(b) Purchase Agreement -- In June 1995, the Company entered into a firm
purchase agreement with Glocom, Inc. ("Glocom"). The agreement provided for an
irrevocable purchase order for the purchase of 4,000 units of the Compact-M
portable satellite telecommunication unit for approximately $12,000,000. In
October 1997, the agreement was amended to provide certain pricing concessions
to the Company and to provide a reduction in the quantity of units that must be
purchased. The amendment also provided certain licensing rights to the Company.
At December 31, 1997, the Company was committed to purchase approximately 250
units at a total cost of approximately $0.7 million. In accordance with the
original agreement, the Company advanced a total of $3,000,000 to Glocom for the
funding of the related production costs. As of December 31, 1996 and 1997, the
Company had advances to the above vendor of $2,320,307 and $1,673,123,
respectively.
(c) Employment Agreements -- On December 1, 1997, the Company entered into
employment agreements with seven key officers and five key employees with annual
compensation ranging in value from $65,000 to $375,000, ending on November 30,
2000. Each of these officers also is eligible for an annual bonus plan. Five of
the officers were granted options to purchase shares of the Company's common
stock at the then existing market value, with the number of shares ranging from
10,000 to 75,000 (see Note 11(f)). In the event of termination without cause,
the terminated individual shall continue to receive his salary for the greater
of the remainder of the agreement or one year. If an agreement is not renewed,
the officer shall receive one year's salary. Each officer also has agreed to
certain non-competition clauses.
As of December 31, 1997, the remaining aggregate commitment under these
employment agreements if all individuals were terminated without cause was
approximately $6.8 million.
(d) Legal Matters -- The Company is party to various legal proceedings
arising from its operations. Management of the Company believes that the outcome
of these proceedings, individually and in the aggregate, will have no material
adverse effect on the Company's financial position, results of operations or its
cash flows.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of significant current assets, current liabilities and
long-term debt approximate their respective historical carrying amounts.
(14) CUSTOMER AND SEGMENT DATA
(a) Segment Data -- The Company operates in three business segments, the
Security Products and Services Group, the Investigations and Intelligence Group
and the Voice and Data Security Group.
F-32
<PAGE> 156
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes information about the Company's business segments:
<TABLE>
<CAPTION>
INVESTIGATIONS
SECURITY AND
PRODUCTS AND INTELLIGENCE VOICE AND DATA
SERVICES GROUP GROUP SECURITY GROUP CONSOLIDATED
-------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Net sales to unaffiliated
customers.......................... $ 34,883 $48,914 $ 2,044 $ 85,841
======== ======= ======= ========
Operating income (loss).............. $ (430) $(3,618) $ (589) $ (4,637)
======== ======= ======= ========
Identifiable assets at year-end...... $ 26,490 $35,678 $ 3,324 $ 65,492
======== ======= =======
Corporate assets..................... 1,275
--------
Total assets at year-end............. $ 66,767
========
1996
Net sales to unaffiliated
customers.......................... $ 79,156 $66,735 $ 7,770 $153,661
======== ======= ======= ========
Operating income..................... $ 6,953 $ 1,008 $ 538 $ 8,499
======== ======= ======= ========
Identifiable assets at year-end...... $ 38,380 $34,681 $ 6,816 $ 79,877
======== ======= =======
Corporate assets..................... 1,357
--------
Total assets at year-end............. $ 81,234
========
1997
Net sales to unaffiliated
customers.......................... $105,557 $67,419 $17,437 $190,413
======== ======= ======= ========
Operating income..................... $ 8,014 $ 665 $ 292 $ 8,971
======== ======= ======= ========
Identifiable assets at year-end...... $ 74,283 $36,955 $13,449 $124,687
======== ======= =======
Corporate assets..................... 9,284
--------
Total assets at year-end............. $133,971
========
</TABLE>
Total net sales by segment includes sales to unaffiliated customers.
Intersegment sales are nominal. Operating income (loss) is total net sales less
operating expenses. Operating income (loss) does not include the following
items: interest expense, other expenses and income taxes. Depreciation expense
F-33
<PAGE> 157
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and capital expenditures for each of the Company's business segments for the
years ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
INVESTIGATIONS
SECURITY AND
PRODUCTS AND INTELLIGENCE VOICE AND DATA
SERVICES GROUP GROUP SECURITY GROUP CONSOLIDATED
-------------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Depreciation expense................ $ 462 $ 791 $-- $1,253
====== ====== === ======
Capital expenditures................ $ 755 $ 373 $-- $1,128
====== ====== === ======
1996
Depreciation expense................ $ 841 $ 690 $-- $1,531
====== ====== === ======
Capital expenditures................ $2,627 $ 603 $-- $3,230
====== ====== === ======
1997
Depreciation expense................ $1,427 $ 774 $16 $2,217
====== ====== === ======
Capital expenditures................ $3,149 $1,663 $43 $4,855
====== ====== === ======
</TABLE>
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets are principally cash,
certain intangible assets and certain prepaid expenses.
The following summarizes information about the Company's different
geographic areas:
<TABLE>
<CAPTION>
UNITED OTHER
STATES FRANCE FOREIGN ELIMINATIONS CONSOLIDATED
------- ------ ------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1995
Net sales to unaffiliated customers........ $70,509 $1,708 $13,624 $ -- $85,841
Intercompany............................... 908 276 1,542 (2,726) --
------- ------ ------- ------- -------
Total net sales....................... $71,417 $1,984 $15,166 $(2,726) $85,841
======= ====== ======= ======= =======
Operating income (loss).................... $(3,429) $ (860) $ (348) $ -- $(4,637)
======= ====== ======= ======= =======
Identifiable assets........................ $57,450 $1,338 $ 6,704 $ -- $65,492
======= ====== ======= =======
Corporate assets........................... 1,275
-------
Total assets at year-end................... $66,767
=======
</TABLE>
F-34
<PAGE> 158
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UNITED OTHER
STATES FRANCE FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- ------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1996
Net sales to unaffiliated customers.... $129,290 $ 2,142 $22,229 $ -- $153,661
Intercompany........................... 3,584 316 2,804 (6,704) --
-------- ------- ------- -------- --------
Total net sales................... $132,874 $ 2,458 $25,033 $ (6,704) $153,661
======== ======= ======= ======== ========
Operating income....................... $ 6,451 $ (118) $ 2,166 $ -- $ 8,499
======== ======= ======= ======== ========
Identifiable assets.................... $ 64,739 $ 1,205 $13,933 $ -- $ 79,877
======== ======= ======= ========
Corporate assets....................... 1,357
--------
Total assets at year-end.......... $ 81,234
========
1997
Net sales to unaffiliated customers.... $119,112 $24,004 $47,297 $ -- $190,413
Intercompany........................... 7,413 208 5,624 (13,245) --
-------- ------- ------- -------- --------
Total net sales................... $126,525 $24,212 $52,921 $(13,245) $190,413
======== ======= ======= ======== ========
Operating income....................... $ 3,810 $ 1,382 $ 3,779 $ -- $ 8,971
======== ======= ======= ======== ========
Identifiable assets.................... $ 69,610 $23,706 $31,371 $ -- $124,687
======== ======= ======= ========
Corporate assets....................... 9,284
--------
Total assets at year-end.......... $133,971
========
</TABLE>
The Company accounts for transfers between geographic areas at cost plus a
proportionate share of operating profit.
The following summarizes the Company's sales in the United States and
foreign locations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales to unaffiliated customers:
U.S. Government........................................... $11,514 $ 51,505 $ 43,719
Other United States....................................... 45,124 61,080 58,158
Middle East............................................... 8,582 7,598 5,887
Europe.................................................... 8,831 11,798 44,022
Asia...................................................... 6,729 8,946 10,697
Central & South America................................... 1,050 5,807 20,123
Other Foreign............................................. 4,011 6,927 7,807
------- -------- --------
$85,841 $153,661 $190,413
======= ======== ========
</TABLE>
Export sales by the Company's domestic operations were approximately 11%,
15% and 16% of net sales for the years ended December 31, 1995, 1996 and 1997,
respectively.
F-35
<PAGE> 159
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is subject to audit and investigation by various agencies which
oversee contract performance in connection with the Company's contracts with the
U.S. Government. Management believes that potential claims from such audits and
investigations will not have a material adverse effect on the consolidated
financial statements. In addition, contracts with the U.S. Government may
contain cost or performance incentives or both based on stated targets or other
criteria. Cost or performance incentives are recorded at the time there is
sufficient information to relate actual performance to targets or other
criteria.
The Company has foreign operations and assets in France, the United
Kingdom, China, Brazil, Mexico, the Philippines, Russia, India, Australia,
Japan, Saudi Arabia, Singapore, Switzerland, and Italy. In addition, the Company
sells its products and services in other foreign countries and continues to
increase its level of international activity. Accordingly, the Company is
subject to various risks including, among others, foreign currency restrictions,
exchange rate fluctuations, government instability and complexities of local
laws and regulations.
(b) Major Customers -- During the years ended December 31, 1995, 1996 and
1997, sales to the U.S. Government approximated 13%, 34%, and 23% of the
Company's net sales, respectively. In addition, the year-end accounts receivable
balance of the U.S. Government approximated 10% and 6% of the Company's accounts
receivable balance as of December 31, 1996 and 1997, respectively.
(15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Company has entered into four foreign currency exchange contracts to
effectively hedge its exposure to certain foreign currency rate fluctuations on
a demand loan to a subsidiary which is denominated in the foreign currency. By
virtue of these contracts, the Company has fixed the total dollar amount which
they will receive under the aforementioned subsidiary loan through the maturity
dates of the contracts regardless of the fluctuations in the exchange rate. The
total notional amount of the contracts, which mature between January 1998 and
July 1999, is $15.5 million. The Company's cumulative foreign currency
translation adjustment component of shareholders' equity was increased by
$346,000 in 1997 as a result of these agreements.
The Company has estimated the fair value of their foreign exchange
contracts based on information obtained from the counterparty of the amount the
Company would receive at December 31, 1997 in order to terminate the agreements.
As of December 31, 1997, the Company would have received approximately $534,000
upon cancellation of all contracts.
F-36
<PAGE> 160
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) SUPPLEMENTAL CASH FLOWS DISCLOSURES
The following is a summary of cash paid related to certain items:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest................................. $2,636,061 $4,293,970 $4,579,261
---------- ---------- ----------
Cash paid for taxes.................................... $ 123,686 $ 97,629 $2,645,474
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Issuance of restricted stock........................... $ -- $ 891,066 $1,356,280
---------- ---------- ----------
Note payable for purchase of Palmer net assets......... $ -- $ 505,834 $ --
---------- ---------- ----------
Affiliate obligation forgiven in connection with the
reorganization...................................... $ -- $ 122,000 $ --
---------- ---------- ----------
Exchange of note receivable for trade receivables...... $ 60,000 $ -- $ --
---------- ---------- ----------
Exchange of stock in an unaffiliated company for trade
receivables......................................... $ 125,000 $ -- $ --
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of Next................................. $ -- $ -- $1,851,284
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of Labbe................................ $ -- $ -- $3,431,000
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of ITI.................................. $ -- $ -- $ 800,011
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of IMEA................................. $ -- $ -- $2,378,474
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of minority interest.................... $ -- $ -- $1,243,474
---------- ---------- ----------
Notes issued in connection with acquisition of Next.... $ -- $ -- $1,575,000
---------- ---------- ----------
Notes issued in connection with acquisition of ITI..... $ -- $ -- $1,231,513
---------- ---------- ----------
Notes issued in connection with acquisition of IMEA.... $ -- $ -- $ 100,000
---------- ---------- ----------
Tax benefit of restricted stock vesting................ $ -- $ -- $2,160,341
---------- ---------- ----------
</TABLE>
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Net sales................................................ $41,239 $47,360 $47,791 $54,023
Gross profit............................................. 13,405 15,585 14,481 15,298
Net income (loss)........................................ 1,529 2,292 2,156 (5,267)
Earnings (loss) per share:
Basic.................................................. $ 0.12 $ 0.17 $ 0.17 $ (0.40)
Diluted................................................ $ 0.09 $ 0.15 $ 0.14 $ (0.40)
1996
Net sales................................................ $36,229 $38,666 $36,959 $41,807
Gross profit............................................. 11,183 9,625 14,204 7,190
Net income (loss)........................................ 3,177 818 3,968 (2,106)
Earnings (loss) per share:...............................
Basic.................................................. $ 0.30 $ 0.08 $ 0.38 $ (0.18)
Diluted................................................ $ 0.27 $ 0.05 $ 0.35 $ (0.18)
</TABLE>
F-37
<PAGE> 161
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
-------------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents...................................... $ 32,859
Marketable securities..................................... --
Trade accounts receivable, net of allowance for doubtful
accounts of $3,295 and $2,516 at September 30, 1998 and
December 31, 1997, respectively........................ 54,806
Unbilled revenues......................................... 7,753
Other receivables
Advances to shareholders............................... 53
Affiliates............................................. 897
Employees.............................................. 115
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 21,625
Inventories............................................... 19,094
Prepaid expenses and other................................ 5,490
Deferred tax asset........................................ 593
--------
Total current assets.............................. 143,285
--------
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land...................................................... 1,637
Buildings and improvements................................ 6,367
Leasehold improvements.................................... 5,832
Furniture and fixtures.................................... 6,250
Machinery and equipment................................... 16,910
Construction-in-progress.................................. 1,936
--------
38,932
Less: accumulated depreciation............................ (20,543)
--------
18,389
--------
DATABASES, net of accumulated amortization of $21,987 and
$19,506 at September 30, 1998 and December 31, 1997,
respectively.............................................. 9,012
COSTS IN EXCESS OF ASSETS ACQUIRED, net of accumulated
amortization of $1,883 and $772 at September 30, 1998 and
December 31, 1997, respectively........................... 39,629
OTHER ASSETS................................................ 7,947
--------
56,588
========
$218,262
========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheet.
F-38
<PAGE> 162
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1998
-------------
<S> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit................................. $ --
Current portion of long-term debt......................... 905
Shareholder payable....................................... 263
Accounts payable --
Trade.................................................. 26,891
Affiliates............................................. 131
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 155
Accrued liabilities....................................... 18,111
Income taxes currently payable............................ 4,359
Customer deposits......................................... 3,949
--------
Total current liabilities......................... 54,764
OTHER LONG-TERM LIABILITIES................................. 2,958
DEFERRED INCOME TAXES....................................... 2,277
LONG-TERM DEBT, net of current portion...................... 39,339
--------
Total liabilities................................. 99,338
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued................................ --
Common stock, $.01 par value, 50,000,000 shares
authorized, 17,751,569, and 13,590,525 shares issued
and outstanding in 1998 and 1997, respectively......... 178
Additional paid-in-capital................................ 129,840
Retained deficit.......................................... (10,827)
Accumulated other comprehensive income (loss)............. (267)
--------
Total shareholders' equity........................ 118,924
--------
$218,262
========
</TABLE>
The accompanying notes are an integral part of these consolidated balance sheet.
F-39
<PAGE> 163
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
NET SALES
Security Products & Services.............................. $ 72,970 $100,808
Investigations & Intelligence............................. 50,221 63,338
Voice & Data Communications............................... 13,199 14,797
-------- --------
136,390 178,943
COST OF SALES
Security Products & Services.............................. 51,434 72,457
Investigations & Intelligence............................. 30,617 35,530
Voice & Data Communications............................... 10,868 12,113
-------- --------
92,919 120,100
GROSS PROFIT
Security Products & Services.............................. 21,536 28,351
Investigations & Intelligence............................. 19,604 27,808
Voice & Data Communications............................... 2,331 2,684
-------- --------
43,471 58,843
OPERATING EXPENSES
Selling and marketing..................................... 9,739 12,092
General and administrative................................ 19,387 23,656
Amortization of costs in excess of assets acquired........ 667 1,112
-------- --------
Operating income............................................ 13,678 21,983
OTHER INCOME (EXPENSE):
Interest expense.......................................... (3,387) (3,322)
Interest income........................................... 259 759
Other, net................................................ (226) (219)
-------- --------
Income before minority interest, provision for income
taxes, and extraordinary item.......................... 10,324 19,201
Minority interest........................................... 118 --
-------- --------
Income before provision for income taxes and extraordinary
item................................................... 10,206 19,201
Provision for income taxes.................................. 4,035 7,641
-------- --------
Income before extraordinary item, net..................... $ 6,171 $ 11,560
Extraordinary item, net..................................... (194) --
======== ========
Net income................................................ $ 5,977 $ 11,560
======== ========
Basic earnings per share.................................... $ 0.46 $ 0.74
======== ========
Basic weighted average shares outstanding................... 13,058 15,580
======== ========
Diluted earnings per share.................................. $ 0.42 $ 0.72
======== ========
Diluted weighted average shares outstanding................. 13,825 15,955
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 164
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED COMPREHENSIVE
SHARES INCOME STOCK CAPITAL DEFICIT INCOME (LOSS) TOTAL
------ ------------- ------ ---------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997.... 13,591 $136 $ 50,590 $(22,387) $(384) $ 27,955
Issuance of stock in
conjunction with the
acquisition of businesses... 699 7 15,625 -- -- 15,632
Public offering of common
stock, net of issuance costs
of approximately $1,325..... 3,200 32 60,403 -- -- 60,435
Issuance of stock bonus to
certain employees........... 2 -- 48 -- -- 48
Exercise of stock options, and
related income tax
benefit..................... 262 3 3,219 -- -- 3,222
Purchase and retirement of
treasury stock.............. (2) -- (45) -- -- (45)
Comprehensive income:
Net income.................. $11,560 -- -- 11,560 -- 11,560
-------
Other comprehensive income,
net of tax:
Foreign currency
translation adjustments,
net of $85 tax
provision............... -- 127 -- -- -- -- --
Reclassification adjustment
for gain on securities
included in net income,
net of $4 tax benefit..... -- (10) -- -- -- -- --
-------
Other comprehensive
income.................... -- 117 -- -- -- 117 117
-------
Comprehensive income.......... -- $11,677 -- -- -- -- --
------ ======= ---- -------- -------- ----- --------
BALANCE, SEPTEMBER 30, 1998... 17,752 $178 $129,840 $(10,827) $(267) $118,924
====== ==== ======== ======== ===== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE> 165
THE KROLL O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1997 1998
------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 5,977 $ 11,560
Adjustments to reconcile net income to net cash provided
by (used in) operating activities --
Depreciation and amortization........................... 1,506 1,770
Amortization of databases............................... 2,245 2,397
Amortization of costs in excess of assets acquired...... 667 1,112
Bad debt expense........................................ 948 1,180
(Gain) on sale of marketable securities................. -- (7)
Minority Interest....................................... 44 --
Share in net (income) loss of joint ventures............ (149) --
Change in assets and liabilities, net of effects of
acquisitions --
Receivables............................................. (6,812) (16,315)
Other receivables....................................... -- 283
Unbilled revenues....................................... (118) (4,264)
Costs in excess of billings on uncompleted contracts.... 794 (9,546)
Inventories............................................. (4,035) 703
Prepaid expenses and other assets....................... (2,906) (366)
Accounts payable and income taxes currently payable..... (2,163) (2,406)
Affiliate payable....................................... -- (744)
Notes payable -- shareholders........................... 107 (58)
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (199) (165)
Customer deposits....................................... (788) 110
Deferred income taxes payable........................... 811 (45)
Accrued liabilities..................................... (912) 1,654
Long term liabilities................................... 106 1,427
------- --------
Net cash used in operating activities................. (4,877) (11,720)
------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net........... (3,124) (3,454)
Additions to databases.................................... (3,036) (3,074)
Acquisitions, net of cash acquired........................ (7,606) (8,262)
Sale (purchase) of marketable securities.................. (3,768) 20
Other..................................................... (15) --
------- --------
Net cash used in investing activities................. (17,549) (14,770)
------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of
credit.................................................. (7,626) (1,096)
Proceeds from long-term debt.............................. 34,951 --
Payments of long-term debt................................ -- (10,193)
Repayment of shareholder notes............................ (186) --
Net proceeds from public offering of common stock......... -- 60,435
Proceeds from exercise of stock options including related
tax benefits............................................ 140 3,222
Purchase and retirement of common stock................... (2,693) (45)
Foreign currency translation.............................. (529) 50
------- --------
Net cash provided by financing activities............. 24,057 52,373
------- --------
NET INCREASE IN CASH AND EQUIVALENTS........................ 1,631 25,883
Effects of foreign currency exchange rates on cash.......... (64) 77
------- --------
CASH AND EQUIVALENTS, beginning of period................... 4,761 6,899
------- --------
CASH AND EQUIVALENTS, end of period......................... $ 6,328 $ 32,859
======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 2,019 $ 2,466
======= ========
Cash paid for taxes....................................... $ 2,386 $ 1,733
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-42
<PAGE> 166
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively the "Company"), is a leading global provider of a
broad range of specialized products and services that are designed to provide
solutions to a variety of security needs. The Company's Security Products and
Services Group markets ballistic and blast protected vehicles to businesses,
individuals and governments. It also offers security services such as training,
risk and crisis management services, and site security systems. The
Investigations and Intelligence Group offers business intelligence and
investigation services to clients worldwide. The Voice and Data Security Group
offers secure satellite communication equipment, satellite navigation systems
and computer hardware and software security.
In December 1997, a wholly owned subsidiary of The O'Gara Company
("O'Gara") was merged (the "Merger") into Kroll Holdings, Inc. ("Kroll"). At the
time of the Merger, the Company's name was changed from The O'Gara Company to
The Kroll-O'Gara Company.
Effective upon the consummation of the Merger, each then issued and
outstanding share of Kroll common stock (including those issued under the Kroll
restricted stock plan) was converted into 62.52 shares of Common Stock of the
Company or 6,098,561 shares of Company Common Stock in total. Outstanding
employee stock options were converted at the same exchange factor into options
to purchase 551,492 shares of Company Common Stock.
The Merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows of Kroll as though it had always
been a part of the Company.
On May 5, 1998, the Company completed a public offering of 3,200,000 shares
of its Common Stock at $20.50 per share (the "Offering"), resulting in net
proceeds to the Company of $60.4 million. A portion of the net proceeds was used
to pay off $14.8 million of indebtedness of the Company, with the balance
invested in short-term instruments and available for potential acquisitions,
working capital and other general corporate purposes. In addition to the shares
sold by the Company, certain shareholders sold 1,860,000 shares of Common Stock
in conjunction with the Offering. The Offering followed the Company's initial
public offering, which was completed on November 15, 1996 and resulted in the
issuance of 2,048,000 shares of Common Stock.
The consolidated financial statements include the accounts of O'Gara and
Kroll and all their majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. Investments in 20% to 50% owned
entities are accounted for on the cost method. Affiliated entities are not
included in the accompanying consolidated financial statements.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation have
been included. Operating results for the nine month periods ended September 30,
1998, are not necessarily indicative of the results that may be expected for the
year ended December 31, 1998. The accompanying consolidated financial statements
should be read in conjunction
F-43
<PAGE> 167
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
with the consolidated financial statements and notes thereto included in the
Company's annual report on Form 10-K for the year ended December 31, 1997.
(2) REVENUE RECOGNITION
Revenue related to contracts for security products (both government and
commercial) results principally from long-term, fixed price contracts and is
recognized using the percentage-of-completion method calculated utilizing the
cost-to-cost approach. The percent deemed to be complete is determined by
comparing the costs incurred to date with estimated total costs for each
contract. This method is used because management considers costs incurred to be
the best available measure of progress on these contracts. However, adjustments
to this measurement are made when management believes that costs incurred
materially exceed effort expended. Contract costs include all direct material
and labor costs, along with certain direct overhead costs related to contract
production.
Provisions for any estimated total contract losses on uncompleted contracts
are recorded in the period in which it becomes known that such losses will
occur. Changes in estimated total contract costs will result in revisions to
contract revenue. These revisions are recognized when determined.
Revenue from investigations, intelligence and security services is
recognized as the services are performed. The Company records either billed or
unbilled accounts receivable based on a case-by-case invoice determination.
Revenue related to voice and data security equipment are recognized as
equipment is shipped. Revenue and related direct costs of brokered satellite
time are recorded when payments are received from customers.
(3) ACQUISITIONS
The Company completed the following acquisitions during the first nine
months of 1998, all of which were accounted for as purchases. The allocation of
purchase price was based on estimates and may be revised at a later date pending
the completion of certain appraisals and other analyses.
(a) On March 16, 1998, the Company acquired all of the shares of
Corplex, Inc. ("Corplex"), a provider of investigative and executive
protection services based in New York, New York. The purchase price
consisted of 29,207 shares of Common Stock (valued at approximately $0.5
million or $17.98 per share). For accounting purposes, the acquisition was
effective March 1, 1998, and the results of operations of Corplex are
included in the consolidated results of the Company from that date forward.
The former shareholder of Corplex, who was employed by Corplex prior to the
acquisition, continues in his formerly held capacity. Cost in excess of
assets acquired is expected to be $0.4 million and will be amortized over
15 years.
(b) On June 15, 1998 the Company completed the acquisition of
Lindquist Avey MacDonald Baskerville Inc. ("Lindquist Avey"), a provider of
forensic and investigative accounting services headquartered in Toronto,
Canada. The purchase price for the acquisition was $10.7 million consisting
of $4.7 million in cash and 278,340 shares of Common Stock (valued at
approximately $6.0 million or $21.52 per share). For accounting purposes,
the acquisition was effective June 1, 1998, and the results of operations
of Lindquist Avey are included in the consolidated results of the Company
from that date forward. Cost in excess of assets acquired is expected to be
$10.7 million and will be amortized over 25 years.
F-44
<PAGE> 168
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
(c) On September 1, 1998, The Company completed the acquisition of all
of the capital stock of Kizorek, Inc., now renamed InPhoto Surveillance,
Inc. ("InPhoto"). InPhoto, headquartered in Naperville, Illinois, is a
leading claims investigation agency which primarily provides video
surveillance services to insurance companies, corporations and government
agencies in connection with investigating exaggerated disability claims and
other fraud. The purchase price consisted of $0.8 million in cash and
352,381 shares of Common Stock (valued at approximately $8.2 million or
$23.35 per share). For accounting purposes, the acquisition was effective
July 1, 1998, and the results of operations of InPhoto are included in the
consolidated results of the Company from that date forward. Cost in excess
of assets is expected to be $8.1 million and will be amortized over 25
years.
(d) On September 22, 1998, the Company completed, through its wholly
owned subsidiary, O'Gara-Hess & Eisenhardt de Colombia, Inc. ("OHE
Colombia"), the acquisition of the assets and technology of Protec S.A.
("Protec") of Bogota, Colombia. Protec was a leading manufacturer of
armored vehicles and bullet-and smash- resistant glass for the Colombian
market. The purchase price consisted of $3.2 million in cash and 38,788
shares of Common Stock (valued at approximately $0.9 million or $22.95 per
share). For accounting purposes, the acquisition was effective September
30, 1998, and the results of operations of OHE Colombia are included in the
consolidated results of the Company from that date forward. Cost in excess
of assets acquired is expected to be $3.6 million and will be amortized
over 20 years.
In connection with the 1998 acquisitions, assets were acquired and
liabilities were assumed as follows (dollars in thousands):
<TABLE>
<CAPTION>
LINDQUIST
PROTEC INPHOTO AVEY CORPLEX
------- ------- --------- -------
<S> <C> <C> <C> <C>
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash............................................... $ -- $ 192 $ 257 $ 16
Accounts receivable................................ -- 1,743 -- 96
Unbilled revenue................................... -- 269 339 69
Other current assets............................... 75 448 577 --
Property, plant and equipment...................... 311 955 628 4
Other non-current assets........................... -- -- 116 15
Intangible assets.................................. 200 700 -- --
Goodwill........................................... 3,602 8,076 10,716 384
------- ------- ------- -----
$ 4,188 $12,383 $12,633 $ 584
Less: Cash paid for net assets.................... (3,200) (800) (4,727) --
Fair value of stock issued................. (890) (8,228) (5,989) (525)
======= ======= ======= =====
$ 98 $ 3,355 $ 1,917 $ 59
======= ======= ======= =====
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition costs.......... $ 98 $ 3,155 $ 1,917 $ 46
Debt............................................... -- 200 -- 13
======= ======= ======= =====
$ 98 $ 3,355 $ 1,917 $ 59
======= ======= ======= =====
</TABLE>
F-45
<PAGE> 169
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
(4) EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS No. 128"). In accordance with SFAS No. 128,
basic earnings per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share are computed by dividing net income by the weighted average
number of shares of common stock and equivalents outstanding during the year.
Dilutive common stock equivalents represent shares issuable upon assumed
exercise of stock options and upon assumed issuance of restricted stock. The
following is a reconciliation of the numerator and denominator for basic and
diluted earnings per share for the nine months ended September 30, 1998 and 1997
(in thousands except per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS....................................... $11,560 15,580 $0.74
=====
Effect of dilutive securities:
Options....................................... -- 375
------- ------
Diluted EPS..................................... $11,560 15,955 $0.72
======= ====== =====
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS....................................... $5,977 13,058 $0.46
=====
Effect of dilutive securities:
Options....................................... -- 182
Restricted stock.............................. (227) 585
------ ------
Diluted EPS..................................... $5,750 13,825 $0.42
====== ====== =====
</TABLE>
Diluted earnings per share calculations for each of the quarters of fiscal
1997 cannot be added together to arrive at the diluted earnings per share amount
for the nine months ended September 30, 1997 due to the effects of rounding and
the dilutive impact of the restricted stock to net income.
(5) NEW PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which established
standards for reporting and displaying comprehensive income and its components
in a financial statement that is displayed with the same prominence as other
financial statements. The Company has chosen to disclose comprehensive income,
which encompasses net income, foreign currency translation adjustments and
unrealized holding gains of marketable securities, in the Consolidated Statement
of Shareholder's Equity. Prior years have been restated to conform to the SFAS
No. 130 requirements. The Accumulated Other Comprehensive Income balance of $0.1
million at September 30, 1998 consists entirely of foreign currency translation
adjustments.
F-46
<PAGE> 170
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
Total comprehensive income for the nine-month period ended September 30,
1997 is as follows (in thousands):
<TABLE>
<S> <C>
Net income.................................................. $5,977
------
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of $390 tax
benefit................................................ (585)
------
Other comprehensive income.................................. (585)
------
Comprehensive income................................... $5,392
======
</TABLE>
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"), effective for fiscal years beginning after December 15, 1997.
This statement requires disclosure for each segment into which a company is
organized by the chief operating decision maker for the purposes of making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure and any
manner in which management disaggregates a company. The Company intends to adopt
SFAS No. 131 during fiscal 1998. This statement, which requires expansion or
modification to existing disclosures, will have no impact on the Company's
reported financial position, results of operations or cash flows.
In April 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-5 "Reporting on the Cost of Start-Up
Activities." The SOP requires costs of start-up activities, including
preoperating costs, organization costs and other start-up costs, to be expensed
as incurred. The Company's current practice is to capitalize these expenses and
amortize them over periods ranging from one to five years. The Company is
required to adopt the provisions of this statement no later than the first
quarter of fiscal 1999. Included in the accompanying September 30, 1998
Consolidated Balance Sheet are approximately $0.7 million of preoperating,
organization and start-up costs which would have been expensed had this
statement already been implemented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. The Company
currently has several forward contracts in place in association with demand
notes from certain subsidiaries. These instruments qualify for hedge accounting.
The Company has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements and has not determined the timing of or method of adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income.
(6) SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash and equivalents consist of all operating cash accounts and investments
with an original maturity of three months or less. Marketable securities consist
of available-for-sale commercial paper obligations which mature in 1998. These
securities are valued at current market value, which
F-47
<PAGE> 171
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
approximates cost. Non-cash activity for the nine months ended September 30,
1997 and 1998 is as follows (dollars in thousands):
<TABLE>
<CAPTION>
1997 1998
------ ------
<S> <C> <C>
Fair value of stock issued in connection with acquisition of
ITI....................................................... $ 800 --
Notes issued in connection with acquisition of ITI.......... $1,232 --
Fair value of stock issued in connection with acquisition of
Next Destination.......................................... $1,851 --
Notes issued in connection with acquisition of Next
Destination............................................... $1,575 --
Fair value of stock issued in connection with acquisition of
Labbe..................................................... $3,431 --
Fair value of stock issued in connection with acquisition of
Corplex................................................... -- $ 525
Fair value of stock issued in connection with acquisition of
Lindquist Avey............................................ -- $5,989
Fair value of stock issued in connection with acquisition of
InPhoto................................................... -- $8,228
Fair value of stock issued in connection with acquisition of
Protec.................................................... -- $ 890
Fair value of stock issued in connection with employee stock
bonus paid................................................ -- $ 48
</TABLE>
(7) INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and include the following (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C>
Raw materials............................................... $10,728
Vehicle costs and work-in-process........................... 8,366
-------
$19,094
=======
</TABLE>
(8) DERIVATIVE FINANCIAL INSTRUMENTS
Financial instruments in the form of foreign currency exchange contracts
are utilized by the Company to hedge its exposure to movements in foreign
currency exchange rates. The Company does not hold or issue derivative financial
instruments for trading purposes. Gains and losses on foreign exchange contracts
are deferred and amortized as an adjustment to the cumulative foreign currency
translation adjustment component of equity over the terms of the agreements in
accordance with hedge accounting standards. The fair value of foreign currency
exchange contracts is not recognized in the consolidated financial statements
since they are accounted for as hedges.
The Company has entered into five foreign currency exchange contracts to
effectively hedge its exposure to certain foreign currency rate fluctuations on
demand loans to subsidiaries which are denominated in the foreign currency. By
virtue of these contracts, the Company has fixed the total dollar amount which
it will receive under the aforementioned subsidiary loans through the maturity
dates of the contracts regardless of the fluctuations in the exchange rate. The
total notional amount and fair market value of the contracts, which mature
between January 1999 and September 2000, are $17.9 million and $0.5 million
respectively. The Company's foreign currency translation adjustment component of
accumulated other comprehensive income (loss) was increased by $0.1 million in
the first three quarters of 1998 as a result of these agreements.
F-48
<PAGE> 172
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Background America, Inc.
Nashville, Tennessee
We have audited the accompanying consolidated balance sheets of Background
America, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1997,
and the related consolidated statements of operations, common shareholders'
deficit and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Background America, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
Nashville, Tennessee
December 18, 1998
(January 21, 1999 as to
second paragraph of
Note 15)
F-49
<PAGE> 173
BACKGROUND AMERICA, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2)........................ $ 92,412 $ 2,925,547
Accounts receivable --
Trade, net of allowance for doubtful accounts of $8,682
for 1996 and 1997 (Note 14).......................... 357,579 608,569
Related party (Note 13)................................ 87,079 272,244
Prepaid expenses and other current assets................. 15,831 53,302
----------- -----------
Total current assets.............................. 552,901 3,859,662
PROPERTY AND EQUIPMENT (Notes 2, 3 and 14).................. 431,892 925,641
Less accumulated depreciation and amortization............ (89,000) (296,248)
----------- -----------
342,892 629,393
GOODWILL, NET (Notes 2 and 14).............................. 633,225 577,558
OTHER ASSETS (Note 2)....................................... 145,955 135,330
----------- -----------
$ 1,674,973 $ 5,201,943
=========== ===========
LIABILITIES, REDEEMABLE PREFERRED STOCK
AND COMMON SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable -- trade................................. $ 222,332 $ 201,013
Accounts payable -- related party (Note 13)............... 139,459 231,499
Accrued expenses and other current liabilities (Note 6)... 245,960 224,301
Notes payable to shareholders (Notes 11 and 13)........... 1,310,000 152,000
----------- -----------
Total current liabilities......................... 1,917,751 808,813
COMMITMENTS (Note 5)
Series A redeemable and convertible cumulative preferred
stock ($1 par value; authorized, 5,000,000 shares; issued
and outstanding, -0- and 1,143,700, respectively;
aggregate liquidation preference of $6,324,660) (Note
11)....................................................... -- 5,968,052
COMMON SHAREHOLDERS' DEFICIT: (Notes 2, 9, 10, 12 and 13)
Common stock (no par value; authorized, 20,000,000 shares;
issued and outstanding, 2,140,572 and 2,144,172,
respectively).......................................... 962,071 966,571
Retained deficit.......................................... (1,204,849) (2,541,493)
----------- -----------
Common shareholders' deficit...................... (242,778) (1,574,922)
----------- -----------
$ 1,674,973 $ 5,201,943
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-50
<PAGE> 174
BACKGROUND AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
REVENUES (Note 2)........................................... $ 1,775,815 $ 4,221,059
COSTS OF SALES.............................................. 1,624,319 3,447,569
----------- -----------
Gross operating profit................................. 151,496 773,490
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 1,118,116 1,899,086
Depreciation and amortization (Notes 2 and 3)............. 118,624 279,214
----------- -----------
Operating loss......................................... (1,085,244) (1,404,810)
OTHER INCOME (EXPENSE):
Interest expense (Notes 4 and 13)......................... (41,801) (84,463)
Interest income........................................... -- 93,106
Other, net................................................ (1,874) 59,523
----------- -----------
NET LOSS.................................................... $(1,128,919) $(1,336,644)
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-51
<PAGE> 175
BACKGROUND AMERICA, INC.
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
COMMON STOCK COMMON
-------------------- RETAINED SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
--------- -------- ----------- -------------
<S> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995................ 10,000 $ 10,000 $ (75,930) $ (65,930)
Fifty-for-one stock split, effective
January 30, 1996 (Note 12)........... 490,000 -- -- --
Issuance of common stock in acquisitions
(Note 14)............................ 140,572 290,571 -- 290,571
Issuance of common stock................ 1,500,000 661,500 -- 661,500
Net loss................................ -- -- (1,128,919) (1,128,919)
--------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1996................ 2,140,572 962,071 (1,204,849) (242,778)
Exercise of stock options (Note 10)..... 3,600 4,500 -- 4,500
Net loss................................ -- -- (1,336,644) (1,336,644)
--------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1997................ 2,144,172 $966,571 $(2,541,493) $(1,574,922)
========= ======== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-52
<PAGE> 176
BACKGROUND AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,128,919) $(1,336,644)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 118,624 279,214
Changes in assets and liabilities, net of effects of
acquisitions:
Increase in accounts receivable........................ (188,524) (436,155)
Increase in prepaid expenses........................... (10,129) (37,471)
Increase in other assets............................... (4,705) (4,375)
Increase in accounts payable and accrued expenses...... 442,162 53,112
----------- -----------
Net cash used in operating activities................ (771,491) (1,482,319)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (317,986) (495,488)
Cash paid for acquisitions, net of cash received.......... (571,728) --
Cash paid for non-compete agreements...................... (150,000) --
----------- -----------
Net cash used in investing activities................ (1,039,714) (495,488)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net of issuance
costs.................................................. -- 4,914,317
Proceeds from issuance of common stock.................... 661,500 --
Proceeds from issuance of notes payable to shareholders... 1,240,000 761,000
Repayment of notes payable to shareholders................ -- (868,875)
Advances under line-of-credit facility.................... -- 232,000
Payments under line-of-credit facility.................... -- (232,000)
Exercise of stock options................................. -- 4,500
----------- -----------
Net cash provided by financing activities............ 1,901,500 4,810,942
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 90,295 2,833,135
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.............. 2,117 92,412
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR.................... $ 92,412 $ 2,925,547
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest.................... $ -- $ 107,042
=========== ===========
SUPPLEMENTAL DISCLOSURES OF NONCASH TRANSACTIONS:
Retirement of shareholders' notes payable and accrued
interest............................................... $ -- $ 1,053,735
=========== ===========
Issuance of preferred stock............................... $ -- $ 1,053,735
=========== ===========
Common stock issued in acquisitions....................... $ 290,571 $ --
=========== ===========
Fair value of net assets acquired......................... $ 218,140 $ --
=========== ===========
Escrow liability from acquisitions........................ $ 20,000 $ --
=========== ===========
</TABLE>
See notes to consolidated financial statements.
F-53
<PAGE> 177
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1996 AND 1997
1. ORGANIZATION
Background America, Inc. (the "Company") was formed in September of 1995 to
deliver high-quality background investigation services to government, corporate
and other professional clients. The consolidated financial statements include
the amounts of the Company and its inactive subsidiaries, all of which are
wholly owned. All significant intercompany balances and transactions have been
eliminated.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ACCOUNTING ESTIMATES. The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS include highly liquid investments with original
maturities of three months or less.
PROPERTY AND EQUIPMENT is carried at cost and is depreciated using an
accelerated method over the estimated useful lives of the assets. Asset lives
are generally three to five years. Significant improvements are capitalized
while maintenance and repairs are expensed as incurred.
SOFTWARE POLICY. External direct costs of materials and services and
payroll-related costs of employees working solely on development of the software
system portion of the project are capitalized. Capitalized costs of the project
will be amortized over the estimated useful life of the software, generally
three to five years. Training costs and costs to reengineer business processes
are expensed as incurred.
GOODWILL arising from the accounting for acquired businesses is amortized
using the straight-line method over twelve years which represents the estimated
useful life. The Company reviews its long-lived and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. As of December 31, 1997, in the opinion
of management, there has been no such impairment.
At December 31, 1996 and 1997, cost in excess of net assets acquired
totaled $666,112 and accumulated amortization totaled $32,887 and $88,554,
respectively.
OTHER ASSETS as of December 31, 1996 and 1997, include deposits of $4,075
and $9,080, respectively, and non-compete agreements in the amount of $150,000.
The non-compete agreements are amortized using the straight-line method over the
life of each agreement. Accumulated amortization of the non-compete agreements
totaled $8,750 and $23,750 as of December 31, 1996 and 1997, respectively.
INCOME TAXES. The Company accounts for income taxes under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109, Accounting for
Income Taxes. Under such statement, the tax benefits of tax operating loss
carryforwards are recorded to the extent available less a valuation allowance if
it is more likely than not that some portion of the deferred tax asset will not
be realized.
F-54
<PAGE> 178
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
REVENUES from operations are recognized at the time that service is
completed using the accrual method of accounting.
STOCK-BASED COMPENSATION. SFAS No. 123, Accounting for Stock-Based
Compensation, encourages, but does not require, companies to adopt the fair
value method of accounting for stock-based compensation. The Company has chosen
to continue to account for stock-based employee compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations. (See Note 10)
CONCENTRATIONS OF CREDIT RISK. Financial instruments which potentially
subject the Company to concentrations of credit risk consist principally of cash
investments and trade receivables. The Company places its cash investments in
high credit quality commercial paper, federal government agencies and FDIC
insured financial institutions thus reducing potential risk. Concentrations of
credit risk with respect to trade receivables are limited due to the Company's
large number of customers and their dispersion across many geographic areas.
3. PROPERTY AND EQUIPMENT:
<TABLE>
<CAPTION>
1996 1997
-------- ---------
<S> <C> <C>
Furniture and fixtures.................................... $ 21,188 $ 36,471
Equipment................................................. 92,777 158,673
Computers, copiers and software........................... 317,259 717,574
Leasehold improvements.................................... 668 12,923
-------- ---------
431,892 925,641
Less accumulated depreciation and amortization............ (89,000) (296,248)
-------- ---------
$342,892 $ 629,393
======== =========
</TABLE>
4. LINE OF CREDIT
On April 4, 1997, the Company entered into a credit agreement with a bank
which provides for a working capital line of $1,000,000 in maximum principal.
There were no borrowings outstanding under the credit facility at December 31,
1997. The credit facility bears interest at the bank's index rate, is due and
payable monthly, matures on April 4, 1999 and is guaranteed by certain
shareholders of the Company.
5. COMMITMENTS
The Company leases certain office space under noncancelable operating lease
agreements. Total rent expense under operating leases for the years ended
December 31, 1996 and 1997 was $113,633 and $214,009, respectively. (See Note
13.)
F-55
<PAGE> 179
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a schedule of the future minimum rental payments required
under noncancelable operating leases as of December 31, 1997:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
1998.................................................. $158,957
1999.................................................. 159,495
2000.................................................. 125,288
2001.................................................. 56,875
2002.................................................. 28,875
--------
Total....................................... $529,490
========
</TABLE>
6. SELF-INSURED RISK
The Company maintains a self-insured health benefits program on behalf of
its employees, covering major medical and hospitalization costs. The Company has
limited its exposure to claims costs by securing an insurance policy on the
plan. The insurance policy reimburses the Company for accumulated costs incurred
and paid during a calendar year related to any covered individual which exceeds
$10,000. Additionally, the insurance limits the maximum amount of costs the
Company will be responsible for, based on the number of employees and families
covered by the plan during the year.
As of December 31, 1996 and 1997, the Company accrued for claims which had
occurred, but had not been paid of $19,980 and $27,306, respectively. Claims
expense, net of insurance reimbursements relative to the health benefit program
for the years ended December 31, 1996 and 1997 was $62,616 and $105,168,
respectively.
7. RETIREMENT PLAN
The Company offers a retirement plan which is available to all full-time
employees for the Company with one year of service. Participants in the plan can
contribute up to 14% of annual earnings as defined by the plan and the Company
will contribute a discretionary matching amount. The Company contributed $15,492
and $0 to the plan in 1996 and 1997, respectively.
8. INCOME TAXES
At December 31, 1996 and 1997, the Company has federal and state net
operating loss carryforwards available to offset future taxable income. The
differences between financial and tax losses are attributable to differences
between reported amounts of assets and liabilities and their tax bases provided
for in accordance with SFAS No. 109. At December 31, 1997, the Company has
approximately $2,400,000 of net operating loss carryforwards for federal tax
purposes which begin to expire in the years 2011 through 2012. The carryforwards
represent a deferred tax asset of the Company which is offset fully by a
valuation allowance due to the uncertainty as to the amount, if any, of the
carryforwards which will ultimately be realized.
9. STOCK WARRANTS
As of December 31, 1996 and 1997, the Company had outstanding warrants to
purchase 500 shares of common stock at $3.50 per share and 4,000 shares of
common stock at $1.25 per share. These warrants were issued in June and July of
1996 with exercise prices equal to or greater than the fair
F-56
<PAGE> 180
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value of the Company's common stock on those dates to certain consultants and
other non-employees of the Company. Warrants totaling 4,000 and 500 vest and
become exercisable on June 30, 1999 and July 15, 2001, respectively. Warrants
totaling 4,000 expire on June 30, 2001 or earlier with the occurrence of a
merger, sale or initial public offering of the Company unless exercised. The
remaining warrants do not expire unless there is a breach of certain contractual
terms as defined by the Stock Purchase Warrant Agreement.
10. STOCK OPTION PLANS
The Company has two stock option plans, the 1996 and 1997 stock option
plans, which provide for the granting of either incentive stock options or
nonqualified stock options to purchase shares of the Company's common stock to
officers, directors and other key employees who have substantial responsibility
for the direction and management of the Company. At December 31, 1997, 100,000
and 240,000 shares of common stock were reserved for issuance under the 1996 and
1997 plans, respectively. Approximately 45,000 and 52,000 of such reserved
shares are available for future grants under the 1996 and 1997 plans,
respectively.
Substantially all outstanding options under such plans are incentive stock
options with vesting periods of three years and maximum option terms of five
years. Vesting is accelerated in the event of the Company's shares being sold in
an initial public offering or ten days preceding the date on which the Company
enters into a merger in which the Company is not the surviving corporation. No
compensation expense related to stock option grants under the 1996 and 1997
plans was recorded in 1996 or 1997 as the option exercise prices were equal to
fair market value on the date of grant. Fair market value is the per share value
of the Company's common stock determined by the board of directors in their sole
discretion, taking into consideration those factors affecting or reflecting
value that they deem appropriate including but not limited to the Company's net
worth, prospective earning power and dividend paying capacities, the goodwill of
the business, the economic outlook in the industry, the values of securities of
corporations engaged in the same or similar lines of business that are listed on
a stock exchange or are traded in the over-the-counter market or for which there
is other information regarding value, the importance and presence of
nonoperating assets and the economic environment.
A summary of the status of the Company's two fixed stock option plans for
fiscal 1996 and 1997 and changes during those years are presented below:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
Balance at December 31, 1995................................ -- $ --
Options granted............................................. 59,952 1.23
Options forfeited........................................... (100) 1.25
-------
Balance at December 31, 1996................................ 59,852 1.23
Options granted............................................. 189,125 2.68
Options forfeited........................................... (2,350) 2.21
Options exercised........................................... (3,600) 1.25
-------
Balance at December 31, 1997................................ 243,027 2.34
=======
</TABLE>
F-57
<PAGE> 181
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Information relating to options under the Company's two fixed stock option
plans at December 31, 1997 summarized by exercise price is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED
RANGE OF REMAINING VESTED AVERAGE
EXERCISE OPTIONS CONTRACTUAL OPTIONS EXERCISE
PRICES OUTSTANDING LIFE IN YEARS OUTSTANDING PRICE
- ------------ ----------- ------------- ----------- --------
<S> <C> <C> <C> <C>
$.75 - 1.25 58,452 3.49 -- $1.22
2.70 - 5.00 184,575 4.46 -- 2.70
-------
243,027 4.22 -- 2.34
=======
</TABLE>
In accordance with accounting for such options utilizing the intrinsic
value method, there is no related compensation expense recorded in the Company's
financial statements for the years ended December 31, 1996 and 1997 related to
the option activity summarized above.
If compensation cost for stock-based compensation had been determined based
on the fair value of the options at the grant dates consistent with the method
of SFAS No. 123, the Company's net loss for the years ended December 31, 1996
and 1997 would have been increased to the pro forma amounts presented below:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Net loss
As reported......................................... $(1,128,919) $(1,336,644)
Pro forma........................................... (1,134,412) (1,383,360)
</TABLE>
The fair value of each option grant is estimated as of the date of grant
utilizing the minimum value option-pricing model with the following weighted
average assumptions applied to the options granted:
<TABLE>
<CAPTION>
1996 1997
---- ----
<S> <C> <C>
Expected dividend yield..................................... 0.0% 0.0%
Expected volatility......................................... 0.0% 0.0%
Risk-free interest rate..................................... 5.7% 5.8%
Expected life of options (years)............................ 5 5
</TABLE>
The weighted average fair value at the date of grant for all options
granted during 1996 and 1997 using the minimum value method approximated $.30
and $.66, respectively.
11. REDEEMABLE PREFERRED STOCK
On June 16, 1997, the Company's charter was amended and restated to
authorize 5,000,000 shares of preferred stock having a par value of $1.00 per
share. Concurrently, the Company issued 1,143,700 shares of Series A Preferred
Stock ("Preferred Stock") for $5.25 per share. Cash proceeds from this investor
financing totaled $4,914,317, net of issuance costs totaling $36,373, with the
remaining proceeds received in the form of cancellation of the principal and
accrued interest amounts due under certain notes payable previously issued by
the Company to certain shareholders totaling $1,053,735.
The holders of Preferred Stock shall be entitled to vote on an "as
converted" basis with the common shares and have a right to elect a certain
number of representatives to the Company's Board of Directors as defined by the
amended and restated corporate charter. At the holders' option, the Preferred
Stock may be converted into the Company's common stock on a share for share
basis, subject to certain
F-58
<PAGE> 182
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
anti-dilution conversion adjustments. The holders of Preferred Stock will be
entitled to accrued dividends beginning in June 2000 at a rate of $.2625 per
share, which are payable quarterly in arrears. Beginning in March 2002, the
dividend rate will be increased to $.5250 per outstanding share. Such dividends
are cumulative and are paid in preference to any declared dividends on common
stock. In the event of a sale, merger, liquidation, dissolution or winding up
the Company, the holders of Preferred Stock are entitled to receive from the
proceeds of such an event an amount not less than the initial issuance price of
the stock, $5.25 per share, plus a ten percent (10%) per annum compounded return
on investment, net of dividends paid in preference to holders of common stock or
any other class or series of stock. Additionally, the holders of Preferred
Stock, as a group, may elect to redeem their shares on or after March 2002 at
the greater of the fair market value or the initial issuance price, plus a ten
percent (10%) per annum compounded return on investment from the date of
issuance, net of dividends paid. Preferred Stock redeemed will be retired in
four quarterly installments beginning June 19, 2002. Should redemption as to any
shares of Preferred Stock not occur when required based on the terms described
above, interest will accrue on the unpaid redemption price at a bank's prime
rate plus 1% per annum during the first year of such delay and at a bank's prime
rate plus 3% per annum thereafter.
12. COMMON STOCK
On January 30, 1996, the Company, by action of its shareholders and
directors, amended the corporate charter to increase the maximum number of
authorized common stock shares from 10,000 to 2,000,000. Concurrently, the Board
of Directors approved a fifty-for-one stock split which was effective January
30, 1996. In October 1996, the Company, by action of its shareholders and
directors, amended the corporate charter to increase the maximum number of
authorized common stock shares to 20,000,000.
In connection with the common and preferred stock issuances, certain
shareholders entered into shareholder agreements whereby the Company maintains
the first right of refusal in future transfers of such stock.
13. RELATED PARTIES
LEASES -- In July 1996, the Company entered into a month to month lease
agreement with a company controlled by the Chief Executive Officer of the
Company. The lease involves the use of a 7,500 square foot office building
located near the corporate offices and certain furniture and equipment. The
lease calls for monthly rentals in the amount of $8,050 and may be terminated by
either party with ninety days notice. The Company owed $48,300 and $64,400 under
the lease agreements as of December 31, 1996 and 1997, respectively and reported
rent expense of $48,300 and $96,600 for the years ended December 31, 1996 and
1997, respectively.
The Company subleases approximately 2,500 square feet of its corporate
office space to a company with common ownership as that of the Company,
including certain officers and directors of the Company. In May 1997, the
affiliated company was sold to a publicly traded company, however, a portion of
the sales price is contingent on the affiliate's results of operations for a
period of three years following the date of sale. The lease continues on a month
to month basis. Monthly rental charged by the Company is at cost, allocated
based on the percentage of space used by the affiliate. The monthly rental
amount has ranged from $2,775 to $4,450. This sublease income has been reflected
as a reduction
F-59
<PAGE> 183
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of rental expense totaling $30,800 and $53,300 for the years ended December 31,
1996 and 1997, respectively.
ACCOUNTING AND OTHER SERVICES -- The Company has provided a company with
common ownership as that of the Company with certain accounting services for a
fee which totaled $152,800 and $127,000 for the years ended December 31, 1996
and 1997, respectively. The affiliated company also provided the Company with
temporary personnel on a per hour basis and was paid a fee for employee
recruiting services based on successful efforts. Total expense incurred for
temporary employees and recruiting services were $91,450 and $36,525 for the
years ended December 31, 1996 and 1997, respectively. Receivables from the
affiliate were $21,100 and $17,000, and payables to the affiliate were $11,100
and $1,200 as of December 31, 1996 and 1997, respectively.
The Company provided administrative payroll and personnel benefit services
on behalf of certain companies controlled by certain shareholders, officers and
directors of the Company. Charges for these services are based on cost plus an
administrative fee. Total billings for these services were $631,000 and
$1,146,800 for the years ended December 31, 1996 and 1997, respectively and
receivables due to the Company resulting from such services were $53,700 and
$216,700 as of December 31, 1996 and 1997, respectively.
NOTES PAYABLE TO SHAREHOLDERS -- During 1996 and 1997 certain officers of
the Company issued loans to the Company due on demand, bearing interest at
annual rates ranging from 8.50% to 8.75%. Interest expense recognized by the
Company on these loans totaled $39,600 and $78,950 for the years ended December
31, 1996 and 1997, respectively. In June 1997, $1,050,000 and $3,735 in
principal and accrued interest amounts due, respectively, were canceled in part
consideration for the purchase of Series A Preferred Stock shares (See Note 11).
The outstanding balance due under these loans as of December 31, 1996 and 1997
was $1,310,000 and $152,000, respectively.
14. ACQUISITIONS
In February 1996, the Company acquired all of the outstanding stock of
Quality Facts, Inc. ("Quality"), an Alabama corporation, in exchange for
$300,000 plus 12,000 shares of common stock valued at $9,000. Quality was in the
business of providing traditional background verification reports for its
clients and maintained operations in Birmingham, Alabama and Goodlettsville,
Tennessee.
In conjunction with the acquisition of Quality, the Company entered into
employment agreements with each of the three shareholders of Quality,
guaranteeing employment to each shareholder for a period of two years at annual
salary of $36,000. Additionally, the Company committed to issue to the Quality
shareholders stock options to purchase a total of 10,200 shares at a weighted
average exercise price of $1.55.
In June 1996, the Company purchased all of the outstanding stock of Concord
Security Services, Inc. ("Concord"), a Maryland corporation, in exchange for
128,572 shares of common stock valued at $281,571. Concord was in the business
of providing traditional background verification services for its clients and
operated in Hamstead, Maryland.
As additional consideration to the shareholders of Concord, the Company
granted the shareholders of Concord put options which were exercisable in May
1997 at an exercise price of $3.85 per share. None of the put options were
exercised and therefore expired in May 1997.
F-60
<PAGE> 184
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Additionally, in June 1996, the Company purchased the assets and assumed
certain liabilities of Background Source, Inc. ("Background"), a Tennessee
corporation, for a total of $110,000. Background maintained a computerized
database of criminal records which provided its clients direct inquiry for a
fee. Additionally, Background provided traditional background verification
services to its clients.
In December 1996, the Company purchased the assets and assumed certain
liabilities of Tennessee Criminal Investigation Center, a Tennessee general
partnership, ("TCIC") for cash of $183,678. TCIC maintained a computerized
database of criminal records which provided its clients direct inquiry for a
fee.
The above acquisitions were accounted for using the purchase method.
Accordingly, the purchase prices have been allocated to the assets purchased and
liabilities assumed of the acquired entities based upon their estimated fair
values at the date of acquisition. The excess of the purchase price over the
estimated fair value of all net assets acquired ("goodwill") is being amortized
on a straight-line basis over 12 years. The purchase prices have been allocated
as follows:
<TABLE>
<CAPTION>
CONCORD
QUALITY SECURITY BACKGROUND
FACTS, INC. SERVICES, INC. SOURCE, INC. TCIC
----------- -------------- ------------ --------
<S> <C> <C> <C> <C>
Receivables and other current assets............ $ 40,807 $154,108 $ 26,104 $ --
Property, plant and equipment................... 7,540 3,398 16,801 45,315
Goodwill........................................ 307,049 132,332 72,043 154,685
Liabilities assumed............................. (46,396) (8,267) (4,948) (16,322)
-------- -------- -------- --------
$309,000 $281,571 $110,000 $183,678
======== ======== ======== ========
</TABLE>
15. SUBSEQUENT EVENTS
The Company entered into an Agreement and Plan of Merger in March 1998 to
acquire the outstanding stock of Profiles Plus, Inc. for 83,334 shares of common
stock of the Company and the option to put such shares to the Company for cash
of $6.00 per share any time during the period beginning June 1, 1998 and ending
June 30, 1998. The put option relating to 27,778 shares issued in connection
with this acquisition was exercised with the remaining put options expiring
unexercised. Additionally, the Company entered into a non-compete agreement with
a shareholder of Profiles Plus, Inc.
In January 1999, the Company entered into an agreement to sell all of the
Company's outstanding capital stock in exchange for approximately 989,000 shares
of the acquiring company, Kroll-O'Gara Co., of Fairfield, Ohio. The Company will
continue to operate as an independent subsidiary of Kroll-O'Gara Co.
* * * * * *
F-61
<PAGE> 185
BACKGROUND AMERICA, INC.
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 1,058,328
Accounts receivable-
Trade, net of allowance for doubtful accounts of $8,682
for 1998.............................................. 1,377,340
Related party.......................................... 212,676
Prepaid expenses and other current assets................. 90,079
-----------
Total current assets.............................. 2,738,423
PROPERTY AND EQUIPMENT...................................... 1,450,329
Less-accumulated depreciation and amortization............ (703,752)
-----------
746,577
GOODWILL, NET............................................... 1,066,916
OTHER ASSETS................................................ 248,769
-----------
$ 4,800,685
===========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND COMMON
SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable -- trade................................. $ 323,750
Accounts payable -- related party......................... 9,622
Accrued expenses and other current liabilities............ 348,248
Current portion of long-term debt......................... 33,824
-----------
Total current liabilities......................... 715,444
Long-term debt............................................ 98,223
Series A redeemable and convertible cumulative preferred
stock ($1 par value; authorized, 5,000,000 shares;
issued and outstanding, 1,143,700; aggregate
liquidation preference of $6,324,660).................. 5,968,052
COMMON SHAREHOLDERS' DEFICIT:
Common stock (no par value; authorized, 20,000,000 shares;
issued and outstanding, 2,199,728)..................... 1,243,783
Common stock, 5,556 shares held in escrow for Profiles'
acquisition............................................ 33,324
Retained deficit.......................................... (3,258,141)
-----------
Common shareholders' deficit...................... (1,981,034)
-----------
$ 4,800,685
===========
</TABLE>
The accompanying notes to the unaudited financial statements
are an integral part of these financial statements.
F-62
<PAGE> 186
BACKGROUND AMERICA, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
----------- ----------
<S> <C> <C>
REVENUES.................................................... $ 3,075,604 $5,027,994
COSTS OF SALES.............................................. 2,554,981 3,359,594
----------- ----------
Gross operating profit................................. 520,623 1,668,400
OPERATING EXPENSES:
Selling, general and administrative expenses.............. 1,362,891 2,150,348
Depreciation and amortization............................. 204,810 318,947
----------- ----------
Operating loss......................................... (1,047,078) (800,895)
OTHER INCOME (EXPENSE):
Interest expense.......................................... (79,189) (9,139)
Interest income........................................... 51,919 76,694
Other, net................................................ 14,307 16,692
----------- ----------
NET LOSS.................................................... $(1,060,041) $ (716,648)
=========== ==========
</TABLE>
The accompanying notes to the unaudited financial statements
are an integral part of these financial statements.
F-63
<PAGE> 187
BACKGROUND AMERICA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(1,060,041) $ (716,648)
Adjustments to reconcile net loss to net cash used in
operating activities-
Depreciation and amortization.......................... 204,811 318,946
Changes in assets and liabilities, net of effects of
acquisitions-
Increase in accounts receivable........................ (482,886) (709,202)
Increase in prepaid expenses........................... (41,017) (36,777)
Increase in other assets............................... (4,375) (5,378)
Increase in accounts payable and accrued expenses...... 89,497 9,173
----------- -----------
Net cash used in operating activities................ (1,294,011) (1,139,886)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures...................................... (415,111) (441,337)
Cash paid for non-compete agreements...................... -- (133,996)
----------- -----------
Net cash used in investing activities................ (415,111) (575,333)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from the issuance of preferred stock, net........ 4,914,317 --
Proceeds from the issuance of notes payable to
shareholders........................................... 761,000 --
Repayment of notes payable to shareholders................ (868,875) (152,000)
Advances under line-of-credit facility.................... 232,000 --
Payments under line-of-credit facility.................... (232,000) --
Exercise of stock options and stock puts.................. 4,500 --
----------- -----------
Net cash provided by (used in) financing
activities........................................ 4,810,942 (152,000)
----------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 3,101,820 (1,867,219)
CASH AND CASH EQUIVALENTS, beginning of period.............. 92,412 2,925,547
----------- -----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 3,194,232 $ 1,058,328
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ (79,189) $ (9,139)
=========== ===========
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Retirement of shareholder notes payable and accrued
interest............................................... $ 1,053,735 $ --
=========== ===========
Issuance of preferred stock............................... $ 1,053,735 $ --
=========== ===========
Common stock issued in acquisitions....................... $ -- $ 477,504
=========== ===========
Fair value of net assets acquired......................... $ -- $ 88,352
=========== ===========
Escrow liability from acquisitions........................ $ -- $ 48,500
=========== ===========
</TABLE>
The accompanying notes to the unaudited financial statements
are an integral part of these financial statements.
F-64
<PAGE> 188
BACKGROUND AMERICA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1997 AND 1998
(1) ORGANIZATION
Background America, Inc. (the Company) was formed in September of 1995 to
deliver high-quality background investigation services to government, corporate
and other professional clients. The consolidated financial statements include
the amounts of the Company and its inactive subsidiaries, all of which are
wholly owned. All significant intercompany balances and transactions have been
eliminated.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the accompanying interim audited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company as of
September 30, 1998 and 1997.
(2) REVENUE RECOGNITION
Revenues from operations are recognized at the time the service is
completed using the accrual method of accounting.
(3) SOFTWARE POLICY
External direct costs of materials and services and payroll-related costs
of employees working solely on the development of the software system portion of
the project are capitalized. Capitalized costs of the project will be amortized
over the estimated useful life of the software, generally three to five years.
Training costs and costs to reengineer business processes are expensed as
incurred.
(4) GOODWILL
Goodwill arising from the accounting for acquired businesses is amortized
using the straight-line method over twelve years which represents the estimated
useful life. The Company reviews its long-lived and intangible assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable.
(5) BUSINESS COMBINATION
The Company entered into an Agreement and Plan of Merger in March 1998 to
acquire the outstanding stock of Profiles Plus, Inc. for 83,334 shares of common
stock of the Company and the option to put such shares to the Company for cash
of $6.00 per share any time during the period beginning June 1, 1998 and ending
June 30, 1998. The put option relating to 27,778 shares issued in connection
with this acquisition was exercised with the remaining put options expiring
unexercised. Additionally, the Company entered into a non-compete agreement with
a shareholder of Profiles Plus, Inc.
(6) SUBSEQUENT EVENTS
In January 1999, the Company entered into an agreement to sell all of the
Company's outstanding capital stock in exchange for approximately 989,000 shares
of the acquiring company, The Kroll-O'Gara Company of Fairfield, Ohio. The
Company will continue to operate as an independent subsidiary of The
Kroll-O'Gara Company.
F-65
<PAGE> 189
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Securify Inc.:
We have audited the accompanying balance sheet of Securify Inc. (a
California corporation) as of December 30, 1998 and the related statements of
operations, shareholders' equity and cash flows for the period from inception
(February 10, 1998) to December 30, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Securify Inc. as of December
30, 1998, and the results of its operations and its cash flows for the period
from inception (February 10, 1998) to December 30, 1998, in conformity with
generally accepted accounting principles.
Arthur Andersen LLP
San Jose, California
February 2, 1999
F-66
<PAGE> 190
SECURIFY INC.
BALANCE SHEET
AS OF DECEMBER 30, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $3,933,813
Accounts receivable, net of allowance for doubtful
accounts of $10,000.................................... 64,973
Work-in-process........................................... 100,000
Prepaid expenses and other current assets................. 27,824
----------
Total current assets.............................. 4,126,610
----------
PROPERTY AND EQUIPMENT:
Computer equipment........................................ 124,512
Furniture and fixtures.................................... 52,823
Purchased software........................................ 8,764
Less: Accumulated depreciation............................ (24,577)
----------
161,522
----------
TOTAL ASSETS...................................... $4,288,132
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 438,980
Accrued liabilities....................................... 135,349
----------
Total current liabilities......................... 574,329
----------
COMMITMENTS AND CONTINGENCIES (Note 3)
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value, aggregate
liquidating preference of $5,525,000
Authorized -- 8,290,268 shares
Series A -- 2,050,000 shares outstanding............... 1,016,619
Series B -- 6,040,268 shares outstanding............... 4,491,620
Common stock, no par value:
Authorized -- 20,000,000 shares
Outstanding -- 5,173,338 shares........................ 1,380,762
Deferred compensation..................................... (1,113,936)
Accumulated deficit....................................... (2,061,262)
----------
Total shareholders' equity........................ 3,713,803
----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $4,288,132
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 191
SECURIFY INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM
INCEPTION (FEBRUARY 10, 1998) TO DECEMBER 30, 1998
<TABLE>
<S> <C>
SERVICE REVENUE............................................. $ 115,973
-----------
COSTS OF REVENUE............................................ 511,021
RESEARCH AND DEVELOPMENT.................................... 433,780
SELLING, GENERAL AND ADMINISTRATIVE......................... 1,365,502
-----------
2,310,303
OPERATING LOSS.............................................. (2,194,330)
INTEREST AND OTHER INCOME, net.............................. 133,068
-----------
NET LOSS.................................................... $(2,061,262)
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE> 192
SECURIFY INC.
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM
INCEPTION (FEBRUARY 10, 1998) TO DECEMBER 30, 1998
<TABLE>
<CAPTION>
CONVERTIBLE PREFERRED STOCK
-----------------------------------------------
COMMON STOCK SERIES A SERIES B
---------------------- ---------------------- ---------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT DEFICIT
--------- ---------- --------- ---------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT INCEPTION,
FEBRUARY 10, 1998.............. -- $ -- -- $ -- -- $ -- $ --
Issuance of common stock....... 4,800,018 170,000 -- -- -- -- --
Issuance of Series A preferred
stock at $0.50 per share, net
of issuance cost of $8,381... -- -- 2,050,000 1,016,619 -- -- --
Issuance of Series B preferred
stock at $.75 per share, net
of issuance cost of $8,380... -- -- -- -- 6,040,268 4,491,620 --
Exercise of stock options...... 373,320 18,666 -- -- -- -- --
Deferred compensation related
to stock options............. -- 1,192,096 -- -- -- -- --
Net loss....................... -- -- -- -- -- -- (2,061,262)
--------- ---------- --------- ---------- --------- ---------- -----------
BALANCE, DECEMBER 30, 1998....... 5,173,338 $1,380,762 2,050,000 $1,016,619 6,040,268 $4,491,620 $(2,061,262)
========= ========== ========= ========== ========= ========== ===========
<CAPTION>
TOTAL
DEFERRED SHAREHOLDERS'
COMPENSATION EQUITY
------------ --------------
<S> <C> <C>
BALANCE AT INCEPTION,
FEBRUARY 10, 1998.............. $ -- $ --
Issuance of common stock....... -- 170,000
Issuance of Series A preferred
stock at $0.50 per share, net
of issuance cost of $8,381... -- 1,016,619
Issuance of Series B preferred
stock at $.75 per share, net
of issuance cost of $8,380... -- 4,491,620
Exercise of stock options...... -- 18,666
Deferred compensation related
to stock options............. (1,113,936) 78,160
Net loss....................... -- (2,061,262)
----------- -----------
BALANCE, DECEMBER 30, 1998....... $(1,113,936) $ 3,713,803
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-69
<PAGE> 193
SECURIFY INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 10, 1998)
TO DECEMBER 30, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(2,061,262)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 24,577
Provision for doubtful accounts........................ 10,000
Noncash compensation expense........................... 78,160
Changes in assets and liabilities:
Increase in receivables.............................. (74,973)
Increase in work-in-process.......................... (100,000)
Increase in prepaid expenses and other current
assets.............................................. (27,824)
Increase in accounts payable and accrued
liabilities......................................... 574,329
-----------
Net cash used in operating activities............. (1,576,993)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (186,099)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 188,666
Proceeds from issuance of preferred stock................. 5,508,239
-----------
Net cash provided by financing activities......... 5,696,905
-----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 3,933,813
CASH AND CASH EQUIVALENTS AT INCEPTION, FEBRUARY 10, 1998... --
===========
CASH AND CASH EQUIVALENTS AT DECEMBER 30, 1998.............. $ 3,933,813
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE> 194
SECURIFY INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 30, 1998
1. ORGANIZATION AND OPERATIONS:
Securify Inc. (the "Company") was incorporated on February 10, 1998 to
provide information security services to businesses and government agencies. The
Company has developed software security tools to analyze and assess network
security issues as a scientific discipline. The Company's consultants have
completed projects for a wide range of clients primarily in the United States.
The Company operates in one segment.
The Company is subject to a number of risks associated with companies in a
similar stage of development, including dependence on a limited number of
customers and limited key employees for technology development and support,
volatility of the industry, potential competition from larger, more established
companies, the ability to penetrate the market with its services and the ability
to obtain adequate financing to support its growth.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist solely of funds held in general checking
accounts and money market accounts. All cash investments with an original
maturity of 90 days or less are considered cash equivalents.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over an estimated useful life of three years.
SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Company capitalizes eligible computer software
development costs upon the establishment of technological feasibility, which it
has defined as completion of a working model. For the period from inception to
December 30, 1998, the amount of costs eligible for capitalization, after
consideration of factors such as realizable value, were not material and,
accordingly, all software development costs have been charged to operating
expense in the accompanying statement of operations.
F-71
<PAGE> 195
SECURIFY INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
STOCK COMPENSATION
The Company adopted the disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation."
In accordance with the provisions of SFAS 123, the Company applies APB Opinion
25 and the related interpretations in accounting for its stock option plan. Note
5 to the financial statements contains a summary of the disclosure provisions
under SFAS No. 123.
ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
<TABLE>
<S> <C>
Accrued bonus.......................................... $ 26,667
Accrued vacation....................................... 41,682
Deferred revenue....................................... 67,000
--------
$135,349
========
</TABLE>
REVENUE RECOGNITION AND SIGNIFICANT CUSTOMERS
During 1998, the Company's service revenues were derived primarily from
agreements with customers located in the United States. Service revenues, which
consist of consulting fees on information security projects, are recognized
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. Work-in-process represents labor costs incurred on contracts in
process at the end of the period.
During 1998, one customer represented 78% of the Company's total revenues.
3. COMMITMENTS AND CONTINGENCIES:
The Company leases its facilities and equipment under operating leases. As
of December 30, 1998, the future minimum lease commitments under these operating
lease are as follows:
<TABLE>
<CAPTION>
FISCAL YEAR ENDING
DECEMBER 30,
------------------
<S> <C>
1999................................................ $107,172
2000................................................ 109,645
2001................................................ 74,196
--------
$291,013
========
</TABLE>
Rent expense under operating leases for the period from inception to
December 30, 1998 was $61,239.
4. INCOME TAXES:
The Company computes deferred tax assets and liabilities based upon the
differences between the financial statement and income tax bases of assets and
liabilities using current rates. The Company switched from a S-Corporation to a
C-Corporation in April 1998.
F-72
<PAGE> 196
SECURIFY INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of December 30, 1998, the Company has net deferred tax assets consisting
primarily of net operating loss carryforwards. The Company has established a
valuation allowance equal to these net deferred tax assets because uncertainty
exists regarding the realizability of the deferred tax assets.
As of December 30, 1998, the Company has approximately $1,300,000 and
$1,300,000 of C-Corporation Federal and state tax net operating loss
carryforwards, which expire at various dates through 2013 and 2006,
respectively. These carryforwards may be subject to limitation due to ownership
changes under the provisions of the Tax Reform Act of 1986.
5. SHAREHOLDERS' EQUITY:
COMMON STOCK
At December 30, 1998, the Company had reserved the following shares of
authorized but unissued common stock for future issuance:
<TABLE>
<S> <C>
Conversion of Series A outstanding Preferred Stock..... 2,050,000
Conversion of Series B outstanding Preferred Stock..... 6,040,268
Stock Option Plan...................................... 2,766,680
----------
10,856,948
==========
</TABLE>
STOCK SPLITS
In April 1998, the Company effected a 1.47-for-1 stock split of its Common
Stock. In August 1998, the Company effected an additional 2 for 1 stock split of
its Common Stock. All share amounts and conversion rates have been retroactively
adjusted to reflect these splits.
DEFERRED COMPENSATION
In connection with the grant of certain stock options to employees during
the period from inception to December 30, 1998, the Company recorded deferred
compensation of $1,192,096, representing the difference between the deemed value
of the Common Stock for accounting purposes and the option exercise price of
such options at the date of grant. Such amount is presented as a reduction of
shareholders' equity and amortized ratably over the vesting period of the
applicable options. Approximately $78,000 was expensed during the period from
inception to December 30, 1998, and the balance will be expensed ratably over
the next four years as the options vest.
CONVERTIBLE PREFERRED STOCK
The Company has authorized the issuance of up to 8,290,268 shares of
convertible preferred stock of which it has designated 2,050,000 shares as
Series A preferred stock and 6,240,268 shares as Series B preferred stock. The
rights and preferences of the outstanding Series A and B preferred stock are as
follows:
Dividends
The holders of Series A and B preferred stock are entitled to receive
non-cumulative dividends at an annual rate of 8% of original issue price. The
original issue price of the Series A and B preferred stock is $0.50 and $0.75,
respectively. Such dividends shall be payable only when, as, and if declared
F-73
<PAGE> 197
SECURIFY INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
by the Board of Directors. No dividends shall be payable on any common stock
until dividends to Series A and B preferred stock have been paid or declared by
the Board of Directors. As of December 30, 1998, no dividends have been
declared.
Liquidation Preference
In the event of any liquidation, dissolution or winding up of the Company,
including a merger or sale of significant assets, holders of Series A and B
preferred stock are entitled to receive in preference to holders of common
stock, a distribution of $0.50 and $0.75 per share, respectively, plus any
unpaid but declared dividends prior to and in preference to any distribution to
the holders of Common Stock. The remaining assets, if any, shall be distributed
ratably among the holders of the Common Stock, Series A and B preferred stock,
based on the number of shares held (assuming conversion of the Series A and B
preferred stock).
Voting Rights
The holders of the Series A and B preferred stock are entitled to the
number of votes equal to the number of shares of common stock into which such
preferred stock is convertible.
Conversion
Each share of Series A and B preferred stock is convertible into one share
of common stock at (a) the option of the holder at any time after the date of
issuance of such shares (b) the date specified by preferred shareholders of at
least two-thirds ( 2/3) of outstanding preferred stock or (c) the consummation
of the Company's sale of common stock in an underwritten public offering which
results in net cash proceeds to the Company of at least $20,000,000 and with an
offering price to the public of at least $5.00 per share. The conversion rate is
subject to adjustment for dilution, including, but not limited to, stock splits,
stock dividends and stock combinations.
STOCK-BASED COMPENSATION PLAN
The Company, under its stock option plan (the "Plan"), is authorized to
issue 3,140,000 shares, as amended, thereunder to employees, directors, and
consultants. Under the Plan, the Board of Directors may grant incentive and
nonqualified stock options to employees, directors, and consultants of the
Company. The exercise price per share for a non-statutory stock option cannot be
less than 85% of the fair market value, as determined by the Board of Directors,
on the date of grant. The exercise price per share for incentive stock options
cannot be less than the fair value, as determined by the Board of Directors, on
the date of grant. Options generally vest over a four year period and generally
expire ten years after the date of grant.
The Company accounts for the Plan under APB Opinion No. 25, "Accounting for
Stock Issued to Employees," under which no compensation expense has been
recognized as the grant price equaled the fair market value at date of grant.
Had compensation expense for the Plan been determined consistent with Statement
of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based
Compensation," the impact on the Company's net loss would be as follows:
<TABLE>
<S> <C>
Net loss
As reported................................................. $2,061,262
Pro forma................................................... $2,066,595
</TABLE>
F-74
<PAGE> 198
SECURIFY INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1998; risk-free interest rate of 5.5 percent;
expected dividend yields of zero percent; expected lives of 4 years; expected
volatility of zero percent (the Company is a private entity).
The following table summarizes stock option activity under the Plan:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-----------------------
OPTIONS WTD. AVG.
AVAILABLE SHARES EX. PRICE
---------- ---------- ---------
<S> <C> <C> <C>
Balance at February 10, 1998................. -- -- $ --
Authorized................................. 3,140,000 -- --
Granted.................................... (2,371,008) 2,371,008 .06
Exercised.................................. -- (373,320) .05
Cancelled.................................. 164,660 (164,660) .05
---------- ---------- ----
Balance at December 30, 1998................. 933,652 1,833,028 $.06
========== ========== ====
Vested and exercisable at year end......... -- --
========== ====
Weighted fair value per option granted....... $ .0130
==========
</TABLE>
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS VESTED AND EXERCISABLE
- ---------------------------------------------------------- ------------------------------
RANGE OF WEIGHTED-AVERAGE WEIGHTED WEIGHTED
EXERCISE REMAINING AVERAGE NUMBER AVERAGE
PRICES SHARES YEARS EXERCISE PRICE SHARES EXERCISE PRICE
-------- --------- ---------------- -------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$.05 1,154,028 9.42 $.05 -- $ .05
$.08 679,000 9.74 $.08 -- $ .08
--------- ---------
$.05 - $.08 1,833,028 9.54 $.06 -- $0.00
========= =========
</TABLE>
At December 30, 1998, 323,320 shares issued upon exercise of stock options
were subject to repurchase by the Company at original costs.
6. SUBSEQUENT EVENTS:
On December 31, 1998, the Company was acquired by the Kroll-O'Gara Company.
The Company exchanged all of its outstanding common and preferred shares for
approximately 1.4 million shares of Kroll-O'Gara common stock. Additionally,
approximately 200,000 shares of Kroll-O'Gara common stock have been reserved for
issuance upon exercise of vested Securify Inc. stock options.
F-75
<PAGE> 199
SECURIFY INC.
BALANCE SHEET
AS OF SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $4,675,636
Accounts receivable -- billed and unbilled................ 48,000
Prepaid expenses and other current assets................. 31,815
----------
Total current assets.............................. 4,755,451
----------
PROPERTY AND EQUIPMENT:
Computer equipment........................................ 74,126
Furniture and fixtures.................................... 29,532
Purchased software........................................ 5,456
Less -- Accumulated depreciation.......................... (11,215)
----------
97,899
----------
$4,853,350
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 48,682
Accrued liabilities....................................... 37,781
----------
Total current liabilities......................... 86,463
----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Convertible preferred stock, no par value, aggregate
liquidating preference of $5,525,000, 8,290,268 shares
authorized
Series A -- 2,050,000 shares outstanding.................. 1,016,619
Series B -- 6,040,268 shares outstanding.................. 4,491,620
Common stock, no par value --
Authorized -- 20,000,000 shares
Outstanding -- 4,800,018 shares........................... 567,554
Deferred compensation....................................... (364,710)
Accumulated deficit......................................... (944,196)
----------
Total shareholders' equity........................ 4,766,887
----------
$4,853,350
==========
</TABLE>
The accompanying notes to the unaudited financial statements
are an integral part of these financial statements.
F-76
<PAGE> 200
SECURIFY INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 10, 1998) TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
SERVICE REVENUE............................................. $ 48,000
COSTS OF REVENUE............................................ 268,000
-----------
Gross profit (loss).................................... (220,000)
OPERATING EXPENSES:
Selling, general and administrative....................... 598,737
Research and development.................................. 190,000
-----------
OPERATING LOSS.............................................. (1,008,737)
INTEREST AND OTHER INCOME, net.............................. 64,541
-----------
NET LOSS.................................................... $ (944,196)
===========
</TABLE>
The accompanying notes to the unaudited financial statements
are an integral part of these financial statements.
F-77
<PAGE> 201
SECURIFY INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (FEBRUARY 10, 1998) TO SEPTEMBER 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss.................................................. $ (944,196)
Adjustments to reconcile net loss to net cash used in
operating activities --
Depreciation and amortization.......................... 11,215
Noncash compensation expense........................... 32,844
Changes in assets and liabilities --
Increase in receivables.............................. (48,000)
Increase in prepaid expenses and other current
assets.............................................. (31,815)
Increase in accounts payable and accrued
liabilities......................................... 86,463
----------
Net cash used in operating activities............. (893,489)
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment........................ (109,114)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock.................... 170,000
Proceeds from issuance of preferred stock................. 5,508,239
----------
Net cash provided by financing activities......... 5,678,239
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 4,675,636
CASH AND CASH EQUIVALENTS, beginning of period.............. --
----------
CASH AND CASH EQUIVALENTS, end of period.................... $4,675,636
==========
</TABLE>
The accompanying notes to the unaudited financial statements
are an integral part of these financial statements.
F-78
<PAGE> 202
SECURIFY INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1998
(1) ORGANIZATION AND OPERATIONS
Securify Inc. (the "Company") was incorporated on February 10, 1998 to
provide information security services to businesses and government agencies. The
Company has developed software security tools to analyze and assess network
security issues as a scientific discipline. The Company's consultants have
completed projects for a wide range of clients primarily in the United States.
The Company is subject to a number of risks associated with companies in a
similar stage of development, including dependence on a limited number of
customers and limited key employees for technology development and support,
volatility of the industry, potential competition from larger, more established
companies, the ability to penetrate the market with its services and the ability
to obtain adequate financing to support its growth.
The accompanying unaudited financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the accompanying interim unaudited financial
statements contain all adjustments (consisting of normal recurring accruals)
necessary to present fairly the financial position of the Company as of
September 30, 1998 and the results of its operations and cash flows for the
period from inception (February 10, 1998) to September 30, 1998. It is suggested
that the statements be read in conjunction with the financial statements and
notes thereto included in the Company's December 30, 1998 financial statements.
(2) REVENUE RECOGNITION
During 1998, the Company's service revenues were derived primarily from
agreements with customers located in the United States. Service revenues, which
consist of consulting fees on information security projects are recognized
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.
(3) SOFTWARE DEVELOPMENT COSTS
In accordance with Statement of Financial Accounting Standards (SFAS) No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," the Company capitalizes eligible computer software
development costs upon the establishment of technological feasibility, which it
has defined as completion of a working model. For the period from inception to
September 30, 1998, the amount of costs eligible for capitalization, after
consideration of factors such as realizable value, were not material and,
accordingly, all software development costs have been charged to operating
expenses in the accompanying statement of operations.
(4) NEW PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" (SFAS 130). This statement, which
established standards for reporting and displaying comprehensive income and its
components in a financial statement that is displayed with the
F-79
<PAGE> 203
SECURIFY INC.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) -- (CONTINUED)
same prominence as other financial statements will have no impact on the
Company's reported financial position, results of operations or cash flows.
(5) SUBSEQUENT EVENTS
On December 31, 1998, the Company was acquired by the Kroll-O'Gara Company.
The Company exchanged all of its outstanding common and preferred shares for
approximately 1.4 million shares of Kroll-O'Gara common stock. Additionally,
approximately 200,000 shares of Kroll-O'Gara common stock have been reserved for
issuance upon exercise of vested Securify stock options.
F-80
<PAGE> 204
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Kizorek, Inc.
Naperville, Illinois
We have audited the accompanying balance sheet of Kizorek, Inc. as of
October 31, 1997 and the related statements of income and retained earnings and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kizorek, Inc. as of October
31, 1997 and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
Crowe, Chizek and Company LLP
Oak Brook, Illinois
December 10, 1997, except for Note 8,
as to which the date is August 31, 1998
F-81
<PAGE> 205
KIZOREK, INC.
BALANCE SHEET
AS OF OCTOBER 31, 1997
<TABLE>
<S> <C>
ASSETS
Current assets
Cash...................................................... $ 558,315
Accounts receivable (less allowance for doubtful accounts
of $65,000)............................................ 2,405,538
Employee loans............................................ 97,069
Prepaid vehicle lease costs............................... 175,473
Other prepaid expenses.................................... 111,458
----------
Total current assets................................... 3,347,853
Property and equipment
Photo equipment........................................... 1,033,364
Office and computer equipment............................. 2,121,218
Vehicles.................................................. 229,329
Leasehold improvements.................................... 76,962
----------
3,460,873
Accumulated depreciation.................................. 2,291,904
----------
1,168,969
Other assets
S corporation tax deposit................................. 30,153
Security deposits......................................... 36,734
----------
66,887
----------
$4,583,709
==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Current maturities of long-term debt (Note 3)............. $ 19,204
Accounts payable.......................................... 677,779
Accrued payroll........................................... 161,107
Accrued other expenses.................................... 120,388
----------
Total current liabilities.............................. 978,478
Long-term debt (Note 3)..................................... 25,669
Stockholder's equity
Common stock, no par value; authorized 100 shares, issued
and outstanding 10 shares.............................. 1,000
Retained earnings......................................... 3,578,562
----------
3,579,562
----------
$4,583,709
==========
</TABLE>
See accompanying notes to financial statements.
F-82
<PAGE> 206
KIZOREK, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
FOR THE YEAR ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
REVENUE..................................................... $14,476,272
Operating expenses
Payroll, payroll taxes, and fringe benefits............... 7,205,295
Vehicle operating and leasing............................. 1,718,389
Travel.................................................... 1,004,521
Occupancy................................................. 340,129
Depreciation.............................................. 478,540
Outside services.......................................... 221,149
Insurance................................................. 488,275
Advertising and promotion................................. 245,531
Telephone................................................. 443,902
Office and computer related expenses...................... 521,926
Other..................................................... 556,566
-----------
13,224,223
-----------
Income from operations...................................... 1,252,049
Interest expense............................................ 19,816
Net income.................................................. 1,232,233
Retained earnings at beginning of year...................... 2,730,052
Dividends to stockholder.................................... (383,723)
-----------
RETAINED EARNINGS AT END OF YEAR............................ $ 3,578,562
===========
</TABLE>
See accompanying notes to financial statements.
F-83
<PAGE> 207
KIZOREK, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED OCTOBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................ $1,232,233
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation........................................... 478,540
Gain on disposal of equipment.......................... (1,103)
Change in assets and liabilities
Accounts receivable.................................. (360,027)
Other current assets................................. (79,983)
Other assets......................................... 18,851
Accounts payable..................................... 145,260
Other current liabilities............................ 4,959
----------
Net cash provided by operating activities......... 1,438,730
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of equipment........................... 36,103
Additions to property and equipment....................... (296,230)
----------
Net cash used in investing activities.................. (260,127)
CASH FLOWS FROM FINANCING ACTIVITIES
Net payments on line of credit............................ (450,000)
Repayment of long-term debt............................... (18,938)
Dividends to stockholder.................................. (383,723)
----------
Net cash used in financing activities.................. (852,661)
----------
NET CHANGE IN CASH.......................................... 325,942
CASH AT BEGINNING OF YEAR................................... 232,373
----------
CASH AT END OF YEAR......................................... $ 558,315
==========
Supplemental disclosures of cash flow information
Cash paid during the year for Interest.................... $ 20,132
Supplemental schedule of noncash investing activity
Equipment acquired through a capital lease................ $ 59,108
</TABLE>
See accompanying notes to financial statements.
F-84
<PAGE> 208
KIZOREK, INC.
NOTES TO FINANCIAL STATEMENTS
OCTOBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Kizorek, Inc. (the Company) is an insurance claims
investigation agency based in Naperville, Illinois. The Company's primary
service is providing video surveillance to insurance companies investigating
disability claims primarily throughout the United States.
Use of Estimates in Preparation of Financial Statements: The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition: Kizorek, Inc. provides surveillance services for its
clients. Fees are generated and recognized for hours incurred based upon
established hourly rates. Accounts receivable include unbilled balances of
$192,000 for services provided prior to the end of the period but billed
subsequently.
Property and Equipment: Property and equipment are stated at cost.
Depreciation is computed based on the estimated useful lives of the related
assets using the straight-line method for financial reporting and accelerated
methods for income tax purposes. For each classification of property and
equipment, the depreciable lives are as follows:
<TABLE>
<S> <C>
Photo equipment.................................... 6 years
Office and computer equipment...................... 3 to 6 years
Vehicles........................................... 3 years
Leasehold improvements............................. 5 years
</TABLE>
Income Taxes: The Company, with the consent of its stockholder, elected to
have its income taxed as an S corporation which provides that, in lieu of
corporate income taxes, the stockholder is taxed on the Company's taxable
income.
NOTE 2 -- LINE OF CREDIT
The Company has a line of credit of $1,000,000 with Northern Trust
Bank/DuPage. The line of credit bears interest at the prime rate and is secured
by all business assets of the Company. The bank's commitment under the line of
credit expires on March 1, 1998. Restrictive covenants contained in the loan
agreement require the maintenance of certain financial ratios. At October 31,
1997, no borrowings had been made against the line of credit.
NOTE 3 -- LONG-TERM DEBT
Long-term debt consists of the following at October 31, 1997:
<TABLE>
<S> <C>
Lease payable, Naper Leasing Service, maturing January 2000
with interest at 12.8%, payable in monthly installments
of $1,988, secured by equipment.......................... $44,873
Less current maturities.................................... 19,204
-------
$25,669
=======
</TABLE>
F-85
<PAGE> 209
KIZOREK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future maturities are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31,
- -----------
<S> <C>
1998..................................................... 19,204
1999..................................................... 21,795
2000..................................................... 3,874
</TABLE>
NOTE 4 -- PROFIT SHARING PLAN
The Company maintains a defined contribution profit sharing plan for
substantially all employees which provides for contributions at the discretion
of the Board of Directors, voluntary employee 401(k) contributions, and matching
contributions by the Company up to specified limits. The matching contribution
for the year ended October 31, 1997 was $46,335. There was no discretionary
contribution for the year ended October 31, 1997.
NOTE 5 -- LEASE COMMITMENTS
The Company conducts its operations from leased office facilities in
Illinois, South Carolina, Hawaii, California, and South Africa. The leases
expire at various dates through 1999.
The total office rental expense was $309,909 for the year ended October 31,
1997.
The Company leases vehicles under operating leases with two- or three-year
lease terms. Total expense amounted to $750,559 for the year ended October 31,
1997.
Future minimum lease commitments are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
OCTOBER 31, AMOUNT
- ----------- ------
<S> <C>
1998................................................... $ 788,614
1999................................................... 213,392
-----------
$ 1,002,006
===========
</TABLE>
NOTE 6 -- CONTINGENCY
The Company entered into an agreement with North American Benefits, Inc.,
whereby North American Benefits, Inc. provides certain administrative services
and North American Specialty Insurance Company provides stop loss coverage.
However, the Company is responsible for the funding of all claims up to $17,500
per individual per policy year and up to approximately $250,000 per year on the
group as a whole. A liability has been recorded for the estimate of claims
pending at the balance sheet date.
NOTE 7 -- PENDING LITIGATION
The Company is a defendant in several lawsuits arising from the performance
of their regular business activities. These lawsuits are being defended by
counsel for the Company's insurance carrier. Damages being sought are covered by
the Company's existing insurance policies and are not expected to exceed
existing coverage limitations. These matters, when finally concluded and
determined, will not, in
F-86
<PAGE> 210
KIZOREK, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the opinion of management, have a material adverse effect on the results of
operations or financial position of the Company.
NOTE 8 -- SUBSEQUENT EVENTS
Effective November 1, 1997, the Company established a deferred compensation
plan for key executives and employees. The total amount of benefits awarded
under this plan is $1,350,000, payable November 1, 2004 plus interest accrued
from the date of the award. If there is a change in control of the Company
through merger, consolidation, liquidation, dissolution, or sale of all or
substantially all of the Company's assets, payments become due in three
installments plus interest commencing on the December 1 following the date of
the change in control of the Company with the balance being due in two
installments on December 1 of each of the next two years.
On August 31, 1998, all of the outstanding shares of common stock of the
Company were exchanged for cash and shares of common stock of The Kroll-O'Gara
Company under the terms of a merger agreement.
F-87
<PAGE> 211
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To The Kroll-O'Gara Company:
We have audited the consolidated balance sheets of THE KROLL-O'GARA COMPANY
(Note 1) and subsidiaries as of December 31, 1996 and 1997 and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1997 included elsewhere
in this document. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits. We did not audit the 1995 or 1996
financial statements of Kroll Holdings, Inc., a company acquired during 1997 in
a transaction accounted for as a pooling of interests, as discussed in Note 1.
Such statements are included in the consolidated financial statements of The
Kroll-O'Gara Company and reflect total assets and total revenues of 46 percent
and 46 percent, respectively, in 1996 and total revenues of 62 percent in 1995,
of the consolidated totals. Those statements were audited by other auditors
whose reports have been furnished to us and our opinion, insofar as it relates
to the amounts included for Kroll Holdings, Inc. for those years, is based
solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the reports of other auditors provide a
reasonable basis for our opinion.
In our opinion based on our audits and the reports of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Kroll-O'Gara Company and
subsidiaries as of December 31, 1996 and 1997 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
We have also made a similar audit of the accompanying supplemental
consolidated balance sheets of The Kroll-O'Gara Company and subsidiaries as of
December 31, 1996 and 1997, and the related supplemental consolidated statements
of income, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 1997. The supplemental consolidated statements
give retroactive effect to the mergers with Laboratory Specialists of America,
Inc. on December 7, 1998, Schiff & Associates, Inc. on December 31, 1998 and
Securify Inc. on December 31, 1998 which have been accounted for as pooling of
interests transactions as described in Note 1. These supplemental financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these supplemental financial
statements based on our audits.
We did not audit the 1995 or 1996 financial statements of Kroll Holdings,
Inc. included in the supplemental consolidated financial statements of The
Kroll-O'Gara Company, which statements reflect total assets and total revenues
constituting 41 percent and 43 percent, respectively, in 1996 and total revenues
of 56 percent in 1995 of the related supplemental consolidated totals. Those
statements were audited by other auditors whose reports thereon have been
furnished to us, and our opinion expressed herein, insofar as it relates to the
amounts included for Kroll Holdings, Inc., is based solely on the reports of the
other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial
F-88
<PAGE> 212
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audit and the reports of other auditors, the
supplemental consolidated financial statements referred to above present fairly,
in all material respects, the financial position of The Kroll-O'Gara Company and
its subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, after giving retroactive effect to the mergers with
Laboratory Specialists of America, Inc., Schiff & Associates, Inc. and Securify
Inc. as described in Note 1, all in conformity with generally accepted
accounting principles.
As explained in Note 2(r) to the supplemental consolidated financial
statements, effective in the fourth quarter of 1997, the Company changed its
method of accounting for costs incurred in connection with business process
reengineering activities.
Arthur Andersen LLP
Cincinnati, Ohio
February 25, 1999
F-89
<PAGE> 213
THE KROLL-O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
ASSETS (NOTE 7)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 5,491,944 $ 9,765,422
Marketable securities..................................... 47,500 22,969
Trade accounts receivable, net of allowance for doubtful
accounts of approximately $2,523,884 and $3,100,064 in
1996 and 1997, respectively (Notes 2 and 4)............ 25,422,774 40,796,471
Unbilled revenues (Note 2)................................ 4,150,307 3,081,481
Related party receivables (Note 6)........................ 1,071,661 939,894
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 4)......................... 15,326,548 12,078,464
Inventories (Note 4)...................................... 8,833,394 19,562,899
Prepaid expenses and other................................ 3,340,465 6,786,288
Deferred tax asset (Note 5)............................... 211,078 572,697
------------ ------------
Total current assets.............................. 63,895,671 93,606,585
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2 and 8):
Land...................................................... 955,182 1,831,042
Buildings and improvements................................ 5,059,512 8,100,454
Leasehold improvements.................................... 5,186,648 5,242,607
Furniture and fixtures.................................... 3,850,933 4,752,974
Machinery and equipment................................... 10,418,786 13,500,247
Construction-in-progress.................................. -- 1,037,528
------------ ------------
25,471,061 34,464,852
Less -- accumulated depreciation............................ (14,707,659) (16,904,830)
------------ ------------
10,763,402 17,560,022
------------ ------------
DATABASES, net of accumulated amortization of $16,568,473
and $19,505,625 in 1996 and 1997, respectively (Note 2)... 7,415,449 8,335,211
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS, net of accumulated amortization of $678,885 and
$1,691,307 in 1996 and 1997, respectively (Notes 2 and
3)........................................................ 6,884,313 26,651,017
OTHER ASSETS (Note 4)....................................... 3,104,953 4,331,645
------------ ------------
17,404,715 39,317,873
------------ ------------
$ 92,063,788 $150,484,480
============ ============
</TABLE>
The accompanying notes to supplemental consolidated financial statements
are an integral part of these supplemental consolidated balance sheets.
F-90
<PAGE> 214
THE KROLL-O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit (Note 7)........................ $ 9,935,947 $ 559,112
Current portion of long-term debt (Note 8)................ 5,327,641 4,038,080
Related party payables (Note 6)........................... 2,532,998 1,184,439
Obligations related to discontinued operation............. 784,272 126,813
Trade accounts payable.................................... 16,519,488 32,328,154
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 4)......................... 1,330,402 320,662
Accrued liabilities....................................... 10,072,388 15,085,447
Income taxes currently payable............................ 514,871 845,753
Deferred income taxes (Note 5)............................ 1,703,377 --
Customer deposits......................................... 3,183,564 3,839,770
------------ ------------
Total current liabilities......................... 51,904,948 58,328,230
OTHER LONG-TERM LIABILITIES................................. 2,057,197 1,532,730
SHAREHOLDER PAYABLE......................................... 5,048,266 --
DEFERRED INCOME TAXES (Note 5).............................. 2,309,879 2,514,606
LONG-TERM DEBT, net of current portion (Note 8)............. 7,626,821 49,641,484
------------ ------------
Total liabilities................................. 68,947,111 112,017,050
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 9 and 12)
SHAREHOLDERS' EQUITY (Note 1):
Preferred stock, $.01 par value, 1,000,000 shares
authorized;
none issued............................................ -- --
Common stock, $.01 par value, 50,000,000 shares
authorized, 13,459,431 and 14,795,244 shares issued and
outstanding in 1996 and 1997, respectively............. 134,594 147,952
Additional paid-in-capital................................ 43,187,110 58,912,209
Retained deficit.......................................... (20,061,208) (20,208,821)
Accumulated other comprehensive income (loss)............. (143,819) (383,910)
------------ ------------
Total shareholders' equity........................ 23,116,677 38,467,430
------------ ------------
$ 92,063,788 $150,484,480
============ ============
</TABLE>
The accompanying notes to supplemental consolidated financial statements
are an integral part of these supplemental consolidated balance sheets.
F-91
<PAGE> 215
THE KROLL-O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ------------ ------------
<S> <C> <C> <C>
NET SALES.............................................. $94,998,407 $164,918,313 $206,102,605
COST OF SALES.......................................... 66,763,734 117,298,266 139,765,613
----------- ------------ ------------
Gross profit (Note 14)............................. 28,234,673 47,620,047 66,336,992
OPERATING EXPENSES:
Selling and marketing................................ 10,042,762 10,401,530 15,054,990
General and administrative........................... 21,766,460 27,310,521 32,590,832
Asset impairment (Note 2(h))......................... -- 124,531 --
Merger related costs................................. -- -- 7,204,926
----------- ------------ ------------
Operating expenses................................. 31,809,222 37,836,582 54,850,748
----------- ------------ ------------
Operating income (loss)............................ (3,574,549) 9,783,465 11,486,244
OTHER INCOME (EXPENSES):
Interest expense..................................... (2,896,979) (3,260,945) (5,092,372)
Interest income...................................... 127,006 41,260 79,438
Other, net........................................... (108,701) 344,398 (411,576)
----------- ------------ ------------
Income (loss) from continuing operations before
minority interest, provision (benefit) for
income taxes, extraordinary item and cumulative
effect of change in accounting principle........ (6,453,223) 6,908,178 6,061,734
Minority interest...................................... -- -- (156,223)
----------- ------------ ------------
Income (loss) from continuing operations before
provision (benefit) for income taxes,
extraordinary item and cumulative effect of
change in accounting principle.................. (6,453,223) 6,908,178 5,905,511
Provision (benefit) for income taxes................... (823,432) 365,547 3,304,993
----------- ------------ ------------
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle.................. (5,629,791) 6,542,631 2,600,518
Discontinued operations (Note 3(a)):
Loss from operations of discontinued clinical
business, net of tax benefit of $257,904........... -- (500,636) --
Loss on disposal of clinical business, net of tax
benefit of $489,420................................ -- (773,580) --
----------- ------------ ------------
Income (loss) before extraordinary item and
cumulative effect of change in accounting
principle....................................... (5,629,791) 5,268,415 2,600,518
Extraordinary loss, net of applicable tax benefit of
$129,250 (Note 7).................................... -- -- (193,875)
----------- ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle............................ (5,629,791) 5,268,415 2,406,643
Cumulative effect of change in accounting principle,
net of applicable tax benefit of $240,000 (Note
2(r))................................................ -- -- (360,000)
----------- ------------ ------------
Net income (loss).................................. (5,629,791) 5,268,415 2,046,643
Dividends on preferred stock........................... 13,344 -- --
----------- ------------ ------------
Net income (loss) available to common
shareholders.................................... $(5,643,135) $ 5,268,415 $ 2,046,643
=========== ============ ============
Earnings (loss) per share (Note 2(o)):
Basic................................................ $ (0.52) $ 0.45 $ 0.15
=========== ============ ============
Diluted.............................................. $ (0.52) $ 0.42 $ 0.14
=========== ============ ============
Weighted average shares outstanding (Note 2(o)):
Basic................................................ 10,883,123 11,607,329 14,006,638
=========== ============ ============
Diluted.............................................. 10,883,123 12,160,974 14,799,322
=========== ============ ============
</TABLE>
The accompanying notes to supplemental consolidated financial statements
are an integral part of these supplemental consolidated statements.
F-92
<PAGE> 216
THE KROLL-O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMPREHENSIVE COMMON PREFERRED PAID-IN RETAINED
SHARES INCOME STOCK STOCK CAPITAL DEFICIT
---------- ------------- -------- --------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994, as
previously reported................. 9,097,902 $ 69,371 $ -- $21,791,885 $(10,953,793)
Adjustment for pooling of interests... 862,846 8,628 300,000 5,374,337 538,105
---------- -------- --------- ----------- ------------
BALANCE, December 31, 1994, as
restated............................ 9,960,748 77,999 300,000 27,166,222 (10,415,688)
Incorporation of OSN.................. 922,375 1,163 -- 248,837 --
Distributions to shareholders......... -- -- -- -- (162,800)
Redemption of preferred stock (Note
6).................................. -- -- (300,000) -- --
Comprehensive income:
Net loss available to common
shareholders...................... -- $(5,643,135) -- -- -- (5,643,135)
-----------
Other comprehensive income, net of
tax:
Foreign currency translation
adjustment, net of $20,000 tax
provision....................... -- 29,735 -- -- -- --
-----------
Other comprehensive income........ -- 29,735 -- -- -- --
-----------
Comprehensive income (loss)..... -- $(5,613,400) -- -- -- --
---------- ----------- -------- --------- ----------- ------------
BALANCE, December 31, 1995............ 10,883,123 79,162 -- 27,415,059 (16,221,623)
Distributions to shareholders, prior
to the offering..................... -- -- -- -- (230,000)
Sale of common stock between
shareholders prior to the
offering............................ -- -- -- 39,780 --
Issuances of stock under employee
benefit plans (Note 11)............. 528,308 4,073 -- 911,813 --
Initial public offering of common
stock, net of issuance costs of
approximately $3,550,000 (Note 1)... 2,048,000 51,359 -- 14,820,458 --
Distribution of previously taxed S
Corp earnings to S Corp shareholders
(Note 1)............................ -- -- -- -- (9,000,000)
Forgiveness of affiliate obligation
(Note 6)............................ -- -- -- -- 122,000
Comprehensive income:
Net income.......................... -- $ 5,268,415 -- -- -- 5,268,415
-----------
Other comprehensive income, net of
tax:
Foreign currency translation
adjustment, net of $237,000 tax
benefit......................... -- (355,534) -- -- -- --
Unrealized appreciation of
marketable securities, net of
$9,000 tax provision............ -- 14,167 -- -- -- --
-----------
Other comprehensive income
(loss).......................... -- (341,367) -- -- -- --
-----------
Comprehensive income............ -- $ 4,927,048 -- -- -- --
---------- ----------- -------- --------- ----------- ------------
BALANCE, December 31, 1996............ 13,459,431 134,594 -- 43,187,110 (20,061,208)
Issuances of stock under employee
benefit plans, including related tax
benefit (Note 11)................... 749,757 7,497 -- 6,296,786 --
Issuance of stock in conjunction with
the acquisition of businesses and
minority interest (Note 3).......... 823,371 8,234 -- 9,695,009 --
Issuance of stock in conjunction with
the settlement of a note payable.... 21,721 217 -- 232,282 --
Purchase and retirement of common
stock (Note 11(d)).................. (259,036) (2,590) -- (498,978) (2,194,256)
Comprehensive income:
Net income.......................... -- $ 2,046,643 -- -- -- 2,046,643
-----------
Other comprehensive income, net of
tax:
Foreign currency translation
adjustment, net of $157,000 tax
benefit......................... (236,393) -- -- -- --
Unrealized depreciation of
marketable securities, net of
$2,400 tax benefit.............. -- (3,698) -- -- -- --
-----------
Other comprehensive income
(loss).......................... -- (240,091) -- -- -- --
-----------
Comprehensive income............ -- $ 1,806,552 -- -- -- --
---------- =========== -------- --------- ----------- ------------
BALANCE, December 31, 1997............ 14,795,244 $147,952 $ -- $58,912,209 $(20,208,821)
========== ======== ========= =========== ============
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- -----------
<S> <C> <C>
BALANCE, December 31, 1994, as
previously reported................. $ 167,813 $11,075,276
Adjustment for pooling of interests... -- 6,221,070
--------- -----------
BALANCE, December 31, 1994, as
restated............................ 167,813 17,296,346
Incorporation of OSN.................. -- 250,000
Distributions to shareholders......... -- (162,800)
Redemption of preferred stock (Note
6).................................. -- (300,000)
Comprehensive income:
Net loss available to common
shareholders...................... -- (5,643,135)
Other comprehensive income, net of
tax:
Foreign currency translation
adjustment, net of $20,000 tax
provision....................... -- --
Other comprehensive income........ 29,735 29,735
Comprehensive income (loss)..... -- --
--------- -----------
BALANCE, December 31, 1995............ 197,548 11,470,146
Distributions to shareholders, prior
to the offering..................... -- (230,000)
Sale of common stock between
shareholders prior to the
offering............................ -- 39,780
Issuances of stock under employee
benefit plans (Note 11)............. -- 915,886
Initial public offering of common
stock, net of issuance costs of
approximately $3,550,000 (Note 1)... -- 14,871,817
Distribution of previously taxed S
Corp earnings to S Corp shareholders
(Note 1)............................ -- (9,000,000)
Forgiveness of affiliate obligation
(Note 6)............................ -- 122,000
Comprehensive income:
Net income.......................... -- 5,268,415
Other comprehensive income, net of
tax:
Foreign currency translation
adjustment, net of $237,000 tax
benefit......................... -- --
Unrealized appreciation of
marketable securities, net of
$9,000 tax provision............ -- --
Other comprehensive income
(loss).......................... (341,367) (341,367)
Comprehensive income............ -- --
--------- -----------
BALANCE, December 31, 1996............ (143,819) 23,116,677
Issuances of stock under employee
benefit plans, including related tax
benefit (Note 11)................... -- 6,304,283
Issuance of stock in conjunction with
the acquisition of businesses and
minority interest (Note 3).......... -- 9,703,243
Issuance of stock in conjunction with
the settlement of a note payable.... -- 232,499
Purchase and retirement of common
stock (Note 11(d)).................. -- (2,695,824)
Comprehensive income:
Net income.......................... -- 2,046,643
Other comprehensive income, net of
tax:
Foreign currency translation
adjustment, net of $157,000 tax
benefit......................... -- --
Unrealized depreciation of
marketable securities, net of
$2,400 tax benefit.............. -- --
Other comprehensive income
(loss).......................... (240,091) (240,091)
Comprehensive income............ -- --
--------- -----------
BALANCE, December 31, 1997............ $(383,910) $38,467,430
========= ===========
</TABLE>
The accompanying notes to supplemental consolidated financial statements
are an integral part of these supplemental consolidated statements.
F-93
<PAGE> 217
THE KROLL-O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 15)
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
<TABLE>
<CAPTION>
1995 1996 1997
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $(5,629,791) $ 5,268,415 $ 2,046,643
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization........................... 4,138,531 5,248,788 6,519,454
Bad debt expense........................................ 3,134,556 8,555,063 2,083,080
Shareholder stock compensation.......................... -- 930,846 1,356,280
Loss on write-off of notes receivable................... 55,966 -- 35,434
Share in net (income) loss of joint ventures............ 224,789 (19,224) (121,650)
Gain on sale of marketable securities................... -- (108,646) (14,503)
Asset impairment........................................ -- 174,531 --
Disposal of clinical business........................... -- 1,263,000 --
Change in assets and liabilities, net of effects of
acquisitions:
Receivables -- trade and unbilled....................... (510,378) (7,191,858) (9,974,669)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. (3,957,287) (7,626,473) 3,499,084
Inventories, prepaid expenses and other assets.......... (4,619,118) (3,274,443) (7,184,407)
Accounts payable and income taxes currently payable..... 5,747,515 1,539,236 8,101,505
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (43,150) (375,640) (1,009,740)
Amounts due to/from employees........................... 19,820 (294,471) 443,290
Deferred taxes.......................................... (894,006) (1,150,316) (156,892)
Accrued liabilities, long-term liabilities and customer
deposits.............................................. 796,993 5,016,351 571,909
----------- ----------- ------------
Net cash provided by (used in) operating activities... (1,535,560) 7,955,159 6,194,818
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net........... (1,699,685) (3,473,979) (5,521,131)
Additions to databases.................................... (2,985,409) (3,250,360) (3,856,914)
Decrease (increase) in notes receivable -- shareholder.... (233,253) 233,253 --
Acquisitions, net of cash acquired (Note 3)............... (101,826) (2,139,123) (10,710,128)
Sale of marketable securities............................. -- 200,313 35,424
Other..................................................... (27,600) (66,711) 266,004
----------- ----------- ------------
Net cash used in investing activities................. (5,047,773) (8,496,607) (19,786,745)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan financing fees....................................... (13,825) -- (723,727)
Net borrowings (repayments) under revolving lines of
credit.................................................. 4,551,025 (252,818) (9,376,835)
Proceeds from debt........................................ 415,011 179,569 44,902,987
Payments of long-term debt................................ (3,827,330) (5,832,603) (10,042,503)
Proceeds from notes payable -- shareholder................ 2,600,000 2,000,000 500,000
Repayment of notes payable -- shareholder................. (106,500) (803,745) (7,238,766)
Net proceeds from issuance of common stock................ 250,000 14,871,817 --
Purchase and retirement of stock.......................... -- -- (2,695,824)
Redemption of preferred stock............................. (300,000) -- --
Warrant offering cost..................................... (38,821) -- --
Foreign currency translation.............................. 922 (46,187) (160,462)
Distributions to shareholders, including preferred
dividends............................................... (187,548) (9,230,000) --
Proceeds from exercise of stock options and warrants...... -- 445 2,776,466
----------- ----------- ------------
Net cash provided by financing activities............. 3,342,934 886,478 17,941,336
----------- ----------- ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (3,240,399) 345,030 4,349,409
Effects of foreign currency exchange rates on cash and cash
equivalents............................................... -- 34,032 (75,931)
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, beginning of year................ 8,353,281 5,112,882 5,491,944
----------- ----------- ------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 5,112,882 $ 5,491,944 $ 9,765,422
=========== =========== ============
</TABLE>
The accompanying notes to supplemental consolidated financial statements
are an integral part of these supplemental consolidated statements.
F-94
<PAGE> 218
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION
(a) HISTORY AND NATURE OF OPERATIONS -- The Kroll-O'Gara Company, an Ohio
corporation, together with its subsidiaries (collectively the "Company"), is a
leading global provider of a broad range of specialized products and services
that are designed to provide solutions to a variety of security needs. The
Company's Security Products and Services Group markets ballistic and blast
protected vehicles to businesses, individuals and governments. It also offers
security services such as training, risk and crisis management services, and
site security systems. The Investigations and Intelligence Group offers business
intelligence and investigation services to clients worldwide. The Voice and Data
Communications Group offers secure satellite communication equipment, satellite
navigation systems and computer hardware and software security.
The Company was originally formed in 1996 for the purposes of becoming a
holding company, effecting a reorganization and a combination of certain
affiliated entities and carrying out an initial public offering of common stock.
On October 28, 1996, various O'Gara entities (primarily O'Gara-Hess & Eisenhardt
Armoring Company (OHE)) and their related shareholders (primarily one
shareholder who owned or controlled approximately 86% to 88% of each entity)
entered into the reorganization plan. Accordingly, the accompanying supplemental
consolidated financial statements present, as a combination of entities under
common control as if using the pooling method of accounting, the financial
position and related results of operations of the O'Gara entities on a
consolidated basis for all periods presented.
The Company completed its initial public offering of common stock in 1996.
The $14.9 million in net proceeds from the sale of 2,048,000 shares of common
stock were used by the Company for retirement of bank debt, payment of $9
million in undistributed previously taxed income of OHE as an S corporation,
purchase of a manufacturing facility in Mexico, acquisition of Palmer net assets
(Note 3) and transaction costs associated with the offering.
(b) BASIS OF PRESENTATION -- In December 1997, a wholly owned subsidiary
of The O'Gara Company (O'Gara) was merged into Kroll Holdings, Inc. (Kroll). At
the time of the merger, the Company's name was changed from The O'Gara Company
to The Kroll-O'Gara Company (see Note 3). The supplemental consolidated
financial statements include the historical consolidated financial statements of
the Company and the financial position, results of operations and cash flows of
three entities which were merged with the Company in December 1998.
In December 1998, a wholly owned subsidiary of the Company was merged with
and into Laboratory Specialists of America, Inc. (LSAI). Effective upon the
consummation of the merger, each then issued and outstanding share of LSAI
common stock was converted into .2102 shares of common stock of the Company or
1,209,053 shares of the Company's common stock in total. Outstanding stock
options and stock warrants of LSAI were converted at the same exchange factor
into options to purchase 39,094 and 24,386 shares, respectively, of the
Company's common stock (See Note 11). The financial position and results of
operations of LSAI will be reported as part of the Company's Investigations and
Intelligence Group.
In December 1998, a wholly owned subsidiary of the Company was merged with
and into Schiff & Associates, Inc. (Schiff). Effective upon the consummation of
the merger, each then issued and outstanding share of Schiff common stock was
converted into approximately 131.41 shares of common stock of the Company or
169,521 shares of the Company's common stock in total. The financial
F-95
<PAGE> 219
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
position and results of operations of Schiff will be reported as part of the
Company's Investigations and Intelligence Group.
In December 1998, a wholly-owned subsidiary of the Company was merged with
and into Securify Inc. (Securify). Effective upon the consummation of the
merger, all of the outstanding stock of Securify was converted to shares of the
Company's common stock at a rate of .110793 for Series A Preferred, .118273 for
Series B Preferred and .0955252 for Securify common stock. In total, the Company
issued 1,430,936 shares of common stock. In addition, outstanding employee stock
options of Securify were converted at the same exchange factor as Securify
common stock into options to purchase 179,877 shares of the Company's common
stock. Effective with the consummation of the merger, the Company created the
Information Security Group and Securify's results of operations and financial
position will be reported in this group. The Information Security Group offers
information and computer security services, including network and system
security review and repair.
The mergers with LSAI, Schiff and Securify constituted tax-free
reorganizations and have been accounted for as pooling of interests
transactions. Accordingly, all prior period consolidated financial statements
presented have been restated on a supplemental basis to include the combined
results of operations, financial position and cash flows of LSAI and Schiff as
though they had always been a part of the Company. Securify was not formed until
1998 and therefore no results of operations, financial position or cash flows
are included in the supplemental consolidated financial statements of the
Company.
There were no transactions between the Company and LSAI, Schiff and
Securify prior to the combination and immaterial adjustments were recorded to
conform LSAI's and Schiff's accounting policies. Certain reclassifications were
made to both the Company's, LSAI's and Schiff's financial statements to conform
presentation. The results of operations for the separate companies and the
combined amounts presented in the supplemental consolidated financial statements
follow:
<TABLE>
<CAPTION>
KROLL-O'GARA
HISTORICAL LSAI SCHIFF COMBINED
------------ ----------- ---------- ------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Revenue....................... $190,413,349 $12,836,953 $2,852,303 $206,102,605
Extraordinary item............ (193,875) -- -- (193,875)
Cumulative effect of change in
accounting principle....... (360,000) -- -- (360,000)
Net income................. 709,866 1,329,103 7,674 2,046,643
Year ended December 31, 1996
Revenue....................... 153,660,749 8,726,799 2,530,765 164,918,313
Discontinued operations....... -- (1,274,216) -- (1,274,216)
Net income (loss).......... 5,857,222 (585,711) (3,096) 5,268,415
Year ended December 31, 1995
Revenue....................... 85,841,300 6,925,716 2,231,391 94,998,407
Net income (loss)............. (6,535,739) 661,216 231,388 (5,643,135)
</TABLE>
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) CONSOLIDATION -- The supplemental consolidated financial statements
include the accounts of all majority-owned subsidiaries. All material
intercompany accounts and transactions are eliminated.
F-96
<PAGE> 220
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Investments in 20% to 50% owned entities are accounted for on the equity method
and investments in less than 20% owned entities are accounted for on the cost
method. Affiliated entities are not included in the accompanying supplemental
consolidated financial statements, and include entities that are directly or
indirectly owned by current shareholders or former shareholders.
(b) REVENUE RECOGNITION -- Revenue related to contracts for security
products (both government and commercial) results principally from long-term
fixed price contracts and is recognized on the percentage-of-completion method
calculated utilizing the cost-to-cost approach. The percent deemed to be
complete is calculated by comparing the costs incurred to date to estimated
total costs for each contract. This method is used because management considers
costs incurred to be the best available measure of progress on these contracts.
However, adjustments to this measurement are made when management believes that
costs incurred materially exceed effort expended. Contract costs include all
direct material and labor costs, along with certain direct overhead costs
related to contract production.
Provisions for any estimated total contract losses on uncompleted contracts
are recorded in the period in which it becomes known that such losses will
occur. Changes in estimated total contract costs will result in revisions to
contract revenue. These revisions are recognized when determined.
Revenue from intelligence and investigation services and security services
is recognized as the services are performed. The Company records either billed
or unbilled accounts receivable based on case-by-case invoicing determination.
Revenue related to voice and data communications equipment and services is
recognized as equipment is shipped or as services are provided. Revenue and
related direct costs of brokered satellite time are recorded when payments are
received from customers.
(c) CASH AND CASH EQUIVALENTS -- Cash equivalents consist of all highly
liquid debt instruments with an initial maturity of three months or less at the
date of purchase. The Company invests excess cash in overnight repurchase
agreements, which are government collateralized securities. The carrying amount
of cash and cash equivalents approximates fair value of those instruments due to
their short maturity.
(d) MARKETABLE SECURITIES -- The Company adopted the provisions of
Statement of Financial Accounting Standards No. 115 (SFAS 115), "Accounting for
Certain Investments in Debt and Equity Securities," for the year ended December
31, 1996. Under SFAS 115, the Company must classify its debt and marketable
securities as either trading, available-for-sale or held-to-maturity. The
Company has classified marketable securities as available-for-sale.
Unrealized holding gains and losses, net of the related income tax effect
on the available-for-sale securities are excluded from earnings and are reported
as a separate component of shareholders' equity until realized. The Company
recorded an unrealized gain (loss) of $14,167 and $(3,698) as of December 31,
1996 and 1997, respectively.
(e) CONCENTRATIONS OF CREDIT RISK -- Financial instruments that subject
the Company to credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to accounts receivable are limited by
the number of clients that comprise the Company's client base, along with the
different industries and geographic regions in which the Company's clients
operate. The Company does not generally require collateral or other security to
support client receivables, although the Company does require retainers,
up-front deposits or irrevocable letters-of-credit in many situations. The
Company has
F-97
<PAGE> 221
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
established an allowance for doubtful accounts based upon facts surrounding the
credit risk of specific clients and past history. Management does not anticipate
incurring losses on its trade receivables in excess of established allowances.
(f) PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are
stated at cost. Depreciation is computed on the straight-line method over the
estimated useful lives of the related assets as follows:
<TABLE>
<S> <C>
Buildings and improvements.................................. 5 - 40 years
Furniture and fixtures...................................... 5 - 10 years
Machinery and equipment..................................... 5 - 12 years
Leasehold improvements...................................... Life of lease
Vehicles.................................................... 5 years
</TABLE>
(g) DATABASES -- Databases are capitalized costs incurred to obtain
information from third party providers. The Company relies on this information
to create and maintain its proprietary and non-proprietary databases. Because of
the continuing accessibility of the information and its usefulness to future
investigative procedures, the cost of acquiring the information is capitalized
and amortized over a five year period. Amortization of databases for the years
ended December 31, 1995, 1996 and 1997 was $2,470,696, $2,949,134 and
$2,937,152, respectively.
(h) IMPAIRMENT OF LONG-LIVED ASSETS -- Effective January 1, 1996, the
Company adopted the provisions of SFAS No. 121 (SFAS 121), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
This standard requires that long-lived assets, certain identifiable intangibles
and goodwill related to those assets be reviewed for impairment by asset group
for which the lowest level of independent cash flows can be identified. In
accordance with this standard, the Company periodically reviews the carrying
value of these assets and impairments are recognized when the expected
undiscounted future cash flows are less than the carrying amount of the asset.
Based on its most recent analysis, the Company believes no impairment exists at
December 31, 1997. However, it is possible, due to a change in circumstances,
that the carrying value could become impaired in the future. Such impairment
could have a material effect on the results of operations in a particular
reporting period.
The adoption of SFAS 121 in 1996 resulted in no adjustment to the
supplemental consolidated financial statements of the Company. However, during
the fourth quarter of 1996, LSAI made a decision to hold for sale a former
laboratory building, which resulted in an impairment of approximately $111,000
being recorded, which reduced the net book value of the building to $225,000.
This impairment, in addition to an approximate $13,000 laboratory equipment
impairment, is included in "asset impairment" in the accompanying supplemental
consolidated statements of operations.
(i) COSTS IN EXCESS OF ASSETS ACQUIRED -- Costs in excess of assets
acquired represents the excess of the purchase cost over the fair value of net
assets acquired in a purchase business combination. Amortization is recorded on
a straight-line basis over periods ranging from 15 to 40 years. Amortization of
costs in excess of assets acquired for the years ended December 31, 1995, 1996
and 1997 was $26,939, $26,992 and $683,649, respectively.
(j) OTHER INTANGIBLE ASSETS -- Other intangible assets, comprised mainly
of customer lists and non-compete agreements, are amortized on a straight-line
basis. Customer lists are amortized over a
F-98
<PAGE> 222
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
fifteen year period and the non-compete agreements are being amortized over the
life of the agreement, which ranges from six months to five years.
(k) FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of foreign
operations are translated using year-end exchange rates and revenues and
expenses are translated using exchange rates prevailing during the year, with
gains or losses resulting from translation included in a separate component of
shareholders' equity.
Gains or losses resulting from foreign currency transactions are translated
to local currency at the rates of exchange prevailing at the dates of the
transactions. Amounts receivable or payable in foreign currencies, other than
the subsidiary's local currency, are translated at the rates of exchange
prevailing at the balance sheet date. The effect of transactional gains or
losses is included in other income (expense) in the accompanying supplemental
consolidated statements of operations.
(l) USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
(m) RESEARCH AND DEVELOPMENT -- Research and development costs are
expensed as incurred. The Company incurred approximately $91,000, $130,000 and
$136,000 for the years ended December 31, 1995, 1996 and 1997, respectively, for
research and development. These costs are included in general and administrative
expenses in the accompanying supplemental consolidated statements of operations.
(n) ADVERTISING -- The Company expenses the cost of advertising as
incurred. Advertising expenses for the years ended December 31, 1995, 1996 and
1997 were $381,000, $782,000 and $1,534,000, respectively.
(o) EARNINGS PER SHARE -- In 1997, the Company adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). In
accordance with SFAS 128, basic earnings per share are computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share are computed by dividing net income
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Dilutive common stock equivalents
represent shares issuable upon assumed exercise of stock options and warrants,
assumed issuance of restricted stock and assumed conversion of the convertible
F-99
<PAGE> 223
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
note payable. The following is a reconciliation of the numerator and denominator
for basic and diluted earnings per share for the years ended December 31, 1995,
1996 and 1997:
Since there were no dilutive securities, basic and diluted loss per share
in 1995 are identical, thus a reconciliation of the numerator and denominator is
not necessary.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------------
INCOME (NUMERATOR) SHARES (DENOMINATOR) PER SHARE AMOUNT
------------------ -------------------- ----------------
<S> <C> <C> <C>
Basic earnings per share..... $5,268,415 11,607,329 $0.45
-----
Effect of dilutive
securities:
Options.................... -- 131,932
Restricted stock........... (162,443) 287,482
Warrants................... -- 101,797
Convertible note payable... -- 32,434
---------- ----------
Diluted earnings per share... $5,105,972 12,160,974 $0.42
========== ========== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
--------------------------------------------------------------
INCOME (NUMERATOR) SHARES (DENOMINATOR) PER SHARE AMOUNT
------------------ -------------------- ----------------
<S> <C> <C> <C>
Basic earnings per share..... $2,046,643 14,006,638 $0.15
-----
Effect of dilutive
securities:
Options.................... -- 238,570
Restricted stock........... -- 443,152
Warrants................... -- 96,740
Convertible note payable... -- 14,222
---------- ----------
Diluted earnings per share... $2,046,643 14,799,322 $0.14
========== ========== =====
</TABLE>
Basic and diluted earnings per share based on income from continuing
operations were $0.56 and $0.52, respectively, for the year ended December 31,
1996. The basic and diluted per share impact of the discontinued operations were
$0.11 and $0.10, respectively.
Basic and diluted earnings per share based on income from continuing
operations before extraordinary item and cumulative effect of change in
accounting principle were $0.19 and $0.18, respectively, for the year ended
December 31, 1997. The basic and diluted per share impact of the extraordinary
item was $0.01 and the basic and diluted per share impact of the change in
accounting principle were $0.03 and $0.02, respectively.
During 1997, 66,000 warrants to purchase a total of 27,746 shares of common
stock of the Company at $7.20 per warrant were outstanding but were not included
in the computation of diluted earnings per share because the warrants' exercise
price was greater than the average market price of the common shares.
(p) NEW ACCOUNTING PRONOUNCEMENTS -- In 1998, the Company adopted
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"), which established standards for reporting and displaying
comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. The Company
has chosen to disclose comprehensive income, which encompasses net income,
foreign currency translation adjustments and unrealized holding gains of
marketable securities, in the supplemental consolidated
F-100
<PAGE> 224
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statement of shareholder's equity. Prior years have been restated to conform to
the SFAS 130 requirements. The accumulated other comprehensive income (loss)
balance of $0.2 million at December 31, 1995 consisted entirely of foreign
currency translation adjustments. The accumulated other comprehensive income
(loss) balance of ($0.1) million at December 31, 1996 consisted of ($0.2)
million of foreign currency translation adjustments and $0.01 million of
unrealized appreciation of marketable securities. The accumulated other
comprehensive income (loss) balance of ($0.4) million at December 31, 1997
consisted of ($0.4) million of foreign currency translation adjustments and
$0.01 million of unrealized appreciation of marketable securities.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS 131"), effective for fiscal years beginning after December 15, 1997. This
statement requires disclosure for each segment into which a company is organized
by the chief operating decision maker for the purposes of making operating
decisions and assessing performance. Reportable segments are based on products
and services, geography, legal structure, management structure and any manner in
which management disaggregates a company. The Company adopted SFAS 131 during
fiscal 1998. This statement, which requires expansion or modification to
existing disclosures, has no impact on the Company's reported supplemental
consolidated financial position, results of operations or cash flows.
In April 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-5 "Reporting on the Cost of Start-Up
Activities." The SOP requires costs of start-up activities, including
preoperating costs, organization costs and other start-up costs, to be expensed
as incurred. The Company's current practice is to capitalize certain of these
expenses and amortize them over periods ranging from one to five years. The
Company is required to adopt the provisions of this statement no later than the
first quarter of fiscal 1999. Included in the accompanying December 31, 1997
supplemental consolidated balance sheet are approximately $1.0 million of
preoperating, organization and start-up costs which would have been expensed had
this statement already been implemented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS 133 is
effective for fiscal years beginning after June 15, 1999. The Company has
several forward contracts in place in association with demand notes from certain
subsidiaries. These instruments qualify for hedge accounting. The Company has
not yet quantified the impact of adopting SFAS 133 on its financial statements
and has not determined the timing of or method of adoption of SFAS 133. However,
SFAS 133 could increase volatility in earnings and other comprehensive income.
(q) STOCK-BASED COMPENSATION -- The Company has elected to account for the
cost of its employee stock options and other forms of employee stock-based
compensation plans utilizing the intrinsic value method prescribed in Accounting
Principles Board Opinion No. 25 (APB 25) as allowed by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS
123). APB 25 requires compensation cost for stock-based compensation plans to be
recognized based on the difference, if any, between the fair market value of the
stock on the date of grant and the option exercise price. SFAS 123 established a
fair value-based method of accounting for compensation
F-101
<PAGE> 225
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
cost related to stock options and other forms of stock-based compensation plans.
SFAS 123 allows an entity to continue to measure compensation cost using the
principles of APB 25 if certain pro forma disclosures are made. The pro forma
disclosures required by SFAS 123 are presented in Note 11(g).
(r) CHANGE IN ACCOUNTING PRINCIPLE -- In the fourth quarter of 1997, the
Company changed its method of accounting for costs incurred in connection with
business process reengineering activities relating to information technology
transformation. Consistent with a consensus reached by the Emerging Issues Task
Force (EITF) under Issue 97-13, in late November 1997, the Company expensed
costs previously capitalized in earlier quarters of 1997 (approximately
$360,000, net of tax benefit of $240,000) as a cumulative effect of change in
accounting principle.
(s) DERIVATIVE FINANCIAL INSTRUMENTS -- Financial instruments in the form
of foreign currency exchange contracts are utilized by the Company to hedge its
exposure to movements in foreign currency exchange rates. The Company does not
hold or issue derivative financial instruments for trading purposes. Gains and
losses on foreign exchange contracts are deferred and amortized as an adjustment
to the cumulative foreign currency translation adjustment component of equity
over the terms of the agreements in accordance with hedge accounting standards.
The fair value of foreign currency exchange contracts is not recognized in the
supplemental consolidated financial statements since they are accounted for as
hedges.
(t) RECLASSIFICATIONS -- Certain reclassifications have been reflected in
1995 and 1996 to conform with the current period presentation.
(3) MERGER AND ACQUISITIONS
The Company has completed the following transactions during 1996 and 1997.
All were accounted for as purchase business combinations except for the merger
with Kroll which was accounted for as a pooling of interests business
combination.
(a) NATIONAL PSYCHOPHARMACOLOGY LABORATORY, INC. -- On January 2, 1996,
the Company acquired all of the shares of National Psychopharmacology
Laboratory, Inc. (NPLI), a company engaged in forensic drug testing and clinical
testing and analysis.
The total purchase price of approximately $3,400,000, substantially all of
which was recorded as intangible assets, consisted of $1,075,000 in cash,
$650,000 in unsecured promissory notes and assumption of net liabilities of
approximately $1,675,000, including $800,000 in deferred income taxes. For
accounting purposes, the acquisition of NPLI was effective on January 1, 1996
and the results of operations of NPLI are included in the supplemental
consolidated results of operations of the Company from that date forward.
The forensic portion of NPLI's business was merged into the operations of a
subsidiary of the Company effective February 1996. The Company intended to sell
the clinical business during 1996, but after negotiations with three potential
buyers failed, the Company shut down the clinical operations effective in the
fourth quarter of 1996. The revenues related to the discontinued clinical
operation for the year ended December 31, 1996, were approximately $3,413,000.
The related operating loss and shut down expenses of the clinical business are
included in the accompanying supplemental consolidated statements of operations
as "discontinued operation" and "disposition of discontinued operation,"
respectively.
F-102
<PAGE> 226
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) PALMER ASSOCIATES, S.C. -- In October 1996, the Company purchased
substantially all of the assets and certain liabilities of Palmer Associates,
S.C., (Palmer) a security services provider, for approximately $1,000,000, which
resulted in goodwill (amortized over fifteen years) and intangible assets equal
to the purchase price. The purchase was payable $500,000 at the closing of the
Company's initial public offering and $250,000 each in November 1997 and 1998.
The former owner also entered into a four year non-competition agreement,
payable in annual installments of $50,000, and a two year employment agreement.
(c) PATHOLOGY LABORATORIES, LTD. -- On January 31, 1997, the Company
acquired certain intangible assets from Pathology Laboratories, Ltd. (PLL), a
Company engaged in providing drug testing services. The total purchase price of
approximately $2.6 million, which was allocated entirely to customer lists to be
amortized over fifteen years, consisted of $1.6 million in cash and quarterly
payments beginning on July 31, 1997 and ending on March 31, 1998 totaling
approximately $1.0 million based on a prescribed level of revenues generated
form the purchased customer list. In the accompanying supplemental consolidated
balance sheet at December 31, 1997, the Company has approximately $250,000
accrued for the remainder of the total purchase price. For accounting purposes,
the acquisition of PLL was effective on January 31, 1997 and the results of
operations of PLL are included in the supplemental consolidated results of
operations of the Company from that date forward.
(d) NEXT DESTINATION LIMITED -- On February 5, 1997, the Company acquired
all of the shares of Next Destination Limited (Next), consisting of
approximately $1.9 million in shares of the Company's common stock (170,234
shares) and approximately $1.6 million in seller-provided financing in the form
of secured three-year 6% notes. Next, headquartered in Salisbury, United Kingdom
(UK), is a distributor of high technology communication equipment for the
consumer electronic, marine, aviation, professional and leisure markets in both
the UK and Europe. The former managing director and founder of Next agreed to
continue to manage the business and enter into a three year non-competition
agreement. For accounting purposes, the acquisition was effective on February 1,
1997 and the results of operations of Next are included in the supplemental
consolidated results of operations of the Company from that date forward. The
resulting goodwill from this transaction is being amortized over fifteen years.
(e) LABBE, S.A. -- On February 12, 1997, the Company acquired all shares
of Labbe, S.A. (Labbe) for approximately $14.2 million, consisting of $10.7
million in cash and 376,597 shares of the Company's common stock valued at
approximately $3.5 million. Labbe, headquartered in Lamballe, France, provides
vehicle armoring systems for commercial customers located mainly in Western
Europe. The former shareholders are subject to certain non-competition
agreements upon their leaving the employment of the Company. For accounting
purposes, the acquisition was effective on January 1, 1997 and the results of
operations of Labbe are included in the supplemental consolidated results of
operations of the Company from that date forward. The resulting goodwill from
this transaction is being amortized over thirty years.
F-103
<PAGE> 227
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following unaudited proforma combined results of operations for the
year ended December 31, 1996 assumes the Labbe acquisition occurred as of
January 1, 1996 (in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
<S> <C>
Sales....................................................... $189,036
Net income.................................................. $ 5,463
Earnings per share:
Basic..................................................... $ 0.46
Diluted................................................... $ 0.42
</TABLE>
(f) INTERNATIONAL TRAINING, INCORPORATED -- On March 24, 1997, the Company
acquired all of the shares of International Training, Incorporated (ITI) for
approximately $2.5 million, consisting of approximately $800,000 in shares of
the Company's common stock (68,086 shares), $500,000 in cash and approximately
$1.2 million in seller-provided financing in the form of unsecured two-year 10%
notes. ITI, headquartered near Washington D.C., provides advanced security
training. For accounting purposes, the acquisition was effective on March 1,
1997 and the results of operations of ITI are included in the supplemental
consolidated results of operations of the Company from that date forward. The
resulting goodwill from this transaction is being amortized over fifteen years.
(g) ACCU-PATH MEDICAL LABORATORIES, INC. -- On December 1, 1997, the
Company acquired certain intangible assets from Accu-Path Medical Laboratories,
Inc. (Accu-Path) a Company engaged in providing drug testing services. The total
purchase price of approximately $360,000, which was allocated entirely to
customer lists to be amortized over fifteen years, consisted of $100,000 in cash
and quarterly payments beginning on approximately March 31, 1998 and ending on
September 30, 1999 totaling $260,000 based on a prescribed level of revenues
generated from the purchased customer list. In the accompanying supplemental
consolidated balance sheet at December 31, 1997, the Company has $260,000
accrued for the remainder of the total purchase price. For accounting purposes,
the acquisition of Accu-Path was effective on December 1, 1997 and the results
of operations of Accu-Path are included in the supplemental consolidated results
of operations of the Company from that date forward.
(h) ZAO IMEA -- On December 2, 1997, the Company acquired all of the
shares of ZAO IMEA, a Russian corporation, and certain assets, liabilities and a
twenty year non-compete agreement in Russia from Acorn Communication Group, Inc.
(Acorn) for approximately $3.1 million, consisting of $600,000 in cash and
138,889 shares of the Company's common stock valued at approximately $2.4
million. IMEA provides vehicle armoring systems and other equipment for
commercial customers located in Russia. IMEA and Acorn had substantially common
ownership prior to the acquisition. The former shareholders also entered into
employment agreements, which include non-competition clauses, for periods of six
months to three years. For accounting purposes, the acquisition was effective on
December 1, 1997 and the results of operations of IMEA are included in the
supplemental consolidated results of operations of the Company from that date
forward. The resulting goodwill from this transaction is being amortized over
fifteen years.
F-104
<PAGE> 228
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the acquisitions in 1997 of PLL, Next, Labbe, ITI,
Accu-Path and IMEA, assets were acquired and liabilities were assumed as follows
(in thousands):
<TABLE>
<CAPTION>
ACCU-
PLL NEXT LABBE ITI PATH IMEA
------- ------- -------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
FAIR VALUE OF ASSETS ACQUIRED
INCLUDING:
Cash................................. $ -- $ -- $ 3,501 $ 123 $ -- $ 2
Accounts receivable.................. -- 1,830 4,689 231 -- 11
Inventories.......................... -- 1,276 3,392 -- -- 553
Prepaid expenses and other........... -- -- 316 4 -- 7
Property, plant & equipment.......... -- 80 3,360 216 -- 82
Costs in excess of assets acquired
and other intangible assets....... 2,560 3,459 7,802 2,061 360 3,287
Other non-current assets............. -- -- 2,357 -- -- 4
------- ------- -------- ------- ----- -------
2,560 6,645 25,417 2,635 360 3,946
Less: Cash paid for net assets....... (1,600) -- (10,730) (500) (100) (500)
Fair value of debt issued......... (960) (1,575) -- (1,231) (260) (100)
Fair value of stock issued........ -- (1,851) (3,431) (800) -- (2,378)
------- ------- -------- ------- ----- -------
$ -- $ 3,219 $ 11,256 $ 104 $ -- $ 968
======= ======= ======== ======= ===== =======
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition
costs............................. $ -- $ 3,219 $ 9,287 $ 85 $ -- $ 968
Debt................................. -- -- 1,969 19 -- --
------- ------- -------- ------- ----- -------
$ -- $ 3,219 $ 11,256 $ 104 $ -- $ 968
======= ======= ======== ======= ===== =======
</TABLE>
(i) MERGER WITH KROLL -- Effective upon the consummation of the merger
with Kroll, each then issued and outstanding share of Kroll common stock,
including shares subject to issuance under the Kroll restricted stock plan (See
Note 11), were converted into 62.52 shares of common stock of the Company or
6,098,561 shares of Company common stock in total. Outstanding employee stock
options of Kroll were converted at the same exchange factor into options to
purchase 551,492 shares of Company common stock (See Note 11).
The merger constituted a tax-free reorganization and has been accounted for
as a pooling of interests. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results of
operations, financial position and cash flows of Kroll as though it had always
been a part of the Company.
There were no transactions between O'Gara and Kroll prior to the
combination, and immaterial adjustments were recorded to conform Kroll's
accounting policies. Certain reclassifications were made to the Kroll financial
statements to conform to the Company's presentations. The results of operations
for
F-105
<PAGE> 229
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the separate companies and the combined amounts presented in the supplemental
consolidated financial statements follow:
<TABLE>
<CAPTION>
O'GARA KROLL COMBINED
----------- ----------- ------------
<S> <C> <C> <C>
Nine months ended
September 30, 1997 (unaudited)
Revenue............................. $82,567,200 $53,823,958 $136,391,158
Extraordinary item.................. (193,875) -- (193,875)
Net income.......................... 4,181,387 1,796,124 5,977,511
Year ended December 31, 1996
Revenue............................. 82,777,691 70,883,058 153,660,749
Net income (loss)................... 6,658,962 (801,740) 5,857,222
Year ended December 31, 1995
Revenue............................. 32,816,996 53,024,304 85,841,300
Net income (loss)................... (1,122,052) (5,413,687) (6,535,739)
</TABLE>
In connection with the Kroll merger, the Company recorded, in the fourth
quarter, a charge to operating expenses of approximately $7.2 million ($5.7
million after taxes, or $0.39 per diluted share) for direct and other
merger-related costs pertaining to the merger transaction. Merger transaction
costs are nonrecurring and include $0.8 million for stock based compensation
costs triggered by the change in control of Kroll, $1.8 million for stay bonuses
and severance and $4.6 million which consisted primarily of fees for investment
bankers, attorneys, accountants, financial printing, travel and other related
charges.
(j) PURCHASE OF MINORITY INTEREST -- During 1997, the Company exercised
their option to acquire the minority interest in its O'Gara Brazilian subsidiary
for approximately 69,565 shares of common stock valued at approximately $1.2
million.
(4) BALANCE SHEET ACCOUNTS
(a) TRADE ACCOUNTS RECEIVABLE AND COSTS AND ESTIMATED EARNINGS IN EXCESS
OF BILLINGS ON UNCOMPLETED CONTRACTS -- The following summarizes the components
of trade accounts receivable and costs and estimated earnings in excess of
billings on uncompleted contracts:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
United States Military:
Billed receivables................................. $ 1,461,491 $ 3,756,035
Costs and estimated earnings in excess of billings
on uncompleted contracts........................ 10,189,891 9,253,872
----------- -----------
Total United States Military.................... $11,651,382 $13,009,907
=========== ===========
</TABLE>
F-106
<PAGE> 230
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Other contracts:
Billed receivables................................. $23,961,283 $37,040,436
Costs and estimated earnings in excess of billings
on uncompleted contracts........................ 5,136,657 2,824,592
----------- -----------
Total other contracts........................... $29,097,940 $39,865,028
=========== ===========
Total trade accounts receivable................. $25,422,774 $40,796,471
=========== ===========
Total costs and estimated earnings in excess of
billings on uncompleted contracts............. $15,326,548 $12,078,464
=========== ===========
</TABLE>
Costs and estimated earnings in excess of billings on uncompleted contracts
are net of $66,180,434 and $89,875,813 of progress billings to the United States
Military at December 31, 1996 and 1997, respectively.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized on long-term contracts in excess of billings
because amounts were not billable at the balance sheet date. It is anticipated
such unbilled amounts attributable to the United States Military will generally
be billed over the next 180 days as the contract is substantially completed.
Amounts receivable on other contracts are generally billed as shipments are
made. It is estimated that substantially all of such amounts will be billed
within one year, although contract extensions may delay certain collections
beyond one year.
The following summarizes activity in the allowance for doubtful accounts on
trade accounts receivable:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Year ended December 31,
1995....................... $3,282,518 $3,149,467 $(3,731,814) $2,700,171
Year ended December 31,
1996....................... $2,700,171 $3,778,583 $(3,954,870) $2,523,884
Year ended December 31,
1997....................... $2,523,884 $2,097,342 $(1,521,162) $3,100,064
</TABLE>
(b) INVENTORIES -- Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method and include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1997
---------- -----------
<S> <C> <C>
Raw materials......................................... $4,882,075 $ 9,551,152
Vehicle costs and work-in-process..................... 3,951,319 10,011,747
---------- -----------
$8,833,394 $19,562,899
========== ===========
</TABLE>
F-107
<PAGE> 231
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes activity in valuation reserves for inventory
obsolescence:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
--------- ---------- ---------- --------
<S> <C> <C> <C> <C>
Year ended December 31, 1995........ $ -- $ -- $ -- $ --
Year ended December 31, 1996........ $ -- $264,114 $ -- $264,114
Year ended December 31, 1997........ $264,114 $113,567 $(23,782) $353,899
</TABLE>
(c) OTHER ASSETS -- Other assets are stated at cost less accumulated
amortization and are being amortized on a straight line basis over their
estimated useful lives, as applicable. Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
USEFUL LIFE ------------------------
DESCRIPTION (YEARS) 1996 1997
- ----------- ----------- ---------- ----------
<S> <C> <C> <C>
Advance to vendor........................... -- $1,825,207 $1,275,437
Deferred costs.............................. -- 80,818 642,971
Security deposits........................... -- 326,376 471,859
Long-term receivable........................ -- -- 380,000
Non-refundable deposit on an equipment lease
with a related party...................... 10 503,858 297,025
Deferred financing fees..................... 7 - 30 152,940 876,667
Long-term investments....................... -- 180,998 101,630
Other long-term assets...................... -- 137,003 452,533
---------- ----------
3,207,200 4,498,122
(102,247) (166,477)
---------- ----------
$3,104,953 $4,331,645
========== ==========
</TABLE>
Costs applicable to bids in process are deferred when management believes
it is probable that future contracts will be obtained. These costs are
transferred to contract costs when contracts are awarded or are expensed when
the contract award is no longer considered probable.
(d) ACCRUED LIABILITIES -- Accrued liabilities consist of the following at
December 31, 1996 and 1997:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
DESCRIPTION 1996 1997
- ----------- ----------- -----------
<S> <C> <C>
Payroll and related benefits......................... $ 5,874,724 $ 8,205,962
Property, sales and other taxes payable.............. 590,648 773,846
Accrued interest..................................... 268,605 564,168
Accrued satellite time............................... 680,835 1,009,162
Accrued customer list installment payments........... -- 510,345
Other accruals....................................... 2,657,576 4,021,964
----------- -----------
$10,072,388 $15,085,447
=========== ===========
</TABLE>
F-108
<PAGE> 232
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) INCOME TAXES
Prior to October 28, 1996, OHE was an S Corporation and generally was not
responsible for payment of income taxes. Rather, the respective OHE shareholders
were taxed on OHE's taxable income at the respective individual federal and
state income tax rates. Therefore, the income generated by OHE has not been
subject to federal, state or certain foreign income taxes prior to the date of
OHE's reorganization on October 28, 1996. Schiff was also an S Corporation for
all periods presented in the supplemental consolidated financial statements.
Accordingly, the accompanying supplemental consolidated financial statements
only reflect a provision (benefit) for income taxes for Kroll and LSAI, both of
which were C Corporations, for all periods prior to October 28, 1996.
The Company accounts for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Under the liability method, deferred tax liabilities and assets are
determined based on the differences between the financial reporting and tax
bases of assets and liabilities using enacted tax rates.
The Company's provision (benefit) for income taxes on income (loss) from
continuing operations for all periods is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- -----------
<S> <C> <C> <C>
Currently payable:
Federal.................................. $ 230,439 $ 470,479 $ 2,800,720
State and local.......................... (169,824) 383,563 576,837
Foreign.................................. -- 83,000 1,364,873
--------- --------- -----------
60,615 937,042 4,742,430
--------- --------- -----------
Deferred:
Federal.................................. (585,645) (425,558) (1,213,147)
State and local.......................... (298,402) (145,937) (224,290)
Foreign.................................. -- -- --
--------- --------- -----------
(884,047) (571,495) (1,437,437)
--------- --------- -----------
$(823,432) $ 365,547 $ 3,304,993
========= ========= ===========
</TABLE>
F-109
<PAGE> 233
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- ------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
----------- ----- ----------- ----- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision (benefit) for income
taxes at the federal
statutory rate............... $(2,194,096) (34.0)% $ 2,349,834 34.0% $2,005,265 34.0%
State and local income taxes,
net of federal benefit....... (308,682) (4.8) 156,912 2.3 295,119 5.0
Impact of S Corp income/loss,
prior to reorganization...... 381,498 5.9 (2,087,529) (30.2) -- --
Impact of foreign income, prior
to reorganization............ -- -- (199,095) (2.9) -- --
Nondeductible expenses......... 13,446 0.3 34,766 0.5 1,424,333 24.1
Change in valuation
allowance.................... 1,338,113 20.7 109,303 1.6 (755,044) (12.8)
Effect of foreign
income/loss.................. 105,693 1.6 (8,768) (0.1) 577,743 9.8
Other.......................... (159,404) (2.5) 10,124 0.1 (242,423) (4.1)
----------- ----- ----------- ----- ---------- -----
Provision (benefit) for
income taxes............ $ (823,432) (12.8)% $ 365,547 5.3% $3,304,993 56.0%
=========== ===== =========== ===== ========== =====
</TABLE>
The components of the Company's consolidated deferred income tax assets and
liabilities as of December 31 are summarized below:
<TABLE>
<CAPTION>
1996 1997
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 783,046 $ 844,101
Fixed assets, depreciation and amortization differences... 646,744 564,262
Accrual for restricted stock plan......................... 164,794 --
Net operating loss carryforwards.......................... 1,423,336 1,839,743
Payroll and other benefits................................ 220,000 594,401
Other accruals............................................ 311,180 336,817
Acquisition costs......................................... -- 440,000
Other..................................................... 422,000 981,610
----------- -----------
3,971,100 5,600,934
Valuation allowance....................................... (2,303,336) (2,126,035)
----------- -----------
Net deferred tax assets................................ 1,667,764 3,474,899
----------- -----------
Deferred tax liabilities:
Nonaccrual service fee receivable......................... (219,560) (212,079)
Deferred revenue.......................................... (2,105,813) (1,908,823)
Database capitalization................................... (2,738,824) (2,779,790)
S to C conversion......................................... (5,745) (5,223)
Customer lists, net of amortization....................... (400,000) (344,000)
Other..................................................... -- (166,893)
----------- -----------
(5,469,942) (5,416,808)
----------- -----------
Net deferred tax liability.................................. $(3,802,178) $(1,941,909)
=========== ===========
</TABLE>
F-110
<PAGE> 234
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has certain foreign net operating loss carryforwards, primarily
in the United Kingdom and France, which approximate $1.4 million and $1.8
million at December 31, 1996 and 1997, respectively. The carryforwards expire
beginning in 2001. A valuation allowance for the full amount of all existing
foreign carryforwards has been provided as it is not certain that the tax
benefit will be realized in the foreseeable future. Adjustments to the valuation
allowance, if any, will be recorded in the periods in which it is determined the
asset is realizable.
(6) RELATED PARTY TRANSACTIONS
(a) SUMMARY OF RELATED PARTY TRANSACTIONS -- The following summarizes
transactions with related parties:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
Sales
to Shareholder.................................. $3,868,967 $5,325,559 $6,412,244
to affiliated entities.......................... 208,000 236,000 21,000
Purchases
from Shareholder................................ 485,807 824,348 814,154
from affiliated entities........................ 557,000 1,176,000 411,000
Lease expense to affiliated entities.............. 431,000 1,179,000 813,000
Consulting, commission and legal services expense
provided by affiliated entities................. 377,000 348,000 --
provided by minority shareholders............... 284,000 118,000 --
provided by LSAI Director....................... 130,000 30,000 170,000
Receivables sale to shareholder................... 4,507,800 -- --
Non-interest bearing advances to shareholders..... -- 288,829 525,996
Charter fee included in costs of the offering or
merger costs.................................... -- 327,000 576,000
Interest on shareholder notes payable............. 33,000 27,000 --
Forgiveness of note payable to affiliated
entity.......................................... -- 122,000 --
</TABLE>
(b) NOTES PAYABLE-SHAREHOLDERS -- OHE had certain notes payable to
shareholders, which were repaid upon the completion of the Company's initial
public offering in 1996. Interest expense associated with these obligations
approximated $33,000 and $27,000 for the years ended December 31, 1995 and 1996,
respectively.
Kroll has certain amounts due to/from shareholders of the Company which
include the following amounts at December 31:
<TABLE>
<CAPTION>
1996 1997
----------- ---------
<S> <C> <C>
Amounts due from a certain shareholder................ $ 1,345,499 $ --
----------- ---------
Amounts due to certain shareholders................... (8,393,765) (309,500)
----------- ---------
Net due to shareholders.......................... $(7,048,266) $(309,500)
=========== =========
</TABLE>
Balances included in amounts due to/from shareholders are classified as
open advance accounts or term loans. The net due to shareholders under the term
loans was $2,309,500 at December 31, 1996.
F-111
<PAGE> 235
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Substantially all amounts due to and due from shareholders were paid off in
connection with the merger except for a loan payable of $309,500 which is due on
demand and bears interest at prime less 0.5%.
(c) SALES -- SHAREHOLDER -- During 1995, 1996 and 1997, the Company
rendered services to a corporation which is also a shareholder of the Company.
Total revenue recognized for the years ended December 31, 1995, 1996 and 1997
was $3,868,967, $5,325,559 and $6,412,244, respectively. Additionally, this
corporation provided certain services to the Company which have been included in
cost of sales and operating expenses in the accompanying supplemental
consolidated statements of operations. These costs were approximately $485,807,
$824,348 and $814,154 for the years ended December 31, 1995, 1996 and 1997,
respectively. The year end accounts receivable balance for this customer was
approximately $857,820 and $897,361 at December 31, 1996 and 1997, respectively.
(d) BUILDING AND EQUIPMENT LEASES -- AFFILIATED ENTITIES -- The Company
currently leases a corporate aircraft from an affiliated entity under a ten year
lease agreement which began in February 1995. The lease stipulates minimum
monthly payments of $35,200, with additional charges accruing for usage in
excess of established base limits. The terms of the lease required a
non-refundable deposit. The original deposit of approximately $504,000 is being
amortized as rental expense over the existing lease period. Rental expense,
including amortization recognized, approximated $414,000, $422,000 and $234,000
for the years ended December 31, 1995, 1996 and 1997, respectively. The Company
also paid this affiliated entity $327,000 in fiscal 1996 for usage of the
aircraft during the roadshow for the initial public stock offering and included
such amount in issuance costs. Additionally, the Company paid $576,000 in fiscal
1997 for usage of the aircraft to consummate the merger with Kroll and included
such amount in merger-related costs. Management is of the opinion that the
hourly rate paid by the Company was equivalent to the rate charged by the
affiliated entity to other unrelated companies for similar services and it was
favorably comparable to rates charged by another unrelated charter service for
similar aircraft. Also, the Company has recorded $152,000 in prepaid expenses
related to payments for the future use of the aircraft at December 31, 1997.
The Company is also currently leasing equipment and a manufacturing
facility from two affiliated entities under various three year and
month-to-month lease agreements which began in July 1995. Rental expense
approximated $17,000, $757,000 and $579,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
(e) NOTE PAYABLE -- In 1994, Laboratory Specialists, Inc. (LSI), a
wholly-owned subsidiary of LSAI, issued a note payable in the amount of $353,123
to an affiliated entity in connection with LSI's then president and former
owner's acquisition of LSI's common stock. This individual later exchanged all
of the outstanding common stock of LSI for 1,000,000 shares of common stock and
300,000 shares of Series I Cumulative Redeemable Preferred Stock (the Series I
Preferred Stock) of LSAI. LSAI redeemed the Series I Preferred Stock in July
1995 at $1.00 per share totaling $300,000.
(7) REVOLVING LINES OF CREDIT
The Company had a $12,000,000 revolving line of credit with a bank at
December 31, 1996, which was replaced during 1997. Borrowings under this line of
credit were $9,935,947 at December 31, 1996.
On December 1, 1997 the Company amended and restated its credit agreement
which provides for a revolving line of credit of $7.0 million maturing on May
31, 1999, a letter of credit facility of approximately $7.7 million and a term
note of $7.0 million which matures on January 4, 1999. The
F-112
<PAGE> 236
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
revolving credit facility bears interest at rates ranging from prime less 0.5%
to prime or, at the Company's option, at LIBOR plus 2.0% to LIBOR plus 2.5%,
dependent upon amounts outstanding. Average borrowings under the revolving line
of credit and its predecessors were $6,530,260, $9,915,663 and $4,568,994 during
1995, 1996 and 1997, respectively, at an approximate weighted average interest
rate of 8.82%, 8.27% and 8.46%, respectively. The maximum borrowings outstanding
during 1995, 1996 and 1997 were $8,216,000, $12,145,000 and $11,600,000,
respectively. Borrowings under this line of credit were $559,112 at December 31,
1997. On October 30, 1998 this credit agreement was amended and restated to
provide for a revolving line of credit of $7.0 million and a letter of credit
facility of approximately $7.6 million which matures on May 31, 2000.
In connection with a refinancing in 1997, the Company fully amortized the
remaining deferred financing costs from a previous agreement, resulting in a one
time extraordinary charge to the company's net income of $193,875, after income
tax benefits of $129,250, or $0.01 per diluted share.
This credit agreement includes certain financial covenants, which among
other restrictions, requires the maintenance of certain financial ratios,
including fixed charge coverage and net worth and imposes limitations on foreign
investment, total intangible assets, additional indebtedness and capital
expenditures. The Company was not in compliance with certain of these covenants
as of December 31, 1997. These events of non compliance have been waived by the
lender.
In December 1995, LSI entered into a $1 million line of credit arrangement,
which matured in December 1996. The line of credit was renewed for $250,000 in
January 1997 with an interest rate equal to the CitiBank N.A. rate, which was
8.25% at the date of renewal. This line of credit matured in January 1998. This
line of credit was collateralized by LSI's accounts receivable, intangibles,
inventories, equipment and furniture and fixtures. No borrowings were made
against the line of credit during 1997, and no balance was outstanding as of
December 31, 1997.
F-113
<PAGE> 237
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(8) LONG-TERM DEBT
The components of long-term debt are as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1997
----------- -----------
<S> <C> <C>
Senior unsecured notes payable to various
institutions, interest at 9.56% (amended to 8.56%
in May 1998) payable semi-annually, principal
payable at maturity in May 2004, subject to
prepayment penalties............................... $ -- $35,000,000
Development Bonds, variable interest rate
approximating 85% of the bond equivalent yield of
13 week U.S. Treasury bills (not to exceed 12%),
which approximated 3.9% at December 31, 1997,
payable in scheduled installments through September
2016, subject to optional tender by the bondholders
and a corresponding remarketing agreement, secured
by the property, plant and equipment of OHE and a
bank letter of credit (Note 12).................... 1,525,000 1,432,224
Notes payable to former shareholders of acquired
companies, interest at fixed rates ranging from 6%
to 10%, payable in scheduled installments through
February 2000, certain notes secured by acquired
assets............................................. 961,127 3,345,989
Notes payable to banks and insurance company,
variable interest rates at prime to prime plus 0.5%
or LIBOR plus 2.5%, fixed rates ranging from 8.65%
to 10.95%, payable in scheduled installments
through April 2003 with certain instruments subject
to prepayment penalties, collateralized by certain
real and personal property with certain notes
collateralized by substantially all assets of
LSI................................................ 8,927,666 9,801,780
Note payable to former shareholder of Kroll, non
interest bearing, paid in full in January 1998..... -- 1,255,402
Other notes payable, interest at 7% to 10.9%, payable
in scheduled installments through September 2007,
certain notes secured by various equipment or
substantially all assets of LSI.................... 1,540,669 2,844,169
----------- -----------
12,954,462 53,679,564
Less-current portion................................. (5,327,641) (4,038,080)
----------- -----------
$ 7,626,821 $49,641,484
=========== ===========
</TABLE>
The Company's $35 million of senior unsecured notes payable also contains
financial covenants, which among other restrictions, require the maintenance of
net worth and fixed charge coverage ratios.
F-114
<PAGE> 238
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of long-term debt at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998.......................................... $ 4,038,080
1999.......................................... 9,108,484
2000.......................................... 2,490,701
2001.......................................... 603,093
2002.......................................... 687,671
Thereafter.................................... 36,751,535
-----------
$53,679,564
===========
</TABLE>
(9) OPERATING LEASES
The Company leases office space and certain equipment and supplies under
agreements with terms from one to ten years. The following is a schedule, by
year, of approximate future minimum rental or usage payments required under
operating leases that have initial or non-cancelable lease terms in excess of
one year as of December 31, 1997:
<TABLE>
<CAPTION>
AFFILIATED
COMPANIES OTHER TOTAL
---------- ----------- -----------
<S> <C> <C> <C>
1998.................................... $ 703,265 $ 4,574,331 $ 5,277,596
1999.................................... 439,600 3,571,406 4,011,006
2000.................................... 422,400 2,711,017 3,133,417
2001.................................... 422,400 2,166,347 2,588,747
2002.................................... 422,400 1,834,362 2,256,762
Thereafter.............................. 1,126,400 8,508,128 9,634,528
---------- ----------- -----------
$3,536,465 $23,365,591 $26,902,056
========== =========== ===========
</TABLE>
Rental expense charged against current operations amounted to approximately
$3,317,000, $4,595,000 and $4,115,000, for the years ended December 31, 1995,
1996 and 1997, respectively.
(10) DEFINED CONTRIBUTION AND BONUS PLANS
As of December 31, 1997, the Company had the following employee benefit
plans in place:
(a) DEFINED CONTRIBUTION PLANS -- The Company and its subsidiaries have
established various non-contributory profit sharing/401(k) plans covering
substantially all of the Company's employees. Contributions to the plans are
discretionary and are determined annually by the Company's Board of Directors.
Certain plans also offer a matching contribution whereby the Company will
contribute a percentage of the amount a participant contributes, limited to
certain maximum amounts. Plan contribution expense charged against current
operations for all such plans amounted to approximately $1,083,000, $1,243,000
and $1,211,140 for the years ended December 31, 1995, 1996 and 1997,
respectively.
(b) PROFIT AND REVENUE SHARING PLANS -- In 1991, Kroll adopted a Profit
and Revenue Sharing Plan to give Kroll employees an annual cash incentive bonus
based on Kroll's performance. The plan made a portion of most employees'
compensation (except administrative personnel, who have a guaranteed bonus)
contingent upon the achievement of certain performance incentives. There were
two
F-115
<PAGE> 239
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
plans under the Profit and Revenue Sharing Plan umbrella -- the Profit and
Revenue Sharing Plan for Managing Directors and the Bonus Plan for Professionals
and Senior Administrative Employees.
PROFIT AND REVENUE SHARING PLAN FOR MANAGING DIRECTORS
The managing directors' bonus plan is based on a matrix of Kroll revenue
and a percentage of operating profit. The maximum bonus opportunity for managing
directors was 50%, 15% and 35% of salary in 1995, 1996 and 1997, respectively.
The administrator may amend, modify or terminate the plan at any time.
BONUS PLAN FOR PROFESSIONAL AND SENIOR ADMINISTRATIVE STAFF
Similar to the managing directors' bonus plan, the plan for the
professional staff is based on a matrix of Kroll revenue and a percentage of
operating profit. The maximum bonus opportunity for this group ranged from 18%
to 26% of salary in 1995, from 15% of salary in 1996, and from 15% of salary in
1997, depending on the employee's level in Kroll. The administrator may amend,
modify or terminate the plan at any time.
The Company expensed approximately $314,000, $2,288,000 and $516,000
associated with the profit and revenue sharing plans in 1995, 1996 and 1997,
respectively.
(11) EQUITY ARRANGEMENTS
(a) STOCK OPTION PLANS -- In 1996, the Company adopted a stock option plan
(the 1996 Plan) for employees and non-employee directors. The Company may grant
options for up to 1,757,000 shares under the 1996 Plan. Options for 180,000 and
482,050 shares were granted during 1996 and 1997, respectively. Options granted
under the plan are generally granted at fair market value at the date of grant
and are exercisable over periods not exceeding ten years.
In January 1995, Kroll established the Kroll Holdings, Inc., Management
Stock Option Plan (the "Management Stock Option Plan"). Options granted under
the Management Stock Option Plan are nonqualified stock options. Options to
purchase 380,747 and 33,448 shares of common stock of the Company were granted
under the Management Stock Option Plan in 1995 and 1996, respectively. In
addition, during 1996, options to purchase 137,294 shares of common stock of the
Company were granted to two key employees with an exercise price above market
price. There were no option grants under the Management Stock Option Plan during
1997.
In May 1994, LSAI established the 1994 Stock Option Plan (the "1994 Plan").
The 1994 Plan provides for the issuance of both incentive stock options ("ISO
Options") and nonqualified stock options with or without stock appreciation
rights ("SARs") to directors, executive officers, key employees and independent
contractors and consultants. ISO Options may be granted only to employees of
LSAI and its subsidiaries. Options to purchase 26,275, 38,887 and 52,550 shares
of common stock were granted under the 1994 Plan in 1995, 1996 and 1997,
respectively.
In October 1997, LSAI established the 1997 Non-Qualified Stock Option Plan
(the "1997 Plan"). The 1997 Plan provides for the issuance of nonqualified stock
options, with SARs attached, to directors, executive officers, key employees and
independent contractors and consultants. Options to purchase 71,468 shares of
common stock were granted under the 1997 Plan in 1997.
F-116
<PAGE> 240
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Options granted under the 1994 and 1997 Plans are fixed-price options
generally granted at the fair market value of the underlying common stock on the
date of the grant. Generally, these options vest and become exercisable six
months from the grant date and expire five to ten years after the grant date.
(b) RESTRICTED STOCK PLAN -- Kroll adopted a long-term incentive plan
designed to give managing directors and other key employees of the Kroll
division a stake in the long-term success of Kroll through grants of phantom
stock options. Each option gave the right to receive a payment equal to the
appreciation in the price of the option at the payment determination date.
Effective June 14, 1993, Kroll replaced the long-term incentive plan with a
restricted stock plan. The restricted stock plan provided for cliff vesting
after a five-year period from the date the stock is awarded. Under the
provisions of the plan, a participant had the ability to put the stock back to
Kroll and receive cash for the then fair value of the stock. In addition, the
plan included a provision which resulted in accelerated vesting of all shares in
the event of a change in control of Kroll. The Company has accounted for this
plan as a fixed plan and accordingly compensation expense was based on the fair
market value as determined by independent appraisal at the date of grant.
During 1996, 259,271 shares of restricted stock fully vested and were
issued. Based on a valuation of Kroll, the total value assigned to these shares
was $572,286. As a result of the Kroll merger in December 1997, all remaining
shares associated with the restricted stock plan vested and all restrictions
lapsed on the merger date. In connection with this accelerated vesting the
Company recognized compensation expense of approximately $800,000 in 1997, which
is included with merger related costs in the accompanying supplemental
consolidated statement of operations. In addition to the regular tax benefits
based on compensation expense recognized, the Company will also realize a tax
benefit for the fair market value of all restricted shares which became fully
vested in 1997. This benefit of approximately $2.2 million has been recognized
as an increase to additional paid in capital in the accompanying supplemental
consolidated statement of shareholders' equity. This balance represents the
spread between cumulative compensation expense recognized by the Company for
accounting purposes and the cumulative compensation expense recognized for tax
purposes based on the fair market value of the shares. No shares are outstanding
under the plan as of December 31, 1997 and effective January 2, 1998, further
issuances under the plan were ceased by a board resolution.
(c) KROLL SUPPLEMENTAL EXECUTIVE AWARD AGREEMENTS -- The Company entered
into agreements with certain senior Kroll executives which provided additional
benefits to the participants. During 1996, all 144,421 previously granted shares
fully vested and were issued. Based on a valuation of the Company, the total
value assigned to the shares on the vesting date equaled $318,780.
(d) PURCHASE AND RETIREMENT OF COMMON STOCK -- In accordance with Kroll's
historical bylaws, restricted stock and stock option agreements, Kroll acquired
259,036 shares (representing shares and shares under options) of a former
director for approximately $2.7 million upon his leaving the employment of Kroll
in January 1997.
(e) OHE EXECUTIVE BONUS PLAN -- During 1993, OHE adopted an executive
bonus plan, which covered four individuals. The plan awarded a bonus based on
the attainment of goals stipulated in the five year business plan, ranging from
50% to 120% of the executives' base compensation. The bonus amounts were
distributed 50% in cash and 50% in non-qualified stock options to purchase stock
of OHE. Subject to the executives' ability to elect a decrease in the percentage
of cash payments and to increase the percentage of stock options, 50% of the
bonus amount was payable in cash, and the
F-117
<PAGE> 241
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
remainder in stock options. OHE issued 121,463 options in 1994 based on 1993's
operating results. No options were issued in 1995 or 1996. In August 1996, the
121,463 options were exercised for 121,463 shares of common stock of the Company
for $445 and the executive bonus plan was terminated.
(f) COMMON STOCK WARRANTS -- In connection with LSAI's initial public
offering on October 11, 1994, LSAI issued 660,000 warrants. No warrants had been
exercised at December 31, 1996. Until April 15, 1997, each warrant could be
exercised to purchase .4204 shares of common stock of the Company for $16.65 per
share. After April 15, 1997, each warrant could be exercised to purchase .4204
shares of common stock for $9.51 per share. On September 3, 1997, LSAI gave
notice to the holders of these warrants of LSAI's election to redeem the
outstanding warrants at $0.01 each on October 14, 1997, unless extended, at the
sole discretion of LSAI, to a date not later than November 7, 1997 (the "Warrant
Redemption"). As a result, 658,290 of the warrants were exercised in September
and October 1997, and the remaining 1,710 warrants were redeemed.
As a portion of the public offering underwriting compensation, LSAI also
issued warrants to purchase 66,000 units at $7.32 per unit, consisting of .4204
shares of common stock of the Company and one warrant for .4204 additional
shares of common stock of the Company, exercisable during a four-year period
commencing on October 11, 1995 (the "Underwriter Warrants"). The warrants
included within each unit were exercisable under the same terms as the warrants
issued in connection with the public offering as described above. As a result of
the Warrant Redemption, 62,000 of these warrants were exercised for $0.12 per
warrant plus $9.51 per share in September and October 1997, and the remaining
4,000 warrants were redeemed. After the Warrant Redemption, the holders of the
Underwriter Warrants continue to have the right to exercise the Underwriter
Warrants with respect to the .4204 shares of common stock of the Company
comprising the unit for $7.20. In November 1997, 30,000 of the Underwriter
Warrants were exercised with respect to the .4204 shares of common stock of the
Company comprising the unit for $7.20. The remaining 36,000 of the Underwriter
Warrants with respect to the .4204 shares of common stock had not been exercised
and were outstanding at December 31, 1997. The proceeds from the exercise of all
warrants during 1997 are included in net proceeds from exercise of stock options
and warrants in the accompanying supplemental consolidated statement of cash
flows and was approximately $2.7 million, net of commissions and other offering
expenses.
In connection with the Warrant Redemption, LSAI issued warrants to purchase
30,281 shares of common stock of the Company to various investment bankers as a
portion of their compensation for serving as managers of the Warrant Redemption
and certain other services. These warrants have an exercise price per share of
$10.47 and expire on October 14, 2000. Both the number of shares and the
exercise price per share are subject to adjustment under certain circumstances.
The value of these warrants, recognized as compensation paid to the investment
bankers for services provided, was treated as a reduction in the recognized net
proceeds to LSAI from the Warrant Redemption. The value of the outstanding
warrants is included in paid in capital in excess of par and entirely offsets
the recognized compensatory value of the warrants, resulting in no net effect on
shareholders' equity.
(g) STOCK BASED COMPENSATION DISCLOSURE -- SFAS 123 requires, at a
minimum, pro forma disclosures of expense for stock-based awards based on their
fair values. Had compensation cost for these plans been determined consistent
with SFAS 123, the Company's net income (loss) and diluted
F-118
<PAGE> 242
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
earnings (loss) per share for the years ended December 31, 1995, 1996 and 1997
would have been as follows:
<TABLE>
<CAPTION>
1995 1996 1997
----------- ---------- ----------
<S> <C> <C> <C>
Net income (loss):
As reported.......................... $(5,643,135) $5,268,415 $2,046,643
Pro forma............................ $(5,689,580) $5,157,960 $ 979,899
Diluted earnings (loss) per share:
As reported.......................... $ (0.52) $ 0.42 $ 0.14
Pro forma............................ $ (0.52) $ 0.42 $ 0.07
</TABLE>
Had compensation cost for the Company's stock options issued in 1995 and
1996 under the Management Stock Option Plan been determined consistent with SFAS
123, there would have been no effect on the Company's net loss or diluted loss
per share as these options were determined to have a fair value of $0.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions used for grants in 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------
1995 1996 1997
------- ----------- -------------
<S> <C> <C> <C>
Dividend yield....................... -- -- --
Expected volatility.................. 35% 35% - 39.3% 38% - 40.5%
Risk-free interest rate.............. 6% 6% - 6.5% 5.96% - 6.76%
5 - 7.5
Expected lives....................... 5 years years 5 - 7.5 years
</TABLE>
The 26,275 options granted by the Company during 1995 to employees and
non-employee directors, excluding options issued under the Management Stock
Option Plan, have a weighted average exercise price of $14.27 per option, a
weighted-average fair value of $5.85 per option and remaining contractual lives,
on a weighted average basis, of 2.9 years. The 218,887 options granted by the
Company during 1996 to employee and non-employee directors, excluding options
issued under the Management Stock Option Plan, have a weighted average exercise
price of $9.72, a weighted-average fair value of $5.06 and remaining contractual
lives, on a weighted-average basis, of 7.9 years. The 606,068 options granted by
the Company during 1997 to employees and non-employee directors have a
weighted-average exercise price of $14.95 per option, a weighted-average fair
value of $7.68 per option and remaining contractual lives, on a weighted-average
basis, of 9.9 years.
F-119
<PAGE> 243
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of the status of the Company's stock option plans at December 31,
1995, 1996 and 1997, and the change during the years then ended is presented in
the table below:
<TABLE>
<CAPTION>
1995 1996 1997
------------------- ------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------- -------- ------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
year.................... -- $ -- 407,022 $6.91 796,651 $6.72
Granted................. 407,022 6.91 389,629 6.52 606,068 14.95
Exercised............... -- -- -- -- (5,777) 9.14
Forfeited/Expired/
Cancelled............ -- -- -- -- (90,500) 11.76
------- ----- ------- ----- --------- -----
Outstanding, end of
year.................... 407,022 $6.91 796,651 $6.72 1,306,443 $9.47
======= ===== ======= ===== ========= =====
Exercisable, end of
year.................... 97,320 $6.57 261,538 $6.14 761,825 $6.52
======= ===== ======= ===== ========= =====
</TABLE>
(12) COMMITMENTS AND CONTINGENCIES
(a) LETTERS OF CREDIT -- Under the terms of the Economic Development
Revenue Bonds Agreement, OHE is required to maintain a letter of credit
supporting the debt. As of December 31, 1997, the Company's lender was committed
to providing this letter of credit through September 1, 1999. During 1998, this
commitment was extended through May 31, 2000. As of December 31, 1997, the
Company had an outstanding letter of credit in the amount of $1,681,750.
At December 31, 1997, the Company had standby and purchase letters of
credit, issued by two financial institutions, in the aggregate amount of
$4,776,502.
(b) PURCHASE AGREEMENTS -- In June 1995, the Company entered into a firm
purchase agreement with Glocom, Inc. ("Glocom"). The agreement provided for an
irrevocable purchase order for the purchase of 4,000 units of the Compact-M
portable satellite telecommunication unit for approximately $12,000,000. In
October 1997, the agreement was amended to provide certain pricing concessions
to the Company and to provide a reduction in the quantity of units that must be
purchased. The amendment also provided certain licensing rights to the Company.
At December 31, 1997, the Company was committed to purchase approximately 250
units at a total cost of approximately $0.7 million. In accordance with the
original agreement, the Company advanced a total of $3,000,000 to Glocom for the
funding of the related production costs. As of December 31, 1996 and 1997, the
Company had advances to the above vendor of $2,320,307 and $1,673,123,
respectively.
(c) EMPLOYMENT AGREEMENTS -- On December 1, 1997, the Company entered into
employment agreements with seven key officers and five key employees with annual
compensation ranging in value from $65,000 to $375,000, ending on November 30,
2000. Each of these officers is also eligible for an annual bonus plan. These
agreements also granted options to five of the officers to purchase shares of
the Company's common stock at the then existing market value with the number of
shares ranging from 10,000 to 75,000 (see Note 11(g)). In the event of
termination without cause, the terminated individual shall continue to receive
his salary for the greater of the remainder of the agreement or one year. If the
agreement is not renewed, the officer shall receive one year's salary. Each
officer has also agreed to certain non-competition clauses.
F-120
<PAGE> 244
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LSAI also has written employment agreements with a few of its key officers
which provide, among other things, a term of four years from April 16, 1996,
with automatic one year extensions after each year of service, annual
compensation ranging from $112,500 to $125,000 and eligibility for an annual
bonus. Subsequent to December 31, 1997, these agreements were verbally amended
to increase the range of annual compensation. The agreements also provide for
certain non-competition clauses. Additionally, LSI has a written employment
severance agreement with one of its key employees providing for salary
continuation for a period of twelve months upon termination for any reason other
than cause.
As of December 31, 1997, the remaining aggregate commitment under these
employment agreements if all individuals were terminated without cause was
approximately $8.0 million.
(d) LEGAL MATTERS -- The Company is party to various legal proceedings
arising from its operations. Management of the Company believes that the outcome
of these proceedings, individually and in the aggregate, will have no material
adverse effect on the Company's financial position, results of operations or its
cash flows.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair values of significant current assets, current liabilities and
long-term debt approximate their respective historical carrying amounts.
The Company has entered into four foreign currency exchange contracts to
effectively hedge its exposure to certain foreign currency rate fluctuations on
a demand loan to a subsidiary which is denominated in the foreign currency. By
virtue of these contracts, the Company has fixed the total dollar amount which
they will receive under the aforementioned subsidiary loan through the maturity
dates of the contracts regardless of the fluctuations in the exchange rate. The
total notional amount of the contracts, which mature between January 1998 and
July 1999, is $15.5 million. The Company's cumulative foreign currency
translation adjustment component of shareholders' equity was increased by
$346,000 in 1997 as a result of these agreements.
The Company has estimated the fair value of their foreign exchange
contracts based on information obtained from the counterparty of the amount the
Company would receive at December 31, 1997 in order to terminate the agreements.
As of December 31, 1997, the Company would have received approximately $534,000
upon cancellation of all contracts.
(14) CUSTOMER AND SEGMENT DATA
SEGMENT DATA -- During 1995, 1996 and 1997, the Company operated in three
business segments, the Security Products and Services Group, the Investigations
and Intelligence Group and the Voice and Data Communications Group. In addition,
as was discussed in Note 1, in 1998 the Company created the Information Security
Group in connection with the merger with Securify.
F-121
<PAGE> 245
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes information about the Company's business segments:
<TABLE>
<CAPTION>
SECURITY
PRODUCTS INVESTIGATIONS VOICE AND
AND AND DATA
SERVICES INTELLIGENCE COMMUNICATIONS
GROUP GROUP GROUP CONSOLIDATED
-------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Net sales to unaffiliated
customers.......................... $ 34,883 $58,071 $ 2,044 $ 94,998
======== ======= ======= ========
Gross profit......................... $ 8,113 $19,713 $ 409 $ 28,235
======== ======= ======= ========
Operating income (loss).............. $ (430) $(2,556) $ (589) $ (3,575)
======== ======= ======= ========
Identifiable assets at year-end...... $ 26,490 $44,351 $ 3,324 $ 74,165
-------- ------- -------
Corporate assets..................... 1,275
--------
Total assets at year end... $ 75,440
========
1996
Net sales to unaffiliated
customers.......................... $ 79,156 $77,992 $ 7,770 $164,918
======== ======= ======= ========
Gross profit......................... $ 20,438 $25,036 $ 2,146 $ 47,620
======== ======= ======= ========
Operating income..................... $ 6,953 $ 2,292 $ 538 $ 9,783
======== ======= ======= ========
Identifiable assets at year-end...... $ 38,380 $45,511 $ 6,816 $ 90,707
======== ======= =======
Corporate assets..................... 1,357
--------
Total assets at year-end... $ 92,064
========
1997
Net sales to unaffiliated
customers.......................... $105,557 $83,109 $17,437 $206,103
======== ======= ======= ========
Gross profit......................... $ 30,017 $33,206 $ 3,114 $ 66,337
======== ======= ======= ========
Operating income..................... $ 8,014 $ 3,180 $ 292 $ 11,486
======== ======= ======= ========
Identifiable assets at year-end...... $ 74,283 $53,468 $13,449 $141,200
======== ======= =======
Corporate assets..................... 9,284
--------
Total assets at year-end... $150,484
========
</TABLE>
Total net sales by segment includes sales to unaffiliated customers.
Intersegment sales are nominal. Operating income (loss) is total net sales less
operating expenses. Operating income (loss) does not include the following
items: interest expense, other expenses and income taxes. Depreciation expense
F-122
<PAGE> 246
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and capital expenditures for each of the Company's business segments for the
years ended December 31, 1995, 1996 and 1997 are as follows:
<TABLE>
<CAPTION>
SECURITY
PRODUCTS INVESTIGATIONS
AND AND VOICE AND DATA
SERVICES INTELLIGENCE COMMUNICATIONS
GROUP GROUP GROUP CONSOLIDATED
-------- -------------- -------------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
1995
Depreciation expense.................. $ 462 $ 985 $ -- $ 1,447
======= ======= ====== =======
Capital expenditures.................. $ 755 $ 956 $ -- $ 1,711
======= ======= ====== =======
1996
Depreciation expense.................. $ 841 $ 1,071 $ -- $ 1,912
======= ======= ====== =======
Capital expenditures.................. $ 2,627 $ 858 $ -- $ 3,485
======= ======= ====== =======
1997
Depreciation expense.................. $ 1,427 $ 1,164 $ 16 $ 2,607
======= ======= ====== =======
Capital expenditures.................. $ 3,149 $ 2,767 $ 43 $ 5,959
======= ======= ====== =======
</TABLE>
Identifiable assets by segment are those assets that are used in the
Company's operations in each segment. Corporate assets are principally cash,
certain intangible assets and certain prepaid expenses.
F-123
<PAGE> 247
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes information about the Company's different
geographic areas:
<TABLE>
<CAPTION>
UNITED OTHER ELIMI- CONSOLI-
STATES FRANCE FOREIGN NATIONS DATED
-------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1995
Net sales to unaffiliated
customers....................... $ 79,666 $ 1,708 $13,624 $ -- $ 94,998
Intercompany...................... 908 276 1,542 (2,726) --
-------- ------- ------- -------- --------
Total net sales......... $ 80,574 $ 1,984 $15,166 $ (2,726) $ 94,998
======== ======= ======= ======== ========
Operating income (loss)........... $ (2,367) $ (860) $ (348) $ -- $ (3,575)
======== ======= ======= ======== ========
Identifiable assets............... $ 66,123 $ 1,338 $ 6,704 $ -- $ 74,165
======== ======= ======= ========
Corporate assets.................. 1,275
--------
Total assets at
year-end............. $ 75,440
========
1996
Net sales to unaffiliated
customers....................... $140,547 $ 2,142 $22,229 $ -- $164,918
Intercompany...................... 3,584 316 2,804 (6,704) --
-------- ------- ------- -------- --------
Total net sales......... $144,131 $ 2,458 $25,033 $ (6,704) $164,918
======== ======= ======= ======== ========
Operating income (loss)........... $ 7,735 $ (118) $ 2,166 $ -- $ 9,783
======== ======= ======= ======== ========
Identifiable assets............... $ 75,569 $ 1,205 $13,933 $ -- $ 90,707
======== ======= ======= ========
Corporate assets.................. 1,357
--------
Total assets at
yearend.............. $ 92,064
========
1997
Net sales to unaffiliated
customers....................... $134,802 $24,004 $47,297 $ -- $206,103
Intercompany...................... 7,413 208 5,624 (13,245) --
-------- ------- ------- -------- --------
Total net sales......... $142,215 $24,212 $52,921 $(13,245) $206,103
======== ======= ======= ======== ========
Operating income.................. $ 6,325 $ 1,382 $ 3,779 $ -- $ 11,486
======== ======= ======= ======== ========
Identifiable assets............... $ 86,123 $23,706 $31,371 $ -- $141,200
======== ======= ======= ========
Corporate assets.................. 9,284
--------
Total assets at
yearend.............. $150,484
========
</TABLE>
The Company accounts for transfers between geographic areas at cost plus a
proportionate share of operating profit.
F-124
<PAGE> 248
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes the Company's sales in the United States and
foreign locations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales to unaffiliated customers:
U.S. Government............................... $11,514 $ 51,505 $ 43,719
Other United States........................... 54,281 72,337 73,848
Middle East................................... 8,582 7,598 5,887
Europe........................................ 8,831 11,798 44,022
Asia.......................................... 6,729 8,946 10,697
Central & South America....................... 1,050 5,807 20,123
Other Foreign................................. 4,011 6,927 7,807
------- -------- --------
$94,998 $164,918 $206,103
======= ======== ========
</TABLE>
Export sales by the Company's domestic operations were approximately 10%,
14% and 15% of net sales for the years ended December 31, 1995, 1996 and 1997,
respectively.
The Company is subject to audit and investigation by various agencies which
oversee contract performance in connection with the Company's contracts with the
U.S. Government. Additionally, the Company's laboratory testing operations are
certified and subject to frequent inspections and proficiency tests by certain
federal, state or local jurisdictions. Management believes that potential claims
from such audits and investigations will not have a material adverse effect on
the supplemental consolidated financial statements. In addition, contracts with
the U.S. Government may contain cost or performance incentives or both based on
stated targets or other criteria. Cost or performance incentives are recorded at
the time there is sufficient information to relate actual performance to targets
or other criteria.
The Company has foreign operations and assets in France, The United
Kingdom, China, Brazil, Mexico, The Philippines, Russia, India, Australia,
Japan, Saudi Arabia, Singapore, Switzerland, Canada, Colombia and Italy. In
addition, the Company sells its products and services in other foreign countries
and continues to increase its level of international activity. Accordingly, the
Company is subject to various risks including, among others, foreign currency
restrictions, exchange rate fluctuations, government instability and
complexities of local laws and regulations.
(b) MAJOR CUSTOMERS -- During the years ended December 31, 1995, 1996 and 1997
sales to the U.S. Government approximated 12%, 31% and 21% of the Company's net
sales, respectively. In addition, the year-end accounts receivable balance of
the U.S. Government approximated 6% and 9% of the Company's accounts receivable
balance as of December 31, 1996 and 1997, respectively.
F-125
<PAGE> 249
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) SUPPLEMENTAL CASH FLOWS DISCLOSURES
The following is a summary of cash paid related to certain items:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $2,720,585 $4,460,514 $4,853,462
---------- ---------- ----------
Cash paid for taxes............................. $ 604,091 $ 729,193 $3,468,474
---------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF NON-CASH ACTIVITIES:
Issuance of restricted stock.................... $ -- $ 891,066 $1,356,280
---------- ---------- ----------
Affiliate obligation forgiven in connection with
the reorganization........................... $ -- $ 122,000 $ --
---------- ---------- ----------
Exchange of note receivable for trade
receivables.................................. $ 60,000 $ -- $ --
---------- ---------- ----------
Exchange of stock in an unaffiliated company for
trade receivables............................ $ 125,000 $ -- $ --
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of businesses.................... $ -- $ -- $8,459,769
---------- ---------- ----------
Fair value of stock issued in connection with
acquisition of minority interest............. $ -- $ -- $1,243,474
---------- ---------- ----------
Notes issued in connection with acquisition of
businesses................................... $ -- $ 505,834 $2,906,513
---------- ---------- ----------
Tax benefit of restricted stock vesting......... $ -- $ -- $2,160,341
---------- ---------- ----------
</TABLE>
(16) QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1997
Net sales.................................... $44,369 $51,441 $52,071 $58,222
Gross profit................................. 14,818 17,623 16,633 17,263
Net income (loss)............................ 1,665 2,640 2,701 (4,959)
Earnings (loss) per share:
Basic..................................... $ 0.12 $ 0.19 $ 0.19 $ (0.35)
Diluted................................... $ 0.09 $ 0.16 $ 0.17 $ (0.35)
1996
Net sales.................................... $38,764 $41,629 $39,880 $44,645
Gross profit................................. 12,450 11,129 15,690 8,351
Net income (loss)............................ 3,449 1,157 4,300 (3,638)
Earnings (loss) per share:
Basic..................................... $ 0.31 $ 0.10 $ 0.38 $ (0.29)
Diluted................................... $ 0.27 $ 0.08 $ 0.35 $ (0.29)
</TABLE>
F-126
<PAGE> 250
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(17) SUBSEQUENT EVENTS
(a) ACQUISITIONS -- In addition to the mergers with LSAI, Schiff and
Securify during 1998 discussed in Note 1, the Company completed eight
acquisitions which were accounted for as purchases. Seven of the 1998
acquisitions will be included in the Company's Investigations and Intelligence
Group. The eighth acquisition will be included in the Company's Security
Products and Services Group. The aggregate purchase price of these eight
acquisitions amounted to approximately $36.4 million and consisted of $19.3
million in cash and 745,003 shares of common stock (valued at approximately
$17.1 million or an average of $22.95 per share). In addition, in connection
with the acquisitions discussed above and the mergers discussed in Note 1, the
Company entered into various employment agreements with officers and key
employees of the acquired companies with varying terms and conditions with an
aggregate future commitment of approximately $33.2 million as of December 31,
1998.
(b) STOCK OFFERINGS -- On May 5, 1998, the Company completed a public
stock offering of 3,200,000 shares of its common stock at $20.50 per share which
resulted in net proceeds to the Company of $60.4 million. A portion of the net
proceeds was used to pay off $14.8 million of indebtedness of the Company, with
the balance invested in short-term instruments and available for potential
acquisitions, working capital and other general corporate purposes. In addition
to the shares sold by the Company, certain shareholders sold 1,860,000 shares of
common stock in conjunction with the Offering.
In addition, on June 4, 1998, LSAI completed a private stock offering of
116,708 shares of its common stock which resulted in net proceeds of
approximately $2.3 million. In addition to underwriting fees, LSAI also issued
to a certain securities corporation and its designees 55,522 warrants. The net
proceeds were used to pay a portion of the purchase price for a customer list
acquired by LSAI in June 1998.
F-127
<PAGE> 251
THE KROLL-O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
ASSETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
CURRENT ASSETS:
Cash and equivalents...................................... $ 40,208
Marketable securities..................................... --
Trade accounts receivable, net of allowance for doubtful
accounts of $3,295 at September 30, 1998............... 59,527
Unbilled revenues......................................... 7,753
Related party receivables................................. 1,065
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 21,625
Inventories............................................... 19,158
Prepaid expenses and other................................ 5,687
Deferred tax asset........................................ 754
--------
Total current assets.............................. 155,777
--------
PROPERTY, PLANT, AND EQUIPMENT, at cost
Land...................................................... 1,831
Buildings and improvements................................ 8,291
Leasehold improvements.................................... 5,832
Furniture and fixtures.................................... 6,422
Machinery and equipment................................... 19,754
Construction-in-progress.................................. 1,936
--------
44,066
Less: accumulated depreciation............................ (22,352)
--------
21,714
--------
DATABASES, net of accumulated amortization of $21,987 at
September 30, 1998........................................ 9,012
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS, net of accumulated amortization of $3,057 at
September 30, 1998........................................ 49,375
OTHER ASSETS................................................ 7,995
--------
66,382
--------
$243,873
========
</TABLE>
The accompanying notes are an integral part of this supplemental consolidated
balance sheet.
F-128
<PAGE> 252
THE KROLL-O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET
LIABILITIES AND SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
<S> <C>
CURRENT LIABILITIES:
Revolving lines of credit................................. $ --
Current portion of long-term debt......................... 1,445
Shareholder payable....................................... 263
Accounts payable --
Trade.................................................. 27,975
Affiliates............................................. 131
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 155
Accrued liabilities....................................... 20,352
Income taxes currently payable............................ 4,359
Customer deposits......................................... 3,949
--------
Total current liabilities......................... 58,629
OTHER LONG-TERM LIABILITIES................................. 4,553
DEFERRED INCOME TAXES....................................... 2,637
LONG-TERM DEBT, net of current portion...................... 39,735
--------
Total liabilities................................. 105,554
SHAREHOLDERS' EQUITY:
Preferred stock, $.01 par value, 1,000,000 shares
authorized, none issued................................ --
Common stock, $.01 par value, 50,000,000 shares
authorized, 20,525,395 shares issued and outstanding in
1998................................................... 6,261
Additional paid-in-capital................................ 140,261
Retained deficit.......................................... (7,571)
Deferred compensation..................................... (365)
Accumulated other comprehensive income (loss)............. (267)
--------
Total shareholders' equity........................ 138,319
--------
$243,873
========
</TABLE>
The accompanying notes are an integral part of this supplemental consolidated
balance sheet.
F-129
<PAGE> 253
THE KROLL-O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
NET SALES
Security Products & Services.............................. $ 72,970 $100,808
Investigations & Intelligence............................. 61,711 78,909
Information Security...................................... -- 48
Voice & Data Communications............................... 13,199 14,797
-------- --------
147,880 194,562
COST OF SALES
Security Products & Services.............................. 51,434 72,457
Investigations & Intelligence............................. 36,501 43,285
Information Security...................................... -- 268
Voice & Data Communications............................... 10,868 12,113
-------- --------
98,803 128,123
GROSS PROFIT
Security Products & Services.............................. 21,536 28,351
Investigations & Intelligence............................. 25,210 35,624
Information Security...................................... -- (220)
Voice & Data Communications............................... 2,331 2,684
-------- --------
49,077 66,439
OPERATING EXPENSES
Selling and marketing..................................... 10,217 12,849
General and administrative................................ 23,242 29,585
-------- --------
Operating income..................................... 15,618 24,005
OTHER INCOME (EXPENSE):
Interest expense.......................................... (3,563) (3,512)
Interest income........................................... 297 930
Other, net................................................ (225) (133)
-------- --------
Income before minority interest, provision for income
taxes and extraordinary item........................ 12,127 21,290
Minority interest........................................... (118) --
-------- --------
Income before provision for income taxes and
extraordinary item.................................. 12,009 21,290
Provision for income taxes.................................. 4,809 8,652
-------- --------
Income before extraordinary item, net................ 7,200 12,638
Extraordinary item, net..................................... (194) --
-------- --------
Net income........................................... $ 7,006 $ 12,638
======== ========
Basic earnings per share.................................... $ 0.50 $ 0.71
======== ========
Basic weighted average shares outstanding................... 13,929 17,845
======== ========
Diluted earnings per share.................................. $ 0.46 $ 0.69
======== ========
Diluted weighted average shares outstanding................. 14,808 18,371
======== ========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-130
<PAGE> 254
THE KROLL-O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER
COMPREHENSIVE COMMON PAID-IN RETAINED DEFERRED COMPREHENSIVE
SHARES INCOME STOCK CAPITAL DEFICIT COMPENSATION INCOME (LOSS) TOTAL
------ ------------- ------ ---------- -------- ------------ ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997.... 14,795 $ 148 $ 58,912 $(20,209) $ -- $(384) $ 38,467
Issuance of stock in
conjunction with the
acquisition of businesses... 699 7 15,625 -- -- -- 15,632
Public offering of common
stock, net of issuance costs
of approximately $1,325..... 3,316 38 62,502 -- -- -- 62,540
Issuance of Securify common
stock....................... 1,400 6,063 -- -- -- -- 6,063
Issuance of stock bonus to
certain employees........... 2 -- 48 -- -- -- 48
Exercise of stock options, and
related income tax
benefit..................... 287 4 3,219 -- -- -- 3,223
Redemption of warrants........ 28 1 -- -- -- -- 1
Purchase and retirement of
treasury stock.............. (2) -- (45) -- -- -- (45)
Deferred compensation related
to stock options............ -- -- -- (365) -- (365)
Comprehensive income:
Net income................ $12,638 -- -- 12,638 -- -- 12,638
-------
Other comprehensive income,
net of tax:
Foreign currency
translation
adjustments, net of
$85 tax provision.... -- 127 -- -- -- -- -- --
Reclassification adjustment
for gain on securities
included in net income,
net of $4 tax benefit..... -- (10) -- -- -- -- -- --
-------
Other comprehensive income.... -- 117 -- -- -- -- 117 117
-------
Comprehensive income.......... $12,755 -- -- -- -- -- --
======= ------ -------- -------- ----- ----- --------
BALANCE, September 30, 1998... 20,525 $6,261 $140,261 $ (7,571) $(365) $(267) $138,319
====== ====== ======== ======== ===== ===== ========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-131
<PAGE> 255
THE KROLL O'GARA COMPANY
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS
ENDED SEPTEMBER 30,
--------------------
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 7,006 $ 12,638
Adjustments to reconcile net income to net cash provided
by (used in) operating activities --
Depreciation and amortization.......................... 2,087 2,513
Amortization of databases.............................. 2,245 2,397
Amortization of costs in excess of assets acquired..... 667 1,112
Bad debt expense....................................... 965 1,210
Gain from extinguishment of long-term debt............. -- (38)
Gain on sale of marketable securities.................. -- (7)
Minority Interest...................................... 44 --
Non-cash compensation expense.......................... -- 33
Share in net income of joint ventures.................. (149) --
Change in assets and liabilities, net of effects of
acquisitions --
Receivables............................................ (7,591) (17,997)
Related party receivables.............................. 477 473
Unbilled revenues...................................... (118) (4,264)
Costs in excess of billings on uncompleted contracts... 794 (9,546)
Inventories............................................ (4,046) 749
Prepaid expenses and other assets...................... (2,844) (382)
Accounts payable and income and other taxes currently
payable............................................... (1,719) (1,724)
Affiliate payable...................................... -- (744)
Notes payable -- shareholders.......................... 107 (58)
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (199) (165)
Customer deposits...................................... (788) 110
Deferred income taxes payable.......................... 811 (45)
Accrued liabilities.................................... (857) 1,704
Long term liabilities.................................. 106 1,427
-------- --------
Net cash used in operating activities................ (3,002) (10,604)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net........... (6,462) (4,198)
Additions to databases.................................... (3,036) (3,074)
Acquisitions, net of cash acquired........................ (7,606) (11,414)
Sale (purchase) of marketable securities.................. (3,768) 20
Other..................................................... (15) 9
-------- --------
Net cash used in investing activities.................. (20,887) (18,657)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of
credit................................................. (8,220) (1,101)
Proceeds from long-term debt.............................. 37,067 --
Payments of long-term debt................................ -- (10,706)
Repayment of shareholder notes............................ (186) --
Net proceeds from public offering of common stock......... -- 62,850
Issuance of preferred stock............................... -- 5,508
Warrant offering costs.................................... (110) --
Proceeds from exercise of stock options including related
tax benefits........................................... 140 3,071
Purchase and retirement of common stock................... (2,693) (45)
Foreign currency translation.............................. (529) 50
-------- --------
Net cash provided by financing activities.............. 25,469 59,627
-------- --------
NET INCREASE IN CASH AND EQUIVALENTS........................ 1,580 30,366
Effects of foreign currency exchange rates on cash.......... (64) 77
-------- --------
CASH AND EQUIVALENTS, beginning of period................... 5,491 9,765
-------- --------
CASH AND EQUIVALENTS, end of period......................... $ 7,007 $ 40,208
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ 2,171 $ 2,626
======== ========
Cash paid for taxes....................................... $ 2,907 $ 2,252
======== ========
</TABLE>
The accompanying notes are an integral part of these supplemental consolidated
financial statements.
F-132
<PAGE> 256
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION
The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively the "Company"), is a leading global provider of a
broad range of specialized products and services that are designed to provide
solutions to a variety of security needs. The Company's Security Products and
Services Group markets ballistic and blast protected vehicles to businesses,
individuals and governments. It also offers security services such as training,
risk and crisis management services, and site security systems. The
Investigations and Intelligence Group offers business intelligence and
investigation services to clients worldwide. The Voice and Data Communications
Group offers secure satellite communication equipment, satellite navigation
systems and computer hardware and software security.
In December 1997, a wholly owned subsidiary of The O'Gara Company
("O'Gara") was merged (the "Merger") into Kroll Holdings, Inc. ("Kroll"). At the
time of the Merger, the Company's name was changed from The O'Gara Company to
The Kroll-O'Gara Company.
Effective upon the consummation of the Merger, each then issued and
outstanding share of Kroll common stock (including those issued under the Kroll
restricted stock plan) was converted into 62.52 shares of Common Stock of the
Company or 6,098,561 shares of Company Common Stock in total. Outstanding
employee stock options were converted at the same exchange factor into options
to purchase 551,492 shares of Company Common Stock.
In December 1998, a wholly owned subsidiary of the Company was merged with
and into Laboratory Specialists of America, Inc. ("LSAI"). Effective upon the
consummation of the merger, each then issued and outstanding share of LSAI
common stock was converted into .2102 shares of the Company or 1,209,053 shares
of the Company's common stock in total. Outstanding stock option and stock
warrants of LSAI were converted at the same exchange factor into options to
purchase 39,094 and 24,386 shares, respectively, of the Company's common stock.
The financial position and results of operations of LSAI will be reported as
part of the Company's Investigations and Intelligence Group.
In December 1998, a wholly owned subsidiary of the Company was merged with
and into Schiff & Associates, Inc. ("Schiff"). Effective upon the consummation
of the merger, each then issued and outstanding share of Schiff common stock was
converted into approximately 131.41 shares of common stock of the Company or
169,521 shares of the Company's common stock in total. The financial position
and results of operations of Schiff will be reported as part of the Company's
Investigations and Intelligence Group.
In December 1998, a wholly owned subsidiary of the Company was merged with
and into Securify Inc. ("Securify"). Effective upon the consummation of the
merger, all of the outstanding stock of Securify was converted into shares of
the Company's common stock at a rate of .110793 for Series A Preferred, .118273
for Series B Preferred, and .0955252 for Securify common stock. In total, the
Company issued 1,430,936 shares of common stock. In addition, outstanding
employee stock options of Securify were converted at the same exchange factor as
Securify common stock into options to purchase 179,877 shares of the Company's
common stock. Effective with the consummation of the merger, the Company created
the Information Security Group and Securify's results of operations and
financial position will be reported in this group. The Information Security
Group offers information and computer security services, including network and
system review and repair.
The Mergers constitute tax-free reorganizations and have been accounted for
as pooling of interests. Accordingly, all prior period supplemental consolidated
financial statements presented have been restated
F-133
<PAGE> 257
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
to include the combined results of operations, financial position and cash flows
of Kroll, LSAI, Schiff, and Securify as though they had always been a part of
the Company.
On May 5, 1998, the Company completed a public offering of 3,200,000 shares
of its Common Stock at $20.50 per share (the "Offering"), resulting in net
proceeds to the Company of $60.4 million. A portion of the net proceeds was used
to pay off $14.8 million of indebtedness of the Company, with the balance
invested in short-term instruments and available for potential acquisitions,
working capital and other general corporate purposes. In addition to the shares
sold by the Company, certain shareholders sold 1,860,000 shares of Common Stock
in conjunction with the Offering. The Offering followed the Company's initial
public offering, which was completed on November 15, 1996 and resulted in the
issuance of 2,048,000 shares of Common Stock.
In addition, on June 4, 1998, LSAI completed a private stock offering of
116,708 shares of its common stock which resulted in net proceeds of
approximately $2.3 million. In addition to the underwriting fees, LSAI also
issued to a certain securities corporation and its designees 55,522 warrants.
The net proceeds were used to pay a portion of the purchase price for a customer
list acquired by LSAI in June 1998.
The supplemental consolidated financial statements include the accounts of
the Company and its majority-owned subsidiaries. All material intercompany
accounts and transactions have been eliminated. Investments in 20% to 50% owned
entities are accounted for on the cost method. Affiliated entities are not
included in the accompanying supplemental consolidated financial statements.
The accompanying unaudited supplemental consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for fair
presentation have been included. Operating results for the three and nine month
periods ended September 30, 1998, are not necessarily indicative of the results
that may be expected for the year ended December 31, 1998. The accompanying
supplemental consolidated financial statements should be read in conjunction
with the supplemental consolidated financial statements and notes thereto
included elsewhere in this document for the year ended December 31, 1997.
(2) REVENUE RECOGNITION
Revenue related to contracts for security products (both government and
commercial) results principally from long-term, fixed price contracts and is
recognized using the percentage-of-completion method calculated utilizing the
cost-to-cost approach. The percent deemed to be complete is determined by
comparing the costs incurred to date with estimated total costs for each
contract. This method is used because management considers costs incurred to be
the best available measure of progress on these contracts. However, adjustments
to this measurement are made when management believes that costs incurred
materially exceed effort expended. Contract costs include all direct material
and labor costs, along with certain direct overhead costs related to contract
production.
F-134
<PAGE> 258
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
Provisions for any estimated total contract losses on uncompleted contracts
are recorded in the period in which it becomes known that such losses will
occur. Changes in estimated total contract costs will result in revisions to
contract revenue. These revisions are recognized when determined.
Revenue from investigations, intelligence and security services is
recognized as the services are performed. The Company records either billed or
unbilled accounts receivable based on a case-by-case invoice determination.
Revenue related to voice and data security equipment are recognized as
equipment is shipped. Revenue and related direct costs of brokered satellite
time are recorded when payments are received from customers.
(3) ACQUISITIONS
The Company completed the following acquisitions during the first nine
months of 1998, all of which were accounted for as purchases. The allocation of
purchase price was based on estimates and may be revised at a later date pending
the completion of certain appraisals and other analyses.
(a) On March 16, 1998, the Company acquired all of the shares of
Corplex, Inc. ("Corplex"), a provider of investigative and executive
protection services based in New York, New York. The purchase price
consisted of 29,207 shares of Common Stock (valued at approximately $0.5
million or $17.98 per share). For accounting purposes, the acquisition was
effective March 1, 1998, and the results of operations of Corplex are
included in the consolidated results of the Company from that date forward.
The former shareholder of Corplex, who was employed by Corplex prior to the
acquisition, continues in his formerly held capacity. Cost in excess of
assets acquired is expected to be $0.4 million and will be amortized over
15 years.
(b) On May 1, 1998, the Company acquired from Harrison Laboratories,
Inc. (HLI) a customer list pursuant to an Asset Purchase Agreement, dated
April 13, 1998 (the HLI Asset Purchase). In connection with the HLI Asset
Purchase, the Company paid $500,000 at closing and agreed to pay on or
before May 30, 1999, an amount equal to the revenues attributable to the
customer list, during the one-year period ending April 30, 1999, in excess
of $500,000. In addition, the Company assumed HLI's obligations under a
five-year lease and acquired the related equipment and entered into a
three-year employment agreement with the principal shareholder of HLI which
provides for a base salary of $50,000 per year, monthly bonuses and other
benefits. The purchase price of the customer list was recorded as an
intangible asset and is being amortized over 15 years.
(c) On June 15, 1998, the Company completed the acquisition of
Lindquist Avey MacDonald Baskerville Inc. ("Lindquist Avey"), a provider of
forensic and investigative accounting services headquartered in Toronto,
Canada. The purchase price for the acquisition was $10.7 million consisting
of $4.7 million in cash and 278,340 shares of Common Stock (valued at
approximately $6.0 million or $21.52 per share). For accounting purposes,
the acquisition was effective June 1, 1998, and the results of operations
of Lindquist Avey are included in the consolidated results of the Company
from that date forward. Cost in excess of assets acquired is expected to be
$10.7 million and will be amortized over 25 years.
(d) On July 1, 1998, the Company acquired from Toxworx Laboratories,
Inc. (TLI), a California corporation, a customer list pursuant to an Asset
Purchase Agreement, dated June 8,
F-135
<PAGE> 259
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
1998 (TLI Asset Purchase). In connection with the TLI Asset Purchase
Agreement, the Company paid $2,400,000 at closing. The purchase price of
the customer list was recorded as an intangible asset which is being
amortized over 15 years.
(e) On September 1, 1998, the Company completed the acquisition of all
of the capital stock of Kizorek, Inc., now renamed InPhoto Surveillance,
Inc. ("InPhoto"). InPhoto, headquartered in Naperville, Illinois, is a
leading claims investigation agency which primarily provides video
surveillance services to insurance companies, corporations and government
agencies in connection with investigating exaggerated disability claims and
other fraud. The purchase price consisted of $0.8 million in cash and
352,381 shares of Common Stock (valued at approximately $8.2 million or
$23.35 per share). For accounting purposes, the acquisition was effective
July 1, 1998, and the results of operations of InPhoto are included in the
consolidated results of the Company from that date forward. Cost in excess
of assets is expected to be $8.1 million and will be amortized over 25
years.
(f) On September 22, 1998, the Company completed, through its wholly
owned subsidiary, O'Gara-Hess & Eisenhardt de Colombia, Inc. ("OHE
Colombia"), the acquisition of the assets and technology of Protec S.A.
("Protec") of Bogota, Colombia. Protec was a leading manufacturer of
armored vehicles and bullet-and smash- resistant glass for the Colombian
market. The purchase price consisted of $3.2 million in cash and 38,788
shares of Common Stock (valued at approximately $0.9 million or $22.95 per
share). For accounting purposes, the acquisition was effective September
30, 1998, and the results of operations of OHE Colombia are included in the
consolidated results of the Company from that date forward. Cost in excess
of assets acquired is expected to be $3.6 million and will be amortized
over 20 years.
F-136
<PAGE> 260
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the 1998 acquisitions, assets were acquired and
liabilities were assumed as follows (dollars in thousands):
<TABLE>
<CAPTION>
LINDQUIST
PROTEC INPHOTO AVEY CORPLEX HLI TLI
------- ------- --------- ------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Cash...................................... $ -- $ 192 $ 257 $ 16 $ -- $ --
Accounts receivable....................... -- 1,743 -- 96 -- --
Unbilled revenue.......................... -- 269 339 69 -- --
Other current assets...................... 75 448 577 -- -- --
Property, plant and equipment............. 311 955 628 4 -- --
Other non-current assets.................. -- -- 116 15 -- --
Intangible assets......................... 200 700 -- -- 500 2,400
Goodwill.................................. 3,602 8,076 10,716 384 -- --
------- ------- ------- ----- ----- -------
$ 4,188 $12,383 $12,633 $ 584 $ 500 $ 2,400
Less: Cash paid for net assets........... (3,200) (800) (4,727) -- (500) (2,400)
Fair value of stock issued......... (890) (8,228) (5,989) (525) -- --
------- ------- ------- ----- ----- -------
$ 98 $ 3,355 $ 1,917 $ 59 $ -- $ --
======= ======= ======= ===== ===== =======
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition
costs.................................. $ 98 $ 3,155 $ 1,917 $ 46 $ -- $ --
Debt...................................... -- 200 -- 13 -- --
------- ------- ------- ----- ----- -------
$ 98 $ 3,355 $ 1,917 $ 59 $ -- $ --
======= ======= ======= ===== ===== =======
</TABLE>
(4) EARNINGS PER SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
No. 128, "Earnings Per Share" ("SFAS No. 128"). In accordance with SFAS No. 128,
basic earnings per share are computed by dividing net income by the weighted
average number of shares of common stock outstanding during the year. Diluted
earnings per share are computed by dividing net income by the weighted average
number of shares of common stock and equivalents outstanding during the year.
Dilutive common stock equivalents represent shares issuable upon assumed
exercise of stock options and upon assumed issuance of restricted stock. The
following is a reconciliation of the numerator and denominator for basic and
diluted earnings per share for the nine months ended September 30, 1997 and 1998
(in thousands except per share data):
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
--------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS................................................ $7,006 13,929 $0.50
=====
Effect of dilutive securities:
Options................................................ -- 197
Restricted stock....................................... (227) 585
Warrants............................................... -- 78
Convertible note taxable............................... -- 19
------ ------
Diluted EPS.............................................. $6,779 14,808 $0.46
====== ====== =====
</TABLE>
F-137
<PAGE> 261
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
--------------------------------------
PER
INCOME SHARES SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ------
<S> <C> <C> <C>
Basic EPS......................................... $12,638 17,845 $0.71
=====
Effect of dilutive securities:
Options......................................... -- 510
Warrants........................................ -- 16
------- ------
Diluted EPS....................................... $12,638 18,371 $0.69
======= ====== =====
</TABLE>
(5) NEW PRONOUNCEMENTS
In 1998, the Company adopted Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which established
standards for reporting and displaying comprehensive income and its components
in a financial statement that is displayed with the same prominence as other
financial statements. The Company has chosen to disclose comprehensive income,
which encompasses net income, foreign currency translation adjustments and
unrealized holding gains of marketable securities, in the Consolidated Statement
of Shareholder's Equity. Prior years have been restated to conform to the SFAS
No. 130 requirements. The Accumulated Other Comprehensive Income balance of $0.1
million at September 30, 1998 consists entirely of foreign currency translation
adjustments.
Total comprehensive income for the nine-month period ended September 30,
1997 is as follows (in thousands):
<TABLE>
<S> <C>
Net income.................................................. $7,006
------
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of $390 tax
benefit................................................ (585)
------
Other comprehensive income.................................. (585)
------
Comprehensive income...................................... $6,421
======
</TABLE>
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures About Segments of an Enterprise and Related Information"
("SFAS No. 131"), effective for fiscal years beginning after December 15, 1997.
This statement requires disclosure for each segment into which a company is
organized by the chief operating decision maker for the purposes of making
operating decisions and assessing performance. Reportable segments are based on
products and services, geography, legal structure, management structure and any
manner in which management disaggregates a company. The Company intends to adopt
SFAS No. 131 during fiscal 1998. This statement, which requires expansion or
modification to existing disclosures, will have no impact on the Company's
reported financial position, results of operations or cash flows.
In April 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-5 "Reporting on the Cost of Start-Up
Activities." The SOP requires costs of start-up activities, including
preoperating costs, organization costs and other start-up costs, to be expensed
as incurred. The Company's current practice is to capitalize these expenses and
amortize them over periods ranging from one to five years. The Company is
required to adopt the provisions of this statement no later than the first
quarter of fiscal 1999. Included in the accompanying September 30, 1998
Consolidated Balance Sheet are
F-138
<PAGE> 262
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
approximately $0.7 million of preoperating, organization and start-up costs
which would have been expensed had this statement already been implemented.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective for fiscal years beginning after June 15, 1999. The Company
currently has several forward contracts in place in association with demand
notes from certain subsidiaries. These instruments qualify for hedge accounting.
The Company has not yet quantified the impact of adopting SFAS No. 133 on its
financial statements and has not determined the timing of or method of adoption
of SFAS No. 133. However, SFAS No. 133 could increase volatility in earnings and
other comprehensive income.
(6) SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash and equivalents consist of all operating cash accounts and investments
with an original maturity of three months or less. Marketable securities consist
of available-for-sale commercial paper obligations which mature in 1998. These
securities are valued at current market value, which approximates cost. Non-
cash activity for the nine months ended September 30, 1998 is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
1998
------
<S> <C>
Fair value of stock issued in connection with acquisition of
ITI....................................................... --
Notes issued in connection with acquisition of ITI.......... --
Fair value of stock issued in connection with acquisition of
Next Destination.......................................... --
Notes issued in connection with acquisition of Next
Destination............................................... --
Fair value of stock issued in connection with acquisition of
Labbe..................................................... --
Fair value of stock issued in connection with acquisition of
Corplex................................................... $ 525
Fair value of stock issued in connection with acquisition of
Lindquist Avey............................................ $5,989
Fair value of stock issued in connection with acquisition of
InPhoto................................................... $8,228
Fair value of stock issued in connection with acquisition of
Protec.................................................... $ 890
Fair value of stock issued in connection with employee stock
bonus paid................................................ $ 48
</TABLE>
(7) INVENTORIES
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and include the following (dollars in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1998
-------------
(UNAUDITED)
<S> <C>
Raw materials......................................... $10,792
Vehicle costs and work-in-process..................... 8,366
-------
$19,158
=======
</TABLE>
F-139
<PAGE> 263
THE KROLL-O'GARA COMPANY
NOTES TO SUPPLEMENTAL CONSOLIDATED UNAUDITED
FINANCIAL STATEMENTS -- (CONTINUED)
(8) DERIVATIVE FINANCIAL INSTRUMENTS
Financial instruments in the form of foreign currency exchange contracts
are utilized by the Company to hedge its exposure to movements in foreign
currency exchange rates. The Company does not hold or issue derivative financial
instruments for trading purposes. Gains and losses on foreign exchange contracts
are deferred and amortized as an adjustment to the cumulative foreign currency
translation adjustment component of equity over the terms of the agreements in
accordance with hedge accounting standards. The fair value of foreign currency
exchange contracts is not recognized in the consolidated financial statements
since they are accounted for as hedges.
The Company has entered into five foreign currency exchange contracts to
effectively hedge its exposure to certain foreign currency rate fluctuations on
demand loans to subsidiaries which are denominated in the foreign currency. By
virtue of these contracts, the Company has fixed the total dollar amount which
it will receive under the aforementioned subsidiary loans through the maturity
dates of the contracts regardless of the fluctuations in the exchange rate. The
total notional amount and fair market value of the contracts, which mature
between January 1999 and September 2000, are $17.9 million and $0.5 million,
respectively. The Company's foreign currency translation adjustment component of
accumulated other comprehensive income (loss) was increased by $0.1 million in
the first three quarters of 1998 as a result of these agreements.
F-140
<PAGE> 264
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING FINANCIAL STATEMENTS
The unaudited pro forma combining financial statements give effect to the
merger as a pooling of interests, and should be read in conjunction with, and is
qualified by reference to, the audited consolidated financial statements of
Kroll-O'Gara and Background America and the notes thereto and the audited
supplemental consolidated financial statements of Kroll-O'Gara and notes thereto
included elsewhere in this Proxy Statement / Prospectus. For purposes of the
unaudited pro forma operating data, Kroll-O'Gara's historical and supplemental
consolidated financial statements for the three fiscal years ended December 31,
1997 and the nine months ended September 30, 1997 and 1998 have been combined
with the consolidated financial statements of Background America for the three
fiscal years ended December 31, 1997 and the nine months ended September 30,
1997 and 1998, respectively. For purposes of the unaudited pro forma combined
condensed balance sheets, Kroll-O'Gara's consolidated financial statements and
supplemental consolidated financial statements at September 30, 1998 have been
combined with Background America's consolidated financial statements at
September 30, 1998.
The pro forma financial statements are presented for illustrative purposes
only and are not necessarily indicative of the operating results or financial
position that would have been achieved if the merger had been consummated as of
the beginning of the periods indicated, nor are they indicative of future
financial position or results of operations.
F-141
<PAGE> 265
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
BACKGROUND
KROLL-O'GARA AMERICA PRO FORMA
------------- ---------- ---------
<S> <C> <C> <C>
Current Assets:
Cash and cash equivalents........................... $ 32,859 $1,058 $ 33,917
Accounts receivable billed and unbilled, net........ 63,624 1,590 65,214
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 21,625 -- 21,625
Inventories......................................... 19,094 -- 19,094
Other current assets................................ 6,083 90 6,173
-------- ------ --------
Total current assets............................. 143,285 2,738 146,023
Property, plant and equipment, net.................... 18,389 747 19,136
Databases, net........................................ 9,012 -- 9,012
Costs in excess of assets acquired and other
intangible assets, net.............................. 39,629 1,067 40,696
Other assets, net..................................... 7,947 249 8,196
-------- ------ --------
Total assets..................................... $218,262 $4,801 $223,063
======== ====== ========
Current liabilities:
Accounts payable.................................... $ 27,022 $ 334 $ 27,356
Accrued liabilities................................. 18,111 348 18,459
Other current liabilities........................... 9,631 34 9,665
-------- ------ --------
Total current liabilities........................ 54,764 716 55,480
Long-term debt, net of current portion................ 39,339 98 39,437
Other long-term liabilities........................... 5,235 -- 5,235
Shareholders' equity.................................. 118,924 3,987(1) 122,911
-------- ------ --------
Total liabilities and shareholders' equity....... $218,262 $4,801 $223,063
======== ====== ========
</TABLE>
(1) This amount includes a reclass of approximately $6.0 million for mandatorily
redeemable preferred stock that was historically reflected as a long-term
liability but is treated as essentially the same as common stock in the
merger transaction.
F-142
<PAGE> 266
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
----------------------------------------------------
BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... $85,841 $ -- $85,841
Cost of sales................................. 62,114 -- 62,114
------- ---- -------
Gross profit............................. 23,727 -- 23,727
Selling, general and administrative expenses,
including amortization...................... 28,364 76 28,440
------- ---- -------
Operating loss........................... (4,637) (76) (4,713)
Interest expense.............................. (2,813) -- (2,813)
Other expense, net............................ (384) -- (384)
------- ---- -------
Loss before benefit for income taxes..... (7,834) (76) (7,910)
Benefit for income taxes...................... (1,298) -- (1,298)
------- ---- -------
Net loss................................. $(6,536) $(76) $(6,612)
======= ==== =======
Basic loss per share from continuing
operations.................................. $ (0.65) $ (0.66)(2)
======= =======
Basic weighted average shares outstanding..... 10,021 29(1) 10,050(2)
======= =======
Diluted loss per share from continuing
operations.................................. $ (0.65) $ (0.66)(2)
======= =======
Diluted weighted average shares outstanding... 10,021 29(1) 10,050(2)
======= =======
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(2) On a pro forma basis for the year ended December 31, 1995, Kroll-O'Gara and
Background America had a combined net loss. As such, there is no further
dilution of earnings per share by the common stock equivalents of
Kroll-O'Gara and Background America and basic and diluted earnings per
share are the same.
F-143
<PAGE> 267
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................ $153,661 $ 1,776 $155,437
Cost of sales............................ 111,459 1,624 113,083
-------- ------- --------
Gross profit........................ 42,202 152 42,354
Selling, general and administrative
expenses, including amortization....... 33,703 1,237 34,940
-------- ------- --------
Operating income (loss)............. 8,499 (1,085) 7,414
Interest expense......................... (3,140) (42) (3,182)
Other income, net........................ 336 (2) 334
-------- ------- --------
Income (loss) before benefit for
income taxes...................... 5,695 (1,129) 4,566
Benefit for income taxes................. (162) -- (162)
-------- ------- --------
Net income (loss)................... $ 5,857 $(1,129) $ 4,728
======== ======= ========
Basic earnings per share from continuing
operations............................. $ 0.55 $ 0.42
======== ========
Basic weighted average shares
outstanding............................ 10,742 505(1) 11,247(2)
======== ========
Diluted earnings per share from
continuing operations.................. $ 0.51 $ 0.39
======== ========
Diluted weighted average shares
outstanding............................ 11,160 510(1) 11,670(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(2) The following is a reconciliation of the numerator and denominator for
basic and diluted earnings per share for the year ended December 31, 1996:
<TABLE>
<CAPTION>
INCOME SHARES
------ -------
<S> <C> <C>
Basic earnings per share............................... $4,728 11,247
Effect of dilutive securities:
Options.............................................. -- 135
Restricted stock..................................... (162) 287
Warrants............................................. -- 1
------ -------
Diluted earnings per share............................. $4,566 11,670
====== =======
</TABLE>
F-144
<PAGE> 268
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-------------------------------------------------------
BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................ $190,413 $ 4,221 $194,634
Cost of sales............................ 131,644 3,448 135,092
-------- ------- --------
Gross profit........................ 58,769 773 59,542
Selling, general and administrative
expenses, including amortization....... 42,593 2,178 44,771
Merger related costs..................... 7,205 -- 7,205
-------- ------- --------
Operating income (loss)............. 8,971 (1,405) 7,566
Interest expense......................... (4,806) (84) (4,890)
Interest income.......................... -- 93 93
Other income (expense), net.............. (393) 59 (334)
-------- ------- --------
Income (loss) before minority interest,
provision for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle........................... 3,772 (1,337) 2,435
Minority interest........................ (156) -- (156)
-------- ------- --------
Income (loss) before provision for
income taxes, extraordinary item and
cumulative effect of change in
accounting principle................ 3,616 (1,337) 2,279
Provision for income taxes............... 2,352 -- 2,352
-------- ------- --------
Income (loss) from continuing
operations(3)..................... $ 1,264 $(1,337) $ (73)
======== ======= ========
Basic earnings per share from continuing
operations(3).......................... $ 0.10 $ (0.01)(2)
======== ========
Basic weighted average shares
outstanding............................ 13,061 744(1) 13,805(2)
======== ========
Diluted earnings per share from
continuing operations(3)............... $ 0.09 $ (0.01)(2)
======== ========
Diluted weighted average shares
outstanding............................ 13,721 84(1) 13,805(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(2) On a pro forma basis for the year ended December 31, 1997, Kroll-O'Gara and
Background America had a combined net loss. As such, there is no further
dilution of earnings per share by the common stock equivalents of
Kroll-O'Gara and Background America and basic and diluted earnings per share
are the same.
(3) During the second quarter of 1997, Kroll-O'Gara recorded an extraordinary
charge of $194, net of a benefit for income taxes of $129, related to the
refinancing of certain debt obligations in 1997. In addition, during the
fourth quarter of 1997, Kroll-O'Gara changed its method of accounting for
costs incurred in connection with business process reengineering activities
relating to information technology transformation and recorded a cumulative
effect of change in accounting principle of $360, net of a benefit for
income taxes of $240. The pro forma basic and diluted earnings per share
impact of the extraordinary item was $0.01 and the pro forma basic and
diluted earnings per share impact of the cumulative effect of change in
accounting principle was $0.03 for the year ended December 31, 1997.
F-145
<PAGE> 269
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------
BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................ $136,390 $ 3,076 $139,466
Cost of sales............................ 92,919 2,555 95,474
-------- ------- --------
Gross profit........................ 43,471 521 43,992
Selling, general and administrative
expenses, including amortization....... 29,793 1,568 31,361
-------- ------- --------
Operating income (loss)............. 13,678 (1,047) 12,631
Interest expense......................... (3,387) (79) (3,466)
Interest income.......................... 259 52 311
Other expense, net....................... (226) 14 (212)
-------- ------- --------
Income (loss) before minority interest,
provision for income taxes and
extraordinary item.................. 10,324 (1,060) 9,264
Minority interest........................ (118) -- (118)
-------- ------- --------
Income (loss) before provision for
income taxes and extraordinary
item.............................. 10,206 (1,060) 9,146
Provision for income taxes............... 4,035 -- 4,035
-------- ------- --------
Income (loss) from continuing
operations(3)..................... $ 6,171 $(1,060) $ 5,111
======== ======= ========
Basic earnings per share from continuing
operations (3)......................... $ 0.47 $ 0.37
======== ========
Basic weighted average shares
outstanding............................ 13,058 697(1) 13,755(2)
======== ========
Diluted earnings per share from
continuing operations (3).............. $ 0.43 $ 0.34
======== ========
Diluted weighted average shares
outstanding............................ 13,825 708(1) 14,533(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
F-146
<PAGE> 270
(2) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
INCOME SHARES
------ ------
<S> <C> <C>
Basic earnings per share.................................... $5,111 13,755
Effect of dilutive securities:
Options................................................... -- 192
Restricted stock.......................................... (227) 585
Warrants.................................................. -- 1
------ ------
Diluted earnings per share.................................. $4,884 14,533
====== ======
</TABLE>
(3) During the second quarter of 1997, Kroll-O'Gara recorded an extraordinary
charge of $194, net of a benefit for income taxes of $129, related to the
refinancing of certain debt obligations in 1997. The pro forma basic and
diluted earnings per share impact of the extraordinary item was $0.01 for
the nine months ended September 30, 1997.
F-147
<PAGE> 271
KROLL-O'GARA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
----------------------------------------------------
BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales..................................... $178,943 $5,028 $183,971
Cost of sales................................. 120,100 3,360 123,460
-------- ------ --------
Gross profit............................. 58,843 1,668 60,511
Selling, general and administrative expenses,
including amortization...................... 36,860 2,469 39,329
-------- ------ --------
Operating income (loss).................. 21,983 (801) 21,182
Interest expense.............................. (3,322) (9) (3,331)
Interest income............................... 759 76 835
Other expense, net............................ (219) 17 (202)
-------- ------ --------
Income (loss) before provision for income
taxes.................................. 19,201 (717) 18,484
Provision for income taxes.................... 7,641 -- 7,641
-------- ------ --------
Net income (loss) from continuing
operations............................. $ 11,560 $ (717) $ 10,843
======== ====== ========
Basic earnings per share from continuing
operations.................................. $ 0.74 $ 0.66
======== ========
Basic weighted average shares outstanding..... 15,580 898(1) 16,478(2)
======== ========
Diluted earnings per share from continuing
operations.................................. $ 0.72 $ 0.64
======== ========
Diluted weighted average shares outstanding... 15,955 940(1) 16,895(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(2) The following is a reconciliation of the numerator and denominator for
basic and diluted earnings per share for the nine months ended September
30, 1998:
<TABLE>
<CAPTION>
INCOME SHARES
------- -------
<S> <C> <C>
Basic earnings per share.................................... $10,843 16,478
Effect of dilutive securities:
Options................................................... -- 416
Warrants.................................................. -- 1
------- -------
Diluted earnings per share.................................. $10,843 16,895
======= =======
</TABLE>
F-148
<PAGE> 272
KROLL-O'GARA AND KIZOREK UNAUDITED PRO FORMA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA KROLL-O'GARA BACKGROUND PRO FORMA
KROLL-O'GARA KIZOREK(1) ADJUSTMENTS(2) PRO FORMA AMERICA ADJUSTMENTS PRO FORMA
------------- ---------- -------------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $190,413 $14,476 $204,889 $ 4,221 $209,110
Cost of sales................ 131,644 8,113 139,757 3,448 143,205
-------- ------- ----- -------- ------- --------
Gross profit............. 58,769 6,363 65,132 773 65,905
Selling, general and
administrative expenses,
including amortization..... 42,593 5,111 340(3) 48,044 2,178 50,222
Merger related costs......... 7,205 -- 7,205 -- 7,205
-------- ------- ----- -------- ------- --------
Operating income
(loss)................. 8,971 1,252 (340) 9,883 (1,405) 8,478
Interest expense............. (4,806) (20) (69)(4) (4,895) (84) (4,979)
Interest income.............. -- -- -- 93 93
Other income (expense),
net........................ (393) -- (393) 59 (334)
-------- ------- ----- -------- ------- --------
Income (loss) before
minority interest,
provision for income
taxes, extraordinary item
and cumulative effect of
change in accounting
principle................ 3,772 1,232 (409) 4,595 (1,337) 3,258
Minority Interest............ (156) -- (156) -- (156)
-------- ------- ----- -------- ------- --------
Income (loss) before
provision for income
taxes, extraordinary item
and cumulative effect of
change in accounting
principle................ 3,616 1,232 (409) 4,439 (1,337) 3,102
Provision for income taxes... 2,352 -- 329(5) 2,681 -- 2,681
-------- ------- ----- -------- ------- --------
Income (loss) from
continuing
operations(9)............ $ 1,264 $ 1,232 $(738) $ 1,758 $(1,337) $ 421
======== ======= ===== ======== ======= ========
Basic earnings per share from
continuing operations(9)... $ 0.10 $ 0.13 $ 0.03
======== ======== ========
Basic weighted average shares
outstanding................ 13,061 352(6) 13,413 744(7) 14,157(8)
======== ======== ========
Diluted earnings per share
from continuing
operations(9).............. $ 0.09 $ 0.12 $ 0.03
======== ======== ========
Diluted weighted average
shares outstanding......... 13,721 352(6) 14,073 761(7) 14,834(8)
======== ======== ========
</TABLE>
- ---------------
(1) To include historical results of operations for Kizorek for the year ended
October 31, 1997. Kizorek's operating costs have been allocated into
categories consistent with the Company's statement of operations
presentation policies.
(2) Pro forma adjustments exclude the impact of compensation expense for a
non-recurring charge under the Kizorek deferred compensation plan associated
with the accelerated vesting of benefits resulting from a change in control
of the company.
(3) Pro forma adjustments are comprised of the following components:
amortization of goodwill resulting from the acquisition of Kizorek (gross
cost of $6,772 over 25 years), amortization of capitalized acquisition costs
associated with Kizorek ($545 over 25 years) and amortization of customer
lists and detective licenses identified in conjunction with the acquisition
($700 over 15 years).
(4) To record interest expense under Kizorek deferred compensation plan ($1,350
at 5.125%).
F-149
<PAGE> 273
(5) To recognize the benefit for income taxes on pro forma adjustments and the
provision for income taxes on the historical results of Kizorek, which had
been previously treated as an S Corporation for income tax purposes. An
effective rate of 40% was used to determine the pro forma income tax impact.
(6) These amounts represent the number of Kroll-O'Gara common shares issued to
Kizorek shareholders for the purchase of Kizorek. Kizorek does not have any
common stock equivalents which would cause further dilution to earnings per
share.
(7) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(8) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the year ended December 31,1997:
<TABLE>
<CAPTION>
INCOME SHARES
------ ------
<S> <C> <C>
Basic earnings per share.................................... $421 14,157
Effect of dilutive securities:
Options................................................... -- 233
Restricted stock.......................................... -- 443
Warrants.................................................. -- 1
---- ------
Diluted earnings per share.................................. $421 14,834
==== ======
</TABLE>
(9) During the second quarter of 1997, Kroll-O'Gara recorded an extraordinary
charge of $194, net of a benefit for income taxes of $129, related to the
refinancing of certain debt obligations in 1997. The pro forma basic and
diluted earnings per share impact of the extraordinary item was $0.01 for
the year ended December 31, 1997.
F-150
<PAGE> 274
KROLL-O'GARA AND KIZOREK UNAUDITED PRO FORMA AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PRO FORMA KROLL-O'GARA BACKGROUND PRO FORMA
KROLL-O'GARA KIZOREK (1) ADJUSTMENTS (2) PRO FORMA AMERICA ADJUSTMENTS PRO FORMA
------------- ----------- --------------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................. $178,943 $6,385 $185,328 $5,028 $190,356
Cost of sales.............. 120,100 3,911 124,011 3,360 127,371
-------- ------ -------- -------- ------ --------
Gross profit........... 58,843 2,474 61,317 1,668 62,985
Selling, general and
administrative expenses,
including amortization... 36,860 2,411 169(3) 39,440 2,469 41,909
-------- ------ -------- -------- ------ --------
Operating income
(loss)............... 21,983 63 (169) 21,877 (801) 21,076
Interest expense........... (3,322) -- (35)(4) (3,357) (9) (3,366)
Interest income............ 759 -- 759 76 835
Other income (expense),
net...................... (219) -- (219) 17 (202)
-------- ------ -------- -------- ------ --------
Income (loss) before
provision for income
taxes.................. 19,201 63 (204) 19,060 (717) 18,343
Provision (benefit) for
income taxes............. 7,641 -- (57)(5) 7,584 -- 7,584
-------- ------ -------- -------- ------ --------
Net income (loss) from
continuing
operations........... $ 11,560 $ 63 $ (147) $ 11,476 $ (717) $ 10,759
======== ====== ======== ======== ====== ========
Basic earnings per share
from continuing
operations............... $ 0.74 $ 0.74 $ 0.65
======== ======== ========
Basic weighted average
shares outstanding....... 15,580 15,580 898(6) 16,478(7)
======== ======== ========
Diluted earnings per share
from continuing
operations............... $ 0.72 $ 0.72 $ 0.64
======== ======== ========
Diluted weighted average
shares outstanding....... 15,955 15,955 940(6) 16,895(7)
======== ======== ========
</TABLE>
- ---------------
(1) To include historical results of operations for Kizorek for the six months
ended April 30, 1998. Kizorek's operating costs have been allocated into
categories consistent with the Company's statement of operations
presentation policies. Kizorek's results of operations from July 1, 1998
through September 30, 1998 are included in the consolidated results of
operations of Kroll-O'Gara.
(2) Pro forma adjustments exclude the impact of compensation expense for a
non-recurring charge under the Kizorek deferred compensation plan associated
with the accelerated vesting of benefits resulting from a change in control
of the company.
(3) Pro forma adjustments are comprised of the following components:
amortization of goodwill resulting from the acquisition of Kizorek (gross
cost of $6,772 over 25 years), amortization of capitalized acquisition costs
associated with Kizorek ($545 over 25 years) and amortization of customer
lists and detective licenses identified in conjunction with the acquisition
($700 over 15 years).
(4) To record interest expense under Kizorek deferred compensation plan ($1,350
at 5.125%).
(5) To recognize the benefit for income taxes on pro forma adjustments and the
provision for income taxes on the historical results of Kizorek, which had
been previously treated as an S Corporation for income tax purposes. An
effective rate of 40% was used to determine the pro forma income tax impact.
(6) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
F-151
<PAGE> 275
(7) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
INCOME SHARES
------- ------
<S> <C> <C>
Basic earnings per share............................... $10,759 16,478
Effect of dilutive securities:
Options.............................................. -- 416
Warrants............................................. -- 1
------- ------
Diluted earnings per share............................. $10,759 16,895
======= ======
</TABLE>
F-152
<PAGE> 276
KROLL-O'GARA SUPPLEMENTAL AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
SUPPLEMENTAL BACKGROUND
KROLL-O'GARA AMERICA PRO FORMA
------------ ---------- ---------
<S> <C> <C> <C>
Current Assets:
Cash and equivalents................................ $ 40,208 $1,058 $ 41,266
Accounts receivable, net............................ 68,345 1,590 69,935
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 21,625 -- 21,625
Inventories......................................... 19,158 -- 19,158
Other current assets................................ 6,441 90 6,531
-------- ------ --------
Total current assets............................. 155,777 2,738 158,515
Property, plant and equipment, net.................... 21,714 747 22,461
Databases, net........................................ 9,012 -- 9,012
Costs in excess of assets acquired and other
intangible assets, net.............................. 49,387 1,067 50,454
Other assets, net..................................... 7,983 249 8,232
-------- ------ --------
Total assets..................................... $243,873 $4,801 $248,674
======== ====== ========
Current liabilities:
Accounts payable.................................... $ 28,106 $ 334 $ 28,440
Accrued liabilities................................. 19,809 348 20,157
Other current liabilities........................... 10,714 34 10,748
-------- ------ --------
Total current liabilities........................ 58,629 716 59,345
Long-term debt, net of current portion................ 41,330 98 41,428
Other long-term liabilities........................... 5,595 -- 5,595
Shareholders' equity.................................. 138,319 3,987(1) 142,306
-------- ------ --------
Total liabilities and shareholders' equity....... $243,873 $4,801 $248,674
======== ====== ========
</TABLE>
(1) This amount includes a reclass of approximately $6.0 million for mandatorily
redeemable preferred stock that was historically reflected as a long-term
liability but is treated as essentially the same as common stock in the
merger transaction.
F-153
<PAGE> 277
KROLL-O'GARA SUPPLEMENTAL AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------
SUPPLEMENTAL BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................. $94,998 $ -- $94,998
Cost of sales............................. 66,764 -- 66,764
------- ---- -------
Gross profit......................... 28,234 -- 28,234
Selling, general and administrative
expenses, including amortization........ 31,809 76 31,885
------- ---- -------
Operating loss.......................... (3,575) (76) (3,651)
Interest expense.......................... (2,897) -- (2,897)
Interest income........................... 127 -- 127
Other expense, net........................ (109) -- (109)
------- ---- -------
Loss before benefit for income taxes.... (6,454) (76) (6,530)
Benefit for income taxes.................. (824) -- (824)
------- ---- -------
Net loss............................. (5,630) (76) (5,706)
Dividends on preferred stock.............. 13 -- 13
------- ---- -------
Net loss available to common
shareholders....................... $(5,643) $(76) $(5,719)
======= ==== =======
Basic loss per share from continuing
operations.............................. $ (0.52) $ (0.52)(2)
======= =======
Basic weighted average shares
outstanding............................. 10,884 29(1) 10,913(2)
======= =======
Diluted loss per share from continuing
operations.............................. $ (0.52) $ (0.52)(2)
======= =======
Diluted weighted average shares
outstanding............................. 10,884 29(1) 10,913(2)
======= =======
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(2) On a pro forma basis for the year ended December 31, 1995, Kroll-O'Gara
supplemental and Background America had a combined net loss. As such, there
is no further dilution of earnings per share by the common stock
equivalents of Kroll-O'Gara and Background America and basic and diluted
earnings per share are the same.
F-154
<PAGE> 278
KROLL-O'GARA SUPPLEMENTAL AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
--------------------------------------------------------
SUPPLEMENTAL BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
-------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales............................... $164,918 $ 1,776 $166,694
Cost of sales........................... 117,298 1,624 118,922
-------- ------- --------
Gross profit....................... 47,620 152 47,772
Selling, general and administrative
expenses, including amortization...... 37,712 1,237 38,949
Asset impairment........................ 125 -- 125
-------- ------- --------
Operating income (loss)............ 9,783 (1,085) 8,698
Interest expense........................ (3,261) (42) (3,303)
Interest income......................... 41 -- 41
Other income (loss), net................ 345 (2) 343
-------- ------- --------
Income (loss) from continuing
operations before provision for
income taxes....................... 6,908 (1,129) 5,779
Provision for income taxes.............. 365 -- 365
-------- ------- --------
Income (loss) from continuing
operations (3)..................... $ 6,543 $(1,129) $ 5,414
======== ======= ========
Basic earnings per share from continuing
operations (3)........................ $ 0.56 $ 0.45
======== ========
Basic weighted average shares
outstanding........................... 11,607 505(1) 12,112(2)
======== ========
Diluted earnings per share from
continuing operations (3)............. $ 0.52 $ 0.41
======== ========
Diluted weighted average shares
outstanding........................... 12,161 510(1) 12,671(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(2) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the year ended December 31, 1996:
<TABLE>
<CAPTION>
INCOME SHARES
------ ------
<S> <C> <C>
Basic earnings per share.................................... $5,414 12,112
Effect of dilutive securities:
Options................................................... -- 137
Restricted stock.......................................... (162) 288
Warrants.................................................. -- 102
Convertible note payable.................................. -- 32
------ ------
Diluted earnings per share.................................. $5,252 12,671
====== ======
</TABLE>
(3) During the fourth quarter of 1996, a subsidiary of Kroll-O'Gara discontinued
its clinical operations. The related operating loss and shut down expenses
of $1,274, net of a benefit for income taxes of $747, were reported as
discontinued operations by Kroll-O'Gara in its supplemental statement of
operations for the year ended December 31, 1996. The pro forma basic and
diluted earnings per share impact of the discontinued operations for the
year ended December 31, 1996 were $0.11 and $0.10, respectively.
F-155
<PAGE> 279
KROLL-O'GARA SUPPLEMENTAL AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
------------------------------------------------------
SUPPLEMENTAL BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------ ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................. $206,103 $ 4,221 $210,324
Cost of sales............................. 139,766 3,448 143,214
-------- ------- --------
Gross profit......................... 66,337 773 67,110
Selling, general and administrative
expenses, including amortization........ 47,646 2,178 49,824
Merger related costs...................... 7,205 -- 7,205
-------- ------- --------
Operating income (loss).............. 11,486 (1,405) 10,081
Interest expense.......................... (5,092) (84) (5,176)
Interest income........................... 79 93 172
Other income (expense), net............... (411) 59 (352)
-------- ------- --------
Income (loss) before minority interest,
provision for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ 6,062 (1,337) 4,725
Minority interest......................... (156) -- (156)
-------- ------- --------
Income (loss) before provision for
income taxes, extraordinary item and
cumulative effect of change in
accounting principle................. 5,906 (1,337) 4,569
Provision for income taxes................ 3,305 -- 3,305
-------- ------- --------
Income (loss) from continuing
operations(3)........................ $ 2,601 $(1,337) $ 1,264
======== ======= ========
Basic earnings per share from continuing
operations(3)........................... $ 0.19 $ 0.09
======== ========
Basic weighted average shares
outstanding............................. 14,007 744(1) 14,751(2)
======== ========
Diluted earnings per share from continuing
operations(3)........................... $ 0.18 $ 0.08
======== ========
Diluted weighted average shares
outstanding............................. 14,799 761(1) 15,560(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
F-156
<PAGE> 280
(2) The following is a reconciliation of the numerator and denominator for
basic and diluted earnings per share for the year ended December 31, 1997:
<TABLE>
<CAPTION>
INCOME SHARES
------ -------
<S> <C> <C>
Basic earnings per share.................................... $1,264 14,751
Effect of dilutive securities:
Options................................................... -- 255
Restricted stock.......................................... -- 443
Warrants.................................................. -- 97
Convertible note payable.................................. -- 14
------ -------
Diluted earnings per share.................................. $1,264 15,560
====== =======
</TABLE>
(3) During the second quarter of 1997, Kroll-O'Gara recorded an extraordinary
charge of $194, net of a benefit for income taxes of $129, related to the
refinancing of certain debt obligations in 1997. In addition, during the
fourth quarter of 1997, Kroll-O'Gara changed its method of accounting for
costs incurred in connection with business process reengineering activities
relating to information technology transformation and recorded a cumulative
effect of change in accounting principle of $360, net of a benefit for
income taxes of $240. The pro forma basic and diluted earnings per share
impact of the extraordinary item was $0.01 and the pro forma basic and
diluted earnings per share impact of the cumulative effect of change in
accounting principle was $0.02 for the year ended December 31, 1997.
F-157
<PAGE> 281
KROLL-O'GARA SUPPLEMENTAL AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-------------------------------------------------------
SUPPLEMENTAL BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................ $147,880 $ 3,076 $150,956
Cost of sales............................ 98,803 2,555 101,358
-------- --------- --------
Gross profit........................ 49,077 521 49,598
Selling, general and administrative
expenses, including amortization....... 33,459 1,568 35,027
-------- --------- --------
Operating income (loss)............. 15,618 (1,047) 14,571
Interest expense......................... (3,563) (79) (3,642)
Interest income.......................... 297 52 349
Other income (expense), net.............. (225) 14 (211)
-------- --------- --------
Income (loss) before minority interest,
provision for income taxes and
extraordinary item.................. 12,127 (1,060) 11,067
Minority interest........................ (118) -- (118)
-------- --------- --------
Income (loss) before provision for
income taxes and extraordinary
item................................ 12,009 (1,060) 10,949
Provision for income taxes............... 4,809 -- 4,809
-------- --------- --------
Income (loss) from continuing
operations(3)....................... $ 7,200 $ (1,060) $ 6,140
======== ========= ========
Basic earnings per share from continuing
operations(3).......................... $ 0.52 $ 0.42
======== ========
Basic weighted average shares
outstanding............................ 13,929 697(1) 14,626(2)
======== ========
Diluted earnings per share from
continuing operations(3)............... $ 0.47 $ 0.38
======== ========
Diluted weighted average shares
outstanding............................ 14,808 708(1) 15,516(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
F-158
<PAGE> 282
(2) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
INCOME SHARES
------ ------
<S> <C> <C>
Basic earnings per share.................................... $6,140 14,626
Effect of dilutive securities:
Options................................................... -- 207
Restricted stock.......................................... (227) 585
Warrants.................................................. -- 79
Convertible note payable.................................. -- 19
------ ------
Diluted earnings per share................................ $5,913 15,516
====== ======
</TABLE>
(3) During the second quarter of 1997, Kroll-O'Gara recorded an extraordinary
charge of $194, net of a benefit for income taxes of $129, related to the
refinancing of certain debt obligations in 1997. The pro forma basic and
diluted earnings per share impact of the extraordinary item was $0.01 for
the nine months ended September 30, 1997.
F-159
<PAGE> 283
KROLL-O'GARA SUPPLEMENTAL AND BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1998
-------------------------------------------------------
SUPPLEMENTAL BACKGROUND PRO FORMA
KROLL-O'GARA AMERICA ADJUSTMENTS PRO FORMA
------------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales................................ $194,562 $5,028 $199,590
Cost of sales............................ 128,123 3,360 131,483
-------- ------ --------
Gross profit........................ 66,439 1,668 68,107
Selling, general and administrative
expenses, including amortization....... 42,434 2,469 44,903
-------- ------ --------
Operating income (loss)............. 24,005 (801) 23,204
Interest expense......................... (3,512) (9) (3,521)
Interest income.......................... 930 76 1,006
Other income (expense), net.............. (133) 17 (116)
-------- ------ --------
Income (loss) before provision for
income taxes........................ 21,290 (717) 20,573
Provision for income taxes............... 8,652 -- 8,652
-------- ------ --------
Net income (loss) from continuing
operations.......................... $ 12,638 $ (717) $ 11,921
======== ====== ========
Basic earnings per share from continuing
operations............................. $ 0.71 $ 0.64
======== ========
Basic weighted average shares
outstanding............................ 17,845 898(1) 18,743(2)
======== ========
Diluted earnings per share from
continuing operations.................. $ 0.69 $ 0.62
======== ========
Diluted weighted average shares
outstanding............................ 18,371 940(1) 19,311(2)
======== ========
</TABLE>
- ---------------
(1) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(2) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
INCOME SHARES
------- ------
<S> <C> <C>
Basic earnings per share.................................... $11,921 18,743
Effect of dilutive securities:
Options................................................... -- 551
Warrants.................................................. -- 17
Convertible note payable.................................. -- --
------- ------
Diluted earnings per share.................................. $11,921 19,311
======= ======
</TABLE>
F-160
<PAGE> 284
KROLL-O'GARA SUPPLEMENTAL AND KIZOREK UNAUDITED PRO FORMA AND
BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUPPLEMENTAL
SUPPLEMENTAL PRO FORMA KROLL-O'GARA BACKGROUND PRO FORMA
KROLL-O'GARA KIZOREK(1) ADJUSTMENTS(2) PRO FORMA AMERICA ADJUSTMENTS PRO FORMA
------------- ---------- -------------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................... $206,103 $14,476 $220,579 $ 4,221 $224,800
Cost of sales................ 139,766 8,113 147,879 3,448 151,327
-------- ------- ------ -------- ------- --------
Gross profit............. 66,337 6,363 72,700 773 73,473
Selling, general and
administrative expenses,
including amortization..... 47,646 5,111 340(3) 53,097 2,178 55,275
Merger related costs......... 7,205 -- 7,205 -- 7,205
-------- ------- ------ -------- ------- --------
Operating income
(loss)................. 11,486 1,252 (340) 12,398 (1,405) 10,993
Interest expense............. (5,092) (20) (69)(4) (5,181) (84) (5,265)
Interest income.............. 79 -- 79 93 172
Other income (expense),
net........................ (411) -- (411) 59 (352)
-------- ------- ------ -------- ------- --------
Income (loss) before
minority interest,
provision for income
taxes, extraordinary item
and cumulative effect of
change in accounting
principle................ 6,062 1,232 (409) 6,885 (1,337) 5,548
Minority interest............ (156) -- (156) -- (156)
-------- ------- ------ -------- ------- --------
Income (loss) before
provision for income
taxes, extraordinary item
and cumulative effect of
change in accounting
principle................ 5,906 1,232 (409) 6,729 (1,337) 5,392
Provision for income taxes... 3,305 -- 329(5) 3,634 -- 3,634
-------- ------- ------ -------- ------- --------
Income (loss) from
continuing
operations(9)............ $ 2,601 $ 1,232 $ (738) $ 3,095 $(1,337) $ 1,758
======== ======= ====== ======== ======= ========
Basic earnings per share from
continuing operations(9)... $ 0.19 $ 0.22 $ 0.12
======== ======== ========
Basic weighted average shares
outstanding................ 14,007 352(6) 14,359 744(7) 15,103(8)
======== ======== ========
Diluted earnings per share
from continuing
operations(9).............. $ 0.18 $ 0.20 $ 0.11
======== ======== ========
Diluted weighted average
shares outstanding......... 14,799 352(6) 15,151 761(7) 15,912(8)
======== ======== ========
</TABLE>
- ---------------
(1) To include historical results of operations for Kizorek for the year ended
October 31, 1997. Kizorek's operating costs have been allocated into
categories consistent with the Company's statement of operations
presentation policies.
(2) Pro forma adjustments exclude the impact of compensation expense for a
non-recurring charge under the Kizorek deferred compensation plan
associated with the accelerated vesting of benefits resulting from a change
in control of the company.
(3) Pro forma adjustments are comprised of the following components:
amortization of goodwill resulting from the acquisition of Kizorek (gross
cost of $6,772 over 25 years), amortization of capitalized acquisition
costs associated with Kizorek ($545 over 25 years) and amortization of
customer lists and detective licenses identified in conjunction with the
acquisition ($700 over 15 years).
(4) To record interest expense under Kizorek deferred compensation plan ($1,350
at 5.125%).
F-161
<PAGE> 285
(5) To recognize the benefit for income taxes on pro forma adjustments and the
provision for income taxes on the historical results of Kizorek, which had
been previously treated as an S Corporation for income tax purposes. An
effective rate of 40% was used to determine the pro forma income tax
impact.
(6) These amounts represent the number of Kroll-O'Gara common shares issued to
Kizorek shareholders for the purchase of Kizorek. Kizorek does not have any
common stock equivalents which would cause further dilution to earnings per
share.
(7) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(8) The following is a reconciliation of the numerator and denominator for
basic and diluted earnings per share for the year ended December 31, 1997:
<TABLE>
<CAPTION>
INCOME SHARES
------ ------
<S> <C> <C>
Basic earnings per share.................................... $1,758 15,103
Effect of dilutive securities:
Options................................................... -- 255
Restricted stock.......................................... -- 443
Warrants.................................................. -- 97
Convertible note payable.................................. -- 14
------ ------
Diluted earnings per share.................................. $1,758 15,912
====== ======
</TABLE>
(9) During the second quarter of 1997, Kroll-O'Gara recorded an extraordinary
charge of $194, net of a benefit for income taxes of $129, related to the
refinancing of certain debt obligations in 1997. In addition, during the
fourth quarter of 1997, Kroll-O'Gara changed its method of accounting for
costs incurred in connection with business process reengineering activities
relating to information technology transformation and recorded a cumulative
effect of change in accounting principle of $360, net of a benefit for
income taxes of $240. The pro forma basic and diluted earnings per share
impact of the extraordinary item was $0.01 and the pro forma basic and
diluted earnings per share impact of the cumulative effect of change in
accounting principle was $0.02 for the year ended December 31, 1997.
F-162
<PAGE> 286
KROLL-O'GARA SUPPLEMENTAL AND KIZOREK UNAUDITED PRO FORMA AND
BACKGROUND AMERICA
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SUPPLEMENTAL
SUPPLEMENTAL PRO FORMA KROLL-O'GARA BACKGROUND PRO FORMA
KROLL-O'GARA KIZOREK(1) ADJUSTMENTS(2) PRO FORMA AMERICA ADJUSTMENTS PRO FORMA
------------- ---------- -------------- ------------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales................ $194,562 $ 6,385 $200,947 $5,028 $205,975
Cost of sales............ 128,123 3,911 132,034 3,360 135,394
-------- --------- -------- -------- ------ --------
Gross profit......... 66,439 2,474 68,913 1,668 70,581
Selling, general and
administrative
expenses, including
amortization........... 42,434 2,411 169(3) 45,014 2,469 47,483
-------- --------- -------- -------- ------ --------
Operating income
(loss)............. 24,005 63 (169) 23,899 (801) 23,098
Interest expense......... (3,512) -- (35)(4) (3,547) (9) (3,556)
Interest income.......... 930 -- 930 76 1,006
Other income (expense),
net.................... (133) -- (133) 17 (116)
-------- --------- -------- -------- ------ --------
Income (loss) before
provision (benefit)
for income taxes..... 21,290 63 (204) 21,149 (717) 20,432
Provision (benefit) for
income taxes........... 8,652 -- (57)(5) 8,595 -- 8,595
-------- --------- -------- -------- ------ --------
Net income (loss)
from continuing
operations......... $ 12,638 $ 63 $ (147) $ 12,554 $ (717) $ 11,837
======== ========= ======== ======== ====== ========
Basic earnings per share
from continuing
operations............. $ 0.71 $ 0.70 $ 0.63
======== ======== ========
Basic weighted average
shares outstanding..... 17,845 17,845 898(6) 18,743(7)
======== ======== ========
Diluted earnings per
share from continuing
operations............. $ 0.69 $ 0.68 $ 0.61
======== ======== ========
Diluted weighted average
shares outstanding..... 18,371 18,371 940(6) 19,311(7)
======== ======== ========
</TABLE>
- ---------------
(1) To include historical results of operations for Kizorek for the six months
ended April 30, 1998. Kizorek's operating costs have been allocated into
categories consistent with the Company's statement of operations
presentation policies. Kizorek's results of operations from July 1, 1998
through September 30, 1998 are included in the consolidated results of
operations of Kroll-O'Gara.
(2) Pro forma adjustments exclude the impact of compensation expense for a
non-recurring charge under the Kizorek deferred compensation plan associated
with the accelerated vesting of benefits resulting from a change in control
of the company.
(3) Pro forma adjustments are comprised of the following components:
amortization of goodwill resulting from the acquisition of Kizorek (gross
cost of $6,772 over 25 years), amortization of capitalized acquisition costs
associated with Kizorek ($545 over 25 years) and amortization of customer
lists and detective licenses identified in conjunction with the acquisition
($700 over 15 years).
(4) To record interest expense under Kizorek deferred compensation plan ($1,350
at 5.125%).
F-163
<PAGE> 287
(5) To recognize the benefit for income taxes on pro forma adjustments and the
provision for income taxes on the historical results of Kizorek, which had
been previously treated as an S Corporation for income tax purposes. An
effective rate of 40% was used to determine the pro forma income tax impact.
(6) These amounts adjust the historical weighted average shares outstanding to
reflect the conversion of Background America common stock and equivalents
into Kroll-O'Gara common stock and equivalents based on the fixed exchange
ratio of .2689628 Kroll-O'Gara shares for every outstanding share of
Background America common and preferred stock on a weighted average basis.
(7) The following is a reconciliation of the numerator and denominator for basic
and diluted earnings per share for the nine months ended September 30, 1998:
<TABLE>
<CAPTION>
INCOME SHARES
------- ------
<S> <C> <C>
Basic earnings per share.................................... $11,837 18,743
Effect of dilutive securities:
Options................................................... -- 550
Warrants.................................................. -- 18
------- ------
Diluted earnings per share.................................. $11,837 19,311
======= ======
</TABLE>
F-164
<PAGE> 288
APPENDIX A
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of January 21,
1999, among The Kroll-O'Gara Company ("TKOG"), an Ohio corporation and a party
to this Agreement but not a constituent corporation in the Merger (as
hereinafter defined), Kroll-O'Gara Tennessee, Inc. ("Merger Sub"), a Tennessee
corporation all of whose capital stock is owned directly by TKOG and Background
America, Inc. (the "Company"), a Tennessee corporation.
WHEREAS, the Boards of Directors of Merger Sub and the Company, deeming it
advisable and for the respective benefit of Merger Sub and the Company, and
their shareholders, have approved the merger of Merger Sub with and into the
Company on the terms and conditions hereinafter set forth, and have approved
this Agreement and authorized the transactions contemplated hereby; and
WHEREAS, the Board of Directors of the Company has determined to recommend
to all of the Company's shareholders that the Merger and this Agreement be
approved; and
WHEREAS, TKOG, Merger Sub and the Company desire to make certain
representations, warranties and agreements in connection with, and establish
various conditions precedent to, the Merger.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
and agreements hereinafter set forth, the parties hereto, intending to be
legally bound, hereby agree as follows:
1 DEFINITIONS
For purposes of this Agreement, the following terms have the meanings
specified or referred to in this Section 1:
"ARTICLES OF MERGER" -- as defined in Section 2.2.
"CLOSING" -- as defined in Section 2.1.
"CLOSING DATE" -- the date and time as of which the Closing actually takes
place.
"CODE" -- the Internal Revenue Code of 1986, as amended, and any successor
law.
"COMMISSION" -- the United States Securities and Exchange Commission.
"COMPANY" -- as defined in the first paragraph of this Agreement.
"COMPANY COMMON STOCK" -- the common stock, no par value, of the Company.
"COMPANY PARTIES" -- as defined in Section 11.3.
"COMPANY SHAREHOLDERS" -- the holders of the Company Common Stock
(including shares of Company Common Stock issuable upon exercise of the Options
at any time prior to the Closing) and the Series A Preferred Stock.
"COMPANY'S KNOWLEDGE" -- includes the knowledge of Michael D. Shmerling, A.
Michael Rosen, Marc Curvin, Steve Cavin, Robert Schlossnagle, Tom Ellis, Gerald
Belko, Alan Wernick and Benny Ball.
"CONTRACT" -- any agreement, contract, obligation, promise or undertaking
(whether written or oral and whether express or implied) that is legally
binding.
"DAMAGES" -- as defined in Section 11.2.
"DISCLOSURE SCHEDULE" -- the disclosure schedule delivered by the Company
to TKOG and Merger Sub concurrently with the execution and delivery of this
Agreement.
A-1
<PAGE> 289
"DISSENTING SHAREHOLDERS" -- as defined in Section 2.7(d).
"EFFECTIVE TIME" -- as defined in Section 2.2.
"ENCUMBRANCE" -- any mortgage, charge, claim, community property interest,
condition, equitable interest, lien, option, pledge, security interest, right of
first refusal or restriction of any kind, including any restriction on use,
voting, transfer, receipt of income or exercise of any other attribute of
ownership.
"ENVIRONMENT" -- soil, land surface or subsurface strata, surface waters,
groundwaters, drinking water supply, stream sediments, ambient air, plant and
animal life and any other environmental medium or natural resource.
"ENVIRONMENTAL, HEALTH, AND SAFETY LIABILITIES" -- any cost, damages,
expense, liability, obligation or other responsibility arising from or under any
Environmental Law or Occupational Safety and Health Law and consisting of or
relating to: (a) any environmental, health or safety matter or condition
(including on-site or off-site contamination, generation, handling and disposal
of hazardous substances, occupational safety and health, and regulation of
chemical and hazardous substances or products); (b) fines, penalties, judgments,
awards, settlements, legal or administrative proceedings, damages, losses,
litigation, including civil and criminal claims, demands and response,
investigative, remedial, response or inspection costs and expenses arising under
Environmental Law or Occupational Safety and Health Law; (c) financial
responsibility under Environmental Law or Occupational Safety and Health Law for
cleanup costs or corrective action, including any investigation, cleanup,
removal, containment, or other remediation or response actions required by
applicable Environmental Law or Occupational Safety and Health Law and for any
natural resource damages; or (d) any other compliance, corrective,
investigative, or remedial measures required under Environmental Law or
Occupational Safety and Health Law. The terms "removal," "remedial," and
"response action," include the types of activities covered by the United States
Comprehensive Environmental Response, Compensation, and Liability Act, 42 U.S.C.
Section 9601 et seq., as amended ("CERCLA").
"ENVIRONMENTAL LAW" -- any and all federal, state, local, provincial, and
foreign, civil and criminal laws, statutes, ordinances, orders, codes, rules,
regulations, permits, policies, guidance documents, judgments, decrees and
agreements with any Governmental Authority of or relating to the protection of
health and the Environment, worker health and safety, and/or governing the
handling, use, generation, treatment, storage, transportation, disposal,
manufacture, distribution, packaging, labeling or release of Hazardous
Materials, including CERCLA; the Resource Conservation and Recovery Act, 42
U.S.C Section 6901 et seq.; the Clean Air Act, 42 U.S.C Section 7401 et seq.;
and the Occupational Safety and Health Act, 29 U.S.C Section 651 et seq.; and
the state analogues thereto and any common law doctrine, including negligence,
nuisance, trespass, personal injury or property damage related or arising out of
the presence, release or exposure to Hazardous Materials.
"ERISA" -- the Employee Retirement Income Security Act of 1974, as amended,
or any successor law.
"ESCROW AGENT" -- as defined in Section 2.8(a).
"ESCROW AGREEMENT" -- as defined in Section 2.8(a).
"ESCROW FUND" -- as defined in Section 2.8(a).
"EXCHANGE ACT" -- the Securities Exchange Act of 1934, as amended, or any
successor law.
"FACILITIES" -- any real property, leaseholds or other interests currently
or formerly owned or operated by the Company and any buildings, plants,
structures or equipment (including motor vehicles) currently or formerly owned
or operated by the Company.
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"FINANCIAL STATEMENTS" -- as defined in Section 4.5.
"GAAP" -- generally accepted United States accounting principles applied on
a basis consistent with the basis on which the financial statements of the
Company referred to in Section 4.5 were prepared.
"GOVERNMENTAL AUTHORITY" -- any court, tribunal, authority, agency,
commission, bureau, department, official or other instrumentality of the United
States, any foreign country or any domestic, foreign, state, local, county, city
or other political subdivision.
"GOVERNMENTAL PERMIT" -- any license, franchise, permit or other
authorization of any Governmental Authority.
"HAZARDOUS ACTIVITY" -- the distribution, generation, handling,
manufacturing, processing, production, release, storage, transportation,
treatment, disposal or use of Hazardous Materials in, on, under, about, or from
the Facilities or any part thereof into the Environment, and any other act,
business or operation that increases the danger or poses an unreasonable risk of
harm to persons or property on or off the Facilities or that may affect the
value of the Facilities or the Company.
"HAZARDOUS MATERIALS" -- any waste or other substance that is listed,
defined, designated or classified as, or otherwise determined to be, hazardous,
radioactive or toxic or a pollutant or a contaminant under or pursuant to any
Environmental Law.
"INTELLECTUAL PROPERTY ASSETS" -- as defined in Section 4.21.
"IRS" -- the United States Internal Revenue Service or any successor agency
and, to the extent relevant, the United States Department of the Treasury.
"MARKET VALUE" -- with respect to any date, the average of the last sales
price on the NASDAQ National Market of TKOG Common Stock for the five
consecutive trading days ending on the trading day that is four days immediately
prior to such date.
"MATERIAL ADVERSE EFFECT" -- as defined in Section 4.7.
"MERGER" -- as defined in Section 2.1(a).
"MERGER SUB" -- as defined in the first paragraph of this Agreement.
"NEW CERTIFICATES" -- as defined in Section 2.8(a)(i).
"OCCUPATIONAL SAFETY AND HEALTH LAW" -- any legal or governmental
requirement or obligation relating to safe and healthful working conditions and
to reduce occupational safety and health hazards, and any program, whether
governmental or private (including those promulgated or sponsored by industry
associations and insurance companies), designed to provide safe and healthful
working conditions.
"OLD CERTIFICATES" -- as defined in Section 2.8(a).
"OPTIONS" -- as defined in Section 2.11.
"ORGANIZATIONAL DOCUMENTS" -- (a) the articles or certificate of
incorporation and the bylaws or code of regulations of a corporation; (b) the
partnership agreement and any statement of partnership of a general partnership;
(c) the limited partnership agreement and the certificate of limited partnership
of a limited partnership; (d) the certificate of formation and operating
agreement of a limited liability company; (e) any charter or similar document
adopted or filed in connection with the creation, formation or organization of a
Person; and (e) any amendment to any of the foregoing.
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"PERSON" -- any individual, corporation (including any non-profit
corporation), general or limited partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union or other entity
or governmental body.
"PROCEEDING" -- as defined in Section 4.13.
"SECURITIES ACT" -- the Securities Act of 1933, as amended, or any
successor law.
"SERIES A PREFERRED STOCK" -- as defined in Section 2.7(a).
"SHAREHOLDERS" -- the Company Shareholders and the holders of Options
exercised pursuant to Section 2.11(b).
"SUBSIDIARY" -- any corporation, joint venture, limited liability company,
partnership, association or other business entity of which more than 50% of the
total voting power of stock or other equity entitled to vote generally in the
election of directors or managers thereof is owned or controlled, directly or
indirectly, by the Company or TKOG, as the case may be.
"SURVIVING CORPORATION" -- as defined in Section 2.1(a).
"TKOG" -- The Kroll-O'Gara Company, an Ohio corporation.
"TKOG COMMON STOCK" -- the Common Stock, $0.01 par value per share, of
TKOG.
"TKOG DISCLOSURE SCHEDULE" -- the disclosure schedule delivered by TKOG and
Merger Sub to the Company concurrently with the execution and delivery of this
Agreement.
"TKOG SEC REPORTS" -- as defined in Section 5.4.
"TKOG SHARES" -- the shares of TKOG Common Stock to be issued to the
Company Shareholders in connection with the Merger.
"TOTAL COMPANY COMMON STOCK ON A FULLY DILUTED BASIS" -- as defined in
Section 2.7(a).
"TRANSACTION DOCUMENTS" -- the Escrow Agreement and the employment
agreements referred to in Section 6.12.
2 THE MERGER; CLOSING
2.1 THE MERGER
(a) Upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the Tennessee Business Corporation Act, as
amended (the "TBCA"), Merger Sub shall be merged with and into the Company at
the Effective Time (the "Merger"). Following the Merger, the separate corporate
existence of Merger Sub shall cease and the Company shall continue as the
surviving corporation (the "Surviving Corporation") under the name "Background
America, Inc."
(b) Unless this Agreement shall have been terminated and the transactions
herein contemplated shall have been abandoned pursuant to Section 10 and subject
to the satisfaction or waiver of the conditions set forth in Sections 8 and 9,
the consummation of the Merger will take place as promptly as practicable (and
in any event within two business days) after satisfaction or waiver of the
conditions set forth in Sections 8 and 9 at the offices of Kramer Levin Naftalis
& Frankel LLP, 919 Third Avenue, New York, New York (the "Closing"), unless
another date, time or place is agreed to in writing by the parties hereto.
2.2 EFFECTIVE TIME
As soon as practicable following the Closing, the parties shall (i) file
articles of merger (the "Articles of Merger") in such form as is required by and
executed in accordance with the relevant provisions of the
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TBCA, and (ii) make all other filings or recordings required under the TBCA. The
Merger shall become effective at such time as the Articles of Merger are duly
filed with the Secretary of State of the State of Tennessee or at such
subsequent time as the Company and TKOG shall agree and be specified in the
Articles of Merger (the date and time the Merger becomes effective being the
"Effective Time").
2.3 EFFECTS OF THE MERGER
At and after the Effective Time, the Merger will have the effects set forth
in the TBCA. Without limiting the generality of the foregoing, and subject
thereto, at the Effective Time all property owned by the Company or Merger Sub
shall be vested in the Surviving Corporation without reversion or impairment;
all liabilities of the Company or Merger Sub shall be vested in the Surviving
Corporation; and a proceeding pending against the Company or Merger Sub may be
continued as if the Merger did not occur or the Surviving Corporation may be
substituted in the proceeding for the Company or Merger Sub.
2.4 ARTICLES OF INCORPORATION
At the Effective Time, the articles of incorporation of the Surviving
Corporation shall be amended in accordance with the TBCA such that the articles
of incorporation of the Surviving Corporation shall consist of the provisions of
the articles of incorporation of Merger Sub, until thereafter changed or amended
as provided therein or by applicable law, except that Article I of the Articles
of Incorporation of the Surviving Corporation shall be amended to read in its
entirety as follows: "The name of this Corporation is 'Background America,
Inc."' The articles of incorporation of Merger Sub shall be amended to provide
for the indemnification by Merger Sub of its officers, directors, employees and
other persons serving at their request to the full extent authorized under the
laws of the jurisdiction of incorporation thereof.
2.5 BY-LAWS
The by-laws of Merger Sub as in effect at the Effective Time shall be the
by-laws of the Surviving Corporation until thereafter changed or amended as
provided therein or by applicable law.
2.6 OFFICERS AND DIRECTORS OF SURVIVING CORPORATION
The officers of the Company as of the Effective Time shall be the officers
of the Surviving Corporation until the earlier of their resignation or removal
or otherwise ceasing to be an officer or until their respective successors are
duly elected and qualified. The directors of Merger Sub as of the Effective Time
shall be the directors of the Surviving Corporation until the earlier of their
resignation or removal or otherwise ceasing to be a director or until their
respective successors are duly elected and qualified.
2.7 CONVERSION OR CANCELLATION OF CAPITAL STOCK OF THE COMPANY
At the Effective Time of the Merger, by virtue of the Merger and without
any action on the part of any holder thereof:
(a) Subject to the provisions of Sections 2.7(c), 2.8 and 2.9, each
share of the Company's Series A Preferred Stock, par value $1.00 per share
(the "Series A Preferred Stock"), issued and outstanding immediately prior
to the Effective Time of the Merger and not theretofore converted into
Company Common Stock shall be converted into the right to receive 0.2689628
of one fully paid and non-assessable share of TKOG Common Stock.
(b) Subject to the provisions of Sections 2.7(c), 2.8 and 2.9, each
share of Company Common Stock issued and outstanding immediately prior to
the Effective Time shall be converted into the right to receive 0.2689628
of one fully paid and non-assessable share of TKOG Common Stock.
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(c) Shares of Series A Preferred Stock and shares of Company Common
Stock owned by a holder who (i) shall not have voted in favor of the
Merger, and (ii) shall have delivered to the Company a written notice of
his intent to demand payment for his shares if the Merger is effectuated in
the manner provided in Section 48-23-201 et seq. of the TBCA (collectively,
the "Dissenting Shareholders"), shall not be converted as provided above,
but shall be entitled to receive such consideration as shall be provided in
such Sections of the TBCA, except that shares of any Dissenting Shareholder
who shall thereafter not perfect his right to appraisal as provided in such
Sections of the TBCA shall thereupon be deemed to have been converted, as
of the Effective Time of the Merger, into shares of TKOG Common Stock, as
provided in Section 2.7(a) and (b), as the case may be. The Company shall
notify TKOG and Merger Sub in writing of the details of the Dissenting
Shareholders and the number of shares of Series A Preferred Stock or shares
of Company Common Stock that they own. The Company shall not enter into any
agreement or settlement with any Dissenting Shareholder without the prior
written consent of TKOG.
(d) Each authorized but unissued share of Series A Preferred Stock and
Company Common Stock shall cease to exist.
(e) Each share of Merger Sub's Common Stock issued and outstanding
immediately prior to the Effective Time of the Merger shall be converted
into one share of Common Stock, par value $.01 per share, of the Surviving
Corporation.
2.8 ISSUANCE OF MERGER CONSIDERATION
(a) Subject to the provisions of Section 2.9, and the proviso to this
Section 2.8(a), at or as soon as practicable after the Effective Time of the
Merger, TKOG shall issue and deliver, upon surrender by a Company Shareholder of
one or more certificates ("Old Certificates") representing Series A Preferred
Stock or Company Common Stock for cancellation, to:
(i) a holder that surrenders Old Certificates representing Series A
Preferred Stock, one or more certificates ("New Certificates"), registered
in the name of such holder, for the number of shares of TKOG Common Stock
equal to the product of (x) the number of shares of TKOG Common Stock
determined pursuant to the provisions of Section 2.7(a) (subject to
appropriate adjustment for any stock splits or combinations after the date
hereof and on or prior to the Effective Time of the Merger) and (y) the
number of shares of Series A Preferred Stock represented by such Old
Certificates; and
(ii) a holder that surrenders Old Certificates representing Company
Common Stock, one or more New Certificates, registered in the name of such
holder, for the number of shares of TKOG Common Stock equal to the product
of (x) the number of shares of TKOG Common Stock determined pursuant to the
provisions of Section 2.7(b) (subject to appropriate adjustment for any
stock splits or combinations after the date hereof and on or prior to the
Effective Time of the Merger) and (y) the number of shares of Company
Common Stock represented by such Old Certificates;
provided, however, that, in lieu of delivering to such holders New Certificates
for the full number of shares of TKOG Common Stock provided for in Sections
2.8(a)(i) and (ii), TKOG shall deliver to (A) each such holder one or more New
Certificates, registered in the name of such holder, for a number of shares of
TKOG Common Stock equal to the total number of shares of TKOG Common Stock
otherwise to be delivered pursuant to this Section 2.8 less the Internal Escrow
Amount and the Applicable Amount determined pursuant to the following provisions
of this proviso to Section 2.8; (B) Michael D. Shmerling, as escrow agent for
deposit into an escrow fund for the benefit of the Shareholders to secure any
obligations of the Shareholders under Section 12.1, one or more New
Certificates, registered in the name of Michael D. Shmerling as escrow agent,
for a number of shares of TKOG Common Stock equal to 2% of the total number of
shares of TKOG Common Stock issuable to the Shareholders (the "INTERNAL ESCROW
AMOUNT"),
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with any fraction of a share being rounded down to the nearest whole share; and
(C) Star Bank, N.A. as escrow agent (the "ESCROW AGENT") for deposit into the
escrow fund (the "ESCROW FUND") provided for in the escrow agreement in the form
attached hereto as Exhibit A (the "ESCROW AGREEMENT"), to secure the
indemnification obligations under Section 11.2, one or more New Certificates,
registered in the name of the Escrow Agent, for such Applicable Amount, all of
which will be held as part of the Escrow Fund and disposed of by the Escrow
Agent in accordance with the provisions of the Escrow Agreement:
The Applicable Amount for each holder of Series A Preferred Stock and
each holder of Company Common Stock is that number of whole shares of TKOG
Common Stock equal to 10% of the total number of shares of TKOG Common
Stock issuable to such holder pursuant to Section 2.8(a), with any fraction
of a share being rounded down to the nearest whole share.
The Escrow Agreement is incorporated herein by reference and shall be considered
part of this Agreement. By voting for or failing to dissent from the approval of
this Agreement, each Company Shareholder automatically and without any further
act or deed irrevocably agrees that such Company Shareholder:
(A) accepts and shall be bound by the terms and provisions of the
Escrow Agreement;
(B) consents to the appointment of Russell R. French as Shareholder
Representative (the "SHAREHOLDER REPRESENTATIVE") for purposes of the
Escrow Agreement with all rights, powers and authority provided for in the
Escrow Agreement and that any action taken by the Shareholder
Representative pursuant to the Escrow Agreement shall be conclusive, valid,
binding and enforceable with respect to such Company Shareholder; and
(C) agrees to indemnify the Shareholder Representative for any costs
and expenses (including reasonable attorney's fees) incurred by the
Shareholder Representative pursuant to Section 11.
By exercising Options pursuant to Section 2.11(b), each holder of such Options
automatically and without any further act or deed irrevocably agrees that such
holder:
(A) accepts and shall be bound by the terms and provisions of the
Escrow Agreement;
(B) consents to the appointment of Russell R. French as Shareholder
Representative for purposes of the Escrow Agreement with all rights, powers
and authority provided for in the Escrow Agreement and that any action
taken by the Shareholder Representative pursuant to the Escrow Agreement
shall be conclusive, valid, binding and enforceable with respect to such
holder; and
(C) agrees to indemnify the Shareholder Representative for any costs
and expenses (including reasonable attorney's fees) incurred by the
Shareholder Representative pursuant to Section 11.
(b) No dividends or other distributions declared on shares of TKOG Common
Stock that are to be represented by New Certificates shall be paid to any Person
otherwise entitled to receive the same until Old Certificates have been
surrendered in exchange for such New Certificates in the manner herein provided,
and upon such surrender such dividends or other distributions shall be paid to
such Persons in accordance with their terms. In no event shall the Persons
entitled to receive such dividends or other distributions be entitled to receive
interest on such dividends or other distributions.
(c) The Company shall pay any transfer taxes in connection with the
exchange of Old Certificates for New Certificates, except that if any New
Certificate is to be issued in a name other than that in which the Old
Certificate surrendered in exchange therefor is registered, it shall be a
condition of such exchange that the Person requesting such exchange shall pay to
TKOG any transfer or other taxes required by reason of the issuance of the New
Certificate in a name other than the registered holder of such Old Certificate,
or shall establish to the satisfaction of TKOG that such tax has been paid or is
not applicable.
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(d) All New Certificates representing shares of TKOG Common Stock subject
to restrictions on transfer by virtue of Rule 145 or the Pooling Rules as
described in Section 6.4 shall be delivered to an escrow agent selected by the
Shareholder Representative for the holders thereof or stop-transfer instructions
shall be entered with the transfer agent of TKOG Common Stock with respect to
the shares represented thereby.
(e) Upon receipt of notice and instructions from Michael D. Shmerling, as
escrow agent for the Shareholders, TKOG shall issue to its stock transfer agent
instructions to issue certificates for TKOG Common Stock in the names and for
the amounts provided by Michael D. Shmerling, subject to the surrender of the
certificates representing the Internal Escrow Amount by Michael D. Shmerling to
TKOG's stock transfer agent for cancellation.
2.9 NO FRACTIONAL SHARES
Neither certificates nor scrip for fractional shares of TKOG Common Stock
shall be issued in connection with the Merger or in payment for the Options, but
in lieu thereof each holder of shares of Company Common Stock or Options
otherwise entitled to a fraction of a share of TKOG Common Stock pursuant to the
provisions of Section 2.7 or 2.11 shall be paid in cash an amount equal to such
fraction multiplied by the Market Value at the Closing Date (subject to
appropriate adjustment for any stock splits or combinations after the date
hereof and prior to the Effective Time of the Merger). No such holder shall be
entitled to dividends or interest on or, except for the cash payment referred to
in the preceding sentence, other rights in respect of any such fractional
interest. If more than one Old Certificate shall be surrendered for the account
of the same Company Shareholder, the number of full shares of TKOG Common Stock
for which Old Certificates shall be exchanged pursuant to Section 2.8 shall be
computed on the basis of the aggregate number of shares of Company Common Stock
represented by the Old Certificates.
2.10 STOCK TRANSFER BOOKS
At the close of business on the day prior to the Effective Time of the
Merger, the stock transfer books of the Company shall be closed and no transfer
of Company Common Stock shall thereafter be made on such stock transfer books.
2.11 OPTIONS
(a) Upon the Effective Time, each option outstanding at the date of this
Agreement to purchase shares of Company Common Stock granted under the Company's
1996 Stock Option Plan or 1997 Stock Option Plan, as such plans are amended as
required by Section 2.11 of the Disclosure Schedule, and each warrant to
purchase shares of Company Common Stock (collectively, the "Options"), all as
listed in Section 4.3 of the Disclosure Schedule, shall have been amended
pursuant to Section 2.11 of the Disclosure Schedule.
(b) At the Effective Time, each outstanding Option shall, subject to the
amended terms of such Option and the agreement of the holder thereof, be deemed
to have been exercised and each such Option holder shall receive from TKOG,
against surrender of the Option and the payment of the exercise price therefor
and in settlement and cancellation of each such Option, an amount of
consideration per Option equal to 0.2689628 of one fully paid and non-assessable
share of TKOG Common Stock; provided, however, that if such exercise price is
paid in shares of TKOG Common Stock, such shares shall be valued at the last
sales price on the NASDAQ National Market of TKOG Common Stock on the Closing
Date;
provided, further, however, that, in lieu of delivering to such holder New
Certificates for the full number of shares of TKOG Common Stock provided for in
Section 2.11(b), TKOG shall deliver to (A) each such holder one or more New
Certificates, registered in the name of such holder, for a number of shares of
TKOG Common Stock equal to the total number of shares of TKOG Common Stock
otherwise to be
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delivered pursuant to this Section 2.11(b) less the Internal Escrow Amount and
the Applicable Amount determined pursuant to the following provisions of this
proviso to Section 2.11(b); (B) Michael D. Shmerling, as escrow agent for
deposit into an escrow fund for the benefit of the Shareholders to secure any
obligations of the Shareholders under Section 12.1, one or more New
Certificates, registered in the name of Michael D. Shmerling as escrow agent,
for the Internal Escrow Amount, with any fraction of a share being rounded down
to the nearest whole share; and (C) the Escrow Agent for deposit into the Escrow
Fund provided for in the Escrow Agreement, to secure the indemnification
obligations under Section 11.2, one or more New Certificates, registered in the
name of the Escrow Agent, for such Applicable Amount, all of which will be held
as part of the Escrow Fund and disposed of by the Escrow Agent in accordance
with the provisions of the Escrow Agreement:
The Applicable Amount for each holder of Options is that number of
whole shares of TKOG Common Stock equal to 10% of the total number of
shares of TKOG Common Stock issuable to such holder, after giving effect to
any "cashless" exercise, pursuant to Section 2.11(b), with any fraction of
a share being rounded down to the nearest whole share.
(c) With respect to those holders of Options who do not agree to the
exercise of their Options pursuant to Section 2.11(b), such Options shall,
pursuant to Section 2.11 of the Disclosure Schedule, upon exercise thereof (or
any portion thereof) and against delivery of the Options, receive in settlement
and cancellation therefor (or for such portion) the number of shares of TKOG
Common Stock as the holder of such Options would have been entitled to receive
pursuant to the Merger had such holder so exercised such Options immediately
prior to the Effective Time at a price per share equal to (x) the aggregate
exercise price for Company Common Stock otherwise issuable upon such exercise of
such Options upon such exercise divided by (y) the number of shares of TKOG
Common Stock issuable upon such exercise of such Options pursuant to Section
2.11; provided, however, that the number of shares of TKOG Common Stock that may
be purchased upon exercise of any such Option shall not include any fractional
share and, upon exercise of the Option, any fractional share shall be rounded up
to the nearest whole number.
2.12 TAX-FREE REORGANIZATION
The parties intend that the Merger qualify as a tax-free reorganization
pursuant to Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code").
3. [INTENTIONALLY OMITTED]
4. REPRESENTATIONS AND WARRANTIES CONCERNING THE COMPANY
The Company hereby represents and warrants to TKOG and Merger Sub as
follows.
4.1 ORGANIZATION AND GOOD STANDING
(a) Section 4.1 of the Disclosure Schedule contains a complete and accurate
list for the Company and each of its Subsidiaries of its name, its jurisdiction
of incorporation, other jurisdictions in which it is authorized to do business
and its capitalization (including the identity of each shareholder and the
number of shares held by each). The Company and each of its Subsidiaries is a
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation, with full corporate power and authority to
conduct its business as it is now being conducted and to own or use the
properties and assets that it purports to own or use. The Company and each of
its Subsidiaries is duly qualified to do business as a foreign corporation and
is in good standing under the laws of each state or other jurisdiction in which
either the ownership or use of the properties owned or used by it, or the nature
of the activities conducted by it, requires such qualification, except where the
failure to be so qualified could not reasonably be expected to have a Material
Adverse Effect on the Company and its Subsidiaries taken as a whole.
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(b) The Company has delivered to Merger Sub correct and complete copies of
the Organizational Documents of the Company and each of its Subsidiaries.
4.2 AUTHORITY; NO CONFLICT
(a) The Company has the right, power, authority and capacity to execute and
deliver this Agreement and the Transaction Documents to which it is a party, to
consummate the Merger and to perform its obligations under this Agreement and
the Transaction Documents to which it is a party. This Agreement has been duly
authorized and approved, executed and delivered by the Company and constitutes
the legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms. Upon the authorization and approval,
execution and delivery by the Company of the Transaction Documents to which it
is a party, such Transaction Documents will constitute legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their respective terms.
(b) Except as set forth in Section 4.2 of the Disclosure Schedule, neither
the execution and delivery of this Agreement by the Company nor the consummation
or performance by the Company of the Merger or any of the other transactions
contemplated hereby will, directly or indirectly (with or without notice or
lapse of time or both):
(i) contravene, conflict with or result in a violation or breach of
(A) any provision of the Organizational Documents of the Company or any of
its Subsidiaries, (B) any resolution adopted by the board of directors or
the shareholders of the Company or any of its Subsidiaries, (C) subject to
obtaining the approval of the Merger by the Company Shareholders, any legal
requirement or any order to which the Company or any of its Subsidiaries or
any of the assets owned or used by the Company or any of its Subsidiaries
may be subject, or (D) any Governmental Permit, including any private
investigator license or other similar license, which is held by the Company
or any of its Subsidiaries or that otherwise relates to the business of, or
any of the assets owned or used by, the Company or any of its Subsidiaries;
(ii) result in a breach of or constitute a default, give rise to a
right of termination, cancellation or acceleration, create any entitlement
to any payment or benefit, or require the consent or approval of or any
notice to or filing with any third party under any Contract to which the
Company or any of its Subsidiaries is a party or to which their respective
assets are bound, or require the consent or approval of or any notice to or
filing with any Governmental Authority to which the Company or any of its
Subsidiaries or their respective assets is subject; or
(iii) result in the imposition or creation of any Encumbrance upon or
with respect to any of the assets owned or used by the Company or any of
its Subsidiaries;
except, with respect to clauses (ii) or (iii) of this Section 4.2, where any
such breach, default, termination right, cancellation or acceleration right or
Encumbrance would not have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole or would not adversely affect the ability of the
Company to consummate the Merger or the other transactions contemplated by this
Agreement.
4.3 CAPITALIZATION
As of the date hereof, the authorized equity securities of the Company
consist of 20,000,000 shares of common stock, no par value per share, of which
2,199,728 shares are issued and outstanding, and 5,000,000 shares of preferred
stock, par value $1.00 per share, with rights and preferences to be designated
by the board of directors of the Company, of which 1,200,000 shares have been
designated as Series A Preferred Stock, of which 1,143,700 shares of Series A
Preferred Stock, and no other series or class of preferred stock, are issued and
outstanding. Each share of Series A Preferred Stock is convertible into one (1)
share of
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Company Common Stock. The authorized, issued and outstanding shares of capital
stock of each of the Company's Subsidiaries are accurately and completely set
forth in Section 4.3 of the Disclosure Schedule. All of the outstanding equity
securities of the Company and each of the Company's Subsidiaries have been duly
authorized and validly issued and are fully paid and nonassessable. Section 4.3
of the Disclosure Schedule sets forth a complete and correct list of all
Options, including as to each holder thereof, the number of shares of Company
Common Stock subject thereto and the exercisability, exercise price and
termination date thereof. Except as set forth on Section 4.3 of the Disclosure
Schedule, there are no voting trusts or other agreements or understandings to
which the Company or any of its Subsidiaries is a party with respect to the
transfer, voting or registration of the capital stock of the Company or any of
its Subsidiaries. There are no Contracts relating to the issuance, sale or
transfer of any equity securities or other securities of the Company or any of
its Subsidiaries. None of the outstanding equity securities or other securities
of the Company or any of its Subsidiaries were issued in violation of the
Securities Act or any other legal requirement. Neither the Company nor any of
its Subsidiaries owns or has any Contract to acquire, any equity securities or
other securities of any Person (other than a Subsidiary) or any, direct or
indirect, equity or ownership interest in any other business. No Person has any
pre-emptive rights with respect to any security of the Company or any of its
Subsidiaries.
4.4 BOOKS AND RECORDS
Except as disclosed in Section 4.4 of the Disclosure Schedule, the books of
account and other records of the Company and its Subsidiaries, all of which have
been made available to Merger Sub, are true, complete and correct. Except as
disclosed in Section 4.4 of the Disclosure Schedule, the minute books of the
Company and its Subsidiaries contain true, accurate and complete records of all
meetings held of, and corporate action taken by, the shareholders, the Boards of
Directors, and committees of the Boards of Directors of the Company and its
Subsidiaries. The stock books of the Company and its Subsidiaries are true,
accurate and complete. At the Closing, all of such books and records will be in
the possession of the Company.
4.5 FINANCIAL STATEMENTS
(a) For purposes of this Agreement: "Financial Statements" shall mean (i)
the consolidated balance sheets of the Company as of December 31, 1996 and 1997,
and the related consolidated income statements for the years then ended, as set
forth in Section 4.5 of the Disclosure Schedule and (ii) the unaudited
consolidated balance sheet of the Company dated as of October 31, 1998 and the
related consolidated income statement for the ten months ended on such date (the
"Interim Financial Statements"). The Company has delivered to TKOG true and
complete copies of the Financial Statements.
(b) The Financial Statements for the years ended December 31, 1996 and
1997, (i) have been prepared from the books and records of the Company and its
Subsidiaries in accordance with GAAP, (ii) fully reflect all liabilities and
contingent liabilities of the Company required to be reflected therein on such
basis as at the date thereof, and (iii) fairly present in all material respects
the financial position of the Company as of the date of the balance sheet
included in the Financial Statements and the results of its operations for the
period indicated. The Interim Financial Statements (i) have been prepared from
the books and records of the Company in accordance with GAAP on a basis
consistent with the Financial Statements for the years ended December 31, 1996
and 1997, and (ii) fairly present in all material respects the financial
position of the Company as at the date of the balance sheet included therein and
the results of its operations for the period indicated; provided, however, the
Interim Financial Statements (x) are subject to normal year-end adjustments and
(y) do not include footnotes.
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4.6 NO UNDISCLOSED LIABILITIES
Except as set forth in Section 4.6 of the Disclosure Schedule, neither the
Company nor any of its Subsidiaries has any liabilities or obligations of any
nature (whether absolute, accrued, contingent, or otherwise) except for
liabilities or obligations reflected or reserved against in the Financial
Statements and current liabilities incurred in the ordinary course of business
since the date of the Financial Statements, which current liabilities are
consistent with the representations and warranties contained in this Agreement
and will not, individually or in the aggregate, have a Material Adverse Effect
on the Company and its Subsidiaries taken as a whole.
4.7 NO MATERIAL ADVERSE CHANGE
Since October 31, 1998, there has not been any material adverse change in
the business, operations, properties, assets, prospects, liabilities, results of
operations or condition (financial or otherwise) (a "Material Adverse Effect")
of the Company and its Subsidiaries taken as a whole and no event has occurred
or circumstance exists that could reasonably be expected to result in a Material
Adverse Effect on the Company and its Subsidiaries taken as a whole.
4.8 TAXES
The Company and its Subsidiaries have properly and timely, taking into
account any extensions granted, filed all federal, state and local Tax Returns
and have timely paid all Taxes, assessments and penalties due and payable,
whether or not shown on such returns. All such Tax Returns were correct in all
respects as filed, and no claims have been assessed with respect to such
returns. The provisions made for Taxes on the balance sheets of the Company
included in the Financial Statements are sufficient in all respects for the
payment of all Taxes whether disputed or not that are due or are hereafter found
to have been due with respect to the conduct of the business of the Company and
its Subsidiaries up to and through the date of such Financial Statements; and
the Company and its Subsidiaries have not, since the date of such Financial
Statements, incurred any liability for Taxes other than in the ordinary course
of business. Except as set forth in Section 4.8 of the Disclosure Schedule,
there are no present disputes as to Taxes of any nature payable by the Company
or any of its Subsidiaries, nor any Tax liens whether existing or inchoate on
any of the assets of the Company or any of its Subsidiaries, except for current
year Taxes not presently due and payable. The federal income Tax Returns of the
Company and its Subsidiaries have never been audited. No IRS or foreign, state,
county or local tax audit is currently in progress, pending or, to the Company's
Knowledge, threatened with respect to the Company and its Subsidiaries. Neither
the Company nor any of its Subsidiaries has waived the expiration of the statute
of limitations with respect to any Taxes. Except as set forth in Section 4.8 of
the Disclosure Schedule, neither the Company nor any of its Subsidiaries has
requested any extension of time within which to file any currently unfiled Tax
Returns.
Neither the Company nor any of its Subsidiaries has filed or been included
in a combined, consolidated or unitary return (or substantial equivalent
thereof) of any Person other than the Company and its Subsidiaries. Neither the
Company nor any of its Subsidiaries is liable for Taxes of any Person other than
the Company and its Subsidiaries, or currently under any contractual obligation
to indemnify any Person with respect to Taxes, or a party to any tax sharing
agreement or any other agreement providing for payments by the Company or any of
its Subsidiaries with respect to Taxes. Except entities the beneficial ownership
of which is wholly-owned by the Company and/or its Subsidiaries, neither the
Company nor any of its Subsidiaries is a party to any joint venture, partnership
or other arrangement or contract which could be treated as a partnership for
United States federal income tax purposes. Neither the Company nor any of its
Subsidiaries is a party to any agreement, contract, arrangement or plan that
would result (taking into account the transactions contemplated by this
Agreement), separately or in the aggregate, in the payment of any "excess
parachute payments" within the meaning of Section 280G of the Code. The prices
for any
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property or services (or for the use of property) provided by the Company or any
of its Subsidiaries to any other Subsidiary or to the Company have been arm's
length prices determined using a method permitted by the Treasury Regulations
under Section 482 of the Code. Neither the Company nor any of its Subsidiaries
is, or has been, a United States real property holding corporation (as defined
in Section 897(c)(2) of the Code) during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code.
For purposes of this Agreement, "Tax" or "Taxes" shall mean taxes, fees,
levies, duties, tariffs, imposts and governmental impositions or charges of any
kind in the nature of (or similar to) taxes, payable to any federal, state,
local or foreign taxing authority, including (without limitation) (i) income,
franchise, profits, gross receipts, ad valorem, net worth, value added, sales,
use, service, real or personal property, special assessments, capital stock,
license, payroll, withholding, employment, social security, workers'
compensation, unemployment compensation, utility, severance, production, excise,
stamp, occupation, premiums, windfall profits, transfer and gains taxes, and
(ii) interest, penalties, additional taxes and additions to tax imposed with
respect thereto; and "Tax Returns" shall mean returns, reports, and information
statements with respect to Taxes required to be filed with the IRS or any other
taxing authority, domestic or foreign, including, without limitation,
consolidated, combined and unitary tax returns.
4.9 ACCOUNTS RECEIVABLE
All accounts receivable of the Company that are reflected on the Financial
Statements or on the accounts receivable ledger of the Company as of the Closing
Date (collectively, the "ACCOUNTS RECEIVABLE") represent or will represent valid
obligations arising from sales actually made or services actually performed in
the ordinary course of business. All of the Accounts Receivable are or will be
collectible at the full recorded amount thereof, less any applicable reserves
established in accordance with GAAP, in the ordinary course of business without
resort to litigation, except for such Accounts Receivable, the failure of which
to collect will not have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
4.10 TITLE TO PROPERTIES; ENCUMBRANCES
Section 4.10 of the Disclosure Schedule contains a complete and accurate
list of all real property, leaseholds or other interests therein owned or held
by the Company. The Company does not own, and has not owned, any real property.
The Company has delivered or made available to Merger Sub true, correct and
complete copies of the real property leases to which the Company or any of its
Subsidiaries is party or pursuant to which it uses or occupies any real
property. Except as set forth in Section 4.10 of the Disclosure Schedule, the
Company and each of its Subsidiaries has good title to all of the properties and
assets, real or personal, tangible and intangible, it owns or purports to own,
including those reflected on its books and records and in the Financial
Statements (except for accounts receivable collected and materials and supplies
disposed of in the ordinary course of business consistent with past practice
after the date of the most recent Financial Statements). The Company and its
Subsidiaries have a valid leasehold, license or other interest in all of the
other assets, real or personal, tangible or intangible, which are used in the
operation of their respective businesses. Except as set forth in Section 4.10 of
the Disclosure Schedule, all material properties and assets owned, leased or
used by the Company and its Subsidiaries are free and clear of all Encumbrances,
except for (a) liens for current taxes not yet due, (b) workman's, common
carrier and other similar liens arising in the ordinary course of business, none
of which materially detracts from the value or impairs the use of the property
or asset subject thereto, or impairs the operations of the Company or any of its
Subsidiaries, (c) Encumbrances disclosed in the Financial Statements, (d)
equipment leases or purchase money security interests for or in an amount not in
excess of $25,000 in any one case and (e) with respect to real property, (i)
minor imperfections of title, if any, none of which is substantial in amount,
materially detracts from the value or impairs the use of the property subject
thereto, or impairs the operations of the
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Company or any of its Subsidiaries, and (ii) zoning laws and other land use
restrictions that do not impair the present or anticipated use of the property
subject thereto.
4.11 CONDITION AND SUFFICIENCY OF ASSETS
The Facilities and other property and assets owned or used by the Company
and its Subsidiaries are in good operating condition and repair, other than
ordinary wear and tear, and are adequate for the uses to which they are being
put, and none of such Facilities or other property and assets owned or used by
the Company and its Subsidiaries is in need of maintenance or repairs except for
ordinary, routine maintenance and repairs that are not material in nature or
cost. The Facilities and other property and assets owned or used by the Company
and its Subsidiaries are sufficient for the continued conduct of their
respective businesses after the Closing in substantially the same manner as
conducted prior to the Closing.
4.12 COMPLIANCE WITH LAWS; GOVERNMENTAL AUTHORIZATIONS
(a) Except as set forth in Section 4.12 of the Disclosure Schedule, the
Company and its Subsidiaries are in compliance in all material respects with all
laws, regulations, licenses, orders, ordinances, judgments and decrees affecting
the properties or assets owned or used by the Company and its Subsidiaries and
the business or operations of the Company and its Subsidiaries, including,
without limitation, federal, state and local: (i) Occupational Safety and Health
Laws; (ii) private investigatory and other similar laws; (iii) securities laws,
rules and regulations; (iv) the Fair Credit Reporting Act and similar state and
local laws; (v) any state or local law regarding or relating to defamation,
libel or slander; and (vi) any federal, state or local law regarding or relating
to trespass or violations of privacy rights. Neither the Company nor any of its
Subsidiaries has been charged with violating, nor to the Company's Knowledge,
threatened with a charge of violating, nor, to the Company's Knowledge, is the
Company or any of its Subsidiaries under investigation with respect to a
possible violation of, any provision of any federal, state or local law, order
or administrative ruling, license or regulation relating to any of their
respective properties or assets or any aspect of their respective businesses.
(b) Section 4.12 of the Disclosure Schedule contains a complete and
accurate list of each Governmental Permit that is held by the Company or any of
its Subsidiaries or that otherwise relates to the business of, or to any of the
properties or assets owned or used by, the Company or any of its Subsidiaries.
Each Governmental Permit listed or required to be listed in Section 4.12 of the
Disclosure Schedule is valid and in full force and effect.
4.13 LEGAL PROCEEDINGS
Except as set forth in Section 4.13 of the Disclosure Schedule, there is no
pending claim, action, investigation, arbitration, litigation or other
proceeding ("PROCEEDING"):
(i) that has been commenced by or against the Company or any of its
Subsidiaries or that otherwise relates to or may affect the business of, or
any of the assets owned or used by, the Company or any of its Subsidiaries;
or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
transactions contemplated hereby.
To the Company's Knowledge, no such Proceeding has been threatened. The
Company has made available to Merger Sub true, correct and complete copies of
all pleadings, correspondence and other documents relating to each Proceeding
listed in Section 4.13 of the Disclosure Schedule. The Proceedings listed in
Section 4.13 of the Disclosure Schedule could not reasonably be expected to have
a Material Adverse Effect on the Company and its Subsidiaries taken as a whole.
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4.14 ABSENCE OF CERTAIN CHANGES AND EVENTS
Except as set forth in Section 4.14 of the Disclosure Schedule, from
December 31, 1997 until the date of this Agreement, the Company and its
Subsidiaries have conducted their respective businesses only in the ordinary
course, consistent with past practice, and there has not been any:
(a) declaration or payment of any dividend or other distribution or
repurchase or payment in respect of shares of capital stock;
(b) issuance or sale or authorization for issuance or sale, or grant
of any options with respect to, any shares of its capital stock or any
other type of its securities, or any change in its outstanding shares of
capital stock or other ownership interests or its capitalization, whether
by reason of a reclassification, recapitalization, stock split or
combination, exchange or readjustment of shares, stock dividend or
otherwise;
(c) mortgage, pledge or grant any security interest in any of its
assets, except security interests solely in tangible personal property
granted pursuant to any purchase money agreement, conditional sales
contract or capital lease under which there exists an aggregate future
liability not in excess of $25,000 (which amount is not more than the
purchase price for such personal property and which security interest does
not extend to any other item or items of personal property);
(d) payment or increase of any bonuses, salaries or other compensation
to any stockholder, director, officer, consultant or (except in the
ordinary course of business consistent with past practice) employee or
entry into any employment, severance or similar Contract with any director,
officer or employee;
(e) adoption of, or increase in the payments to or benefits under, any
profit sharing, bonus, deferred compensation, savings, insurance, pension,
retirement or other employee benefit plan for or with any employees;
(f) damage to or destruction or loss of any customer, asset or
property, whether or not covered by insurance, which could reasonably be
expected to have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole;
(g) entry into, termination of, or receipt of notice of termination of
any Contract or transaction involving a total remaining commitment by or to
the Company or any Subsidiary of at least $25,000, including the entry into
(i) any document evidencing any indebtedness; (ii) any capital or other
lease; or (iii) any guaranty;
(h) sale, lease or other disposition (other than in the ordinary
course of business consistent with past practice) of any property or asset
or mortgage, pledge, or imposition of any Encumbrance on any material
property or asset;
(i) cancellation, compromise or waiver of any claim or right with a
value to the Company or any or its Subsidiaries in excess of $25,000;
(j) incurrence or assumption of any indebtedness for borrowed money or
guarantee any obligation or the net worth of any Person in an aggregate
amount in excess of $25,000, except for endorsements of negotiable
instruments for collection in the ordinary course of business;
(k) discharge or satisfaction of any Encumbrance other than those
which are required to be discharged or satisfied during such period in
accordance with their original terms;
(l) payment of any material obligation or liability, absolute,
accrued, contingent or otherwise, whether due or to become due, except for
any current liabilities, and the current portion of any long
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term liabilities, shown on the Financial Statements (or not required as of
the date thereof to be shown thereon in accordance with GAAP) or incurred
since the date of the most recent balance sheet in the ordinary course of
business consistent with past practice;
(m) any loan or advance to any Person other than travel and other
similar routine advances in the ordinary course of business consistent with
past practice, or acquire any capital stock or other securities of or any
ownership interest in any other business enterprise; (n) any capital
expenditure or capital addition or betterment in amounts which exceed
$25,000 in the aggregate;
(o) institution or settlement of any Proceeding before any court or
governmental body relating to it or its property;
(p) except in the ordinary course of business consistent with past
practice, commitment to provide services for an indefinite period or a
period of more than twelve months;
(q) enter into other Contracts, except Contracts made in the ordinary
course of business consistent with past practice;
(r) change in the method of accounting or the accounting principles or
practices used by the Company in the preparation of the Financial
Statements except as required by GAAP; or
(s) agreement, whether oral or written, by the Company or any of its
Subsidiaries to do any of the foregoing.
4.15 CONTRACTS; NO DEFAULTS
(a) As of the date of this Agreement, Section 4.15(a) of the Disclosure
Schedule contains a complete and accurate list, and the Company has delivered or
made available to Merger Sub true, correct and complete copies, of:
(i) each Contract that involves performance of services or delivery of
goods or materials by the Company or any Subsidiary of the Company of an
amount or value in excess of $25,000;
(ii) each Contract that involves performance of services or delivery
of goods or materials to the Company or any Subsidiary of the Company of an
amount or value in excess of $25,000;
(iii) each lease, license and other Contract affecting any leasehold
or other interest in any real or personal property;
(iv) each licensing agreement or other Contract with respect to
patents, trademarks, copyrights, trade secrets or other intellectual
property, including agreements with current or former employees,
consultants or contractors regarding the appropriation or the
non-disclosure of any intellectual property;
(v) each collective bargaining agreement and other Contract to or with
any labor union or other employee representative of a group of employees;
(vi) each joint venture, partnership and other Contract involving a
sharing of profits, losses, costs or liabilities by the Company or any of
its Subsidiaries with any other Person or requiring the Company or any of
its Subsidiaries to make a capital contribution;
(vii) each Contract containing covenants that in any way purport to
restrict the business activity of the Company or any of its Subsidiaries or
limit the freedom of the Company or any of its Subsidiaries to engage in
any line of business or to compete with any Person or hire any Person;
(viii) each employment or consulting agreement;
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(ix) each agreement between the Company or any of its Subsidiaries and
an officer or director of the Company or any affiliate of any of the
foregoing;
(x) each power of attorney that is currently effective and
outstanding;
(xi) each Contract for capital expenditures in excess of $25,000;
(xii) each agreement under which any money has been or may be borrowed
or loaned or any note, bond, factoring agreement, indenture or other
evidence of indebtedness has been issued or assumed (other than those under
which there remain no ongoing obligations of the Company or any of its
Subsidiaries), and each guaranty (including "take-or-pay" and "keepwell"
agreements) of any evidence of indebtedness or other obligation, or of the
net worth, of any Person (other than endorsements for the purpose of
collection in the ordinary course of business);
(xiii) each agreement containing restrictions with respect to the
payment of dividends or other distributions in respect of the Company's or
any of its Subsidiaries' capital stock;
(xiv) each stock purchase, merger or other agreement pursuant to which
the Company acquired any of its Subsidiaries or any material amount of
assets, and all relevant documents and agreements delivered in connection
therewith;
(xv) each agreement containing a change of control provision;
(xvi) each other agreement having an indefinite term or a fixed term
of more than one (1) year (other than those that are terminable at will or
upon not more than sixty (60) days' notice by the Company or any of its
Subsidiaries without penalty) or requiring payments by the Company or any
of its Subsidiaries of more than $25,000 per year; and
(xvii) each standard form of agreement pursuant to which the Company
or any of its Subsidiaries provides services to customers.
(b) Except as set forth in Section 4.15(b) of the Disclosure Schedule, each
Contract identified or required to be identified in Section 4.15(a) of the
Disclosure Schedule is in full force and effect and is valid and enforceable
against the Company or a Subsidiary of the Company and, to the Company's
Knowledge, against the other parties thereto in accordance with its terms.
(c) Except as set forth in Section 4.15(c) of the Disclosure Schedule:
(i) the Company and its Subsidiaries are in full compliance with all
applicable terms and requirements of each Contract under which the Company
and its Subsidiaries have any obligation or liability or by which the
Company or any of its Subsidiaries or any of the assets owned or used by
the Company or any of its Subsidiaries is or was bound, except for such
noncompliance that would not have a Material Adverse Effect on the Company
and its Subsidiaries taken as a whole;
(ii) to the Company's Knowledge, each other person that has or had any
obligation or liability under any Contract under which the Company or any
of its Subsidiaries has any rights is in full compliance with all
applicable terms and requirements of such Contract; and
(iii) no event has occurred or, to the Company's Knowledge,
circumstance exists that (with or without notice or lapse of time or both)
may result in a violation or breach of any Contract, which violation or
breach would have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
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4.16 INSURANCE
Section 4.16 of the Disclosure Schedule sets forth the premium payments and
describes all the insurance policies of the Company and its Subsidiaries, which
policies are now in full force and effect in accordance with their terms and
expire on the dates shown on Section 4.16 of the Disclosure Schedule. There has
been no material default in the payment of premiums on any of such policies,
and, to the Company's Knowledge, there is no ground for cancellation or
avoidance of any such policies, or any increase in the premiums thereof, or for
reduction of the coverage provided thereby. Such policies insure the Company and
its Subsidiaries in amounts and against losses and risks customary and
sufficient for businesses similar to that of the Company and its Subsidiaries,
and, to the Company's Knowledge, such policies shall continue in full force and
effect up to the expiration dates shown in Section 4.16 of the Disclosure
Schedule. True, correct and complete copies of all insurance policies listed in
Section 4.16 have been previously furnished to Merger Sub.
4.17 ENVIRONMENTAL MATTERS
Except as set forth in Section 4.17 of the Disclosure Schedule:
(a) The Company and its Subsidiaries are, and at all times have been,
in full compliance with, and have not been and are not in violation of or
liable under, any Environmental Law. The Company and its Subsidiaries have
obtained and are in compliance with all permits required under
Environmental Laws. Neither the Company nor any of its Subsidiaries has
received any actual or threatened order, notice or other communication from
(i) any Governmental Authority or third party, or (ii) the current or prior
owner or operator of any Facilities, of any actual or potential violation
or failure to comply with any Environmental Law, or of any actual or
threatened Environmental, Health, and Safety Liabilities with respect to
any of the Facilities or any other properties or assets in which the
Company or any of its Subsidiaries has had an interest or the operation of
their respective businesses, or with respect to any property or Facility at
or to which Hazardous Materials were generated, manufactured, transported,
used or processed by the Company or any of its Subsidiaries.
(b) There are no pending or, to the Company's Knowledge, threatened
claims, Encumbrances, or other restrictions of any nature, resulting from
any Environmental, Health, and Safety Liabilities or arising under or
pursuant to any Environmental Law, with respect to or affecting any of the
Facilities or any other properties and assets in which the Company or any
of its Subsidiaries has or had an interest.
(c) Neither the Company nor any of its Subsidiaries has knowledge of
any basis to expect, nor has any of them received, any inquiry, notice,
order or other communication that relates to Hazardous Activity, Hazardous
Materials, or any violation or failure to comply with any Environmental
Law, or of any obligation to undertake or bear the cost of any
Environmental, Health, and Safety Liabilities with respect to any of the
Facilities or any other properties or assets in which the Company or any of
its Subsidiaries had an interest, or with respect to any property or
facility to which Hazardous Materials generated, manufactured, transported,
used, or processed by the Company or any of its Subsidiaries have been
transported, treated, stored, handled or disposed.
(d) Neither the Company nor any of its Subsidiaries has any
Environmental, Health, and Safety Liabilities with respect to the
Facilities or with respect to any other properties and assets in which the
Company (or any predecessor) or any of its Subsidiaries has or had an
interest that could reasonably be expected to have a Material Adverse
Effect on the Company and its Subsidiaries, taken as a whole.
(e) There are no Hazardous Materials present on, in, under or
migrating to or from the Environment at the Facilities, to the Company's
Knowledge. Neither the Company nor any of its Subsidiaries has permitted or
conducted, or is aware of, any Hazardous Activity conducted with respect
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to the Facilities or any other properties or assets in which the Company or
any of its Subsidiaries has or had an interest except in compliance in all
material respects with all applicable Environmental Laws.
(f) There has been no release or, to the Company's Knowledge, threat
of release, of any Hazardous Materials at or from the Facilities or at any
other locations where any Hazardous Materials were generated, manufactured,
transported, produced, used, disposed, or processed from or by the
Facilities, or from or by any other properties and assets in which the
Company or any of its Subsidiaries has or had an interest whether by the
Company, any Subsidiary of the Company or any other Person, which release
could reasonably be expected to have a Material Adverse Effect on the
Company and the Subsidiaries, taken as a whole.
(g) The Company has delivered to Merger Sub true, correct and complete
copies and results of any and all reports, studies, analyses, tests, or
monitoring possessed or initiated by the Company or any Subsidiary of the
Company pertaining to Hazardous Materials or Hazardous Activities in, on,
or under the Facilities, or concerning compliance by the Company and its
Subsidiaries with Environmental Laws.
4.18 EMPLOYEES
(a) Section 4.18 of the Disclosure Schedule contains a complete and
accurate list of the following information for each employee of the Company and
its Subsidiaries: name; job title; current compensation; vacation accrued; and
service credited for purposes of vesting and eligibility to participate under
any employee benefit plan of any nature.
(b) No key employee or any officer of the Company or any of its
Subsidiaries is a party to, or is otherwise bound by, any agreement or
arrangement, including any confidentiality, noncompetition, or proprietary
rights agreement, between such key employee or officer and any other Person that
materially and adversely affects (i) the performance of his duties as an officer
or employee of the Company or any of its Subsidiaries, or (ii) the ability of
the Company or any of its Subsidiaries to conduct its business. To the Company's
Knowledge, no officer or other key employee of the Company or any of its
Subsidiaries intends to terminate his or her employment with the Company.
4.19 EMPLOYEE BENEFITS
(a) Except as listed on Section 4.19 of the Disclosure Schedule, neither
the Company nor any ERISA Affiliate maintains any Employee Benefit Plans.
"Employee Benefit Plan" means any "employee benefit plan" as defined in Section
3(3) of ERISA and any other plan, policy, program, practice, agreement,
understanding or arrangement (whether written or otherwise) providing
compensation or other benefits to any current or former director, officer,
employee or consultant (or to any dependent or beneficiary thereof), of the
Company or any of its Subsidiaries or any ERISA Affiliate, which are now, or
were within the past six years, maintained by the Company or any of its
Subsidiaries or any ERISA Affiliate, or under which the Company or any of its
Subsidiaries or any ERISA Affiliate has any obligation or liability, whether
actual or contingent, including, without limitation, all incentive, bonus,
deferred compensation, vacation, holiday, cafeteria, medical, disability, stock
purchase, stock option, stock appreciation, phantom stock, restricted stock or
other stock-based compensation plans, policies, programs, practices or
arrangements. "ERISA Affiliate" means any entity (whether or not incorporated)
other than the Company or any of its Subsidiaries that, together with the
Company or any of its Subsidiaries, is or was a member of (i) a controlled group
of corporations within the meaning of Section 414(b) of the Code; (ii) a group
of trades or businesses under common control within the meaning of Section
414(c) of the Code; or (iii) an affiliated service group within the meaning of
Section 414(m) of the Code.
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The Company has delivered to TKOG or its counsel prior to the date hereto
true and complete copies of (i) any employment agreements and any procedures and
policies relating to the employment of employees of the Company or any of its
Subsidiaries and the use of temporary employees and independent contractors by
the Company or any of its Subsidiaries (including written summaries of any
procedures and policies that are unwritten), (ii) plan instruments and
amendments thereto for all Employee Benefit Plans and related trust agreements,
insurance and other contracts (including written summaries of any plans that are
unwritten), summary plan descriptions, and summaries of material modifications,
and material communications distributed to the participants of each Plan, (iii)
to the extent annual reports on Form 5500 are required with respect to any
Employee Benefit Plan, the three most recent annual reports and attached
schedules for each Employee Benefit Plan as to which such report is required to
be filed, (iv) where applicable, the most recent (A) opinion, notification and
determination letters, (B) audited financial statements, (C) actuarial valuation
reports and (D) nondiscrimination tests performed under the Code (including
401(k) and 401(m) tests) for each Employee Benefit Plan and (v) representative
forms of communication used in (X) making distributions under any plan intended
to be qualified under Section 401(a) of the Code, (Y) explaining benefit rights
on termination of employment (including rights to elect health care continuation
coverage under Part 6 of Subtitle B of Title I ERISA and Section 4980B of the
Code ("COBRA").
(b) None of the Company, any of its Subsidiaries nor any ERISA Affiliate
maintains or has ever maintained an Employee Benefit Plan subject to Title IV of
ERISA.
(c) With respect to each Employee Benefit Plan, (i) no party in interest or
disqualified person (as defined in Section 3(14) of ERISA and Section 4975 of
the Code, respectively) has at any time engaged in a transaction which could
subject TKOG, Merger Sub, the Company or any of the Company's Subsidiaries,
directly or indirectly, to a tax, penalty or liability for prohibited
transactions imposed by ERISA or the Code and (ii) no fiduciary (as defined in
Section 3(21) of ERISA) with respect to any Employee Benefit Plan, or for whose
conduct the Company or any of its Subsidiaries could have any material liability
(by reason of indemnities or otherwise), has breached any of the
responsibilities or obligations imposed upon the fiduciary under Title I of
ERISA.
(d) Except as disclosed in Section 4.19 of the Disclosure Schedule, each
Employee Benefit Plan which is a "welfare plan" within the meaning of Section
3(1) of ERISA and which provides health, disability or death benefits is fully
insured; the Company is not obligated to directly pay any such benefits or to
reimburse any third party payor for the payment of such benefits.
(e) Each Employee Benefit Plan which is an "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA (a "Pension Plan") and which is
subject to Sections 201, 301 or 401 of ERISA has received a favorable
determination letter from the Internal Revenue Service covering all amendments
required by the Tax Reform Act of 1986 and prior legislation and, to the
Company's Knowledge, there are no circumstances that are reasonably likely to
result in revocation of any such favorable determination letter. To the
Company's Knowledge, each Employee Benefit Plan is and has been operated in all
material respects in compliance with its terms and all applicable laws, and by
its terms can be amended and/or terminated at any time. As of and including the
Closing Date, the Company and its Subsidiaries shall have made all contributions
required to be made by them up to and including the Closing Date with respect to
each Employee Benefit Plan, or adequate accruals therefor will have been
provided for and will be reflected on the Financial Statements provided to TKOG
by the Company. All notices, filings and disclosures required by ERISA or the
Code (including notices under Section 4980B of the Code) have been timely made.
(f) The Company has not received or is not aware of any Proceeding (other
than routine claims for benefits) pending or, to the Company's Knowledge,
threatened with respect to any Employee Benefit Plan or against any fiduciary of
any Employee Benefit Plan, and the Company has no knowledge of any facts that
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could give rise to any such Proceeding. To the Company's Knowledge, there has
not occurred any circumstances by reason of which the Company or any of its
Subsidiaries may be liable for an act, or a failure to act, by a fiduciary with
respect to any Employee Benefit Plan.
(g) No Employee Benefit Plan provides for medical or health benefits
(through insurance or otherwise) or provided for the continuation of such
benefits or coverage for any participant or any dependent or beneficiary of any
participant after such participant's retirement or other termination of
employment except as may be required by COBRA.
(h) None of the Company, any of its Subsidiaries nor any ERISA Affiliate
has ever contributed to, or withdrawn in a partial or complete withdrawal from,
any "multiemployer plan" (as defined in Section 3(37) of ERISA) or has any fixed
or contingent liability under Section 4204 of ERISA.
(i) No Employee Benefit Plan is a "multiple employer plan" as described in
Section 3(40) of ERISA or Section 413(c) of the Code.
(j) No Employee Benefit Plan, other than a "pension plan" within the
meaning of Section 3(2) of ERISA ("Pension Plan"), is funded through a trust
intended to be exempt from tax pursuant to Section 501 of the Code.
(k) Except as required by law, neither the Company nor any of its
Subsidiaries has proposed or has agreed to any changes to any Employee Benefit
Plan that would cause an increase in benefits under any such Employee Benefit
Plan (or the creation of new benefits or plans) or to change any employee
coverage which would cause an increase in the expense of maintaining any such
plan.
(l) Except as provided in Section 4.19 of the Disclosure Schedule, no
person or entity has an employment, severance, consulting or independent
contractor agreement with the Company or any of its Subsidiaries. No "leased
employee" (within the meaning of Section 414(n) or (o) of the Code) performs any
material services for the Company or any of its Subsidiaries.
Except as set forth in Section 4.19 of the Disclosure Schedule, the
consummation of the transactions contemplated by this Agreement will not result
in (i) any payment (including, without limitation, severance, unemployment
compensation, golden parachute or bonus payments or otherwise) becoming due to
any director, officer, employee or consultant of the Company or any of its
Subsidiaries, (ii) any increase in the amount of compensation or benefits
payable in respect of any director, officer, employee or consultant of the
Company or any of its Subsidiaries, or (iii) accelerate the vesting or timing of
payment of any benefits or compensation payable in respect of any director,
officer, employee or consultant of the Company or any of its Subsidiaries. No
Employee Benefit Plan provides benefits or payments contingent upon, triggered
by, or increased as a result of a change in the ownership or effective control
of the Company.
4.20 LABOR RELATIONS
Except as set forth in Section 4.20 of the Disclosure Schedule:
(a) To the Company's Knowledge, the Company and its Subsidiaries have
satisfactory relationships with their respective employees.
(b) To the Company's Knowledge, no condition or state of facts or
circumstances exists which could materially adversely affect the Company's
or any of its Subsidiaries relations with its employees, including the
consummation of the transactions contemplated by this Agreement.
(c) The Company and its Subsidiaries are in compliance in all material
respects with all applicable laws respecting employment and employment
practices, terms and conditions of employment and wages and hours and none
of them is engaged in any unfair labor practice.
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(d) No collective bargaining agreement with respect to the business of
the Company or any of its Subsidiaries is currently in effect or being
negotiated. Neither the Company nor any of its Subsidiaries has encountered
any labor union or collective bargaining organizing activity with respect
to its employees. Neither the Company nor any of its Subsidiaries has any
obligation to negotiate any such collective bargaining agreement and, to
the Company's Knowledge, there is no indication that the employees of the
Company or any of its Subsidiaries desire to be covered by a collective
bargaining agreement.
(e) There are no strikes, slowdowns, work stoppages or other labor
trouble pending or, to the Company's Knowledge, threatened with respect to
the employees of the Company or any of its Subsidiaries, nor has any of the
above occurred or, to the Company's Knowledge, been threatened.
(f) There is no representation claim or petition pending before the
National Labor Relations Board or any state or local labor agency and, to
the Company's Knowledge, no question concerning representation has been
raised or threatened respecting the employees of the Company or any of its
Subsidiaries.
(g) There are no complaints or charges against the Company or any of
its Subsidiaries pending before the National Labor Relations Board or any
state or local labor agency and, to the Company's Knowledge, no complaints
or charges have been filed or threatened to be filed against the Company or
any of its Subsidiaries with any such board or agency.
(h) To the Company's Knowledge, no charges with respect to or relating
to the business of the Company or any of its Subsidiaries are pending
before the Equal Employment Opportunity Commission or any state or local
agency responsible for the prevention of unlawful employment practices.
(i) Section 4.20 of the Disclosure Schedule accurately sets forth all
unpaid severance which, as of the date hereof, is due or claimed, in
writing, to be due from the Company or any of its Subsidiaries to any
Person whose employment with the Company or any of its Subsidiaries was
terminated.
(j) Neither the Company nor any of its Subsidiaries has received
notice of the intent of any government body responsible for the enforcement
of labor or employment laws to conduct an investigation of the Company or
any of its Subsidiaries and no such investigation is in progress.
(k) Neither the Company nor any of its Subsidiaries is, and to the
Company's Knowledge no employee of the Company or any of its Subsidiaries
is, in violation in any material respect of any employment agreement,
non-disclosure agreement, non-compete agreement or any other agreement
regarding an employee's employment with the Company or any of its
Subsidiaries.
(l) The Company and its Subsidiaries have paid all wages which are due
and payable to each employee and each independent contractor.
4.21 INTELLECTUAL PROPERTY
(a) Intellectual Property Assets -- The term "Intellectual Property Assets"
includes: (i) the name "Background America," all business names, trade names,
registered and unregistered trademarks, service marks and applications
(collectively, "MARKS"); (ii) all patents, patent applications and inventions
and discoveries (collectively, "PATENTS"); (iii) all copyrights in both
published works and unpublished works, including software, training manuals and
videos (collectively, "COPYRIGHTS"); (iv) all know-how, trade secrets,
confidential information, customer lists, proprietary information, technologies,
processes and formulae, all software, source and object code, algorithms,
architecture, structure, display screens and development tools, data, plans,
drawings and blue prints (collectively, "TRADE SECRETS"); and (v) all
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documentation and media constituting, describing or relating to items (i)
through (iv); owned, used or licensed by the Company and its Subsidiaries as
licensee or licensor.
(b) Agreements -- Section 4.21(b) of the Disclosure Schedule contains a
true, correct and complete list and summary description, including any royalties
paid or received by the Company and its Subsidiaries, of all Contracts relating
to the Intellectual Property Assets to which the Company and its Subsidiaries
are a party or by which the Company and its Subsidiaries are bound.
(c) Know-How Necessary for the Business -- The Intellectual Property Assets
are all those necessary for the operation of the business of the Company and its
Subsidiaries as it is currently conducted. The Company and its Subsidiaries own
all right, title and interest in and to each of the Intellectual Property
Assets, free and clear of all Encumbrances, or have valid licenses to use each
of the Intellectual Property Assets, as applicable, and have the right to use
without payment to a third party all of the Intellectual Property Assets.
(d) Trademarks -- (i) Section 4.21(d) of Disclosure Schedule contains a
true, correct and complete list of all Marks; (ii) the Company and its
Subsidiaries own all right, title and interest in and to the Marks, free and
clear of all Encumbrances, or have valid licenses to use the Marks, as
applicable; (iii) all Marks that have been registered with the United States
Patent and Trademark Office are currently in compliance in all material respects
with all formal legal requirements and are valid and enforceable; (iv) no Mark
is infringed or, to the Company's Knowledge, has been challenged or threatened
in any way. None of the Marks used by the Company or any of its Subsidiaries
infringes or is alleged to infringe any trade name, trademark or service mark of
any Person.
(e) Copyrights -- (i) Section 4.21(e) of the Disclosure Schedule contains a
true, correct and complete list of all Copyrights; (ii) the Company and its
Subsidiaries own all right, title and interest in and to each of the Copyrights,
free and clear of all Encumbrances, or have valid licenses to use each of the
Copyrights, as applicable; (iii) all the Copyrights have been registered and are
currently in compliance in all material respects with formal legal requirements,
and are valid and enforceable; (iv) no Copyright is infringed or, to the
Company's Knowledge, has been challenged or threatened in any way; (v) none of
the subject matter of any of the Copyrights infringes or is alleged to infringe
any copyright of any Person or is a derivative work based on the work of a third
Person; and (vi) all works encompassed by the Copyrights have been marked with
the proper copyright notice.
(f) Trade Secrets -- (i) The Company and its Subsidiaries have taken all
reasonable precautions to protect the secrecy, confidentiality and value of
their Trade Secrets; and (ii) the Company and its Subsidiaries have good title
and an absolute right to use the Trade Secrets. To the Company's Knowledge, the
Trade Secrets have not been used, divulged or appropriated either for the
benefit of any Person (other than the Company and its Subsidiaries) or to the
detriment of the Company. No Trade Secret is subject to any claim or, to the
Company's Knowledge, has been challenged or threatened in any way.
(g) Year 2000 -- (i) The Company and its Subsidiaries have: (w) undertaken
a detailed inventory, review, and assessment of all areas within and affecting
their businesses and operations that could be adversely affected by the failure
of the Company or any of its Subsidiaries to be Year 2000 Compliant (as
hereinafter defined) on a timely basis; (x) developed a plan and time line for
becoming Year 2000 Compliant on or before December 31, 1999; (y) to date,
implemented that plan in accordance with the specified timetable in all material
respects; and (z) delivered to TKOG or its representatives a copy of any such
plan or time line; (ii) it is anticipated that the Company and all of its
Subsidiaries will be Year 2000 Compliant on or before December 31, 1999; and
(iii) the Company, pursuant to its plan for becoming Year 2000 Compliant, is
currently investigating its and its Subsidiaries' vendors and suppliers to
determine that the computer systems which such vendors and suppliers are using
are Year 2000 Compliant.
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As used here, "Year 2000 Compliant" shall mean that all software, embedded
microchips and other processing capabilities utilized by the Company or any of
its Subsidiaries, or the Company's or any of its Subsidiaries' key suppliers,
vendors and customers will provide, among other things, the following
functionality: (i) accurate processing of date-related information before,
during and after January 1, 2000, including accepting the date input, providing
the date output, and performing calculations on dates or portions of dates; (ii)
accurate functioning without interruption before, during and after January 1,
2000 without any change in operation associated with the advent of the new
century; (iii) ability to respond to two-digit date input in a way that resolves
any ambiguity as to century in a disclosed, defined and predetermined manner;
and (iv) the ability to store and provide output date information in ways that
are unambiguous as to century.
(h) Development Tools -- Section 4.21(h) of the Disclosure Schedule
contains a complete list of all material development tools used or currently
intended to be used by the Company or any of its Subsidiaries in the development
of any product or service of the Company or any of its Subsidiaries or used in
the conduct of the Company's or any Subsidiary's business as presently conducted
and as it is expected to be conducted after the date of this agreement, except
for any such tools that are generally available and are used in their generally
available form (the "Company Development Tools"). Section 4.21(h) of the
Disclosure Schedule also sets forth, for each Company Development Tool: (a) for
any Company Development Tool not entirely developed internally by employees of
the Company or any of its Subsidiaries, the identity of the independent
contractors and consultants involved in such development and a list of the
agreements with such independent contractors and consultants; (b) a list of any
third parties with any rights to receive royalties or other payments with
respect to such Company Development Tools, and a schedule of all such royalties
payable; (c) a list of agreements containing any restrictions on the Company's
or any Subsidiary's unrestricted right to use and distribute such Company
Development Tools; and (d) a list of all agreements with third parties for the
use by such third party of such Company Development Tools. The Company and its
Subsidiaries have sufficient right, title and interest in and to the Company
Development Tools necessary for the conduct of their respective businesses as
currently conducted and as to any products or services currently in development
or proposed to be developed and, except as set forth on the Disclosure Schedule,
all Company Development Tools are works made-for-hire and the Company or any of
its Subsidiaries is the author and owner of all such Company Development Tools
under the Copyright Act of 1976, as amended.
4.22 CERTAIN PAYMENTS
Neither the Company nor any of its Subsidiaries nor any director, officer,
agent or employee of the Company or any of its Subsidiaries, or to the Company's
Knowledge, any other Person associated with or acting for or on behalf of the
Company or any of its Subsidiaries, has directly or indirectly (a) made any
contribution, gift, bribe, rebate, payoff, influence payment, kickback or other
payment to any Person, private or public, regardless of form, whether in money,
property or services, that is illegal or prohibited by any Contract to which the
Company or any of its Subsidiaries is a party, (i) to obtain favorable treatment
in securing business, (ii) to pay for favorable treatment for business secured,
(iii) to obtain special concessions, or for special concessions already
obtained, for or in respect of the Company or any affiliate of the Company, or
(iv) in violation of any legal requirement, or (b) established or maintained any
fund or asset that has not been recorded in the books and records of the
Company.
4.23 RELATIONSHIPS WITH RELATED PERSONS
Except as set forth in Section 4.23 of the Disclosure Schedule, none of the
Company Shareholders, nor any officer, director or employee of the Company, nor
any spouse or child of any of them or any Person associated with any of them
("Related Person") has any interest in any property used in or pertaining to the
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business of the Company or any of its Subsidiaries. Except as set forth in
Section 4.23 of the Disclosure Schedule, no Related Person has owned an equity
interest or any other financial or profit interest in a Person that has (i) had
business dealings with the Company or any of its Subsidiaries, or (ii) engaged
in competition with the Company or any of its Subsidiaries. Except as set forth
in Section 4.23 of the Disclosure Schedule, no Related Person is a party to any
Contract with, or has any claim or right against, the Company or any of its
Subsidiaries, except employment or consulting agreements listed in Section
4.15(a) of the Disclosure Schedule.
4.24 BROKERS OR FINDERS
Neither the Company nor its agents has incurred any obligation or
liability, contingent or otherwise, for brokerage or finders' fees or agents'
commissions or financial advisory services or other similar payment in
connection with this Agreement.
4.25 DEPOSIT ACCOUNTS
Section 4.25 of the Disclosure Schedule contains a true, correct and
complete list of (a) the name of each financial institution in which the Company
has an account or safe deposit box, (b) the names in which each account or box
is held, (c) the type of account, and (d) the name of each person authorized to
draw on or have access to each account or box.
4.26 POOLING OF INTERESTS
The Company has fully, completely and accurately responded to all requests
made by the independent accountants of TKOG for information concerning actions
taken or agreed to be taken by the Company that relate to such accountants'
determinations with respect to the ability of TKOG to account for the business
combination to be effected by the Merger as a pooling of interests.
4.27 CUSTOMER RELATIONSHIPS
To the Company's Knowledge, there are no facts or circumstances, including
the consummation of the transactions contemplated by this Agreement, that are
reasonably likely to result in the loss of any material customer of the Company
or any of its Subsidiaries or a material change in the relationship of the
Company or any of its Subsidiaries with such a customer.
4.28 CONDUCT OF BUSINESS; USE OF NAME
The business carried on by the Company and its Subsidiaries has been
conducted by the Company and each Subsidiary directly and not through any
affiliate of any shareholder, officer, director or employee of the Company or
through any other Person. The Company owns and has the exclusive right, title
and interest in and to the name "Background America" and no other Person has the
right to use the same, or any confusing derivative thereof, as its corporate
name or otherwise in connection with the operation of any business similar or
related to the business conducted by the Company.
4.29 RESTRICTIONS ON BUSINESS ACTIVITIES.
There is no Contract, judgment, injunction, order or decree binding upon
the Company or, to the Company's Knowledge, threatened that has or could
reasonably be expected to have the effect of prohibiting or materially impairing
any business practice of the Company and its Subsidiaries (either individually
or in the aggregate), any acquisition of property by the Company and its
Subsidiaries (either individually or in the aggregate), providing of any service
by the Company and its Subsidiaries or the hiring of employees or the
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conduct of business by the Company and its Subsidiaries (either individually or
in the aggregate) as currently conducted or proposed to be conducted.
4.30 PAYABLES
There has been no adverse change since the date of the Financial Statements
in the amount or delinquency of accounts payable of the Company (either
individually or in the aggregate) which would have a Material Adverse Effect
upon the Company and its Subsidiaries taken as a whole.
4.31 OUTSTANDING INDEBTEDNESS
Section 4.31 of the Disclosure Schedule sets forth as of November 30, 1998
(a) the amount of all indebtedness of the Company then outstanding and the
interest rate applicable thereto, (b) any Encumbrances which relate to such
indebtedness and (c) the name of the lender or the other payee of each such
indebtedness.
4.32 CUSTOMERS AND CONTRACTORS
Section 4.32 of the Company Disclosure Schedule contains a complete and
accurate list of the top 30 clients of the Company, including the amounts they
paid to the Company in the last year. Section 4.32 of the Disclosure Schedule
contains a complete and accurate list of the material contractors and
subcontractors used by the Company.
4.33 PRIVATE INVESTIGATION LICENSE
Section 4.33 of the Disclosure Schedule contains a complete list of all
private investigation licenses or other similar licenses held by the Company or
each Subsidiary of the Company or any employee of the Company or any of its
Subsidiaries and the jurisdictions in which each such license was granted. Each
such private investigation license is in full force and effect. There has been
no violation of such private investigation licenses. Neither the Company nor any
Subsidiary of the Company nor any employee of the Company or any of its
Subsidiaries conducts any business or takes or performs any other action which
would require any of them to be licensed as a private investigator in any
jurisdiction other than those listed in Section 4.33 of the Disclosure Schedule.
4.34 BUSINESS PLAN
The Company has delivered to TKOG and Merger Sub a true, correct and
complete copy of the May 1997 Business Plan (the "Business Plan") of the
Company. The Business Plan was prepared by the Company in good faith by the
Company and except as set forth in Section 4.34 of the Disclosure Schedule, the
assumptions underlying the Business Plan, taken as whole, are reasonable.
4.35 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS
The information supplied by the Company with respect to the Company and its
Subsidiaries and their respective officers, directors, shareholders and other
affiliates (collectively, the "COMPANY INFORMATION") for inclusion in the
Registration Statement (as defined in Section 5.8) shall not at the time the
Registration Statement is declared effective by the Commission contain any
untrue statement of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the statements therein not
misleading. The Company Information supplied by the Company for inclusion in the
notice of meeting/prospectus (such notice of meeting/prospectus as amended or
supplemented is referred to herein as the "PROXY STATEMENT/PROSPECTUS") to be
sent to the Company Shareholders in connection with the meeting of the Company
Shareholders to consider the Merger will not, on the date the Proxy
Statement/Prospectus
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(or any amendment thereof or supplement thereto) is first mailed to Company
Shareholders or at the time of such meeting, contain any statement which, at
such time and in light of the circumstances under which it shall be made, is
false or misleading with respect to any material fact, or shall omit to state
any material fact necessary in order to make the statements made therein, in
light of the circumstances under which it shall be omitted, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication to Company Shareholders in connection
with the meeting which has become false or misleading. If at any time prior to
the Effective Time any event relating to the Company or its Subsidiaries or any
of their respective officers, directors, shareholders or other affiliates is
discovered by the Company which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement/Prospectus, the
Company shall promptly inform TKOG. The Proxy Statement/Prospectus will comply
in all material respects with the requirements of the Securities Act.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to any information supplied by TKOG or Merger Sub which is
contained or incorporated by reference in, or furnished in connection with the
preparation of, the Registration Statement or the Proxy Statement/Prospectus.
4.36 DISCLOSURE
No representation or warranty of the Company in this Agreement and no
statement in the Disclosure Schedule is inaccurate in any material respect or
omits to state a material fact necessary to make the statements herein or
therein, in light of the circumstances under which they were made, not
misleading.
5. REPRESENTATIONS AND WARRANTIES OF TKOG AND MERGER SUB
TKOG and Merger Sub each represents and warrants to the Company as follows:
5.1 ORGANIZATION AND GOOD STANDING
Merger Sub is a corporation duly organized, validly existing and in good
standing under the laws of the State of Tennessee. TKOG is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Ohio. Each of TKOG and Merger Sub has full corporate power and authority to
conduct its business as it is now being conducted and to own or use the
properties and assets that it purports to own or use. Each of TKOG and Merger
Sub is duly qualified to do business as a foreign corporation and is in good
standing under the laws of each state or other jurisdiction in which either the
ownership or use of the properties owned or used by it, or the nature of the
activities conducted by it, requires such qualification, except where the
failure to be so qualified could not reasonably be expected to have a Material
Adverse Effect on TKOG and its Subsidiaries taken as a whole.
5.2 AUTHORITY; NO CONFLICT
(a) TKOG and Merger Sub each has the right, power, authority and capacity
to execute and deliver this Agreement and the Transaction Documents to which
TKOG or Merger Sub is a party, to consummate the Merger and to perform their
respective obligations under this Agreement and the Transaction Documents to
which TKOG or Merger Sub is a party. This Agreement has been duly authorized and
approved, executed and delivered by TKOG and Merger Sub and constitutes the
legal, valid and binding obligation of TKOG and Merger Sub, enforceable against
them in accordance with its terms. Upon the execution and delivery by TKOG and
Merger Sub of the Transaction Documents to which TKOG or Merger Sub is a party,
such Transaction Documents will constitute the legal, valid and binding
obligations of TKOG and Merger Sub, enforceable against them in accordance with
their respective terms.
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(b) Neither the execution and delivery of this Agreement by TKOG or Merger
Sub nor the consummation or performance by TKOG or Merger Sub of the Merger or
any of the other transactions contemplated hereby will, directly or indirectly
(with or without notice or lapse of time or both):
(i) contravene, conflict with, or result in a violation or breach of
(A) any provision of the Organizational Documents of TKOG or Merger Sub,
(B) any resolution adopted by the board of directors or the shareholders of
TKOG or Merger Sub, (C) any legal requirement or any order to which TKOG or
Merger Sub or any of the assets owned or used by them may be subject, or
(D) any Governmental Permit held by TKOG or Merger Sub;
(ii) result in a breach of or constitute a default, give rise to a
right of termination, cancellation or acceleration, create any entitlement
to any payment or benefit, or require the consent or approval of or any
notice to or filing with any third party, under any Contract to which TKOG
or Merger Sub is a party or by which their respective assets are bound, or
require the consent or approval of or any notice to or filing with any
Governmental Authority to which either TKOG, Merger Sub or their respective
assets are subject; or
(iii) result in the imposition or creation of any Encumbrance upon or
with respect to any of the assets owned or used by TKOG or Merger Sub,
except, with respect to clause (i) (C) or (D), (ii) or (iii) of this Section
5.2, where any such contravention, conflict, violation, breach, default,
termination right, cancellation or acceleration right or Encumbrance would not
have a Material Adverse Effect on TKOG and its Subsidiaries taken as a whole or
would not adversely affect the ability of TKOG or Merger Sub to consummate the
Merger or the other transactions contemplated by this Agreement.
5.3 CAPITALIZATION; TKOG SHARES
(a) The authorized capital stock of TKOG consists of 1,000,000 shares of
preferred stock, $0.01 par value per share, of which as of the date of this
Agreement no shares are issued or outstanding, and 50,000,000 shares of TKOG
Common Stock, of which as of December 30, 1998, 19,015,368 shares were issued
and outstanding. All of the authorized capital stock of Merger Sub is owned of
record and beneficially by TKOG.
(b) The TKOG Shares issuable as a result of the Merger have been duly
authorized and upon the Effective Time will be validly issued, fully paid and
nonassessable and designated for quotation on the NASDAQ National Market.
5.4 FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION
(a) TKOG has delivered to the Company true, correct and complete copies of
its Prospectus dated April 30, 1998 as filed with the Commission (the
"Prospectus"), the Prospectus dated November 10, 1998, which forms a part of its
Registration Statement on Form S-4 (Registration No. 333-66959), (the "S-4
Prospectus"), its Annual Report on Form 10-K for the year ended December 31,
1997 (the "Form 10-K"), its Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (the "March Form 10-Q"), its Quarterly Report on Form 10-Q for
the quarter ended June 30, 1998 (the "June Form 10-Q"), and its Quarterly Report
on Form 10-Q for the quarter ended September 30, 1998 (the "September Form
10-Q," and together with the March Form 10-Q and the June Form 10-Q, the "Forms
10-Q"). The Prospectus, the S-4 Prospectus, the Form 10-K and the Forms 10-Q
(collectively, the "TKOG SEC Reports") have been timely filed pursuant to the
Securities Act or the Exchange Act, as applicable.
(b) The TKOG SEC Reports complied as to form in all material respects with
the requirements of the Securities Act and the Exchange Act, as applicable, in
effect on the respective dates thereof. None of the
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TKOG SEC Reports, when filed pursuant to the Securities Act or the Exchange Act,
as applicable, contained any untrue statement of a material fact or omitted to
state any material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading.
(c) Each of the TKOG financial statements (including the related notes)
included in the TKOG SEC Reports presents fairly, in all material respects, the
consolidated financial position and consolidated results of operations and cash
flows of TKOG as of the respective dates or for the respective periods set forth
therein, all in conformity with GAAP consistently applied during the periods
involved except as otherwise noted therein, and subject, in the case of any
unaudited interim financial statements included therein, to normal year-end
adjustments and to absence of complete footnotes.
5.5 NO MATERIAL ADVERSE CHANGE
Since September 30, 1998, there has not been any material adverse change in
the business, operations, properties, prospects, liabilities, results of
operations, assets or condition (financial or otherwise) of TKOG and its
Subsidiaries taken as a whole.
5.6 LEGAL PROCEEDINGS
Except as set forth in Section 5.6 of the TKOG Disclosure Schedule, there
is no pending Proceeding:
(i) that has been commenced by or against TKOG or any of its
Subsidiaries or that otherwise relates to or may affect the business of, or
any of the assets owned or used by, TKOG or any of its Subsidiaries, that
could reasonably be expected to have a Material Adverse Effect on TKOG and
its Subsidiaries taken as a whole; or
(ii) that challenges, or that may have the effect of preventing,
delaying, making illegal, or otherwise interfering with, any of the
transactions contemplated hereby.
To the knowledge of TKOG, no such Proceeding has been threatened.
5.7 BROKERS OR FINDERS
Neither TKOG nor Merger Sub nor any of its officers and agents has incurred
any obligation or liability, contingent or otherwise, for brokerage or finders'
fees or agents' commissions or financial advisory services or other similar
payment in connection with this Agreement, except for the fees of J. Jeffrey
Brausch & Company and of SunTrust Equitable Securities, which shall be paid by
TKOG.
5.8 REGISTRATION STATEMENT; PROXY STATEMENT/PROSPECTUS
The registration statement (the "REGISTRATION STATEMENT") pursuant to which
the TKOG Common Stock to be issued in the Merger will be registered with the
Commission shall not at the time the Registration Statement is declared
effective by the Commission contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The information supplied by TKOG and
Merger Sub in writing specifically for inclusion in the Proxy Statement/
Prospectus will not, on the date the Proxy Statement/Prospectus (or any
amendment thereof or supplement thereto) is first mailed to Company Shareholders
or at the time of the meeting of the Company Shareholders, contain any statement
which, at such time and in light of the circumstances under which it shall be
made, is false or misleading with respect to any material fact, or shall omit to
state any material fact necessary in order to make the statements made therein,
in light of the circumstances under which it shall be omitted, not false or
misleading; or omit to state any material fact necessary to correct any
statement in any earlier communication to Company Shareholders in connection
with the meeting which has become false or
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misleading. If at any time prior to the Effective Time any event relating to
TKOG, Merger Sub or any of their respective affiliates, officers or directors
should be discovered by TKOG or Merger Sub which should be set forth in an
amendment to the Registration Statement or a supplement to the Proxy Statement/
Prospectus, TKOG will promptly inform the Company. The Proxy
Statement/Prospectus will comply in all material respects with the requirements
of the Securities Act. Notwithstanding the foregoing, TKOG makes no
representation or warranty with respect to any Company Information which is
contained or incorporated by reference in, or furnished in connection with the
preparation of, the Registration Statement or the Proxy Statement/Prospectus.
5.9 DISCLOSURE
Except as set forth in Section 5.9 of the TKOG Disclosure Schedule, no
representation or warranty of TKOG or Merger Sub in this Agreement is inaccurate
in any material respect or omits to state a material fact necessary to make the
statements herein, in light of the circumstances under which they were made, not
misleading.
6 COVENANTS OF THE COMPANY
The Company hereby covenants and agrees as follows:
6.1 NORMAL COURSE
From the date hereof until the Closing, the Company and its Subsidiaries
will: (a) maintain their respective corporate existence in good standing; (b)
maintain the general character of their respective business; (c) use all
commercially reasonable best efforts to maintain in effect all of their
respective presently existing insurance coverage (or substantially equivalent
insurance coverage), preserve their respective business organization
substantially intact, keep the services of their respective present principal
employees and preserve their respective present business relationships with
their respective material suppliers and customers; (d) permit TKOG, Merger Sub,
their accountants, their legal counsel and their other representatives full
access to their respective management, minute books and stock transfer records,
other books and records, Contracts, properties and operations at all reasonable
times and upon reasonable notice; and (e) in all respects conduct their
respective business in the usual and ordinary manner consistent with past
practice and perform in all material respects all agreements or other
obligations with banks, customers, suppliers, employees and others.
6.2 CONDUCT OF BUSINESS
Without limiting the provisions of Section 6.1, from the date hereof until
the Closing, except as set forth in Section 6.2 of the Disclosure Schedule,
neither the Company nor any of its Subsidiaries will, without the prior written
consent of TKOG:
(a) amend or otherwise modify its Organizational Documents;
(b) issue or sell or authorize for issuance or sale, or grant any
options or make other agreements of the type referred to in Section 4.3
with respect to, any shares of its capital stock or any other of its
securities, or, except as contemplated by Section 2.11, alter any term of
any of its outstanding securities or make any change in its outstanding
shares of capital stock or other ownership interests or its capitalization,
whether by reason of a reclassification, recapitalization, stock split or
combination, exchange or readjustment of shares, stock dividend or
otherwise;
(c) mortgage, pledge or grant any security interest in any of its
assets, except security interests solely in tangible personal property
granted pursuant to any purchase money agreement, conditional
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sales contract or capital lease under which there exists an aggregate
future liability not in excess of $25,000 (which amount is not more than
the purchase price for such personal property and which security interest
does not extend to any other item or items of personal property);
(d) declare, set aside, make or pay any dividend or other distribution
to any shareholder with respect to its capital stock;
(e) redeem, purchase or otherwise acquire, directly or indirectly, any
capital stock of the Company or any of its Subsidiaries;
(f) increase the compensation of any of its employees, except for
amounts accrued as of October 31, 1998 and reflected in the Interim
Financial Statements and except for increases in the ordinary course of
business, consistent with past practice, for those employees listed on
Exhibit 6.12(a);
(g) adopt or (except as otherwise required by law) amend any employee
benefit plan or enter into any collective bargaining agreement;
(h) terminate or modify any material Contract, except for terminations
of Contracts upon their expiration during such period in accordance with
their terms;
(i) incur or assume any indebtedness for borrowed money or guarantee
any obligation or the net worth of any Person in an aggregate amount in
excess of $25,000, except for endorsements of negotiable instruments for
collection in the ordinary course of business;
(j) discharge or satisfy any Encumbrance other than those which are
required to be discharged or satisfied during such period in accordance
with their original terms;
(k) pay any material obligation or liability, absolute, accrued,
contingent or otherwise, whether due or to become due, except for any
current liabilities, and the current portion of any long term liabilities,
shown on the Financial Statements (or not required as of the date thereof
to be shown thereon in accordance with GAAP) or incurred since the date of
the most recent balance sheet in the ordinary course of business consistent
with past practice;
(l) sell, transfer, lease to others or otherwise dispose of any of its
properties or assets having a fair market value in the aggregate in excess
of $25,000, except in the ordinary course of business consistent with past
practice;
(m) cancel, compromise or waive any material debt, claim or right;
(n) make any loan or advance to any Person other than travel and other
similar routine advances in the ordinary course of business consistent with
past practice, or acquire any capital stock or other securities of or any
ownership interest in any other business enterprise;
(o) make any capital expenditure or capital addition or betterment in
amounts which exceed $25,000 in the aggregate, except as contemplated in
capital budgets in effect on the date of this Agreement;
(p) change its method of accounting or the accounting principles or
practices utilized in the preparation of the Financial Statements, other
than as required by GAAP;
(q) institute or settle any Proceeding before any court or
governmental body relating to it or its property;
(r) except in the ordinary course of business consistent with past
practice, commit to provide services for an indefinite period or a period
of more than twelve months;
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(s) enter into other Contracts, except Contracts made in the ordinary
course of business consistent with past practice; or
(t) enter into any commitment to do any of the foregoing.
6.3 COMPANY SHAREHOLDERS MEETING
The Company shall call a meeting of the Company Shareholders as promptly as
practicable for the purpose of voting upon the approval of this Agreement and
the Merger, and the Company shall use its reasonable best efforts to hold such
meeting as soon as practicable after the date on which the Registration
Statement becomes effective. The Company shall solicit from the Company
Shareholders proxies in favor of approval of the Merger and this Agreement,
shall take all such reasonable action that is necessary or advisable to secure
the vote or consent of the Company Shareholders in favor of such approval and
shall not take any action that could reasonably be expected to prevent the vote
or consent of shareholders in favor of such approval.
6.4 AGREEMENTS WITH RESPECT TO AFFILIATES
The Company shall deliver to TKOG, at least five days prior to the date the
Registration Statement becomes effective under the Securities Act, a letter (the
"AFFILIATE LETTER") identifying all Persons who are, at the time of the meeting
of the Company Shareholders, anticipated to be "Affiliates" of the Company for
purposes of Rule 145 under the Securities Act ("RULE 145"), or the rules and
regulations of the Commission relating to pooling of interests accounting
treatment for merger transactions (the "POOLING RULES"). The Company shall use
its reasonable best efforts to cause each Person who is identified as an
"affiliate" in the Affiliate Letter to deliver to TKOG, no less than ten days
prior to the date of the meeting of the Company Shareholders a written agreement
(an "AFFILIATE AGREEMENT") in connection with restrictions on Affiliates under
Rule 145 and pooling of interests accounting treatment, in form mutually
agreeable to the Company and TKOG.
6.5 CERTAIN FILINGS
(a) The Company agrees to cooperate with TKOG with respect to all filings
with regulatory authorities that are required to be made by the Company to carry
out the transactions contemplated by this Agreement. The Company shall assist
TKOG and Merger Sub in making all such filings, applications and notices as may
be necessary or desirable in order to obtain the authorization, approval or
consent of any Governmental Authority which may be reasonably required or which
TKOG and Merger Sub may reasonably request in connection with the consummation
of the transactions contemplated hereby. The Company and TKOG shall furnish all
information reasonably required to be included in the Proxy Statement/Prospectus
and the Registration Statement or for any application or other filing to be made
pursuant to the rules and regulations of any United States or foreign
governmental body in connection with the transactions contemplated by this
Agreement.
(b) The Company agrees to make all reasonable representations and covenants
in connection with the opinions of counsel to be attached to the Registration
Statement with respect to the correctness of the discussion in the Registration
Statement as to the material federal income tax consequences of the Merger.
6.6 CONSENTS AND APPROVALS
The Company shall use its best efforts to obtain as promptly as practicable
all consents, authorizations, approvals and waivers required in connection with
the consummation of the transactions contemplated by this Agreement.
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6.7 BEST EFFORTS TO SATISFY CONDITIONS
The Company shall use its best efforts to cooperate with TKOG for purposes
of satisfying the conditions set forth in Sections 8 and 9 that are within their
control.
6.8 INTERCOMPANY PAYMENTS
All loans, payables and other amounts due to or from the Company and its
Affiliates (as defined in Rule 501 promulgated under the Securities Act) are
listed in Section 6.8 of the Disclosure Schedule and shall be paid in full,
written off or adjusted to zero balances or otherwise resolved to the
satisfaction of TKOG at or prior to the Closing. Such amounts due may be paid
from cash on hand or as may otherwise be available to the Company from existing
lines of credit with third party lenders.
6.9 NOTIFICATION OF CERTAIN MATTERS
The Company shall promptly notify TKOG of (i) the occurrence or
non-occurrence of any fact or event of which the Company has knowledge which
would be reasonably likely (A) to cause any representation or warranty of the
Company contained in this Agreement to be untrue or inaccurate in any material
respect at any time from the date hereof to the Closing Date or (B) to cause any
covenant, condition or agreement of the Company in this Agreement not to be
complied with or satisfied in any material respect and (ii) any failure of the
Company to comply with or satisfy any covenant, condition or agreement to be
complied with or satisfied by it hereunder in any material respect; provided,
however, that no such notification shall affect the representations or
warranties of the Company, or the right of TKOG to rely thereon, or the
conditions to the obligations of TKOG. The Company shall give prompt notice to
TKOG of any notice or other communication from any third party alleging that the
consent of such third party is or may be required in connection with the
transactions contemplated by this Agreement.
6.10 POOLING ACCOUNTING TREATMENT
(a) The Company agrees not to take any action from and after the date of
this Agreement that would reasonably be expected to adversely affect the ability
of TKOG to account for the business combination to be effected by the Merger as
a pooling of interests, and the Company agrees to use its commercially
reasonable efforts to take such action as may be reasonably required to negate
the impact of any past actions by the Company which would reasonably be expected
to adversely impact the ability of TKOG to treat the Merger as a pooling of
interests. The taking by the Company of any action prohibited by the previous
sentence, or the failure of the Company to use its commercially reasonable
efforts to take any action required by the previous sentence, if the Merger is
not able to be accounted for as a pooling of interests because of such action or
failure to take action, shall constitute a breach of this Agreement by such
party for the purposes of Section 10.
(b) The Company agrees to make all reasonable representations and covenants
in connection with the opinions of accountants required by Section 8.10.
6.11 OTHER AGREEMENTS
(a) The Company shall use its reasonable best efforts to enter into new
leases for the two office buildings in Tennessee with Michael D. Shmerling &
Co., LLC, as landlord. Such leases shall be in form and substance reasonably
satisfactory to TKOG.
(b) The Company shall use its reasonable best efforts to enter into an
agreement for services with System X. Such agreement shall be in form and
substance reasonably satisfactory to TKOG.
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6.12 EMPLOYMENT AGREEMENTS
The Company shall use its reasonable best efforts to cause the key
employees listed on Exhibit 6.12(a) to enter into new employment agreements with
the Company to be effective on the Closing Date. Each employment agreement will
be in substantially the form attached hereto as Exhibit 6.12(b).
6.13 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT
The Proxy Statement/Prospectus shall include the unanimous recommendation
of the Board of Directors of the Company in favor of the Merger and such
recommendation shall not be withdrawn, modified or changed in a manner adverse
to TKOG or Merger Sub unless this Agreement is terminated pursuant to Section
10.
6.14 TAX FREE REORGANIZATION
The Company agrees not to take any action that would reasonably be expected
to adversely affect the qualification of the Merger as a tax-free reorganization
pursuant to Section 368 of the Code.
6.15 OPTIONS
The Company shall cause the amendments and other actions listed on Section
2.11 of the Disclosure Schedule, on terms and conditions reasonably satisfactory
to TKOG, to be approved by the Board of Directors of the Company and shall use
its reasonable best efforts to cause each of the Option holders to consent
thereto.
6.16 FINANCIAL STATEMENTS
The Financial Statements for the years ended December 31, 1996 and 1997,
which are being audited by Deloitte & Touche LLC, shall be substantially the
same as the Financial Statements set forth in Section 4.5 of the Disclosure
Schedule. Copies of the audited Financial Statements shall be delivered to TKOG
as soon as practicable after the date first above written.
7 COVENANTS OF TKOG AND MERGER SUB
Each of TKOG and Merger Sub, jointly and severally, hereby covenants and
agrees as follows:
7.1 CERTAIN FILINGS
(a) TKOG and Merger Sub agree to make or cause to be made all filings with
regulatory authorities that are required to be made by TKOG or Merger Sub or
their respective affiliates to carry out the transactions contemplated by this
Agreement.
(b) TKOG and Merger Sub agree to make all reasonable representations and
covenants in connection with the opinions of counsel to be attached to the
Registration Statement with respect to the correctness of the discussion in the
Registration Statement as to the material federal income tax consequences of the
Merger.
7.2 BEST EFFORTS TO SATISFY CONDITIONS
Each of TKOG and Merger Sub agrees to use its best efforts to satisfy the
conditions set forth in Sections 8 and 9 that are within its control.
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7.3 NOTIFICATION OF CERTAIN MATTERS
TKOG and Merger Sub shall promptly notify the Company of (i) the occurrence
or non-occurrence of any fact or event of which TKOG or Merger Sub has knowledge
which would be reasonably likely (A) to cause any representation or warranty of
Merger Sub or TKOG contained in this Agreement to be untrue or inaccurate in any
material respect at any time from the date hereof to the Closing Date or (B) to
cause any covenant, condition or agreement of Merger Sub or TKOG in this
Agreement not to be complied with or satisfied in any material respect and (ii)
any failure of Merger Sub or TKOG to comply with or satisfy any covenant,
condition or agreement to be complied with or satisfied by it hereunder in any
material respect; provided, however, that no such notification shall affect the
representations or warranties of Merger Sub and TKOG, or the Company's right to
rely thereon, or the conditions to the obligations of the Company. TKOG and
Merger Sub shall give prompt notice to the Company of any notice or other
communication from any third party alleging that the consent of such third party
is or may be required in connection with the transactions contemplated by this
Agreement.
7.4 TAX FREE REORGANIZATION
TKOG and Merger Sub agree not to take any action that would reasonably be
expected to adversely affect the qualification of the Merger as a tax-free
reorganization pursuant to Section 368 of the Code.
7.5 PROXY STATEMENT/PROSPECTUS; REGISTRATION STATEMENT
As promptly as practicable after the execution of this Agreement, and after
the furnishing by the Company and TKOG of all information required to be
contained therein (which each agrees to do as promptly as practicable after the
date hereof), TKOG shall file with the Commission a Registration Statement on
Form S-4 (or on such other form as shall be appropriate), which shall include
the Proxy Statement/Prospectus relating to the approval of this Agreement and
the transactions contemplated hereby by the shareholders of the Company, and
shall use all reasonable efforts to cause the Registration Statement to become
effective as soon thereafter as practicable. The Proxy Statement/Prospectus
shall include the unanimous recommendation of the Board of Directors of the
Company in favor of the Merger.
7.6 [INTENTIONALLY OMITTED]
7.7 LISTING
TKOG shall use its reasonable best efforts to designate, prior to the
Closing Date, the TKOG Shares for quotation on the NASDAQ National Market.
8. CONDITIONS TO OBLIGATIONS OF TKOG AND MERGER SUB
The obligations of TKOG and Merger Sub under this Agreement to consummate
the Merger shall be subject to the satisfaction, on or before the Closing Date,
of each of the following conditions:
8.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Company contained in this
Agreement or in the Disclosure Schedule or any certificate delivered pursuant
hereto shall be complete and correct as of the date when made, shall be deemed
repeated at and as of the Closing Date as if made on the Closing Date and,
without giving effect to any qualification as to materiality (or any variation
of such term) contained in any representation or warranty, shall then be
complete and correct in all material respects.
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8.2 PERFORMANCE OF COVENANTS
The Company shall have performed and complied in all material respects with
each covenant, agreement and condition required by this Agreement to be
performed or complied with by it prior to or on the Closing Date.
8.3 LACK OF ADVERSE CHANGE
Except as set forth in Section 8.3 of the Disclosure Schedule, since
October 31, 1998, there shall not have occurred any incident or event which,
individually or in the aggregate, has had or is reasonably likely to result in a
Material Adverse Effect on the Company and its Subsidiaries taken as a whole,
including the loss of any significant customer of the Company or any of its
Subsidiaries.
8.4 UPDATE CERTIFICATE
TKOG and Merger Sub shall have received favorable certificates, dated the
Closing Date, signed by the Company as to the matters set forth in Sections 8.1,
8.2 and 8.3.
8.5 NO GOVERNMENTAL OR OTHER PROCEEDING
No order of any Governmental Authority shall be in effect that restrains or
prohibits any transaction contemplated hereby or that would limit or affect
TKOG's or Merger Sub's ownership or operation of the business of the Company; no
suit, action, investigation, inquiry or proceeding by any Governmental Authority
shall be pending or threatened against TKOG, Merger Sub, the Company or any
officer or director of any thereof, as such, that challenges the validity or
legality, or that seeks to restrain the consummation, of the transactions
contemplated hereby or that seeks to limit or otherwise affect TKOG's or Merger
Sub's right to own or operate the business of the Company; and no written advice
shall have been received by TKOG, Merger Sub or the Company or by any of their
respective counsel from any Governmental Authority, and remain in effect,
stating that an action or proceeding will, if the Merger is consummated or
sought to be consummated, be filed seeking to invalidate or restrain the Merger
or limit or otherwise affect TKOG's or Merger Sub's ownership or operation of
the business of the Company.
8.6 APPROVALS AND CONSENTS
All material consents, waivers, approvals, authorizations or orders
required to be obtained, and all filings required to be made, by the Company for
the authorization, execution and delivery of this Agreement, the consummation by
it of the transactions contemplated hereby and the continuation in full force
and effect of any and all material rights, documents, agreements or instruments
of the Company shall have been obtained and made, except where the failure to
receive such consents, waivers, approvals, authorizations or orders would not
reasonably be expected to have a Material Adverse Effect on the Company and its
Subsidiaries taken as a whole.
8.7 OPINION OF COUNSEL
The Company shall have delivered to TKOG and Merger Sub an opinion of
Sherrard & Roe, PLC, dated the Closing Date and addressed to TKOG and Merger
Sub, as to the matters set forth on Exhibit B hereto.
8.8 SHAREHOLDER APPROVAL
This Agreement shall have been duly approved at or prior to the Effective
Time of the Merger by the requisite vote of the Company Shareholders in
accordance with the TBCA.
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8.9 ESCROW AGREEMENT
The Escrow Agreement shall have been duly executed and delivered by the
Company.
8.10 OPINION OF ACCOUNTANT
(a) TKOG and Merger Sub shall have received an opinion of Arthur Andersen
LLP, independent certified public accountants, regarding the qualification of
the Merger as a pooling of interests for accounting purposes. Such opinion shall
be in form and substance reasonably satisfactory to TKOG.
(b) The Company shall have received an opinion of Deloitte & Touche LLC,
independent certified public accountants, regarding the poolability of the
Company. Such opinion shall be in form and substance reasonably satisfactory to
TKOG.
8.11 AFFILIATE AGREEMENTS
TKOG shall have received from each Person who is identified in the
Affiliate Letter as an "affiliate" of the Company, an Affiliate Agreement, and
such Affiliate Agreement shall be in full force and effect.
8.12 EFFECTIVENESS OF THE REGISTRATION STATEMENT
The Registration Statement shall have been declared effective by the
Commission under the Securities Act. No stop order suspending the effectiveness
of the Registration Statement shall have been issued by the Commission and no
proceedings for that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus shall have been initiated or threatened by the Commission.
8.13 EMPLOYMENT AGREEMENTS
The employment agreements referred to in Section 6.12 shall have been
executed by those employees listed on Exhibit 6.12(a).
8.14 DISSENTING SHAREHOLDERS
Holders of not more than 7.5% of the shares of outstanding capital stock of
the Company that are entitled to vote on the Merger shall be Dissenting
Shareholders.
8.15 OPTIONS
The Options shall have been amended or otherwise dealt with in accordance
with Section 2.11 of the Disclosure Schedule, on terms and conditions reasonably
satisfactory to TKOG, and all Option holders shall have consented to such
amendments or other actions.
8.16 OTHER AGREEMENTS
The agreements referred to in Section 6.11 shall have been executed by all
parties thereto.
9. CONDITIONS TO OBLIGATIONS OF THE COMPANY
The obligations of the Company under this Agreement to consummate the
Merger shall be subject to the satisfaction, on or before the Closing Date, of
each of the following conditions:
9.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties of TKOG and Merger Sub contained in this
Agreement or in the Disclosure Schedule or any certificate delivered pursuant
hereto shall be complete and correct as of the date
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when made, shall be deemed repeated at and as of the Closing Date as if made on
the Closing Date and, without giving effect to any qualification as to
materiality (or any variation of such term) contained in any representation or
warranty, shall then be complete and correct in all material respects.
9.2 PERFORMANCE OF COVENANTS
TKOG and Merger Sub shall have performed and complied in all material
respects with each covenant, agreement and condition required by this Agreement
to be performed or complied with by them prior to or on the Closing Date.
9.3 UPDATE CERTIFICATE
The Company shall have received favorable certificates, dated the Closing
Date, signed by TKOG and Merger Sub as to the matters set forth in Sections 9.1
and 9.2.
9.4 NO GOVERNMENTAL OR OTHER PROCEEDING
No order of any Governmental Authority shall be in effect that restrains or
prohibits the Merger; and no written advice shall have been received by TKOG,
Merger Sub or the Company or by any of their respective counsel from any
Governmental Authority, and remain in effect, stating that an action or
proceeding will, if the Merger is consummated or sought to be consummated, be
filed seeking to invalidate or restrain the Merger.
9.5 OPINIONS OF COUNSEL
TKOG and Merger Sub shall have delivered to the Company an opinion of
Kramer Levin Naftalis & Frankel LLP, dated the Closing Date and addressed to the
Company, as to the matters set forth on Exhibit C-1 hereto and an opinion of
Taft, Stettinius & Hollister LLP, dated the Closing Date and addressed to the
Company, as to the matters set forth on Exhibit C-2 hereto.
9.6 SHAREHOLDER APPROVAL
This Agreement shall have been duly approved at or prior to the Effective
Time of the Merger by the requisite vote of the Company Shareholders in
accordance with the TBCA.
9.7 EFFECTIVENESS OF THE REGISTRATION STATEMENT
The Registration Statement shall have been declared effective by the
Commission under the Securities Act. No stop order suspending the effectiveness
of the Registration Statement shall have been issued by the Commission and no
proceedings for that purpose and no similar proceeding in respect of the Proxy
Statement/Prospectus shall have been initiated or threatened by the Commission.
9.8 LACK OF ADVERSE CHANGE
Since September 30, 1998, there shall not have occurred any incident or
event which, individually or in the aggregate, has had or is reasonably likely
to result in a Material Adverse Effect on TKOG and its Subsidiaries, taken as a
whole.
9.9 EMPLOYMENT AGREEMENTS
The employment agreements referred to in Section 6.12 shall have been
executed by the Company.
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10 TERMINATION OF AGREEMENT
This Agreement may be terminated:
10.1 MUTUAL CONSENT
At any time prior to the Effective Time, by mutual consent of TKOG, Merger
Sub and the Company.
10.2 TRANSACTION DATE
By TKOG, Merger Sub or the Company if the Effective Time shall not have
occurred by June 30, 1999, unless such failure shall be due to a material breach
of any representation or warranty, or the nonfulfillment in a material respect,
and failure to cure such nonfulfillment, of any covenant or agreement contained
herein on the part of the party or parties seeking to terminate.
10.3 BREACH
(a) By TKOG or Merger Sub if there has been a material misrepresentation by
the Company, or a material breach on the part of the Company of any of its
warranties or covenants set forth herein, or a material failure on the part of
the Company to comply with any of its other obligations hereunder; or
(b) by the Company if there has been a material misrepresentation by TKOG
or Merger Sub, or a material breach on the part of TKOG or Merger Sub of any of
their warranties or covenants set forth herein, or a material failure on the
part of TKOG or Merger Sub to comply with any of their other obligations
hereunder.
No such termination shall relieve any party of the consequences of any such
misrepresentation, breach or failure.
11. INDEMNIFICATION; REMEDIES
11.1 SURVIVAL; RIGHT TO INDEMNIFICATION NOT AFFECTED BY KNOWLEDGE
(a) All representations, warranties, covenants, and obligations in this
Agreement, the Disclosure Schedule and any other certificate or document
delivered pursuant to this Agreement shall survive the Closing until the first
anniversary of the Closing Date and shall thereafter terminate; provided,
however, that a representation, warranty, covenant or obligation with respect to
which a claim has been made but not resolved by such date shall survive, only
with respect to such claim, until such claim is resolved and paid in full. The
right to indemnification, payment of Damages (as defined below) or other remedy
based on such representations, warranties, covenants and obligations will not be
affected by any investigation conducted with respect to, or any knowledge
acquired (or capable of being acquired) at any time, whether before or after the
execution and delivery of this Agreement or the Closing Date, with respect to
the accuracy or inaccuracy of or compliance with, any such representation,
warranty, covenant or obligation.
(b) Neither party will have the right to indemnification, payment of
Damages (as defined below) or other remedy based on any breach of
representation, warranty, covenant or obligation from the other party to the
extent that the party seeking indemnification, Damages or any other remedy had
actual knowledge prior to the Closing Date of such breach; provided that if any
information relating to any alleged breach was disclosed in the Disclosure
Schedule, such disclosure is complete in all material respects; provided further
that for purposes of this Section 11.1(b), the actual knowledge of TKOG is
limited to the actual knowledge of Jules Kroll, Abram Gordon, Nicholas
Carpinello, Nazzareno Paciotti and Steven Sharpe.
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11.2 INDEMNIFICATION AND PAYMENT OF DAMAGES BY SHAREHOLDERS
(a) From and to the extent of the Escrow Fund only, and pursuant to the
terms of the Escrow Agreement, Merger Sub, TKOG, the Company and their
respective representatives (including all officers and directors), stockholders,
controlling persons and Affiliates (collectively, the "Indemnified Persons")
shall be indemnified and held harmless from and against any and all loss,
liability, claim, damage, expense (including costs of investigation and defense
and reasonable attorneys' and experts' fees) or diminution of value, whether or
not involving a third-party claim (collectively, "Damages"), arising, directly
or indirectly, from or in connection with:
(i) any breach of any representation or warranty made by the Company
in this Agreement, the Disclosure Schedule or any certificate delivered by
the Company pursuant to this Agreement; and
(ii) any breach by the Company of any covenant or obligation of the
Company in this Agreement; and
(iii) any claim by any Person for brokerage or finder's fees or
commission or similar payments based upon any agreement or understanding
alleged to have been made by any such Person with the Company in connection
with the transactions contemplated hereby.
(b) Notwithstanding any provision of this Agreement to the contrary, the
Indemnified Persons shall not be entitled to recover Damages for any individual
breach or series of related breaches of any representation, warranty, covenant
or obligation of the Company unless such Damages (net of attorneys' fees) in
respect of such breach or series of related breaches equal or exceed $25,000.
(c) Notwithstanding any provision of this Agreement to the contrary, all
claims for indemnification pursuant to this Section 11.2 shall be reduced by the
amount of any insurance proceeds received by the Indemnified Persons in
connection with the event(s) giving rise to such claims. If the Indemnified
Persons receive payment from the Escrow Fund, pursuant to the Escrow Agreement,
and the Indemnified Persons shall subsequently receive any insurance proceeds in
connection with the event giving rise to the claim for indemnification
hereunder, then the Indemnified Persons shall promptly pay back into the Escrow
Fund a number of TKOG Shares having an aggregate Market Value as of the date of
such repayment equal to the lesser of the sum of such insurance proceeds
received and the amount so paid from the Escrow Fund, in each case, net of
Taxes, if any, payable with respect to such amounts.
(d) Notwithstanding any provision of this Agreement to the contrary, any
Damages suffered by the Indemnified Persons in connection with a breach of any
representation or warranty relating to Profiles Plus, Inc. for which the
Indemnified Persons are entitled to indemnification pursuant to this Section
11.2 shall, to the extent available, first be satisfied by the escrow fund
established in connection with the Agreement and Plan of Merger, dated as of
March 23, 1998, among the Company, Background America of Florida, Inc., Gerry
Belko, Gerard R. Schwalje, Paula Schwalje, David Cuffe and Profiles Plus, Inc.
11.3 INDEMNIFICATION AND PAYMENT OF DAMAGES BY TKOG AND MERGER SUB
TKOG and Merger Sub will indemnify and hold harmless the Company and its
representatives (including all officers and directors), shareholders,
controlling persons and affiliates ("Company Parties"), and will pay to the
Company Parties the amount of any Damages arising, directly or indirectly, from
or in connection with (a) any breach of any representation or warranty made by
TKOG or Merger Sub in this Agreement or in any certificate delivered by TKOG or
Merger Sub pursuant to this Agreement, (b) any breach by TKOG or Merger Sub of
any covenant or obligation of TKOG or Merger Sub in this Agreement or (c) any
claim by any Person for brokerage or finder's fees or commissions or similar
payments based upon any agreement or understanding alleged to have been made by
such Person with TKOG or Merger Sub in connection with the transactions
contemplated hereby.
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11.4 PROCEDURE FOR INDEMNIFICATION--THIRD PARTY CLAIMS
(a) An indemnified party shall promptly give notice to each indemnifying
party after obtaining knowledge of any matter as to which recovery may be sought
against such indemnifying party because of the indemnity set forth above, and,
if such indemnity shall arise from the claim of a third party, shall permit such
indemnifying party to assume the defense of any such claim or any Proceeding
resulting from such claim; provided, however, that failure promptly to give any
such notice shall not affect the indemnification provided under this Section 11,
except to the extent such indemnifying party shall have been actually and
materially prejudiced as a result of such failure. Notwithstanding the
foregoing, an indemnifying party may not assume the defense of any such
third-party claim or Proceeding if the claim or Proceeding (i) is reasonably
likely to result in imprisonment of the indemnified party, (ii) is reasonably
likely to result in a criminal penalty or fine against the indemnified party the
consequences of which would be reasonably likely to have a Material Adverse
Effect on the indemnified party unrelated to the size of such penalty or fine or
(iii) is reasonably likely to result in an equitable remedy which would
materially impair the indemnified party's ability to exercise its rights under
this Agreement, or impair TKOG's right or ability to operate the Company or any
of its Subsidiaries. If an indemnifying party assumes the defense of such third
party claim or Proceeding, such indemnifying party shall agree prior thereto, in
writing, that it is liable under this Section 11 to indemnify the indemnified
party in accordance with the terms contained herein in respect of such claim or
Proceeding (provided that no such agreement as to liability shall contain any
admission of liability to any third party), shall conduct such defense
diligently, shall have full and complete control over the conduct of such claim
or Proceeding on behalf of the indemnified party and shall, in its sole
discretion, have the right to decide all matters of procedure, strategy,
substance and settlement relating to such claim or Proceeding; provided,
however, that any counsel chosen by such indemnifying party to conduct such
defense shall be reasonably satisfactory to the indemnified party. The
indemnified party may participate in such claim or Proceeding and retain
separate co-counsel at its sole cost and expense (except that the indemnifying
party shall be responsible for the fees and expenses of one separate co-counsel
for the indemnified party to the extent the indemnified party is advised by its
counsel that either (x) the counsel the indemnifying party has selected has a
conflict of interest or (y) there are legal defenses available to the
indemnified party that are different from or additional to those available to
the indemnifying party), and the indemnifying party will not without the written
consent of the indemnified party consent to the entry of any judgment or enter
into any settlement with respect to the matter which does not include a
provision whereby the plaintiff or the claimant in the matter releases the
indemnified party from all liability with respect thereto. Failure by an
indemnifying party to notify the indemnified party of its election to defend any
such claim or Proceeding by a third party within thirty (30) days after notice
thereof shall have been given to such indemnifying party by the indemnified
party shall be deemed a waiver by such indemnifying party of its right to defend
such claim or Proceeding.
(b) If no indemnifying party is permitted or elects to assume the defense
of any such claim or Proceeding by a third party, the indemnified party shall
diligently defend against such claim or Proceeding in such manner as it may
reasonably deem appropriate and, in such event, the indemnifying party or
parties shall promptly reimburse the indemnified party for all reasonable
out-of-pocket costs and expenses, legal or otherwise, incurred by the
indemnified party and its affiliates in connection with the defense against such
claim or Proceeding, as such costs and expenses are incurred. Any counsel chosen
by such indemnified party to conduct such defense must be reasonably
satisfactory to the indemnifying party or parties, and only one counsel shall be
retained to represent all indemnified parties in a Proceeding (except that if
litigation is pending in more than one jurisdiction with respect to a
Proceeding, one such counsel may be retained in each jurisdiction in which such
litigation is pending).
(c) The indemnified party will cooperate in all reasonable respects with
any indemnifying party in the conduct of any claim or Proceeding as to which
such indemnifying party assumes the defense. For the
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cooperation of the indemnified party pursuant to this Section 11.4, the
indemnifying party or parties shall promptly reimburse the indemnified party for
all reasonable out-of-pocket costs and expenses, legal or otherwise, incurred by
the indemnified party or its affiliates in connection therewith, as such costs
and expenses are incurred.
(d) In the event the indemnified party is any of the Indemnified Persons
(and not any of the Company Parties), then the Shareholder Representative shall
have the right to take over the defense of any such claim or Proceeding in
accordance with this Section 11.4 and all decisions made by the Shareholder
Representative in connection with such defense shall bind all indemnifying
parties. Notwithstanding anything in this Section 11.4 to the contrary, the
Shareholder Representative shall not assume the defense of any third party claim
or Proceeding if the claim or Proceeding is for an unspecified amount or is for
an amount in excess of the value of the Escrow Fund available at the time such
claim or Proceeding is brought. If the Shareholder Representative cannot assume
the defense of any claim or Proceeding pursuant to the preceding sentence, the
Shareholder Representative may nevertheless participate in (but not control) the
defense of such claim or Proceeding at its sole cost and expense. If the
Shareholder Representative has assumed the defense of a third party claim or
Proceeding as the indemnifying party in accordance with Section 11.4, the
Shareholder Representative may not settle such claim or Proceeding for an amount
in excess of the value of the Escrow Fund without the prior written consent of
TKOG.
12 GENERAL PROVISIONS
12.1 EXPENSES
Except as otherwise expressly provided in this Agreement, each party to
this Agreement will bear its respective expenses incurred in connection with the
preparation, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby, including all fees and
expenses of agents, representatives, counsel and accountants. The Company's
out-of-pocket expenses with respect to the foregoing, including attorney's fees,
shall not exceed the amount set forth in Section 12.1 of the Disclosure
Schedule. Any out-of-pocket expenses incurred by the Company in excess of such
amount shall be borne by the Shareholders. By voting for or failing to dissent
from the approval of this Agreement, each Company Shareholder automatically and
without any further act or deed irrevocably agrees that such Company Shareholder
accepts and shall be bound by this Section 12.1. By exercising Options pursuant
to Section 2.11(b), each holder of such Options automatically and without any
further act or deed irrevocably agrees that such holder accepts and shall be
bound by this Section 12.1.
12.2 PUBLIC ANNOUNCEMENTS
Unless required by law or by the NASDAQ National Market, any public
announcement or similar publicity with respect to this Agreement, the Closing or
the transactions contemplated hereby will be issued, if at all, at such time and
in such manner as TKOG determines with the concurrence of the Company, which
concurrence shall not be unreasonably withheld or delayed by the Company. Unless
disclosure is consented to by TKOG in advance or required by law, the Company
shall keep this Agreement strictly confidential and may not make any disclosure
of this Agreement to any Person and shall use its best efforts to ensure that
the Company Shareholders do the same. The Company and TKOG will consult with
each other concerning the means by which the Company"s employees, customers and
suppliers and others having dealings with the Company will be informed of this
Agreement, the Closing and the transactions contemplated hereby, and
representatives of TKOG may at its option be present for any such communication.
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12.3 NOTICES
All notices, consents, waivers, and other communications under this
Agreement must be in writing and will be deemed to have been duly given when (a)
delivered by hand (with written confirmation of receipt), (b) sent by fax (with
written confirmation of receipt), provided that a copy is mailed by registered
mail, return receipt requested, or (c) when received by the addressee, if sent
by a nationally recognized overnight delivery service (receipt requested), in
each case to the appropriate addresses or fax numbers set forth below (or to
such other address, person's attention or fax number as a party may designate by
notice to the other parties given in accordance with this Section 12.3):
(a) If to TKOG or Merger Sub:
The Kroll-O'Gara Company
9113 LeSaint Drive
Fairfield, OH 45014
Telecopier No.: (513) 874-1262
Telephone No.: (513) 881-5481
Attention: Abram S. Gordon, Esq.
With a copy to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, NY 10022
Telecopier No.: (212) 715-8000
Telephone No.: (212) 715-9100
Attention: Peter S. Kolevzon, Esq.
(b) If to the Company:
Background America, Inc.
1900 Church Street, Suite 400
Nashville, TN 37203
Telecopier No.: (615) 321-9585
Telephone No.: (615) 320-9800
Attention: Michael Shmerling
With a copy to:
Sherrard & Roe
424 Church Street, 20th Floor
SunTrust Center Building
Nashville, TN 37219
Telecopier No.: (615) 742-4539
Telephone No.: (615) 742-4200
Attention: Thomas Sherrard, Esq.
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BACKGROUND AMERICA, INC.
SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PROXY FOR SPECIAL MEETING
The undersigned hereby appoints Michael D. Shmerling and A. Michael Rosen, and
each of them, attorneys with the powers which the undersigned would possess if
personally present, including the power of substitution, to vote all shares of
the undersigned at the Special Meeting of Shareholders of Background America,
Inc. to be held at 1900 Church Street, Suite 400, Nashville, Tennessee 37203
on ________, 1999, at __________, and at any adjournments thereof:
1. The Agreement and Plan of Merger, dated as of January 21, 1999, by and
among The Kroll-O'Gara Company, Kroll-O'Gara Tennessee, Inc. (a wholly owned
subsidiary of Kroll-O'Gara) and Background America, Inc.
/ / FOR / / AGAINST / / ABSTAIN on the proposal for the merger of
Kroll-O'Gara Tennessee, Inc. into
Background America with the result
that Background America will become
a wholly owned subsidiary of
Kroll-O'Gara, and the waiver of any
liquidation preference otherwise
payable to holders of Background
America preferred stock.
2. In accordance with the recommendation of the Board of Directors, upon such
other business as may properly come before the meeting.
The proxy will be voted on the above as specified. IF NO SPECIFICATION IS MADE,
THE PROXY WILL BE VOTED "FOR" THE PROPOSAL and, in accordance with the
recommendation of the Board of Directors, upon such other business as may
properly come before the meeting.
(CONTINUED AND TO BE SIGNED ON THE OTHER SIDE)
As to any other matter, said attorneys shall vote in accordance with the
recommendation of the Board of Directors.
Please mark: I do / / do not / / plan to attend the meeting. Please mail your
proxy to Background America even though you plan to attend the meeting. If you
do not vote in person, your proxy will be used; if you do vote in person, your
proxy will not be used.
Dated __________________, 1999
________________________________________
________________________________________
(Signature of Shareholder)
IMPORTANT: Please date and sign exactly
as name appears hereon. If shares are
held jointly, each shareholder named
should sign. Executors, administrators,
trustees, etc. should so indicate when
signing. If the signer is a corporation,
please sign full corporate name by duly
authorized officer.
<PAGE> 332
(c) If to the Shareholder Representative:
Russell R. French
c/o Noro-Mosely Partners III, L.P.
9 North Parkway Square
4200 Northside Parkway, N.W.
Atlanta, GA 30327
Telecopier No.: (404) 239-9280
Telephone No.: (404)
With a copy to:
King & Spalding
191 Peachtree Street, N.E.
Atlanta, GA 30303-1763
Telecopier No.: (404) 572-5100
Telephone No.: (404) 572-4600
Attention: Lynn Scott, Esq.
And a copy to:
Sherrard & Roe
424 Church Street, 20th Floor
SunTrust Center Building
Nashville, TN 37219
Telecopier No.: (615) 742-4539
Telephone No.: (615) 742-4200
Attention: Thomas Sherrard, Esq.
12.4 JURISDICTION; SERVICE OF PROCESS
Any Proceeding seeking to enforce any provision of, or based on any right
arising out of, this Agreement may be brought against any of the parties in the
courts of the State of Ohio, County of Butler or the United States District
Court for the Southern District of Ohio, Western Division, and each of the
parties consents to the jurisdiction of such courts (and of the appropriate
appellate courts) in any such Proceeding and waives any objection to venue laid
therein. Service of process or any other papers in any such Proceeding may be
made by registered or certified mail, return receipt requested, pursuant to the
provisions of Section 12.3.
12.5 FURTHER ASSURANCES
The parties agree (a) to furnish upon request to each other such further
information, (b) to execute and deliver to each other such other documents, and
(c) to do such other acts and things, all as the other party may reasonably
request for the purpose of carrying out the intent of this Agreement and the
documents referred to in this Agreement.
12.6 WAIVER
Neither the failure nor any delay by any party in exercising any right,
power or privilege under this Agreement or the documents referred to in this
Agreement will operate as a waiver of such right, power or privilege.
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12.7 ENTIRE AGREEMENT AND MODIFICATION
This Agreement supersedes all prior agreements between the parties with
respect to its subject matter (including any correspondence among TKOG, Merger
Sub, the Company or any Company Shareholder) and constitutes (along with the
documents referred to in this Agreement) the entire agreement among the parties
with respect to its subject matter. This Agreement may not be amended except by
a written agreement executed by the party to be charged with the amendment.
12.8 ASSIGNMENTS, SUCCESSORS, AND NO THIRD-PARTY RIGHTS
No party may assign any of its rights under this Agreement without the
prior written consent of the other parties except that TKOG may assign any of
its rights, but not its obligations, under this Agreement to any direct wholly
owned Subsidiary of TKOG. Subject to the preceding sentence, this Agreement will
apply to, be binding in all respects upon, and inure to the benefit of the
successors and permitted assigns of the parties and their respective heirs and
personal representatives. Nothing expressed or referred to in this Agreement
will be construed to give any Person other than the parties to this Agreement
and the Persons contemplated by Section 11 any legal or equitable right, remedy
or claim under or with respect to this Agreement or any provision of this
Agreement.
12.9 SEVERABILITY
If any provision of this Agreement or the application of any such provision
to any party or circumstances shall be determined by any court of competent
jurisdiction to be invalid or unenforceable to any extent, the remainder of this
Agreement, or the application of such provision to such person or circumstances
other than those to which it is so determined to be invalid or unenforceable,
shall not be affected thereby, and each provision hereof shall be enforced to
the fullest extent permitted by law. If the final judgment of a court of
competent jurisdiction declares that any item or provision hereof is invalid or
unenforceable, the parties hereto agree that the court making the determination
of invalidity or unenforceability shall have the power, and is hereby directed,
to reduce the scope, duration or area of the term or provision, to delete
specific words or phrases and to replace any invalid or unenforceable term or
provision with a term or provision that is valid and enforceable and that comes
closest to expressing the intention of the invalid or unenforceable term or
provision, and this Agreement shall be enforceable as so modified.
12.10 SECTION HEADINGS, CONSTRUCTION
The headings of Sections in this Agreement are provided for convenience
only and will not affect its construction or interpretation. In this Agreement
(i) words denoting the singular include the plural and vice versa, (ii) "it" or
"its" or words denoting any gender include all genders, (iii) the word
"including" shall mean "including without limitation," whether or not expressed,
(iv) any reference to a statute shall mean the statute and any regulations
thereunder in force as of the date of this Agreement or the Closing Date, as
applicable, unless otherwise expressly provided, (v) any reference herein to a
Section, Schedule or Exhibit refers to a Section of or a Schedule or Exhibit to
this Agreement, unless otherwise stated, and (vi) when calculating the period of
time within or following which any act is to be done or steps taken, the date
which is the reference day in calculating such period shall be excluded and if
the last day of such period is not a Business Day, then the period shall end on
the next day which is a Business Day. Each party acknowledges that he, she or it
has been advised and represented by counsel in the negotiation, execution and
delivery of this Agreement and accordingly agrees that if an ambiguity exists
with respect to any provision of this Agreement, such provision shall not be
construed against any party because such party or its representatives drafted
such provision.
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12.11 GOVERNING LAW
This Agreement will be governed by the internal laws of the State of New
York without regard to principles of conflict of laws.
12.12 COUNTERPARTS
This Agreement may be executed in one or more counterparts, each of which
will be deemed to be an original copy of this Agreement and all of which, when
taken together, will be deemed to constitute one and the same agreement.
IN WITNESS WHEREOF, the parties have executed and delivered this Agreement
as of the date first written above.
THE KROLL-O'GARA COMPANY
By
------------------------------------
Name:
Title:
KROLL-O'GARA TENNESSEE, INC.
By
------------------------------------
Name:
Title:
BACKGROUND AMERICA, INC.
By
------------------------------------
Name:
Title:
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EXHIBIT A
ESCROW AGREEMENT
This ESCROW AGREEMENT dated as of , 1999 is by and among The
Kroll-O'Gara Company ("TKOG"), an Ohio corporation, Russell R. French, as the
representative (the "Shareholder Representative") of the shareholders (the
"Shareholders") of Background America, Inc. ("BAI"), a Tennessee corporation,
and Star Bank, N.A., as escrow agent (the "Escrow Agent").
PRELIMINARY STATEMENT
Pursuant to an Agreement and Plan of Merger dated as of January 21, 1999
(the "Merger Agreement") by and among TKOG, Kroll-O'Gara Tennessee, Inc. and
BAI, Merger Sub will be merged with and into BAI and BAI will become a wholly
owned subsidiary of TKOG. Capitalized terms used herein and not otherwise
defined have the meanings assigned to them in the Merger Agreement.
BAI and the Shareholders have agreed to indemnify TKOG as provided in the
Merger Agreement through the deposit of shares of TKOG Common Stock (the "Escrow
Shares") pursuant to Section 2.8 of the Merger Agreement. A list of all
Shareholders and their respective percentage interests in the Escrow Shares is
attached hereto as Schedule 1.
The Escrow Agent is not a party to any agreement between TKOG and BAI and
shall not be required to interpret the terms of any such agreement, it being
agreed that all of Escrow Agent's duties and obligations are stated in this
Agreement.
The parties hereto agree as follows:
1. Establishment of Escrow. Pursuant to Section 2.8 of the Merger
Agreement, TKOG has delivered to the Escrow Agent, and the Escrow Agent hereby
acknowledges receipt of, the Escrow Shares in the form of a single stock
certificate. The Escrow Shares shall be held in escrow in the name of the Escrow
Agent or its nominee, subject to the terms and conditions set forth herein. The
Escrow Shares and any and all shares of TKOG Common Stock or other securities
declared and paid as a dividend or other distribution on or with respect to the
Escrow Shares shall be and become part of the "Escrow Fund" to be held and
disposed of by the Escrow Agent pursuant to the terms and conditions of this
Agreement. Unless and until the Escrow Shares are returned to TKOG or delivered
to the Shareholders pursuant to the terms of this Agreement, the Shareholder
Representative shall vote the Escrow Shares.
2. Amounts Earned on Escrow Shares; Tax Matters. All amounts distributed
on the Escrow Shares as cash dividends shall be distributed pro rata to the
Shareholders. The parties agree that to the extent permitted by applicable law,
including Section 468B(g) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Shareholders will include all amounts earned on the Escrow Fund in
their gross income for federal, state and local income tax (collectively,
"income tax") purposes and pay any income tax resulting therefrom. The Escrow
Agent has been previously furnished with all information necessary to enable it
to comply with the reporting and backup withholding requirements of the Code and
all reporting and withholding information.
3. Claims Against Escrow Shares.
(a) At any time or times prior to the first anniversary of the Effective
Time (as such term is defined in the Merger Agreement), TKOG may make claims
against the Escrow Fund for amounts due for indemnification under Section 11 of
the Merger Agreement. TKOG shall notify the Shareholder Representative and the
Escrow Agent in writing of each such claim, stating that TKOG has paid or
incurred or
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anticipates that it may be required to pay or may incur Damages (as such term is
defined in the Merger Agreement) in the amount stated in such notice or has
negotiated a proposed settlement in connection with potential Damages, and
specifying in reasonable detail (to the extent then ascertainable) individual
items of Damages included in the amount so stated, the date each such item was
paid or incurred, or the material terms of a settlement or the basis for such
anticipated liability, and the nature of the claim to which such item is
related. If applicable, each such notice shall state that the Damages paid or
incurred or anticipated to be incurred or paid by the Company exceed, on a
cumulative basis with all prior Damages paid or incurred or anticipated to be
paid or incurred, the applicable threshold amount, if any, set forth in Section
11.2 of the Merger Agreement. Each such notice delivered to the Escrow Agent by
TKOG shall contain a representation from TKOG to the effect that TKOG has
delivered a copy of such notice to the Shareholder Representative prior to or
simultaneously with its delivery to the Escrow Agent. The Escrow Agent shall
have no duty to ascertain whether the Shareholder Representative received the
notice. The Escrow Agent shall advise TKOG and the Shareholder Representative of
the date on which it received notice from TKOG of such claim, which date shall
be conclusively deemed correct. In the event that the amount subject to the
claim is unliquidated, TKOG shall make a good faith estimate as to the amount of
the claim; such claim and such amount of the claim are subject to Section 4
hereof. If the amount of such unliquidated claim is paid pursuant to Section
3(e) hereof and if Damages actually incurred in connection with any such
unliquidated claim are less than the amount paid to TKOG from the Escrow Fund,
TKOG will pay back into the Escrow Fund a number of shares of TKOG Common Stock
(the "Refund Shares") having an aggregate Escrow Share Value as of the date such
amount was first paid to TKOG equal to the amount by which (i) the Escrow Share
Value of the Escrow Shares paid to TKOG from the Escrow Fund on the date such
amount was first paid to TKOG exceeds (ii) the Damages actually incurred;
provided that if the Escrow Agreement has terminated, TKOG shall distribute the
Refund Shares to the Shareholders in proportion to the percentages set forth on
Schedule I. If the amount of such unliquidated claim is paid pursuant to Section
3(e) hereof and if Damages actually incurred in connection with any such
unliquidated claim are greater than the amount paid to TKOG from the Escrow
Fund, TKOG shall so notify the Shareholder Representative and the Escrow Agent
in writing and pursuant to Section 3(e) hereof, the Escrow Agent shall pay to
TKOG a number of shares of TKOG Common Stock having an aggregate Escrow Share
Value as of the date such amount was first paid to TKOG equal to the amount by
which (i) the Damages actually incurred exceeds (ii) the Escrow Share Value of
the Escrow Shares paid to TKOG from the Escrow Fund on the date such amount was
first paid to TKOG.
(b) The Shareholder Representative may dispute such claim, in which case
the Shareholder Representative shall give written notice thereof to TKOG and to
the Escrow Agent within thirty (30) days after the date on which the Escrow
Agent received TKOG's notice (the "Response Period") (if the Escrow Agent
receives the Shareholder Representative's notice within the aforesaid time
period, the Escrow Agent may conclusively presume that the notice was received
by TKOG within the aforesaid time period).
(c) If the Shareholder Representative gives a timely written notice of
dispute pursuant to Section 3(b) hereof, the Escrow Agent shall continue to hold
the Escrow Shares in accordance with the terms of this Agreement. If the
Shareholder Representative does not give timely written notice disputing such
claim, such claim shall be deemed to have been acknowledged to be payable out of
the Escrow Fund in the full amount thereof as set forth in the claim and the
Escrow Agent shall promptly pay such claim from the Escrow Fund to TKOG after
expiration of the Response Period. Such claim shall be paid in Escrow Shares
having a value equal to the amount of such claim (based upon the Escrow Share
Value (as defined below)).
(e) The Escrow Agent shall effect any payment or delivery of Escrow Shares
to TKOG by surrendering the certificate for such Escrow Shares to TKOG's
transfer agent for cancellation and transfer upon receipt by the Escrow Agent of
a copy of a letter from TKOG to TKOG's transfer agent, instructing such transfer
agent to promptly issue a new certificate to the Escrow Agent for the remaining
Escrow Shares after giving
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effect to such payment or delivery. If the amount of the claim exceeds the
aggregate value of the Escrow Fund, the Escrow Agent shall have no liability or
responsibility for any deficiency. The value per share of the Escrow Shares for
purposes of this Agreement shall be the Market Value (collectively, the "Escrow
Share Value"); provided however, that the Escrow Share Value will be
appropriately increased or decreased, as the case may be, in the event of any
combination or split-up (by way of stock dividend or otherwise) of TKOG Common
Stock. For purposes of this Agreement, "Market Value" shall mean the average of
the last sales price on the Nasdaq National Market of TKOG Common Stock for the
five consecutive trading days ending on the trading day that is four days
immediately prior to the Closing Date. In determining the number of Escrow
Shares required to pay a claim, the Escrow Agent may make such determination in
good faith or it may rely on the written instructions of TKOG; provided, that in
each case such determination shall be based upon the Escrow Share Value. All
payments made by the Escrow Agent pursuant to such claim shall be applied to the
Shareholders in accordance with their respective percentages set forth on
Schedule I hereto. The Escrow Agent shall have no liability or responsibility
for the performance of any calculations pursuant to this Section 3, including
any determination with respect to the number of Escrow Shares required to pay a
claim pursuant to this Section 3. All claims paid out of the Escrow Shares with
respect to each Shareholder shall be rounded down to the nearest whole share.
Under no circumstances shall the Shareholders or the Shareholder Representative
have any right to substitute other property for the Escrow Shares or to change
the per share value stated herein.
4. Disputed Claims.
(a) If the Shareholder Representative shall dispute an indemnification
claim of TKOG as above provided and subject to Section 3 hereof, the Escrow
Agent shall set aside a number of Escrow Shares having an aggregate Escrow Share
Value equal to the amount of the claim as set forth in the notice of the claim
(the "Set Aside Amount"). The Escrow Agent shall adjust each Set Aside Amount in
the event that (i) TKOG makes another claim against the Escrow Fund pursuant to
Section 3 and an additional Set Aside Amount is established, (ii) the Escrow
Agent pays out any claim for which any Set Aside Amount was set aside or (iii)
the Expiration Date occurs, so that any Set Aside Amount, as adjusted, shall at
any such time have an aggregate Escrow Share Value equal to the amount of the
claim as set forth in the notice of the claim; provided that for purposes of the
payment of claims, the value of each share comprising any Set Aside Amount shall
equal the Market Value on the date of such payment. In the event TKOG notifies
the Escrow Agent in writing that it has made or anticipates that it will incur
out-of-pocket expenditures or legal expenses in connection with any such
disputed claim with respect to which it is entitled to be indemnified under the
Merger Agreement, a number of the Escrow Shares having an aggregate Escrow Share
Value equal to such incurred or anticipated expenditures shall also be set aside
and added to and become a part of the Set Aside Amount, which aggregate Set
Aside Amount shall be set forth in a written notice to the Escrow Agent executed
by TKOG; provided, that in the event that it shall be agreed (as evidenced by a
written notice executed by TKOG and the Shareholder Representative) or
determined through a proceeding described in Section 4(b) hereof that TKOG is
not entitled to indemnification with respect to such claim, the Escrow Agent
shall no longer set aside such number of Escrow Shares but shall nevertheless
continue to hold the same, subject to the terms and conditions otherwise herein
contained.
(b) If the Escrow Agent has not received written notice executed by TKOG
and the Shareholder Representative within thirty (30) days after the Shareholder
Representative sends notice of such dispute to the effect that the disputed
indemnification claim has been resolved, the Escrow Agent shall continue to hold
the Set Aside Amount until directed to dispose of it pursuant to (i) a final
non-appealable order of a court of competent jurisdiction or (ii) instructions
or directions furnished in writing signed by both the Shareholder Representative
and TKOG. Upon receipt of either such direction, the Escrow Agent shall promptly
comply therewith. In no event shall the Escrow Agent be responsible for any fees
or expenses of any party to any litigation or proceeding.
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5. Termination. This Agreement shall terminate at the first anniversary
of the Effective Time (the date of such anniversary is hereinafter referred to
as the "Expiration Date"), provided that there is no outstanding litigation
between TKOG and the Shareholder Representative with respect to the settlement
of any Set Aside Amount; otherwise this Agreement shall continue in effect with
respect to each Set Aside Amount that is subject to litigation between TKOG and
the Shareholder Representative until the resolution of such litigation. TKOG
shall provide the Escrow Agent with reasonable advance notice of the Expiration
Date and shall confirm the occurrence of such as soon as practicable thereafter.
On the Expiration Date or as soon thereafter as is practicable, the Escrow Agent
shall distribute the Escrow Fund (including any Set Aside Amount which is not
the subject of such litigation), less the number of Escrow Shares subject to
such litigation, to the Shareholders, pro rata in accordance with their
respective percentages set forth on Schedule I hereto, or to TKOG pursuant to
Section 3(e). At such time thereafter as all litigation with respect to the
settlement of any Set Aside Amount has been resolved and the Escrow Agent has
received a written notice executed by TKOG and the Shareholder Representative to
that effect (or a copy of a court order pursuant to Section 4(b) hereof to that
effect) and any Escrow Shares to be distributed to TKOG in connection therewith
have been so distributed, the Escrow Agent shall distribute the remaining Escrow
Fund, if any, to the Shareholders pro rata in accordance with their respective
percentages set forth on Schedule I hereto and this Agreement shall terminate.
The Escrow Agent shall effect such distributions of Escrow Shares as it is
required to make to the Shareholders under this Agreement by surrendering such
Escrow Shares to TKOG's stock transfer agent for cancellation and transfer upon
receipt by the Escrow Agent of a copy of a letter from TKOG to TKOG's transfer
agent (which letter TKOG shall promptly issue to the transfer agent),
instructing such transfer agent to issue certificates for such Escrow Shares pro
rata to the Shareholders.
6. The Escrow Agent.
(a) Notwithstanding anything herein to the contrary, the Escrow Agent shall
retain and promptly dispose of all or any part of the Escrow Fund in accordance
with this Agreement. The reasonable fees and expenses of the Escrow Agent in
connection with its execution and performance of this Agreement as set forth on
Schedule 2 hereto shall be borne by TKOG and shall be due and payable upon the
signing of this Agreement and on the first day of each subsequent year during
which this Agreement remains in effect. The Escrow Agent shall not be liable for
any act or omission to act under this Agreement, including any and all claims
made against the Escrow Agent as a result of its holding the Escrow Fund in its
own name, except for its own gross negligence or willful misconduct. TKOG agrees
to indemnify and hold harmless the Escrow Agent from and against any and all
claims, losses, costs, liabilities, damages, suits, demands, judgments or
expenses (including but not limited to reasonable attorneys' fees) (the "Escrow
Damages") claimed against or incurred by the Escrow Agent arising out of or
related, directly or indirectly, to this Agreement, except for Escrow Damages
arising out of acts of gross negligence or willful misconduct; provided,
however, that the Shareholder Representative agrees to promptly reimburse TKOG
for any Escrow Damages arising solely out of any improper action or omission to
act on the part of (i) any Shareholder, using a portion of the Escrow Fund in an
amount up to such Shareholder's pro rata share of the Escrow Fund, or (ii) the
Shareholder Representative, in an amount up to the Escrow Fund. The Escrow Agent
may decline to act and shall not be liable for failure to act if in doubt as to
its duties under this Agreement. The Escrow Agent may act upon any instrument or
signature believed by it to be genuine and may assume that any person purporting
to give any notice or instruction hereunder, reasonably believed by it to be
authorized, has been duly authorized to do so. The Escrow Agent's duties shall
be determined only with reference to this Agreement and applicable laws, and the
Escrow Agent is not charged with knowledge of or any duties or responsibilities
in connection with any other document or agreement, including, but not limited
to, the Merger Agreement. In the event that the Escrow Agent shall be uncertain
as to its duties or rights hereunder, the Escrow Agent shall be entitled to
refrain from taking any action other than to keep safely the Escrow
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Fund until it shall (i) receive written instructions signed by TKOG and the
Shareholder Representative; or (ii) is directed otherwise by a court of
competent jurisdiction.
(b) The Escrow Agent may act in reliance upon any instructions signed on
signature believed by it to be genuine, and may assume that any person who has
been designated by TKOG or the Shareholder Representative to give any written
instructions, notice or receipt, or make any statements in connection with the
provisions hereof, has been duly authorized to do so. The Escrow Agent shall
have no duty to make inquiry as to the genuineness, accuracy or validity of any
statements or instructions or any signatures on statements or instructions. The
name and true signatures of each individual authorized to act on behalf of TKOG
and the Shareholder Representative are stated in Exhibit A which is attached
hereto and made a part hereof.
(c) The Escrow Agent shall have the right at any time to resign hereunder
by giving written notice of its resignation to TKOG and the Shareholder
Representative, at the addresses set forth herein or at such other address as
such parties shall provide, at least thirty (30) days prior to the date
specified for such resignation to take effect. In such event TKOG and the
Shareholder Representative shall appoint a successor escrow agent within said
thirty (30) days; if a successor escrow agent is not designated within such
period, the Escrow Agent may appoint a successor escrow agent; provided,
however, that such successor escrow agent shall be acceptable to TKOG and the
Shareholder Representative and shall agree to abide by the terms and conditions
of this Agreement. Upon the effective date of such resignation, the Escrow Fund
shall be delivered by it to such successor escrow agent. In the event the Escrow
Agent does not appoint a successor escrow agent within thirty (30) days, the
Escrow Fund shall be delivered to and deposited with a court of competent
jurisdiction to act as successor escrow agent. Upon the delivery of the Escrow
Fund pursuant to this Section 6(c) to a successor escrow agent, the Escrow Agent
shall be relieved of all liability hereunder except those arising from its
negligence or willful misconduct.
(d) In the event that the Escrow Agent should at any time be confronted
with inconsistent or conflicting claims or demands by the parties hereto, the
Escrow Agent shall have the right to interplead said parties in any court of
competent jurisdiction and request that such court determine the respective
rights of such parties with respect to this Agreement and, upon doing so, the
Escrow Agent shall be released from any obligations or liability to either party
as a consequence of any such claims or demands.
(e) The Escrow Agent may execute any of its powers or responsibilities
hereunder and exercise any rights hereunder, either directly or by or through
its agents or attorneys. The Escrow Agent shall not be responsible for and shall
not be under a duty to examine, inquire into or pass upon the validity, binding
effect, execution or sufficiency of this Agreement or of any amendment or
supplement hereto.
7. Shareholder Representative.
(a) In the event the Shareholder Representative shall die or resign or
otherwise terminate his status as such, his successor shall be any Shareholder
appointed by the Shareholder Representative or, in the case of the death of the
Shareholder Representative or where the Shareholder Representative fails to
appoint a successor after a vacancy has been created, elected by the vote or
written consent of a majority in interest of the Shareholders. If the
Shareholders fail for any reason to elect a new Shareholder Representative and
during any period in which a vacancy exists, Michael D. Shmerling shall serve as
the Shareholder Representative until a new Shareholder Representative is
elected. All decisions of the Shareholder Representative shall be binding upon
the Shareholders. The Shareholder Representative shall keep the Shareholders
reasonably informed of his or her decisions of a material nature.
(b) The Shareholder Representative is authorized to take any action deemed
by him or her appropriate or necessary to carry out the provisions of, and to
determine the rights of the Shareholders under, this Agreement and is entitled
to rely on the advice of counsel with respect to the decision to take any action
or
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omit to take any action hereunder. The Shareholder Representative shall serve as
the agent of the Shareholders for all purposes related to this Agreement,
including without limitation service of process upon the Shareholders. By his or
her execution of this Agreement, the Shareholder Representative accepts and
agrees to diligently discharge the duties and responsibilities of the
Shareholder Representative set forth in this Agreement. The authorization and
designation of the Shareholder Representative under this Section 7(b) shall be
binding upon the successors and assigns of each of the Shareholders. TKOG and
the Escrow Agent shall be entitled to rely upon such authorization and
designation and shall be fully protected in dealing with the Shareholder
Representative, and shall have no duty to inquire into the authority of any
person reasonably believed by any of them to be the Shareholder Representative.
(c) The Shareholder Representative shall not be entitled to any
compensation for services hereunder.
(d) In performing the functions specified in this Agreement, the
Shareholder Representative shall not be subject to liability to the Shareholders
for any act or omission to act under this Agreement in the absence of fraud or
willful misconduct on the part of the Shareholder Representative.
(e) Each of the Shareholders by approval of or absence of dissent from the
Merger Agreement (i) appoints the Shareholder Representative (and any successor
appointed in accordance with this Section 7) as agent and attorney-in-fact, to
serve as the Shareholder Representative under this Agreement and take all
actions pursuant to this Agreement and (ii) agrees to indemnify the Shareholder
Representative for all costs and expenses incurred by the Shareholder
Representative in fulfilling his obligations under this Agreement. All decisions
of the Shareholder Representative under this Agreement shall be binding upon the
Shareholders, and notices to or from the Shareholder Representative shall
constitute notice to or from each of the Shareholders under this Agreement.
8. Governing Law; Successors and Assigns; Venue; Jurisdiction. This
Agreement is governed by the laws of Ohio without regard to its conflict of law
provisions, and shall inure to the benefit of and be binding upon the
successors, assigns, heirs and personal representatives of the parties hereto.
This Agreement shall be enforceable in any court of competent jurisdiction. In
furtherance of and not in limitation of the foregoing, each of the parties
hereto (i) agrees and consents to the personal jurisdiction and venue of the
state and Federal courts sitting in the county of Butler and State of Ohio in
any action or proceeding arising out of or connected in any way with this
Agreement, (ii) irrevocably waives, to the fullest extent permitted by law, any
claim that any such proceeding brought in such a court has been brought in an
inconvenient forum, and (iii) agrees that service of process in any such action
or proceeding will be sufficient if sent by certified mail, return receipt
requested, to the address set forth in Section 10 hereof, and that such service
shall constitute "personal service," and further agrees to the invocation of
said jurisdiction by service of process in any other manner authorized by law.
9. Counterparts. This Agreement may be executed in one or more
counterparts, all of which documents shall be considered one and the same
document.
10. Notices. Any notice or other communication required or permitted
hereunder shall be in writing and shall be deemed given when so delivered in
person, by overnight courier, by facsimile transmission (with receipt confirmed
by telephone or by automatic transmission report) or two business days after
being sent by registered or certified mail (postage prepaid, return receipt
requested), as follows:
TO TKOG:
The Kroll-O'Gara Company
9113 LeSaint Drive
Fairfield, Ohio 45014
Attention: General Counsel
Fax: (513) 874-1262
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In each case with a copy to:
Kramer Levin Naftalis & Frankel LLP
919 Third Avenue
New York, New York 10022
Attention: Peter S. Kolevzon, Esq.
Fax: (212) 715-8000
TO THE SHAREHOLDER REPRESENTATIVE:
Russell R. French
c/o Noro-Mosely Partners III, L.P.
9 North Parkway Square
4200 Northside Parkway, N.W.
Atlanta, Georgia 30327
Fax: (404) 239-9280
In each case with a copy to:
King & Spalding
191 Peachtree Street
Atlanta, GA 30303-1763
Attention: Lynn Scott, Esq.
Fax: (404) 572-5100
and to:
Sherrard & Roe
424 Church Street, 20th Floor
SunTrust Center Building
Nashville, TN 37219
Attention: Thomas Sherrard, Esq.
Fax: (615) 742-4539
TO ESCROW AGENT:
Star Bank, N.A.
452 Walnut Street
Cincinnati, Ohio 45202
Attention: Bob Jones
Fax: (513) 632-5511
Addresses, facsimile numbers and the person to whose attention notices are to be
sent may be changed by written notice given pursuant to this Section 10. Any
notice given hereunder may be given on behalf of any party by his counsel or
other authorized representative.
11. Business Days. In any case where the date for payment of any portion
of the Escrow Fund or notice or any other date hereunder shall be a Saturday,
Sunday or legal holiday or a day on which banking institutions in the City of
New York are authorized by law to close, then the date for such payment of the
Escrow Fund or notice or any other date may be made on the next succeeding
business day.
12. Amendments, Etc. This Agreement may be amended, modified, superseded
or canceled (collectively, "modification"), and any of the terms or conditions
hereof may be waived, only by a written instrument executed by each party hereto
or, in the case of a waiver, by the party waiving compliance; provided, however,
that any modification or waiver which treats all of the Shareholders equally
with respect
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to their rights to the Escrow Fund shall only require approval of the
Shareholders on whose behalf a then majority in interest of the Escrow Fund is
held. The failure of any party at any time or times to require performance of
any provision hereof shall in no manner affect its right at a later time to
enforce the same. No waiver of any party of any condition, or of the breach of
any term contained in this Agreement, whether by conduct or otherwise, in any
one or more instances shall be deemed to be or construed as a further or
continuing waiver of any such condition or breach or a waiver of any other
condition or of the breach of any other term of this Agreement. No party may
assign any rights, duties or obligations hereunder unless all other parties have
given their prior written consent.
13. Headings. The headings of Sections in this Agreement are provided for
convenience only and will not affect the construction or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Escrow Agreement
under seal as of the date first stated above.
THE KROLL-O'GARA COMPANY
By:
----------------------------------
Name:
Title:
SHAREHOLDER REPRESENTATIVE, in his
capacity as the Shareholder
Representative
By:
----------------------------------
Name: Russell R. French
STAR BANK, N.A., as Escrow Agent
By:
----------------------------------
Name:
Title:
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APPENDIX B
CHAPTER 23
BUSINESS CORPORATIONS -- DISSENTERS' RIGHTS
PART 1. RIGHT TO DISSENT AND OBTAIN PAYMENT FOR SHARES
48-23-101 DEFINITIONS. -- (1) "Beneficial shareholder" means the person
who is a beneficial owner of shares held by a nominee as the record shareholder;
(2) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by merger or
share exchange of that issuer;
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under "48-23-102 and who exercises that right when and in the
manner required by Sections 48-23-201-48-23-209;
(4) "Fair value", with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action to which
the dissenter objects, excluding any appreciation or depreciation in
anticipation of the corporate action;
(5) "Interest" means interest from the effective date of the corporate
action that gave rise to the shareholder's right to dissent until the date of
payment, at the average auction rate paid on United States treasury bills with a
maturity of six (6) months (or the closest maturity thereto) as of the auction
date for such treasury bills closest to such effective date;
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares to
the extent of the rights granted by a nominee certificate on file with a
corporation; and
(7) "Shareholder" means the record shareholder or the beneficial
shareholder.
48-23-102 RIGHT TO DISSENT. -- (a) A shareholder is entitled to dissent
from, and obtain payment of the fair value of his shares in the event of, any of
the following corporate actions:
(1) Consummation of a plan of merger to which the corporation is a party:
(A) If shareholder approval is required or the merger by Section
48-21-103 or the charter and the shareholder is entitled to vote on the
merger; or
(B) If the corporation is a subsidiary that is merged with its parent
under Section 48-21-104;
(2) Consummation of a plan of share exchange to which the corporation is a
party as the corporation whose shares will be acquired, if the shareholder is
entitled to vote on the plan;
(3) Consummation of a sale or exchange of all, or substantially all, of the
property of the corporation other than in the usual and regular course of
business, if the shareholder is entitled to vote on the sale or exchange,
including a sale in dissolution, but not including a sale pursuant to court
order or a sale for cash pursuant to a plan by which all or substantially all of
the net proceeds of the sale will be distributed to the shareholders within one
(1) year after the date of sale;
(4) An amendment of the charter that materially and adversely affects
rights in respect of a dissenter's shares because it:
(A) Alters or abolishes a preferential right of the shares;
(B) Creates, alters, or abolishes a right in respect of redemption,
including a provision respecting a sinking fund for the redemption or
repurchase, of the shares;
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(C) Alters or abolishes a preemptive right of the holder of the shares
to acquire shares or other securities;
(D) Excludes or limits the right of the shares to vote on any matter,
or to cumulate votes, other than a limitation by dilution through issuance
of shares or other securities with similar voting rights; or
(E) Reduces the number of shares owned by the shareholder to a
fraction of a share, if the fractional share is to be acquired for cash
under Section 48-16-104; or
(5) Any corporate action taken pursuant to a shareholder vote to the extent
the charter, bylaws, or a resolution of the board of directors provides that
voting or nonvoting shareholders are entitled to dissent and obtain payment for
their shares.
(b) A shareholder entitled to dissent and obtain payment for his shares
under this chapter may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to the
shareholder or the corporation.
(c) Notwithstanding the provisions of subsection (a), no shareholder may
dissent as to any shares of a security which, as of the date of the effectuation
of the transaction which would otherwise give rise to dissenters' rights, is
listed on an exchange registered under Section 6 of the Securities Exchange Act
of 1934, as amended, or is a "national market system security," as defined in
rules promulgated pursuant to the Securities Exchange Act of 1934, as amended.
48-23-103 DISSENT BY NOMINEES AND BENEFICIAL OWNERS. -- (a) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in his name only if he dissents with respect to all shares
beneficially owned by any one (1) person and notifies the corporation in writing
of the name and address of each person on whose behalf he asserts dissenters'
rights. The rights of a partial dissenter under this subsection are determined
as if the shares as to which he dissents and his other shares were registered in
the names of different shareholders.
(b) A beneficial shareholder may assert dissenters' rights as to shares of
any one (1) or more classes held on his behalf only if:
(1) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenters' rights; and
(2) He does so with respect to all shares of the same class of which
he is the beneficial shareholder or over which he has power to direct the
vote.
PART 2. PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
48-23-201 NOTICE OF DISSENTERS' RIGHTS. -- (a) If proposed corporate
action creating dissenters' rights under Section 48-23-102 is submitted to a
vote at a shareholders' meeting, the meeting notice must state that shareholders
are or may be entitled to assert dissenters' rights under this chapter and be
accompanied by a copy of this chapter.
(b) If corporate action creating dissenters' rights under Section 48-23-102
is taken without a vote of shareholders, the corporation shall notify in writing
all shareholders entitled to assert dissenters' rights that the action was taken
and send them the dissenters' notice described in Section 48-23-203.
(c) A corporation's failure to give notice pursuant to this section will
not invalidate the corporate action.
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48-23-202 NOTICE OF INTENT TO DEMAND PAYMENT. -- (a) If proposed corporate
action creating dissenters' rights under Section 48-23-102 is submitted to a
vote at a shareholders' meeting, a shareholder who wishes to assert dissenters'
rights:
(1) Must deliver to the corporation, before the vote is taken, written
notice of his intent to demand payment for his shares if the proposed
action is effectuated; and
(2) Must not vote his shares in favor of the proposed action. No such
written notice of intent to demand payment is required of any shareholder
to whom the corporation failed to provide the notice required by
Section 48-23-201.
(b) A shareholder who does not satisfy the requirements of subsection (a)
is not entitled to payment for his shares under this chapter.
48-23-203 DISSENTERS' NOTICE. -- (a) If proposed corporate action creating
dissenters' rights under Section 48-23-102 is authorized at a shareholders'
meeting, the corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of Section 48-23-202.
(b) The dissenters' notice must be sent no later than ten (10) days after
the corporate action was authorized by the shareholders or effectuated,
whichever is the first to occur, and must:
(1) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(2) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(3) Supply a form for demanding payment that includes the date of the
first announcement to news media or to shareholders of the principal terms
of the proposed corporate action and requires that the person asserting
dissenters' rights certify whether or not he acquired beneficial ownership
of the shares before that date;
(4) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than one (1) nor more than two (2)
months after the date the subsection (a) notice is delivered;
and (5) Be accompanied by a copy of this chapter if the corporation has
not previously sent a copy of this chapter to the shareholder pursuant to
Section 48-23-201.
48-23-204 DUTY TO DEMAND PAYMENT. -- (a) A shareholder sent a dissenters'
notice described in Section 48-23-203 must demand payment, certify whether he
acquired beneficial ownership of the shares before the date required to be set
forth in the dissenters' notice pursuant to Section 48-23-203(b)(3), and deposit
his certificates in accordance with the terms of the notice.
(b) The shareholder who demands payment and deposits his share certificates
under subsection (a) retains all other rights of a shareholder until these
rights are cancelled or modified by the effectuation of the proposed corporate
action.
(c) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters' notice, is
not entitled to payment for his shares under this chapter.
(d) A demand for payment filed by a shareholder may not be withdrawn unless
the corporation with which it was filed, or the surviving corporation, consents
thereto.
48-23-205 SHARE RESTRICTIONS. -- (a) The corporation may restrict the
transfer of uncertificated shares from the date the demand for their payment is
received until the proposed corporate action is effectuated or the restrictions
released under Section 48-23-207.
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(b) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until these
rights are cancelled or modified by the effectuation of the proposed corporate
action.
48-23-206 PAYMENT. -- (a) Except as provided in section 48-23-208, as soon
as the proposed corporate action is effectuated, or upon receipt of a payment
demand, whichever is later, the corporation shall pay each dissenter who
complied with section 48-23-204 the amount the corporation estimates to be the
fair value of his shares, plus accrued interest.
(b) The payment must be accompanied by:
(1) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of payment, an
income statement for that year, a statement of changes in shareholders'
equity for that year, and the latest available interim financial
statements, if any;
(2) A statement of the corporation's estimate of the fair value of the
shares;
(3) An explanation of how the interest was calculated;
(4) A statement of the dissenter's right to demand payment under
Section 48-23-209; and
(5) A copy of this chapter if the corporation has not previously sent
a copy of this chapter to the shareholder pursuant to Section 48-23-201 or
Section 48-23-203.
48-23-207 FAILURE TO TAKE ACTION. -- (a) If the corporation does not
effectuate the proposed action that gave rise to the dissenters' rights within
two (2) months after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates and
release the transfer restrictions imposed on uncertificated shares.
(b) If after returning deposited certificates and releasing transfer
restrictions, the corporation effectuates the proposed action, it must send a
new dissenters' notice under section 48-23-203 and repeat the payment demand
procedure.
48-23-208 AFTER-ACQUIRED SHARES. -- (a) A corporation may elect to
withhold payment required by section 48-23-206 from a dissenter unless he was
the beneficial owner of the shares before the date set forth in the dissenters'
notice as the date of the first announcement to news media or to shareholders of
the principal terms of the proposed corporate action.
(b) To the extent the corporation elects to withhold payment under
subsection (a), after effectuating the proposed corporate action, it shall
estimate the fair value of the shares, plus accrued interest, and shall pay this
amount to each dissenter who agrees to accept it in full satisfaction of his
demand. The corporation shall send with its offer a statement of its estimate of
the fair value of the shares, an explanation of how the interest was calculated,
and a statement of the dissenter's right to demand payment under section
48-23-209.
48-23-209 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER. --
(a) A dissenter may notify the corporation in writing of his own estimate of the
fair value of his shares and amount of interest due, and demand payment of his
estimate (less any payment under section 48-23-206), or reject the corporation's
offer under section 48-23-208 and demand payment of the fair value of his shares
and interest due, if:
(1) The dissenter believes that the amount paid under section
48-23-206 or offered under section 48-23-208 is less than the fair value of
his shares or that the interest due is incorrectly calculated;
(2) The corporation fails to make payment under section 48-23-206
within two (2) months after the date set for demanding payment; or
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<PAGE> 347
(3) The corporation, having failed to effectuate the proposed action,
does not return the deposited certificates or release the transfer
restrictions imposed on uncertificated shares within two (2) months after
the date set for demanding payment.
(b) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under subsection (a)
within one (1) month after the corporation made or offered payment for his
shares.
PART 3. JUDICIAL APPRAISAL OF SHARES
48-23-301 COURT ACTION. -- (a) If a demand for payment under section
48-23-209 remains unsettled, the corporation shall commence a proceeding within
two (2) months after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the two-month period, it shall pay each
dissenter whose demand remains unsettled the amount demanded.
(b) The corporation shall commence the proceeding in a court of record
having equity jurisdiction in the county where the corporation's principal
office (or, if none in this state, its registered office) is located. If the
corporation is a foreign corporation without a registered office in this state,
it shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose shares were
acquired by the foreign corporation was located.
(c) The corporation shall make all dissenters (whether or not residents of
this state) whose demands remain unsettled, parties to the proceeding as in an
action against their shares and all parties must be served with a copy of the
petition. Nonresidents may be served by registered or certified mail or by
publication as provided by law.
(d) The jurisdiction of the court in which the proceeding is commenced
under subsection (b) is plenary and exclusive. The court may appoint one (1) or
more persons as appraisers to receive evidence and recommend decision on the
question of fair value. The appraisers have the powers described in the order
appointing them, or in any amendment to it. The dissenters are entitled to the
same discovery rights as parties in other civil proceedings.
(e) Each dissenter made a party to the proceeding is entitled to judgment:
(1) For the amount, if any, by which the court finds the fair value of
his shares, plus accrued interest, exceeds the amount paid by the
corporation; or
(2) For the fair value, plus accrued interest, of his after-acquired
shares for which the corporation elected to withhold payment under
section 48-23-208.
48-23-302 COURT COSTS AND COUNSEL FEES. -- (a) The court in an appraisal
proceeding commenced under section 48-23-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under section 48-23-209.
(b) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(1) Against the corporation and in favor of any or all dissenters if
the court finds the corporation did not substantially comply with the
requirements of sections 48-23-201-48-23-209; or
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<PAGE> 348
(2) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith
with respect to the rights provided by this chapter.
(c) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that the fees
for those services should not be assessed against the corporation, the court may
award to these counsel reasonable fees to be paid out of the amounts awarded to
the dissenters who were benefitted.
B-6
<PAGE> 349
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 1701.13(D) of the Ohio General Corporation Law allows
indemnification by Kroll-O'Gara to any person made or threatened to be made a
party to any proceedings, other than a proceeding by or in the right of
Kroll-O'Gara, by reason of the fact that he is or was a director, officer,
employee or agent of Kroll-O'Gara, against expenses, including judgments and
fines, if he acted in good faith and in a manner reasonably believed to be or
not opposed to the best interests of Kroll-O'Gara and, with respect to criminal
actions, in which he had no reasonable cause to believe that his conduct was
unlawful. Similar provisions apply to actions brought by or in the right of the
Registrant, except that no indemnification shall be made in such cases when the
person shall have been adjudged to be liable for negligence or misconduct to
Kroll-O'Gara unless determined by the court. The right to indemnification is
mandatory in the case of a director or officer who is successful on the merits
or otherwise in defense of any action, suit or proceeding or any claim, issue or
matter therein. Permissive indemnification is to be made by a court of competent
jurisdiction, the majority vote of a quorum of disinterested directors, the
written opinion of independent counsel or by the shareholders.
Kroll-O'Gara's Code of Regulations provides that Kroll-O'Gara shall
indemnify such persons to the fullest extent permitted by law.
Kroll-O'Gara maintains director and officer liability insurance which
provides coverage against certain liabilities.
ITEM 21. EXHIBITS.
(a) Exhibits. The list of Exhibits is set forth beginning on page E-1 of
this Registration Statement and is incorporated by reference.
(b) Financial Statement Schedules. All financial statement schedules are
omitted due to the absence of conditions under which they are required or
because the information is shown in the consolidated financial statements or
notes thereto.
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
*(a)(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of a prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate offering
price set forth in the "Calculation of Registration Fee" table in the
effective registration statement;
II-1
<PAGE> 350
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
*(g)(1) The undersigned registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this registration statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other items of the applicable form.
(2) The registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Act and is used in connection with
an offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
*(h) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the Registrant pursuant to the foregoing provisions, or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11 or 13 of this Form, within one business day of receipt of such
request, and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in the documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired therein, that was not the subject of and included in the
Registration Statement when it became effective.
- ---------------
* Paragraph references correspond to those of Item 512 of Regulation S-K.
II-2
<PAGE> 351
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF NEW YORK, STATE OF NEW
YORK, AS OF THE 5TH DAY OF MARCH, 1999.
THE KROLL-O'GARA COMPANY
BY: /s/ JULES B. KROLL
-----------------------------------
Jules B. Kroll
Chairman of the Board and
Chief Executive Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AS OF THE 5TH DAY OF MARCH, 1999.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JULES B. KROLL Chairman of the Board and Chief Executive Officer
- -------------------------------------- (principal executive officer)
Jules B. Kroll
/s/ THOMAS M. O'GARA* Vice Chairman of the Board
- --------------------------------------
Thomas M. O'Gara
/s/ WILFRED T. O'GARA* Director
- --------------------------------------
Wilfred T. O'Gara
/s/ NAZZARENO E. PACIOTTI Chief Financial Officer
- -------------------------------------- (principal financial officer)
Nazzareno E. Paciotti
/s/ NICHOLAS P. CARPINELLO Controller and Treasurer
- -------------------------------------- (principal accounting officer)
Nicholas P. Carpinello
/s/ MICHAEL G. CHERKASKY* Director
- --------------------------------------
Michael G. Cherkasky
/s/ MARSHALL S. COGAN* Director
- --------------------------------------
Marshall S. Cogan
/s/ MICHAEL J. LENNON* Director
- --------------------------------------
Michael J. Lennon*
/s/ RAYMOND E. MABUS* Director
- --------------------------------------
Raymond E. Mabus
/s/ HUGH E. PRICE* Director
- --------------------------------------
Hugh E. Price
</TABLE>
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<PAGE> 352
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JERRY E. RITTER* Director
- --------------------------------------
Jerry E. Ritter
/s/ WILLIAM S. SESSIONS* Director
- --------------------------------------
William S. Sessions
/s/ HOWARD I. SMITH* Director
- --------------------------------------
Howard I. Smith
* Pursuant to Power of Attorney
/s/ ABRAM S. GORDON
- --------------------------------------
Abram S. Gordon, Attorney-in-fact
</TABLE>
II-4
<PAGE> 353
LIST OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
2.1 Agreement and Plan of Merger by and among The Kroll-O'Gara
Company, Kroll-O'Gara Tennessee, Inc. and Background
America, Inc. dated as of January 21, 1999 (Appendix A to
the Proxy Statement/Prospectus contained in this
Registration Statement)
3.1 Amended and Restated Articles of Incorporation of the
Company(1)
3.2 Code of Regulations of the Company(2)
4.1 Note Purchase Agreement, dated as of May 30, 1997, between
and among the Company, Connecticut General Life Insurance
Company, Life Insurance Company of North America,
Massachusetts Mutual Life Insurance Company, The Traveler's
Insurance Company, and the Guardian Life Insurance Company
of America(3)
5.1 Opinion of Taft, Stettinius & Hollister LLP
10.1 Agreement to armor HMMWVs between the Company and the United
States Army Tank and Automotive Command, dated May 12, 1994,
as amended(2)
10.2 Systems Technical Support Agreement between the Company and
the United States Army, dated January 20, 1997(4)
10.3 Aircraft Lease between O'Gara-Hess & Eisenhardt Armoring
Company and Longline Leasing, Inc. and Excel Armor Products,
Inc., dated February 13, 1995, as amended(2)
10.4 1996 Stock Option Plan, as amended
10.5 Employment Agreement between the Company and Thomas M.
O'Gara, dated August 23, 1996(2)
10.6 Employment Agreement between the Company and Wilfred T.
O'Gara, dated August 23, 1996(2)
10.7 Employment Agreement between the Company and Nicholas P.
Carpinello, dated August 23, 1996(2)
10.8 Employment Agreement between O'Gara-Hess & Eisenhardt
Armoring Company and Michael J. Lennon, dated August 23,
1996(2)
10.9 License agreement between O'Gara Satellite Networks Limited
and Morsviasputnik, dated March 21, 1995(2)
10.10 Plan and Agreement to Merge, dated as of August 8, 1997, by
and among The O'Gara Company, VDE, Inc., Kroll Holdings,
Inc. and Jules B. Kroll(7)
10.11 Acquisition Agreement between the Company and Labbe, S.A.,
dated January 21, 1997(5)
10.12 Amended and Restated Loan Agreement, dated as of December 1,
1997, between The O'Gara Company, O'Gara-Hess & Eisenhardt
Armoring Company, Kroll Holdings, Inc., Kroll Associates,
Inc. and KeyBank National Association(1)
10.13 Supplemental Agreement Modification to acquire 360
additional armored HMMWVs between United States Army Tank
and Automotive Armaments Command and O'Gara-Hess and
Eisenhardt Armoring Company, dated March 31, 1997(6)
10.14 Stock Option and Shareholders' Agreement, dated January 29,
1996, among Kroll Holdings, Inc., Jules B. Kroll and Michael
Cherkasky(7)
10.15 Stock Option and Shareholders' Agreement, dated January 29,
1996, among Kroll Holdings, Inc., Jules B. Kroll and
Nazzareno E. Paciotti(7)
10.16 AUI Retainer Agreement(7)
10.17 Amended and restated lease of office space in New York, New
York between Progress Partners and Kroll Associates, Inc.(7)
10.18 Registration Rights Agreement, dated August 8, 1997, among
Thomas M. O'Gara, Jules B. Kroll and the Company(7)
</TABLE>
E-1
<PAGE> 354
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- ------- -----------
<C> <S>
10.19 Registration Rights Agreement between American International
Group, Inc. and the Company(1)
10.20 Employment Agreement, dated October 17, 1997, between the
Company and Jules B. Kroll(7)
10.21 Employment Agreement, dated October 17, 1997, between the
Company and Nazzareno E. Paciotti(7)
10.22 Employment Agreement, dated October 17, 1997, between the
Company and Abram S. Gordon(7)
10.23 Amendment to Employment Agreement, dated October 17, 1997,
between O'Gara-Hess & Eisenhardt Armoring Company and
Michael J. Lennon(7)
10.24 Amendment to Employment Agreement, dated October 17, 1997,
between the Company and Thomas M. O'Gara(7)
10.25 Amendment to Employment Agreement, dated October 17, 1997,
between the Company and Wilfred T. O'Gara(7)
10.26 Amendment to Employment Agreement, dated October 17, 1997,
between the Company and Nicholas P. Carpinello(7)
10.27 Form of Promissory Note between Jules B. Kroll and Kroll
Associates(7)
10.28 Supplemental Agreement Modifications to acquire 738
additional armored HMMWVs between the United States Army
Tank and Automotive Armaments Command and O'Gara-Hess &
Eisenhardt Armoring Company, dated March 31, 1998 and April
13, 1998(8)
10.29 Stock Purchase Agreement among The Kroll-O'Gara Company, The
Kroll-O'Gara Canada Company, Kroll Associates, Inc. and the
shareholders of Lindquist Avey MacDonald Baskerville Inc.
and U.S. Holdings, Inc. dated June 1, 1998(9)
10.30 Agreement and Plan of Merger dated June 30, 1998 among The
Kroll-O'Gara Company, Kroll-O'Gara Acquisition Co., Inc.,
Kizorek, Inc. and William Kizorek(10)
10.31 Agreement and Plan of Merger by and among The Kroll-O'Gara
Company, Kroll-O'Gara Oklahoma, Inc. and Laboratory
Specialists of America, Inc. dated as of October 21,
1998(11)
10.32 Amended and Restated Loan Agreement, dated October 30, 1998,
among The Kroll-O'Gara Company, O'Gara-Hess & Eisenhardt
Armoring Company, Kroll Holdings, Inc., Kroll Associates,
Inc. and Keybank National Association(11)
10.33 Agreement and Plan of Merger dated as of December 31, 1998
among The Kroll-O'Gara Company, TKOG Delaware, Inc. and
Securify Inc.(12)
21.1 Subsidiaries of the Company
23.1 Consent of Taft, Stettinius & Hollister LLP (contained in
Exhibit 5.1)
23.2 Consent of Arthur Andersen LLP (as to The Kroll-O'Gara
Company)
23.3 Consent of Deloitte & Touche LLP (as to The Kroll-O'Gara
Company)
23.4 Consent of KPMG LLP (as to The Kroll-O'Gara Company)
23.5 Consent of Arthur Andersen LLP (as to Securify Inc.)
23.6 Consent of Crowe, Chizek and Company LLP (as to Kizorek,
Inc.)
23.7 Consent of Deloitte & Touche LLP (as to Background America,
Inc.)
24.1 Power of Attorney
27 Financial Data Schedules (Exhibits 27.1-27.5)
</TABLE>
- ---------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
No. 333-48099 and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
No. 333-11093 and incorporated herein by reference.
E-2
<PAGE> 355
(3) Filed as an Exhibit to the Company's Current Report on Form 8-K (Date of
Report: May 30, 1997) and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Current Report on Form 8-K (Date of
Report: February 12, 1997) and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997 and incorporated herein by reference.
(7) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
No. 333-35845 and incorporated herein by reference.
(8) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q/A for
the quarter ended March 31, 1998 and incorporated herein by reference.
(9) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1998 and incorporated herein by reference.
(10) Filed as an Exhibit to the Company's Current Report on Form 8-K (Date of
Report: September 1, 1998) and incorporated herein by reference.
(11) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
No. 333-66959 and incorporated herein by reference.
(12) Filed as an Exhibit to the Company's Current Report on Form 8-K (Date of
Report: December 31, 1998) and incorporated herein by reference.
E-3
<PAGE> 1
EXHIBIT 5.1
Taft, Stettinius & Hollister LLP
1800 Firstar Tower
425 Walnut Street
Cincinnati, Ohio 45202
March 5, 1999
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, DC 20549
Dear Sir or Madam:
We have acted as counsel for The Kroll-O'Gara Company, an Ohio
corporation ("Kroll-O'Gara"), in connection with its filing of a Registration
Statement on Form S-4 with respect to the registration of 989,431 shares of the
Company's Common Stock, $.01 par value per share (the "Common Stock"). Pursuant
to a merger agreement dated January 21, 1999 (the "Merger Agreement") between
Kroll-O'Gara, a wholly owned subsidiary of Kroll-O'Gara ("Merger Sub") and
Background America, Inc. ("Background America"). Background America will be
merged into Merger Sub, resulting in Background America becoming a wholly owned
subsidiary of Kroll-O'Gara (the "Merger"). The Common Stock will be issued to
the shareholders, option holders and warrant holders of Background America in
connection with the Merger pursuant to the terms of the Merger Agreement.
It is our opinion that the registration of the Common Stock pursuant to
the Registration Statement and the issuance of the shares by Kroll-O'Gara have
been duly authorized by all necessary corporate action by Kroll-O'Gara. When
issued as contemplated by the Registration Statement and upon consummation of
the Merger, or upon exercise of the applicable options or warrants, the Common
Stock will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to our firm under the caption "Legal
Matters" in the Proxy Statement/Prospectus contained in the Registration
Statement.
Very truly yours,
/s/ TAFT, STETTINIUS & HOLLISTER LLP
<PAGE> 1
Exhibit 10.4
THE KROLL-O'GARA COMPANY
1996 Stock Option Plan
(as amended through December 23, 1998)
ARTICLE I
OBJECTIVES
1.1 The objectives of this Stock Option Plan (the "Plan") are
to enable The Kroll-O'Gara Company ("TKOC") to compete successfully in retaining
and attracting employees, directors and advisors of outstanding ability, to
stimulate the efforts of these persons toward TKOC's objectives and to encourage
their ownership of shares of TKOC's Common Stock.
ARTICLE II
DEFINITIONS
2.1 For purposes of the Plan each of the following terms shall
have the definition which is attributed to it, unless another definition is
clearly indicated by a particular usage and context.
A. "ADVISOR" means any person who provides bona fide
advisory or consulting services to the Company other than
services in connection with the offer or sale of securities in
a capital-raising transaction.
B. "BOARD" means the Board of Directors of TKOC.
C. "CODE" means the Internal Revenue Code of 1986, as
amended. Reference to any Section of the Code includes the
provisions of that Section as it may be amended or replaced by
any other section(s) of like intent and purpose and also
includes any regulations or rulings promulgated thereunder.
D. "COMPANY" means TKOC and any subsidiary of TKOC,
as the term "subsidiary" is defined in Section 424(f) of the
Code.
E. "DISABILITY" means permanent and total disability
as defined in Section 22(e)(3) of the Code.
F. "EFFECTIVE DATE OF GRANT" means the date on which,
<PAGE> 2
or such later date as of which, the Board makes an award of an
Option.
G. "ELIGIBLE EMPLOYEE" means any individual (other
than one who receives retirement benefits, stipends,
consulting fees, honorariums and the like) who performs
services for the Company and is included on the regular
payroll of the Company. A director of the Company who does not
otherwise qualify as an Eligible Employee pursuant to the
previous sentence shall nonetheless be considered an Eligible
Employee with respect to the grant of Nonqualified Stock
Options.
H. "EXCHANGE ACT" means the Securities Exchange Act
of 1934, as amended.
I. "FAIR MARKET VALUE" means the last sale price
reported on The Nasdaq Stock Market, or on any stock exchange
on which the Shares are traded, on a specified date or, if
there are no reported sales on such date, then the last
reported sales price on the next preceding day on which such a
sale was transacted. If the Shares are not then traded as
described in the preceding sentence, then the average of the
closing bid and asked prices on the specified date or last
preceding day on which bid and asked prices were reported, or
such other method as the Board may select, shall be used in
determining Fair Market Value for a Share.
J. "INCENTIVE STOCK OPTION" shall have the same
meaning as is given to that term by Section 422 of the Code.
K. "MATURE SHARES" means Shares which have been fully
paid and held, of record or beneficially, by the holder of an
Option for at least six months.
L. "NONQUALIFIED STOCK OPTION" means any Option other
than an Incentive Stock Option.
M. "OPTION" means the right, subject to the terms of
this Plan and to such other terms and conditions as the Board
may establish, to purchase from TKOC a stated number of Shares
at a specified price.
N. "OPTION PRICE" means the purchase price per Share
subject to an Option. The Option Price shall not be (i) less
than 85% of the Fair Market Value of a Share on the Effective
Date of Grant in the case of a Nonqualified Stock Option,
except that no Nonqualified Stock Option which is intended to
result in compensation that qualifies for exclusion from the
deduction limitation of Code Section 162(m) shall be granted
with an Option
<PAGE> 3
Price of less than 100% of the Fair Market Value of a Share on
the Effective Date of Grant, or (ii) less than 100% of the
Fair Market Value of a Share on the Effective Date of Grant in
the case of an Incentive Stock Option, except as otherwise
provided in Section 8.1.
O. "SHARE" means one share of the Common Stock, $.01
par value, of TKOC.
ARTICLE III
ADMINISTRATION
3.1 ADMINISTRATION. The Plan shall be administered by the
Board. Subject to and consistent with the provisions of the Plan, the Board
shall establish such rules and regulations as it deems necessary or appropriate
for the proper administration of the Plan, shall interpret the provisions of the
Plan, shall decide all questions of fact arising in the application of Plan
provisions and shall make such other determinations and take such actions in
connection with the Plan and the Options granted hereunder as it deems necessary
or advisable. At any time, or from time to time, the Board may appoint a
committee of at least three directors (the "Committee") to administer, or to
approve transactions pursuant to, the Plan. For the purpose of option grants to
and approval of other transactions with persons who are subject to Section 16 of
the Exchange Act with respect to TKOC, each member of the Committee shall be a
"Non-Employee Director" as defined in Rule 16b-3 under the Exchange Act. To the
extent that it is desired that compensation resulting from the grant of a
particular Option be excluded from the deduction limitation of Section 162(m) of
the Code, all directors comprising the Committee granting such Option also shall
be "outside directors" within the meaning of Code Section 162(m). In the event a
Committee is so appointed, it may carry out all of the functions of the Board
with respect to the Plan, except for amendments to or suspension or termination
of the Plan.
3.2 Except as specifically limited by the provisions of the
Plan, the Board shall have authority to:
A. Determine which Eligible Employees or Advisors
shall be granted Options;
B. Determine the number of Shares which may be
subject to each Option;
C. Determine the term and the Option Price of each
Option;
D. Determine whether an Option is an Incentive Stock
Option or a Nonqualified Stock Option (except that only
Nonqualified Stock Options may be granted to nonemployee
directors of the Company and to Advisors);
<PAGE> 4
E. Determine the time or times when Options will be
granted; and
F. Determine all other terms and conditions of each
Option, including (but not limited to) the terms of any Option
agreement. The Board may, in its discretion, determine as a
condition of any Option that a stated percentage of Shares
covered by such Option shall be exercisable in any one year or
other stated period of time. The Board may also waive or amend
the terms and conditions of, or accelerate the vesting of, an
Option under circumstances selected by the Board.
3.3 Any action, decision, interpretation or determination by
the Board with respect to the application or administration of this Plan shall
be final and binding upon all persons, and need not be uniform with respect to
its determination of recipients, amount, timing, form, terms or provisions of
Options.
3.4 No member of the Board shall be liable for any action or
determination taken or made in good faith with respect to the Plan or any Option
granted hereunder and, to the extent not prohibited by applicable law, all
members shall be indemnified by the Company for any liability and expenses which
they may incur as a result of any claim or cause of action, or threatened claim
or cause of action, arising in connection with the administration of this Plan
or the grant of any Option hereunder.
ARTICLE IV
SHARES ISSUABLE
4.1 Except as provided in Article XI, the number of Shares
which may be issued under the Plan shall not exceed 1,757,000 Shares in the
aggregate and Options for no more than 125,000 Shares may be granted to any
individual Eligible Employee or Advisor during any period of twelve (12)
consecutive months. If any Option expires or terminates for any reason without
being completely exercised, the Shares with respect to which such Option was not
exercised may again be subject to other Options. Shares tendered as payment for
the Option Price pursuant to Section 7.1 shall be available for issuance under
the Plan. The Board may make such other determinations regarding the counting of
Shares issued pursuant to the Plan as it deems necessary or advisable, provided
that such determinations shall be permitted by law.
ARTICLE V
GRANTING OF OPTIONS
5.1 Subject to the terms and conditions of the Plan, the Board
may, from time to
<PAGE> 5
time, grant Options to Eligible Employees or Advisors on such terms and
conditions as it shall determine. Subject to the restriction of Section 3.2(D),
more than one Option and more than one form of Option may be granted to the same
individual.
ARTICLE VI
EXERCISE OF OPTIONS
6.1 Any person entitled to exercise an Option may do so,
without the need for further approval pursuant to Exchange Act Rule 16b-3, in
whole or in part by delivering to TKOC, attention: Stock Option Plan
Administrator, at its principal office, a written notice of exercise. The
written notice shall specify the number of Shares for which an Option is being
exercised and shall be accompanied by full payment of the Option Price for the
Shares being purchased.
ARTICLE VII
PAYMENT OF OPTION PRICE
7.1 Subject to such administrative requirements as the Board
may impose, payment of the Option Price may be made, at the election of the
holder of an Option, in cash or by the tender of Mature Shares or by a
combination of the foregoing. If payment by the tender of Mature Shares is
selected, the value of each Mature Share shall be deemed to be the Fair Market
Value of a Share on the day the Mature Shares are tendered for payment, which
shall be the date on which the Mature Shares, duly endorsed or accompanied by a
stock power duly endorsed for transfer to TKOC, are received by TKOC. An
Option's exercise price also may be paid pursuant to a "cashless" exercise/sale
procedure involving a simultaneous sale by a broker, in which case the exercise
date shall be the trade date, provided that proceeds of such sale in full
payment of the Option Price are received by TKOC on such date.
ARTICLE VIII
INCENTIVE STOCK OPTIONS AND NONQUALIFIED STOCK OPTIONS
8.1 Any option designated as an Incentive Stock Option will be
subject to the general provisions applicable to all Options granted under the
Plan. In addition, an Incentive Stock Option shall be subject to the following
specific provisions:
A. No Incentive Stock Option may be exercised after
the expiration of ten years from the Effective Date of Grant.
B. At the time the Incentive Stock Option is granted,
if
<PAGE> 6
the Eligible Employee owns, directly or indirectly, stock
representing more than 10% of the total combined voting power
of all classes of stock of the Company then:
(i) The Option Price must equal at least
110% of the Fair Market Value on the Effective Date
of Grant; and
(ii) The term of the Option shall not be
greater than five years from the Effective Date of
Grant.
C. The aggregate Fair Market Value (determined as of
the Effective Date of Grant) of the Shares with respect to
which Incentive Stock Options are exercisable for the first
time by any holder during any calendar year (under all plans
of the Company) shall not exceed $100,000.
8.2 If any Option is not granted, exercised or held pursuant
to the provisions of Code Section 422, it will be considered to be a
Nonqualified Stock Option to the extent that any or all of the grant is in
conflict with those provisions.
ARTICLE IX
TRANSFERABILITY OF OPTIONS
9.1 During the lifetime of an Eligible Employee or Advisor to
whom an Option has been granted, such Option is non-assignable and
non-transferable and may be exercised only by such individual or that
individual's legal representative or guardian, except that a Nonqualified Stock
Option may be transferred (A) pursuant to a "domestic relations order" as
defined in Section 414(p)(1)(B) of the Code or (B) under such other
circumstances and in accordance with such other terms and conditions as may be
established by the Board. In the event of the death of an Eligible Employee or
Advisor to whom an Option has been granted, the Option shall be transferable
pursuant to the holder's Will or by the laws of descent and distribution and may
thereafter be exercised by the transferee(s) as provided in Article X.
ARTICLE X
TERMINATION OF OPTIONS
10.1 Unless earlier terminated pursuant to Article XIII, an
Option granted to an Eligible Employee will terminate as follows:
A. During the period of the Eligible Employee's
<PAGE> 7
continuous employment with, or service as a director of, the
Company, the Option will terminate upon the earlier of the
date on which it has been fully exercised, it expires by its
terms or it is terminated by the mutual agreement of the
Company and the Eligible Employee.
B. Upon termination of the Eligible Employee's
employment with, or service as a director of, the Company for
any reason any unexercisable Option shall immediately
terminate. Except as provided in Section 10.1(C), any Option
which is exercisable on the date of termination of employment,
or service as a director, will terminate upon the earlier of
its full exercise, the expiration of the Option by its terms
or the end of the three-month period following the date of
termination. For purposes of the Plan, a leave of absence
approved by the Company shall not be deemed to be termination
of employment.
C. If an Eligible Employee to whom an Option was
granted dies or becomes subject to a Disability while employed
by, or serving as a director of, the Company or within three
months of termination of employment or service as a director,
for any reason, the Option may be exercised at any time within
one year after the date of death or the commencement of
Disability, to the extent that the Eligible Employee shall
have been entitled to exercise it at the time of death or the
commencement of Disability, by the Eligible Employee or the
Eligible Employee's legal representative or guardian or by the
representative(s) of the Eligible Employee's estate or the
person(s) to whom the Option may have been transferred by Will
or by the laws of descent and distribution.
10.2 An Option granted to an Advisor will terminate upon the
earlier of the full exercise of the Option or the expiration of the Option by
its terms.
10.3 The provisions of Sections 10.1 and 10.2 above shall
apply irrespective of whether an Option has been transferred to a person or
entity other than the Eligible Employee or Advisor to whom the Option was
granted.
10.4 The Board, at its discretion, may extend the periods for
Option exercise set forth in this Article X.
ARTICLE XI
ADJUSTMENTS TO SHARES AND OPTION PRICE
11.1 The Board shall make appropriate adjustments in the
number of Shares available for issuance under the Plan, the number of Shares
subject to outstanding Options and the
<PAGE> 8
Option Price of optioned Shares in order to give effect to changes in the Shares
as a result of any merger, consolidation, recapitalization, reclassification,
combination, stock dividend, stock split, or other similar event. The
determination as to the method and extent of such adjustments shall be within
the sole discretion of the Board.
ARTICLE XII
AMENDMENT OR TERMINATION OF PLAN
12.1 The Board may at any time amend, suspend or terminate the
Plan; provided, however, that shareholder approval shall be required for any
amendment if such approval is required pursuant to the Code or the Exchange Act,
or any rule or regulation thereunder, as such may be in effect and be
interpreted from time to time.
12.2 No amendment to the Plan shall alter or impair any Option
granted under the Plan without the consent of the holder thereof.
ARTICLE XIII
CERTAIN EVENTS
13.1 In the event TKOC shall consolidate with, merge into, or
transfer all or substantially all of its assets to another corporation or
corporations (a "successor corporation"), such successor corporation may
obligate itself to continue this Plan and to assume all obligations under the
Plan. In the event that such successor corporation does not obligate itself to
continue this Plan as above provided, the Plan shall terminate effective upon
such consolidation, merger or transfer, and, except as provided in Section 13.3,
any Option previously granted hereunder shall terminate. If practical, TKOC
shall give each holder of an Option twenty (20) days prior notice of any
possible transaction which might terminate this Plan and the Options previously
granted hereunder.
13.2 In the event of the execution of an agreement of
reorganization, merger or consolidation of TKOC with one or more corporations as
a result of which TKOC is not to be the surviving corporation (whether or not
TKOC shall be dissolved or liquidated) or the execution of an agreement of sale
or transfer of all or substantially all of the assets of TKOC, then all Options
which are outstanding at the time of such event shall immediately become
exercisable in full.
13.3 In the event of any of the transactions referred to in
Section 13.2 hereof, any holder of one or more Options who is subject to the
reporting requirements of Section 16(a) of the Exchange Act with respect to TKOC
shall be entitled to tender such Options to the Company and to receive from the
Company a payment of cash equal to the difference between the aggregate "Fair
Value" of Shares subject to the holder's Options which are outstanding and not
exercised immediately prior to the time of consummation of the transaction and
the aggregate Option Price of such Shares. For this purpose, "Fair Value" shall
mean the cash value per Share to be paid to
<PAGE> 9
shareholders pursuant to such agreement, or if cash value is not to be paid, the
highest Fair Market Value of a Share during the 60-day period immediately
preceding the date of the consummation of the transaction. The foregoing payment
under this Section 13.3 shall be made in lieu of and in full discharge of any
and all obligations of the Company in respect of all subject Options of the
holder.
13.4 The grant of Options under the Plan shall in no way
affect the right of TKOC to adjust, reclassify, reorganize or otherwise change
its capital or business structure or to merge, consolidate, dissolve, liquidate
or sell or transfer all or any part of its business or assets.
13.5 Notwithstanding the foregoing, in the event the amounts
deemed payable under this Article XIII when added to all other payments to the
holder of an Option by the Company, would, if made, constitute Excess Parachute
Payments within the meaning of Sections 280G and 4999 of the Code, the amounts
deemed payable by the Company under this Article shall be reduced by the amount
deemed necessary to cause the holder to receive $1,000.00 less than three times
the holder's Base Amount (as that term is defined in Code Section 280G) from all
such payments to the holder from the Company. In the event the amount of the
payments exceeds the amount subsequently determined to have been due, the excess
benefits over three times the Base Amount shall constitute a loan by the Company
to the holder, payable on demand by the Company, with interest at a rate equal
to 120% of the applicable federal rate determined under Section 1274 of the
Code, compounded semi-annually.
ARTICLE XIV
EFFECTIVE DATE
14.1 This Plan became effective on October 23, 1996. No Option
shall be granted pursuant to this Plan subsequent to October 22, 2006 or
subsequent to any earlier date as of which this Plan is terminated.
ARTICLE XV
MISCELLANEOUS
15.1 Nothing contained in this Plan shall constitute the
granting of an Option. Each Option shall be represented by a written Option
agreement executed by both the Eligible Employee or Advisor and TKOC.
15.2 Certificates for Shares purchased through exercise of
Options will be issued in regular course after exercise of the Option and
payment therefor as called for by the terms of the Option. No person holding an
Option or entitled to exercise an Option granted under this Plan shall have any
rights or privileges of a shareholder of TKOC with respect to any Shares
issuable upon exercise of such Option until certificates representing such
Shares shall have been issued and delivered. No Option may be transferred, and
no Option shall be exercisable or Shares issued and
<PAGE> 10
delivered upon exercise of an Option, unless and until TKOC has complied with
any and all applicable federal and state securities laws, listing requirements
of any market or national securities exchange on which TKOC's Shares may then be
traded and other requirements of law. Any certificate representing Shares
acquired upon exercise of an Option may bear such legends as the Company deems
advisable to assure compliance with all applicable laws and regulations.
15.3 Nothing contained in this Plan or in any Option granted
pursuant to it shall confer upon any person any right to continue in the employ
of, as a director of or in any business relationship with the Company or to
interfere in any way with the right of the Company to terminate a person's
employment, status as a director or business relationship with the Company at
any time. So long as a holder of an Option shall continue to be an employee of
the Company, the Option shall not be affected by any change of the employee's
duties or position.
15.4 This Plan shall be construed and administered in
accordance with and governed by the laws of the State of Ohio.
<PAGE> 1
Exhibit 21.1
The Kroll-O'Gara Company
Subsidiaries
O'Gara-Hess & Eisenhardt Armoring Company (Delaware) (100%)
The Kroll-O'Gara de Mexico, S.A. de
C.V. (Mexico) (100%)
O'Gara-Hess & Eisenhardt de Brasil LTDA (Brazil)(100%)
O'Gara Security International, Inc. (Delaware)(100%)
O'Gara Laura Automotive Group (Russia) (51%)
ZAO IMYA (Russia)(100%)
O'Gara France S.A. (France) (100%)
Labbe S.A. (France) (100% by O'Gara France S.A.)
Hellio Polds Lourds-Carrosserie, Tolerie, Peinture
S.A. (France) (100%)
SARL Normandie Carrosserie (France) (83.7%)
Societte De Blindage and de Secirite
(France) (100%)
O'Gara Philippines, Inc. (Philippines) (100%)
O'Gara Satellite Networks Limited (Ireland) (100%)
O'Gara Satellite Networks, Inc. (Delaware) (100%)
Next Destination Limited (U.K.) (100%)
International Training, Incorporated (Virginia) (100%)
The O'Gara Company FSC, Inc. (Barbados)(100%)
Kroll Holdings, Inc. ("KHI") (Delaware) (100%)
Kroll Associates, Inc. (Delaware) (100%)
Kroll Associates (Asia) Limited (Hong Kong) (50%; 50% by KHI)
Kroll Information Services, Inc. (Delaware)(100%)
Kroll Associates U.K. Limited (England)(100%)
Kroll International, Inc. (Delaware)(100%)
Kroll Associates International Holdings, Inc. (100%)
Lindquist Avey Macdonald Baskerville Company (Nova Scotia)
(100% owned by L.A.M.B. Acquisition, Inc., which is 100% owned by
The Kroll-O'Gara Company)
InPhoto Surveillance, Inc. (Illinois) (100%)
Laboratory Specialists of America, Inc. (Oklahoma) (100%)
Securify Inc. (California) (100%)
All other subsidiaries together do not meet the definition of a
Significant Subsidiary.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.
ARTHUR ANDERSEN LLP
Cincinnati, Ohio,
March 5, 1999
<PAGE> 1
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
The Kroll-O'Gara Company
Fairfield, Ohio
We consent to the use in this registration statement of The Kroll-O'Gara Company
on Form S-4 of our report dated March 13, 1997 (August 8, 1997 as to Notes 7 and
17 to the financial statements) appearing in the Prospectus, which is part of
this Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ DELOITTE & TOUCHE LLP
New York, New York
March 5, 1999
<PAGE> 1
Exhibit 23.4
The Board of Directors
Kroll Holdings, Inc.:
We consent to the use of our report contained in this registration
statement and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG LLP
New York, New York
March 5, 1999
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to use of our report on the
financial statements of Securify Inc., dated February 2, 1999, and to all
references to our Firm included in this registration statement of The
Kroll-O'Gara Company on Form S-4.
ARTHUR ANDERSEN LLP
San Jose, California
March 5, 1999
<PAGE> 1
Exhibit 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We consent to the use in the Prospectus constituting part of this
Registration Statement of Kroll-O'Gara Company on Form S-4 of our report dated
December 10, 1997 except for Note 8, as to which the date is August 31, 1998 on
the October 31, 1997 financial statements of Kizorek, Inc. We also consent to
the reference to our firm under the heading "Experts" in such Prospectus, which
is part of this Registration Statement.
/s/ CROWE, CHIZEK AND COMPANY LLP
Crowe, Chizek and Company LLP
Oak Brook, Illinois
March 5, 1999
<PAGE> 1
Exhibit 23.7
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of The Kroll-O'Gara Company
on Form S-4 of our report dated December 18, 1998 (January 21, 1999 as to second
paragraph of Note 15) on the consolidated financial statements of Background
America, Inc. and subsidiaries for the years ended December 31, 1996 and 1997,
appearing in the Prospectus, which is part of this Registration Statement.
We also consent to the reference of us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Nashville, Tennessee
March 5, 1999
<PAGE> 1
EXHIBIT 24.1
POWER OF ATTORNEY
We, the undersigned directors of The Kroll-O'Gara Company, hereby appoint
Wilfred T. O'Gara and Abram S. Gordon, or either of them, our true and lawful
attorneys and agents, to do any and all acts and things in our name and on our
behalf in our capacities indicated below, which said attorneys and agents, or
each of them, may deem necessary or advisable to enable said corporation to
comply with the Securities Act of 1933, as amended, and any rules, regulations,
and requirements of the Securities and Exchange Commission, in connection with a
Registration Statement on Form S-4 relating to the registration of shares of the
Common Stock of the corporation, including, without limitation, power and
authority to sign for us, or any of us, in our names in the capacities indicated
below, such Registration Statement as well as any and all amendments (including
post-effective amendments) thereto, and we hereby ratify and confirm all that
said attorneys and agents, or each of them, shall do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Power of
Attorney has been signed below by the following persons in the capacities
indicated as of the 5th day of March, 1999.
Signatures Title
- ---------- -----
/s/ Jules B. Kroll Chairman of the Board
- ------------------------
Jules B. Kroll
/s/ Thomas M. O'Gara Vice Chairman of the Board
- ------------------------
Thomas M. O'Gara
/s/ Wilfred T. O'Gara Director
- ------------------------
Wilfred T. O'Gara
/s/ Michael G. Cherkasky Director
- ------------------------
Michael G. Cherkasky
/s/ Marshall S. Cogan Director
- ------------------------
Marshall S. Cogan
/s/ Michael J. Lennon Director
- ------------------------
Michael J. Lennon
/s/ Raymond E. Mabus Director
- ------------------------
Raymond E. Mabus
/s/ Hugh E. Price Director
- ------------------------
Hugh E. Price
<PAGE> 2
/s/ Jerry E. Ritter Director
- -----------------------
Jerry E. Ritter
/s/ William S. Sessions Director
- -----------------------
William S. Sessions
/s/ Howard I. Smith Director
- -----------------------
Howard I. Smith
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CONSOLIDATED STATEMENTS OF CASH FLOWS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 40,208
<SECURITIES> 0
<RECEIVABLES> 93,265
<ALLOWANCES> 3,295
<INVENTORY> 19,158
<CURRENT-ASSETS> 155,777
<PP&E> 44,066
<DEPRECIATION> 22,352
<TOTAL-ASSETS> 243,873
<CURRENT-LIABILITIES> 58,629
<BONDS> 0
0
0
<COMMON> 6,261
<OTHER-SE> 132,058
<TOTAL-LIABILITY-AND-EQUITY> 243,873
<SALES> 194,562
<TOTAL-REVENUES> 194,562
<CGS> 127,965
<TOTAL-COSTS> 127,965
<OTHER-EXPENSES> 42,592
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,512
<INCOME-PRETAX> 21,290
<INCOME-TAX> 8,652
<INCOME-CONTINUING> 12,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,638
<EPS-PRIMARY> .71
<EPS-DILUTED> .69
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SUPPLEMENTAL
CONSOLIDATED STATEMENTS OF OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 0
<CURRENT-LIABILITIES> 0
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 0
<SALES> 147,880
<TOTAL-REVENUES> 147,880
<CGS> 98,665
<TOTAL-COSTS> 98,665
<OTHER-EXPENSES> 33,597
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,563
<INCOME-PRETAX> 12,009
<INCOME-TAX> 4,809
<INCOME-CONTINUING> 7,200
<DISCONTINUED> 0
<EXTRAORDINARY> 194
<CHANGES> 0
<NET-INCOME> 7,006
<EPS-PRIMARY> .50
<EPS-DILUTED> .46
</TABLE>
