<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 8-K/A
(Amendment No. 1)
Current Report
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF THE REPORT (DATE OF EARLIEST EVENT REPORTED): DECEMBER 31, 1998
THE KROLL-O'GARA COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
Ohio 000-21629 31-1470817
(State or other jurisdiction of (Commission (I.R.S. Employer
Incorporation) file number) Identification No.)
</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)
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<PAGE> 2
INFORMATION TO BE INCLUDED IN THE REPORT
Items 1, 3, 4, 5, 6, 8 and 9 are not applicable and are omitted from this
Current Report. The information required by Items 2 and 7(c) has been previously
filed. This amended report is filed to provide the financial information
required by Items 7(a) and 7(b).
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
<TABLE>
<CAPTION>
(a) Financial Statements of Securify Inc.
- -----------------------------------------
<S> <C> <C>
Report of Independent Public Accountants......................................2
Balance Sheet as of December 30, 1998.........................................3
Statement of Operations For the Period from Inception
(February 10, 1998) to December 30, 1998.............................4
Statement of Shareholders' Equity For the Period from Inception
(February 10, 1998) to December 30, 1998.............................5
Statement of Cash Flows For the Period from Inception
(February 10, 1998) to December 30, 1998.............................6
Notes to Financial Statements.................................................7
Balance Sheet as of September 30, 1998 (unaudited)...........................12
Statement of Operations For the Period from Inception
(February 10, 1998) to September 30, 1998 (unaudited)...............13
Statement of Cash Flows For the Period from Inception
(February 10, 1998) to September, 1998 (unaudited)..................14
Notes to Financial Statements................................................15
</TABLE>
<TABLE>
<CAPTION>
(b) Pro Forma Financial Information of the Kroll-O'Gara Company (Unaudited)
- ---------------------------------------------------------------------------
<S> <C> <C>
Pro Forma Combined Condensed Balance Sheet as of
September 30, 1998.......................................................17
Pro Forma Combined Condensed Statement of Operations
for the Nine Months Ended September 30, 1998.............................18
</TABLE>
1
<PAGE> 3
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
2
<PAGE> 4
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.
3
<PAGE> 5
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.
4
<PAGE> 6
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.
5
<PAGE> 7
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.
6
<PAGE> 8
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.
7
<PAGE> 9
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.
8
<PAGE> 10
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
9
<PAGE> 11
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>
10
<PAGE> 12
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.
11
<PAGE> 13
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.
12
<PAGE> 14
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.
13
<PAGE> 15
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.
14
<PAGE> 16
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
15
<PAGE> 17
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.
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<PAGE> 18
Pro Forma Financial Information of The Kroll O'Gara Company
The unaudited pro forma combined condensed financial data gives
effect to the acquisition of Securify Inc. as a pooling of interests, and
should be read in conjunction with, and is qualified by reference to the
audited consolidated financial statements of The Kroll-O'Gara Company and
the financial statements of Securify Inc. and notes thereto. For purposes
of the unaudited pro forma operating data, Kroll-O'Gara's unaudited
consolidated financial statements for the nine months ended September 30,
1998 have been combined with the unaudited financial statements of Securify
Inc. for the period from the inception of operations (February 10, 1998)
through September 30, 1998. For purposes of the unaudited pro forma
combined condensed balance sheet data, Kroll-O'Gara's unaudited
consolidated financial data as of September 30, 1998 has been combined with
Securify Inc.'s unaudited financial data as of September 30, 1998.
The Unaudited Pro Forma Combined Condensed Financial Statements have
been prepared by the Company based upon assumptions it deems proper. The
Unaudited Pro Forma Combined Condensed Financial Statements presented herein are
not necessarily indicative of the future consolidated financial position or
future consolidated results of operations of the Company. The statements are
also not indicative of the consolidated financial position or consolidated
results of operations of the Company that would have actually occurred had the
transaction with Securify Inc. been in effect for the entire period presented.
The Unaudited Pro Forma Combined Condensed Financial Statements should
be read in conjunction with the historical consolidated Financial Statements and
related notes of Kroll-O'Gara contained in its annual report on Form 10-K for
the year ended December 31, 1997.
THE KROLL-O'GARA COMPANY
PRO FORMA COMBINED CONDENSED BALANCE SHEETS
AS OF SEPTEMBER 30, 1998
(unaudited)
(dollars in thousands)
<TABLE>
<CAPTION>
Historical Securify (1) Pro Forma
---------- ------------ ---------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 32,859 $ 4,676 $ 37,535
Accounts receivable 54,806 48 54,854
Costs and estimated earnings in excess of --
billings on uncompleted contracts 21,625 -- 21,625
Inventories 19,094 -- 19,094
Other current assets 14,901 32 14,933
-------- -------- --------
Total current assets 143,285 4,756 148,041
Property, plant, and equipment, net 18,389 98 18,487
Databases, net 9,012 -- 9,012
Cost in excess of assets acquired, net 39,629 -- 39,629
Other assets 7,947 -- 7,947
-------- -------- --------
56,588 -- 56,588
-------- -------- --------
Total assets $218,262 $ 4,854 $223,116
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 26,891 $ 49 $ 26,940
Accrued liabilities 18,111 38 18,149
Other current liabilities 9,762 -- 9,762
-------- -------- --------
Total current liabilities 54,764 87 54,851
Other long-term liabilities 2,958 -- 2,958
Deferred income taxes 2,277 -- 2,277
Long-term debt, net of current portion 39,339 -- 39,339
-------- -------- --------
Total liabilities 99,338 87 99,425
Shareholders' equity 118,924 4,767 123,691
-------- -------- --------
Total liabilities and shareholders' equity $218,262 $ 4,854 $223,116
======== ======== ========
</TABLE>
(1) Securify historical balance sheet as of September 30, 1998
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<PAGE> 19
THE KROLL-O'GARA COMPANY
PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(unaudited)
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
Pro Forma
Historical Securify(1) Adjustments Pro Forma
---------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Net sales $ 178,943 $ 48 $ 178,991
Cost of sales 120,100 268 120,368
--------- --------- ---------
Gross profit 58,843 (220) 58,623
OPERATING EXPENSES
Selling and marketing 12,092 -- 12,092
General and administrative 23,656 789 24,445
Amortization of costs in excess of
assets acquired 1,112 -- 1,112
--------- --------- ---------
Operating income 21,983 (1,009) 20,974
OTHER INCOME (EXPENSE):
Interest expense (3,322) -- (3,322)
Other, net 540 65 605
--------- --------- ---------
Income before provision for income taxes 19,201 (944) 18,257
Provision for income taxes 7,641 -- 7,641
--------- --------- ---------
Net income $ 11,560 $ (944) $ 10,616
========= ========= =========
Basic earnings per share $ 0.74 $ 0.64
========= =========
Basic weighted average shares outstanding 15,580 994 (2) 16,574
========= =========
Diluted earnings per share $ 0.72 $ 0.62
========= =========
Diluted weighted average shares outstanding 15,955 1,089 (2) 17,044
========= =========
</TABLE>
(1) Historical results of operations for Securify Inc. from its
inception (February 10, 1998) to September 30, 1998.
(2) These amounts adjust the historical weighed average shares outstanding
to reflect the conversion of Securify Inc. common shares, preferred
shares and common stock equivalents to Kroll-O'Gara common stock based
on the following ratios:
<TABLE>
<S> <C>
Common stock and equivalents 0.0955252
Series A Preferred 0.1107930
Series B Preferred 0.1182730
</TABLE>
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<PAGE> 20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATE: MARCH 10, 1999 THE KROLL-O'GARA COMPANY
By /s/Nicholas P. Carpinello
-------------------------
Nicholas P. Carpinello
Controller and Treasurer
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