<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
Commission File Number: 000-21629
THE KROLL-O'GARA COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 31-1470817
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
9113 LESAINT DRIVE
FAIRFIELD, OHIO 45014
(513) 874-2112
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF PRINCIPAL EXECUTIVE OFFICES)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares of each of the issuer's classes of common stock,
as of the latest practicable date.
22,310,100
---------------------
(SHARES OF COMMON STOCK OUTSTANDING AS OF OCTOBER 31, 2000)
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<PAGE> 2
THE KROLL-O'GARA COMPANY
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
SEPTEMBER 30, 2000
<TABLE>
<CAPTION>
PAGE
----
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1: FINANCIAL STATEMENTS
Consolidated Balance Sheets (unaudited) as of
December 31, 1999 and September 30, 2000.............................. 1
Consolidated Statements of Operations (unaudited) for
the three and nine months ended September 30, 1999
and 2000.............................................................. 3
Consolidated Statements of Cash Flows (unaudited)
for the nine months ended September 30, 1999 and 2000................. 4
Notes to Consolidated Unaudited Financial Statements ................. 5
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.................................... 13
PART II - OTHER INFORMATION.............................................................. 25
ITEM 1: LEGAL PROCEEDINGS...................................................... 25
ITEM 6: EXHIBITS .............................................................. 25
SIGNATURES...................................................................... 26
</TABLE>
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
ASSETS
------
<S> <C> <C>
Current Assets:
Cash and equivalents (Note 7) $ 13,835 $ 8,610
Trade accounts receivable, net of allowance for doubtful accounts
of $4,779 and $5,252 at December 31, 1999 and September 30, 2000,
respectively 68,017 71,789
Unbilled revenues 18,034 22,044
Related party receivables 2,096 1,601
Costs and estimated earnings in excess of billings on
uncompleted contracts 24,160 16,570
Inventories (Note 8) 26,264 25,090
Prepaid expenses and other 11,579 10,032
Deferred tax asset 824 824
--------- ---------
Total current assets 164,809 156,560
--------- ---------
Property, Plant and Equipment, at cost
Land 2,164 2,067
Buildings and improvements 8,587 8,145
Leasehold improvements 7,452 7,919
Furniture and fixtures 10,131 11,442
Machinery and equipment 36,769 41,905
--------- ---------
65,103 71,478
Less: accumulated depreciation (26,195) (31,385)
--------- ---------
38,908 40,093
--------- ---------
Databases, net of accumulated amortization of $26,187 and $28,718
at December 31, 1999 and September 30, 2000, respectively 9,696 10,398
Costs in Excess of Assets Acquired and Other Intangible Assets, net of
accumulated amortization of $9,028 and $11,756 at December 31,
1999 and September 30, 2000, respectively 81,676 78,106
Other Assets:
Other assets 4,304 4,373
--------- ---------
95,676 92,877
--------- ---------
$ 299,393 $ 289,530
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
<PAGE> 4
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current Liabilities:
Bank lines of credit (Note 5) $ 26,583 $ 34,362
Current portion of long-term debt 3,737 1,812
Payable to shareholder -- 698
Trade accounts payable 38,823 37,834
Billings in excess of costs and estimated earnings on
uncompleted contracts 361 --
Accrued liabilities 28,299 29,578
Customer deposits 4,196 5,311
Income taxes currently payable 768 600
--------- ---------
Total current liabilities 102,767 110,195
--------- ---------
Other Long-Term Liabilities 2,673 1,745
Deferred Income Taxes 1,821 1,821
Long-Term Debt, net of current portion 36,264 36,700
--------- ---------
Total liabilities 143,525 150,461
Shareholders' Equity (Note 1):
Preferred stock, $.01 par value, 1,000,000 shares authorized,
none issued -- --
Common stock, $.01 par value, 50,000,000 shares authorized,
22,255,510 and 22,310,100 shares issued and outstanding
at December 31, 1999 and September 30, 2000, respectively 223 223
Additional paid-in capital 170,102 170,026
Retained deficit (12,640) (24,488)
Deferred compensation (1,630) (1,054)
Accumulated other comprehensive loss (187) (5,638)
--------- ---------
Total shareholders' equity 155,868 139,069
--------- ---------
$ 299,393 $ 289,530
========= =========
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
2
<PAGE> 5
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- --------------------------
1999 2000 1999 2000
---------- ---------- ----------- ------------
<S> <C> <C> <C> <C>
NET SALES $ 87,547 $ 88,441 $ 239,588 $ 251,490
COST OF SALES 55,553 61,068 149,106 165,779
---------- ---------- ----------- ------------
Gross profit 31,994 27,373 90,482 85,711
OPERATING EXPENSES:
Selling and marketing expenses 4,185 8,129 17,487 22,752
General and administrative expenses 20,048 20,062 49,627 60,981
Separation expenses (Note 11) -- 2,571 -- 3,247
Failed merger expenses (Note 11) -- 519 -- 2,519
Merger expenses (Note 3) 443 24 3,537 462
Restructuring expense (Note 2) -- 686 4,364 686
---------- ---------- ----------- ------------
Operating income (loss) 7,318 (4,618) 15,467 (4,936)
---------- ---------- ----------- ------------
OTHER INCOME (EXPENSE):
Interest expense (1,218) (1,731) (3,094) (4,603)
Litigation settlement (Note 13) -- (1,108) -- (1,108)
Other, net (110) (137) (39) (228)
---------- ---------- ----------- ------------
Income (loss) before provision for income taxes and
cumulative effect of change in accounting principle 5,990 (7,594) 12,334 (10,875)
Provision (benefit) for income taxes 2,336 (406) 5,108 974
---------- ---------- ----------- ------------
Income (loss) before cumulative effect of change in
accounting principle 3,654 (7,188) 7,226 (11,849)
---------- ---------- ----------- ------------
Cumulative effect of change in accounting principle,
net of applicable tax benefit of $408 (Note 6) -- -- (778) --
---------- ---------- ----------- ------------
Net income (loss) $ 3,654 $ (7,188) $ 6,448 $ (11,849)
========== ========== ----------- ------------
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment, net of $948
and $3,634 tax benefit, respectively (1,547) (5,451)
----------- ------------
Other comprehensive income (loss) (1,547) (5,451)
----------- ------------
Comprehensive income (loss) $ 4,901 $ (17,300)
=========== ============
PER SHARE DATA:
BASIC EARNINGS (LOSS) PER SHARE (Note 4)
Earnings (loss) per share $ 0.16 $ (0.32) $ 0.29 $ (0.53)
============ ============ =========== ===========
Weighted Average Shares Outstanding 22,169,133 22,310,703 21,934,599 22,281,687
============ ============ =========== ===========
DILUTED EARNINGS (LOSS) PER SHARE (Note 4)
Earnings (loss) per share $ 0.16 $ (0.32) $ 0.29 $ (0.53)
============ ============ =========== ===========
Weighted Average Shares Outstanding 22,664,716 22,310,703 22,595,018 22,281,687
============ ============ =========== ===========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
3
<PAGE> 6
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 7)
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1999 2000
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 6,448 $(11,849)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities-
Depreciation and amortization 10,416 11,779
Bad debt expense (298) 3,034
Noncash compensation expense 785 436
Change in assets and liabilities, net of effects of acquisitions -
Receivables - trade and unbilled (14,444) (10,463)
Costs and estimated earnings in excess of billings on uncompleted contracts (1,388) 7,589
Inventories, prepaid expenses and other assets (9,175) 2,637
Accounts payable and income taxes currently payable (11,326) (1,284)
Billings in excess of costs and estimated earnings on uncompleted contracts (64) (361)
Amounts due to/from related parties 2,157 495
Customer deposits 354 1,115
Accrued liabilities 9,010 845
Long-term liabilities 2,221 (928)
-------- --------
Net cash provided by (used in) operating activities (5,304) 3,045
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (13,957) (8,271)
Additions to databases (3,122) (3,621)
Acquisitions, net of cash acquired (12,015) (470)
Sale of marketable securities 12,757 --
-------- --------
Net cash used in investing activities (16,337) (12,362)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under bank lines of credit 19,850 7,779
Payments of long-term debt (986) (1,914)
Proceeds from payable to shareholder -- 698
Proceeds from exercise of stock options 1,777 64
Foreign currency translation (1,193) (2,103)
-------- --------
Net cash provided by financing activities 19,448 4,524
-------- --------
NET DECREASE IN CASH AND EQUIVALENTS (2,193) (4,793)
Effects of foreign currency exchange rates on cash (354) (432)
-------- --------
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 14,041 13,835
-------- --------
CASH AND EQUIVALENTS, END OF PERIOD $ 11,494 $ 8,610
-------- --------
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements.
4
<PAGE> 7
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1999 AND SEPTEMBER 30, 2000
(1) GENERAL
The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively "Kroll-O'Gara"), is a leading global provider of a
broad range of specialized products and services that are designed to provide
solutions to a variety of security needs. Kroll-O'Gara's Security Products and
Services Group markets ballistic and blast protected vehicles and security
services. The Investigations and Intelligence Group offers business intelligence
and investigation services. The Voice and Data Communications Group offers
secure satellite communication equipment and satellite navigation systems. The
Information Security Group offers information and computer security services,
including network and system security review and repair.
The consolidated financial statements include all majority-owned
subsidiaries. All material intercompany accounts and transactions are
eliminated. Investments in 20% to 50% owned entities are accounted for using the
equity method. Affiliated entities are not included in the accompanying
consolidated financial statements.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring adjustments) considered necessary for fair presentation have
been included. Operating results for the three and nine month periods ended
September 30, 2000, are not necessarily indicative of the results that may be
expected for the year ended December 31, 2000. The accompanying financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in Kroll-O'Gara's annual report on Form
10-K for the year ended December 31, 1999 as amended in Form 8-K dated October
4, 2000.
(2) RESTRUCTURINGS OF OPERATIONS
In the first quarter of 1999, Kroll-O'Gara began implementation of a
restructuring plan (the "1999 Plan") to reduce costs and improve operating
efficiencies. The 1999 Plan was substantially completed in the second quarter of
1999. The total non-recurring, pre-tax restructuring charge associated with the
1999 Plan was $4.4 million. Total payments or writeoffs made pursuant to the
1999 Plan through September 30, 2000 were $3.7 million. Kroll-O'Gara does not
expect to incur any other significant restructuring charges in future periods
related to the 1999 Plan. The principal elements of the restructuring plan
were the closure of two Investigations and Intelligence Group offices and the
elimination of approximately 82 employees. The primary components of the
restructuring charge, including accrued balances, as of September 30, 2000 were
as follows:
5
<PAGE> 8
<TABLE>
<CAPTION>
DESCRIPTION EXPENSE ACCRUAL
--------------------------------------------------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Severance and related costs $3,116 $ 290
Writedown of property, plant and equipment 150 --
Lease termination costs 1,064 430
Other 34 --
------ ------
$4,364 720
======
Less - Current portion 515
------
$ 205
======
</TABLE>
In the third quarter of 2000, Kroll-O'Gara's Security Products and Services
Group implemented a plan to reduce costs (the "2000 Plan"). The 2000 Plan was
completed in the third quarter of 2000 with a total non-recurring pre-tax
restructuring charge of $0.7 million. Total payments pursuant to the 2000 Plan
through September 30, 2000 were $0.2 million. Kroll-O'Gara does not expect to
incur any other significant restructuring charges in future periods related to
the 2000 Plan. The principal element of the restructuring plan was the
elimination of approximately 25 employees. The primary component of the
restructuring charge was severance related to the termination of employees. At
September 30, 2000, approximately $0.5 million remained as an accrual relating
to the 2000 Plan.
(3) ACQUISITIONS AND MERGERS
In 2000, Kroll-O'Gara recorded a charge to operating expenses of
approximately $0.5 million ($0.02 per diluted share) for integration related
costs. These costs relate primarily to mergers and acquisitions completed in
1999. Kroll-O'Gara has completed several business combinations in the periods
presented. These transactions, accounted for as either purchase business
combinations, or pooling of interests business combinations were as follows:
On July 11, 2000, Kroll-O'Gara acquired all of the capital stock of
Decision Resources, Inc., a corporation doing business in Canada. The purchase
price of $0.7 million was satisfied with cash of $0.3 million and a note payable
of $0.4 million to the former owner. The acquisition has been accounted for as a
purchase and was effective on July 1, 2000. Goodwill related to this transaction
was approximately $0.7 million which is being amortized over 25
6
<PAGE> 9
years. Decision Resources specializes in market research and business
intelligence services. Its revenues are included in Kroll-O'Gara's
Investigations and Intelligence Group.
On May 16, 2000, Kroll-O'Gara acquired substantially all of the assets and
assumed certain liabilities of The Search Is On, Inc., a corporation doing
business in Nashville, Tennessee. The purchase price of $0.6 million was
satisfied with cash of $0.4 million and a note payable of $0.2 million to the
former owner. The acquisition has been accounted for as a purchase and was
effective on May 16, 2000. Goodwill related to this transaction was
approximately $0.4 million which is being amortized over 25 years. The Search Is
On specializes in obtaining public records information for utilization in
providing background investigation to clients. Its revenues are included in
Kroll-O'Gara's Investigations and Intelligence Group.
On June 16, 1999, Kroll-O'Gara acquired all of the outstanding capital
stock of Background America, Inc. for approximately 989,000 shares of
Kroll-O'Gara common stock, including approximately 90,000 shares reserved for
issuance for outstanding common stock equivalents. Background America provides
employment screening and compliance services to a variety of industries and is
included in Kroll-O'Gara's Investigations and Intelligence Group. The merger
with Background America constituted a tax-free reorganization and has been
accounted for as a pooling of interests transaction. Accordingly, all prior
period consolidated financial statements presented have been restated to include
the combined results of operations, financial position and cash flows of
Background America as though they had always been a part of Kroll-O'Gara. There
were no transactions between Kroll-O'Gara and Background America prior to the
combination and immaterial adjustments were recorded to conform Background
America's accounting policies. Certain reclassifications were made to
Kroll-O'Gara's and Background America's financial statements to conform
presentation.
On June 3, 1999, Kroll-O'Gara acquired substantially all of the assets and
assumed certain liabilities of The Buchler Phillips Group, a partnership
headquartered in London, England. The purchase price of $20.0 million was
satisfied with cash of $12.0 million and 366,469 shares of stock valued at $8.0
million, or $21.86 per share. The acquisition has been accounted for as a
purchase and was effective on April 1, 1999. Goodwill related to this
transaction was approximately $20.8 million which is being amortized over 25
years. Buchler Phillips specializes in corporate advisory practices which
includes work related to corporate rescue, insolvency, financial consulting and
corporate finance. Buchler Phillips' revenues are included in the Investigations
and Intelligence Group.
On March 1, 1999, Kroll-O'Gara acquired all of the capital stock of
Financial Research, Inc. for approximately $3.3 million, consisting of 101,555
shares of common stock. Financial Research provides business valuation and
economic damage analysis services and is included in Kroll-O'Gara's
Investigations and Intelligence Group. The acquisition has been accounted for as
a pooling of interests.
(4) EARNINGS PER SHARE
In accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share," basic earnings per share are computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the period. 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 period. Dilutive common stock equivalents
represent shares issuable upon assumed exercise of stock options and warrants
and upon assumed issuance of restricted stock. The following is a reconciliation
of the numerator and denominator for basic and diluted earnings per share for
the three and nine months ended September 30, 1999 (in thousands, except per
share data):
THREE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Basic EPS $3,654 22,169 $0.16
=====
Effect of dilutive securities:
Options -- 459
Warrants -- 1
Restricted Stock -- 36
------ ------
Diluted EPS $3,654 22,665 $0.16
====== ====== =====
7
<PAGE> 10
NINE MONTHS ENDED SEPTEMBER 30, 1999
----------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ----------
Basic EPS $6,448 21,935 $0.29
=====
Effect of dilutive securities:
Options - 622
Warrants - 2
Restricted Stock - 36
------ ------
Diluted EPS $6,448 22,595 $0.29
====== ====== =====
As a result of the net loss recorded for the three and nine months ended
September 30, 2000, basic and diluted earnings per share are identical as all
options and warrants are anti-dilutive.
Basic and diluted earnings per share based on income before cumulative
effect of change in accounting principle were $0.33 and $0.32, respectively, for
the nine months ended September 30, 1999. The basic and diluted per share impact
of the change in accounting principle was $0.04 and $0.03, respectively.
(5) DEBT
(a) Amendment of Credit Facility
On September 14, 2000, Kroll-O'Gara amended its credit agreement to
continue to provide for a temporary increase in its revolving line of credit
from $25.0 million to $40.0 million. Pursuant to the amended credit agreement,
the increase in the revolving line of credit is effective until January 1, 2001,
at which time all borrowings in excess of $25.0 million must be repaid. The
credit facility continues to provide for a letter of credit facility of
approximately $7.6 million. Both the letter of credit facility and the line of
credit mature on May 31, 2001. Advances under the revolving line of credit
during the period of the temporary increase bear interest at prime to prime plus
0.75%, or, at Kroll-O'Gara's option, LIBOR plus 1.5% to LIBOR plus 2.5%,
dependent upon a defined financial ratio. Borrowings under this line of credit
were approximately $22.8 million and $31.5 million at December 31, 1999 and
September 30, 2000, respectively.
This credit agreement includes financial covenants which, among other
restrictions, require the maintenance of certain financial ratios and other
financial requirements, including an interest coverage ratio and net worth
minimum, and impose limitations on foreign investment, goodwill, additional
indebtedness and capital expenditures. Pursuant to the amended credit agreement,
certain of these financial ratios were revised. Kroll-O'Gara was not in
compliance with one of these covenants at September 30, 2000. This event of
non-compliance was subsequently waived by the lender.
(b) Senior unsecured notes
Kroll-O'Gara's $35.0 million of senior unsecured notes also contain
financial covenants, which among other restrictions, require the maintenance of
a minimum level of net worth and a fixed charge coverage ratio. Kroll-O'Gara was
in compliance with these financial covenants at September 30, 2000.
8
<PAGE> 11
(6) NEW PRONOUNCEMENTS
In April 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-5, "Reporting on the Cost of Start-Up
Activities." The SOP requires costs of start-up activities, including
pre-operating costs, organization costs and start-up costs to be expensed as
incurred. Kroll-O'Gara's practice was to capitalize these expenses and amortize
them over periods ranging from one to five years. Kroll-O'Gara adopted SOP 98-5
in the first quarter of 1999 and recorded a cumulative effect of an accounting
change of $0.8 million, net of a tax benefit of $0.4 million.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS 133). SFAS 133 establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. SFAS
133 requires that changes in the derivative's fair value be recognized currently
in earnings unless specific hedge accounting criteria are met. SFAS 133, as
amended, is effective for fiscal years beginning after June 15, 2000.
Kroll-O'Gara has nine forward contracts in place in association with demand
notes from two subsidiaries. These instruments qualify for hedge accounting.
Kroll-O'Gara has not yet quantified the impact of adopting SFAS 133 on its
financial statements, however, SFAS 133 could increase volatility in earnings
and other comprehensive income. As required, Kroll-O'Gara will adopt SFAS 133
effective January 1, 2001.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 ("Interpretation No. 44"), "Accounting for Certain
Transactions involving Stock Compensation - an interpretation of APB Opinion
25." Interpretation No. 44 became effective July 1, 2000. Interpretation No. 44
clarifies the application of APB Opinion 25 for certain matters, specifically
(a) the definition of an employee for purposes of applying APB Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. The adoption of
Interpretation No. 44 has not had and is not expected to have a material impact
on financial position or the results of operations.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." SAB 101 interprets and expands upon existing guidance regarding
revenue recognition. The implementation of SAB 101 is required no later than the
fourth quarter of 2000. Kroll-O'Gara does not expect SAB 101 to have a material
impact on revenue recognition for current contracts. The impact of SAB 101 on
Kroll-O'Gara's future revenue recognition will be dependent on the nature and
terms of services offered by Kroll-O'Gara.
The Emerging Issues Task Force (EITF) Issue No. 00-20, "Accounting for
Costs Incurred to Acquire or Originate Information for Database Content and
Other Collections of Information", states that the EITF is considering different
views for the accounting for database costs. One of the views would require
Kroll-O'Gara to expense some or all of the database costs that Kroll-O'Gara
currently capitalizes and amortizes, which is currently an acceptable
alternative. Adoption of a different method of accounting for database costs
could have a material impact on Kroll-O'Gara's financial position and results of
operations. To date, the EITF has not made any official determinations on the
issue.
(7) SUPPLEMENTAL CASH FLOW DISCLOSURE
9
<PAGE> 12
1999 2000
---------------------
(DOLLARS IN THOUSANDS)
Cash paid for taxes $ 4,196 $ (1,140)
Cash paid for interest $ 2,452 $ 3,524
Non-cash activity:
Fair value of stock issued in
connection with acquisition
of Buchler Phillips $ 8,011 $ -
Deferred compensation related to
options and restricted stock $ 1,572 $ -
(8) 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, SEPTEMBER 30,
-----------------------------------
INVENTORY CATEGORY 1999 2000
---------------------------------------------- --------------- -------------
INVENTORY CATEGORY (DOLLARS IN THOUSANDS)
<S> <C> <C>
Raw materials $14,495 $19,830
Vehicle costs and work-in-process 11,769 5,260
------- -------
Total inventory $26,264 $25,090
======= =======
</TABLE>
(9) DERIVATIVE FINANCIAL INSTRUMENTS
Financial instruments in the form of foreign currency exchange contracts
are utilized by Kroll-O'Gara to hedge its exposure to movements in foreign
currency exchange rates. Kroll-O'Gara does not hold or issue derivative
financial instruments for trading purposes. Gains and losses on foreign exchange
contracts are deferred and amortized as an adjustment to the cumulative foreign
currency translation adjustment component of equity over the terms of the
agreements in accordance with hedge accounting standards.
Kroll-O'Gara has nine foreign currency exchange contracts to hedge its
exposure to certain foreign currency rate fluctuations on demand loans to two
subsidiaries that are denominated in the foreign currencies. By virtue of these
contracts, Kroll-O'Gara has fixed the total dollar amount that they will receive
under the aforementioned subsidiary loans through the maturity dates of the
contracts regardless of the fluctuations in the exchange rate. At September 30,
2000, the total notional amount of the contracts, which mature between December
2000 and July 2002, is $17.4 million. Kroll-O'Gara's foreign currency
translation adjustment component of shareholder's equity was increased by $1.3
million in the nine months ended September 30, 2000 as a result of these
agreements.
Kroll-O'Gara has estimated the fair value of the foreign exchange contracts
based on information obtained from the counterparty of the amount Kroll-O'Gara
would receive at September 30, 2000 in order to terminate the agreements. As of
September 30, 2000, Kroll-O'Gara would have received approximately $2.7 million
upon cancellation of all contracts.
(10) SEGMENT DATA
During 1999 and 2000, Kroll-O'Gara operated in four business segments, the
Security Products and Services Group, the Investigations and Intelligence Group,
the Voice and Data Communications Group and the Information Security Group.
10
<PAGE> 13
The following summarizes information about the Company's business segments:
<TABLE>
<CAPTION>
-------------- -------------- -------------- ----------- ----- ------------
INVESTIGATIONS
SECURITY AND VOICE AND DATA INFORMATION
PRODUCTS AND INTELLIGENCE COMMUNICATIONS SECURITY
SERVICES GROUP GROUP GROUP GROUP OTHER CONSOLIDATED
-------------- -------------- -------------- ----------- ----- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales to unaffiliated customers $ 34,159 $ 46,079 $ 6,567 $ 742 $ $ 87,547
========= ========= ========= ========= ========== =========
Gross profit $ 10,457 $ 20,694 $ 531 $ 312 $ $ 31,994
========= ========= ========= ========= ========== =========
Operating income (loss) $ 5,588 $ 6,669 $ (163) $ (845) $ (3,931) $ 7,318
========= ========= ========= ========= ========== =========
THREE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales to unaffiliated customers $ 28,472 $ 52,890 $ 5,149 $ 1,930 $ - $ 88,441
========= ========= ========= ========= ========== =========
Gross profit $ 4,767 $ 22,004 $ 655 $ (53) $ - $ 27,373
========= ========= ========= ========= ========== =========
Operating income (loss) $ (86) $ 5,565 $ (1) $ (4,018) $ (6,078) $ (4,618)
========= ========= ========= ========= ========== =========
NINE MONTHS ENDED
SEPTEMBER 30, 1999
Net sales to unaffiliated customers $ 91,634 $ 130,702 $ 14,030 $ 3,222 $ - $ 239,588
========= ========= ========= ========= ========== =========
Gross profit $ 29,032 $ 58,518 $ 1,354 $ 1,578 $ - $ 90,482
========= ========= ========= ========= ========== =========
Operating income (loss) $ 15,132 $ 12,487 $ (796) $ (722) $ (10,634) $ 15,467
========= ========= ========= ========= ========== =========
NINE MONTHS ENDED
SEPTEMBER 30, 2000
Net sales to unaffiliated customers $ 83,122 $ 150,891 $ 13,738 $ 3,739 $ - $ 251,490
========= ========= ========= ========= ========== =========
Gross profit $ 18,950 $ 65,027 $ 2,028 $ (294) $ - $ 85,711
========= ========= ========= ========= ========== =========
Operating income (loss) $ 5,105 $ 14,490 $ (124) $ (8,722) $ (15,685) $ (4,936)
========= ========= ========= ========= ========== =========
Identifiable assets at September 30, $ 92,988 $ 162,705 $ 11,168 $ 7,362 $ - $ 274,223
2000 ========= ========= ========= ========= ==========
Corporate assets 15,307
---------
Total assets at September 30, $ 289,530
2000 =========
</TABLE>
(11) FAILED MERGER AND PROPOSED SEPARATION OF BUSINESS
On November 15, 1999, Kroll-O'Gara announced that it had entered into a
definitive agreement with Blackstone Capital Partners III Merchant Banking Fund
L.P. (Blackstone) pursuant to which shares held by all Kroll-O'Gara
shareholders, other than certain members of management, would be acquired by
Blackstone for $18.00 per share in cash. On April 12, 2000, Kroll-O'Gara
announced that Blackstone had withdrawn its offer to acquire Kroll-O'Gara
shares. Costs associated with the failed recapitalization merger in the nine
months ended September 30, 2000 were approximately $2.5 million ($0.11 per
diluted share) and consisted primarily of fees for attorneys, accountants,
investment bankers, travel and other related charges.
On September 8, 2000, Kroll-O'Gara adopted a plan to separate its two
principal operating segments, the Security Products and Services Group and the
Investigations and Intelligence Group, into two independent public companies.
Kroll-O'Gara has made initial required filings relating to the proposed
separation with the Securities and Exchange Commission and also has requested a
private letter ruling from the Internal Revenue Services that the separation
will be tax free to Kroll-O'Gara and its shareholders. These filings are pending
before both agencies. Completion of the transaction, which is expected in the
first quarter of 2001, is subject to receipt of a favorable private letter
ruling, shareholder approval and separate company financing on a post split-up
basis. When the split-up is completed, Kroll-O'Gara shareholders, other than
members of management of the separated companies, will own shares in both
companies. Costs associated with this separation in the nine months ended
11
<PAGE> 14
September 30, 2000 were approximately $3.2 million ($0.15 per diluted share) and
consisted primarily of fees for attorneys, accountants, investment bankers and
other related charges. Kroll-O'Gara anticipates additional expenses will be
incurred in the fourth quarter of 2000 and first quarter of 2001.
(12) DISCONTINUED OPERATIONS SUBSEQUENTLY RETAINED
On April 28, 1999, the Board of Directors approved a formal plan to
discontinue operations of the Voice and Data Communications Group pursuant to
several outside expressions of interest to purchase this business. In May 2000,
Kroll-O'Gara terminated all then pending negotiations to sell this business due
to an inability to agree to terms of a sale with outside third parties.
Accordingly, the results of operations of the Voice and Data Communications
Group for all prior periods have been reclassified from discontinued operations
to continuing operations.
Kroll-O'Gara had not anticipated a loss on disposal of the Voice and Data
Communications Group and, accordingly, had not recorded any estimated loss on
disposal. Kroll-O'Gara continues to monitor the potential for impairment of the
net assets of this Group and will record impairment reserves as facts and
circumstances warrant. Based on its most recent analysis, Kroll-O'Gara believes
that no impairment existed at September 30, 2000.
(13) SETTLEMENT OF LITIGATION
During 1999, Kroll-O'Gara learned that an individual had filed a qui tam
suit, which was under seal, against Kroll-O'Gara under the Civil False Claims
Act, 31 U.S.C. ss. 3729 alleging that Kroll-O'Gara and three of its vendors
knowingly violated their contractual requirements with the Army. On January 18,
2000, an attorney for the U.S. Department of Justice stated that it was his
intention to recommend that the Government intervene and take over the suit and
estimated Kroll-O'Gara's liability to be as high as $16,000,000 stemming from
its vendors' alleged failure to have certified welders. On October 12, 2000,
Kroll-O'Gara settled this outstanding litigation with the Department of Justice
for $1.1 million. Kroll-O'Gara admits no wrongdoing as part of the settlement.
The terms of the settlement provide for a payment of $0.55 million on November
15, 2000 with the remainder due on December 30, 2001.
(14) SUBSEQUENT EVENTS
On October 17, 2000, Kroll-O'Gara's then wholly-owned subsidiary, Securify,
Inc., completed a private equity financing of approximately $34.0 million. Under
the terms of the stock purchase agreement, Securify issued approximately 49.2
million shares of Series A Convertible Preferred Stock. These preferred shares
are convertible into an equivalent number of shares of Securify's Common Stock.
As a result of the equity financing transaction, Kroll-O'Gara owns approximately
27% of Securify on an as-if converted basis. As part of the financing, Securify
agreed to repay Kroll-O'Gara $10.5 million, of which $5.0 million was paid at
closing with the remaining sum payable over a five-year period.
12
<PAGE> 15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of results of operations and financial condition
is based upon and should be read in conjunction with Kroll-O'Gara's Consolidated
Financial Statements and Notes. As a result of the acquisitions made by
Kroll-O'Gara in 1999, financial results from period-to-period may lack
comparability. In May 2000, Kroll-O'Gara reclassified the Voice and Data
Communications Group from discontinued to continuing operations. Historical
amounts have been reclassified to conform to the current categories.
RECENT DEVELOPMENTS
Failed Merger and Proposed Separation of Business
On November 15, 1999, Kroll-O'Gara announced that it had entered into a
definitive agreement with Blackstone Capital Partners III Merchant Banking Fund
L.P. (Blackstone) pursuant to which shares held by all Kroll-O'Gara
shareholders, other than certain members of management, would be acquired by
Blackstone for $18.00 per share in cash. On April 12, 2000, Kroll-O'Gara
announced that Blackstone had withdrawn its offer to acquire Kroll-O'Gara
shares.
On September 8, 2000, Kroll-O'Gara adopted a plan to separate its two
principal operating segments, the Security Products and Services Group and the
Investigations and Intelligence Group, into two independent public companies:
respectively, The O'Gara Company and Kroll Risk Consulting Services, Inc.
Kroll-O'Gara has made initial required filings relating to the proposed
separation with the Securities and Exchange Commission and also has requested a
private letter ruling from the Internal Revenue Services that the separation
will be tax free to Kroll-O'Gara and its shareholders. These filings are pending
before both agencies. Completion of the transaction, which is expected in the
first quarter of 2001, is subject to receipt of a favorable private letter
ruling, shareholder approval and separate company financing on a post split-up
basis. When the split-up is completed, Kroll-O'Gara shareholders, other than
members of management of the separated companies, will own shares in both
companies. Each of the separate companies will continue to hold an equity
interest in Securify, Inc., as discussed below. The Voice and Data
Communications Group will be part of Kroll Risk Consulting Services, Inc. Costs
associated with this separation in the nine months ended September 30, 2000 were
approximately $3.2 million ($0.15 per diluted share) and consisted primarily of
fees for attorneys, accountants, investment bankers and other related charges.
Kroll-O'Gara anticipates additional expenses will be incurred in the fourth
quarter of 2000 and first quarter of 2001. The possible effects of this
transaction on Kroll-O'Gara's future business, financial condition, results of
operations and cash flow currently are unknown.
Discontinued Operations Subsequently Retained
On April 28, 1999, the Board of Directors approved a formal plan to
discontinue operations of the Voice and Data Communications Group pursuant to
several outside expressions of interest to purchase this business. In May 2000,
Kroll-O'Gara terminated all then pending negotiations to sell this business to
outside third parties. Accordingly, the results of operations of the Voice and
Data Communications Group for all prior periods have been reclassified from
discontinued operations to continuing operations. See Note 12 to the Notes to
Consolidated Unaudited Financial Statements for more information.
Equity Financing of the Information Security Group
On October 17, 2000, Kroll-O'Gara's then wholly-owned subsidiary, Securify,
Inc., completed a private equity financing of approximately $34.0 million. Under
the terms of the stock purchase agreement, Securify issued approximately 49.2
million shares of Series A Convertible Preferred Stock. These preferred shares
are convertible into an equivalent number of shares of Securify's Common Stock.
As a result of the transaction, Kroll-O'Gara owns approximately 27% of Securify
on an as-if converted basis. As part of the financing, Securify agreed to repay
Kroll-O'Gara $10.5 million, of which $5.0 million was paid at closing with the
remaining sum payable over a five-year period.
13
<PAGE> 16
Reimplementation of Enterprise System
In August, 2000, due to continuing difficulties in utilizing all of the
functionality of the newly installed enterprise system in the Security Products
and Services Group's Cincinnati facility, Kroll-O'Gara engaged an outside
consulting group to assist with the reimplementation of the enterprise system.
The reimplementation involves building on what has been previously accomplished
and will not involve a writeoff of any previously capitalized amounts related to
the initial implementation. The reimplementation is being done primarily to
improve the facility's ability to utilize the full functionality of the existing
system.
GENERAL
Kroll-O'Gara is a leading global provider of a broad range of specialized
products and services that are designed to provide solutions to a variety of
security needs. Kroll-O'Gara reports its revenue through four groups. The
Security Products and Services Group markets ballistic and blast protected
vehicles and security services. The Investigations and Intelligence Group offers
business intelligence and investigation services. The Voice and Data
Communications Group offers secure satellite communication equipment and
satellite navigation systems. The Information Security Group offers information
and computer security services.
Acquisitions. Kroll-O'Gara completed several acquisitions in 1999 and 2000,
some of which were accounted for as pooling of interests and others of which
were accounted for as purchases.
On July 11, 2000, Kroll-O'Gara acquired all of the capital stock of
Decision Resources, Inc., a corporation doing business in Canada. The purchase
price of $0.7 million was satisfied with cash of $0.3 million and a note payable
of $0.4 million to the former owner. The acquisition has been accounted for as a
purchase and was effective on July 1, 2000. Goodwill related to this transaction
was approximately $0.7 million which is being amortized over 25 years. Decision
Resources specializes in market research and business intelligence services. Its
revenues are included in Kroll-O'Gara's Investigations and Intelligence Group.
On May 16, 2000, Kroll-O'Gara acquired substantially all of the assets and
assumed certain liabilities of The Search Is On, Inc., a corporation doing
business in Nashville, Tennessee. The purchase price of $0.6 million was
satisfied with cash of $0.4 million and a note payable of $0.2 million to the
former owner. The acquisition has been accounted for as a purchase and was
effective on May 16, 2000. Goodwill related to this transaction was
approximately $0.4 million which is being amortized over 25 years. The Search Is
On specializes in obtaining public records information for utilization in
providing background investigation to clients. Its revenues are included in
Kroll-O'Gara's Investigations and Intelligence Group.
On June 16, 1999, Kroll-O'Gara acquired all of the capital stock of
Background America, Inc. of Nashville, Tennessee, in exchange for 899,243 shares
of Kroll-O'Gara common stock. Background America provides background
investigation services to a variety of industries. The transaction was accounted
for as a pooling of interests. Background America's revenues are included in the
Investigations and Intelligence Group.
On June 3, 1999, Kroll-O'Gara acquired substantially all of the assets and
assumed certain liabilities of The Buchler Phillips Group, a partnership
headquartered in London, England. The
14
<PAGE> 17
purchase price of $20.0 million was satisfied with cash of $12.0 million and
366,469 shares of stock valued at $8.0 million, or $21.86 per share. The
acquisition has been accounted for as a purchase and was effective on April 1,
1999. Goodwill related to this transaction was approximately $20.8 million,
which will be amortized over 25 years. Buchler Phillips specializes in corporate
advisory practices which includes work related to corporate rescue, insolvency,
financial consulting and corporate finance. Buchler Phillips' revenues are
included in the Investigations and Intelligence Group.
On March 1, 1999, Kroll-O'Gara acquired all of the capital stock of
Financial Research, Inc. of Fort Washington, Pennsylvania, in exchange for
101,555 shares of Kroll-O'Gara common stock valued at approximately $3.3
million, or $32.49 per share. The acquisition has been accounted for as a
pooling of interests. Financial Research provides business valuation and
economic damage analysis services throughout the United States. Its revenues are
included in the Investigations and Intelligence Group.
Revenue recognition. Kroll-O'Gara recognizes net sales from military and
certain commercial armoring contracts using the percentage-of-completion method
calculated utilizing the cost-to-cost approach. Under this method, Kroll-O'Gara
recognizes estimated contract revenues based generally on the percentage that
costs to date bear to total estimated costs and recognizes estimated contract
losses in full when it becomes likely that a loss will occur. Accordingly,
Kroll-O'Gara periodically reviews and revises contract revenues and total cost
estimates as the work progresses and as change orders are approved. It reflects
adjustments in contract revenues, based upon the percentage of completion, in
the period when the estimates are revised. To the extent that these adjustments
result in an increase, a reduction or an elimination of previously reported
contract revenues, Kroll-O'Gara recognizes a credit or a charge against current
earnings, which could be material. Contract costs include all direct material
and labor costs, along with certain direct overhead costs related to contract
production. Kroll-O'Gara records provisions for any estimated total contract
losses on uncompleted contracts in the period in which it concludes that the
losses will occur. Changes in estimated total contract costs result in revisions
to contract revenue. The revisions are recognized when determined.
Kroll-O'Gara recognizes revenue from investigative and intelligence
services as the services are performed. It records either billed or unbilled
accounts receivable based on case-by-case invoicing determinations.
Kroll-O'Gara recognizes revenue from telecommunications equipment and
services 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.
Kroll-O'Gara recognizes information security service revenues, which
consist of consulting fees on information security projects, ratably over the
period of the agreement or according to the completed contract method of
accounting for contract revenues, depending on the nature of the agreement.
RESTRUCTURING OF OPERATIONS
Due to the large number of acquisitions Kroll-O'Gara completed in 1997 and
1998, integration of the operations of the acquired companies with existing
operations was a strategic initiative for Kroll-O'Gara's management in 1999. As
part of this initiative, management evaluated its business segments to ensure
that its core businesses within the segments were operating efficiently. In
1998, most of the businesses were acquired as part of the Investigations and
Intelligence Group. As a result of management's evaluation of this Group, the
decision was made to close several less profitable operating facilities so that
the Group could focus on integration of existing facilities with the newly
acquired businesses. In 1997, the Security Products and Services Group completed
several acquisitions as well. In evaluating the operations of this Group,
management concluded that a cost
15
<PAGE> 18
savings initiative was required and would be achieved largely through operating
process improvements and a corresponding decrease in personnel.
In the first quarter of 1999, Kroll-O'Gara began implementation of a plan
to reduce costs and improve operating efficiencies. In the second quarter of
1999, Kroll-O'Gara completed the restructuring plan with a total non-recurring
pre-tax restructuring charge of $4.4 million. The principal elements of the
restructuring plan were the closure of two Investigations and Intelligence Group
offices and the elimination of approximately 82 employees. The primary
components of the restructuring charge were severance costs and lease
termination costs.
In a continuing effort to control operating expenses and improve operating
efficiencies, Kroll-O'Gara's Security Products and Services Group implemented a
plan in the third quarter of 2000 for its Cincinnati, Ohio facility to reduce
costs. This Plan was completed in the third quarter of 2000 with a non-recurring
pre-tax restructuring charge of $0.7 million. The principal element of the
restructuring plan was the elimination of approximately 25 employees. The
primary component of the restructuring charge was severance related to the
termination of employees. See Note 2 to the Notes to Consolidated Unaudited
Financial Statements for more information.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- -------------------------
1999 2000 1999 2000
<S> <C> <C> <C> <C>
Security Products and Services
Military 11.4% 9.6% 11.6% 9.4%
Commercial 27.6% 22.6% 26.6% 23.6%
Investigations and Intelligence 52.6% 59.8% 54.6% 60.0%
Voice and Data Communications 7.5% 5.8% 5.9% 5.5%
Information Security 0.8% 2.2% 1.3% 1.5%
----- ---- ----- -----
Total net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 63.5 69.0 62.2 65.9
----- ---- ----- -----
Gross profit 36.5 31.0 37.8 34.1
Operating expenses:
Selling and marketing 4.8 9.2 7.3 9.0
General and administrative 22.9 22.7 20.7 25.1
Separation expenses -- 2.9 -- 1.3
Failed merger expenses -- 0.6 -- 1.0
Merger expenses 0.5 -- 1.5 0.2
Restructuring charge -- 0.8 1.8 0.3
----- ---- ----- -----
Operating income (loss) 8.4 (5.2) 6.5 (2.0)
Other income (expense):
Interest expense (1.4) (2.0) (1.3) (1.8)
Litigation settlement -- (1.3) -- (0.4)
Other, net (0.1) (0.2) -- (0.1)
----- ---- ----- -----
Income (loss) before provision (benefit)
for income taxes and cumulative
effect of accounting change 6.8 (8.6) 5.1 (4.3)
Provision (benefit) for income taxes 2.7 (0.5) 2.1 0.4
----- ---- ----- -----
Income (loss) before cumulative effect of
accounting change 4.2 (8.1) 3.0 (4.7)
----- -----
Cumulative effect of accounting change,
net of tax benefit -- -- (0.3) --
----- ---- ----- -----
</TABLE>
16
<PAGE> 19
<TABLE>
<S> <C> <C> <C> <C>
Net income (loss) 4.2% (8.1)% 2.7% (4.7)%
===== ==== ===== =====
</TABLE>
Three Months Ended September 30, 2000 Compared to Three Months Ended
September 30, 1999
NET SALES. Net sales for the three months ended September 30, 2000
increased $0.9 million, or 1%, from $87.5 million in 1999 to $88.4 million in
2000.
Security Products and Services Group. Net sales for the Security Products
and Services Group for the three months ended September 30, 2000 decreased $5.7
million, or 17%, from $34.2 million in 1999 to $28.5 million in 2000. The
decrease primarily results from a decrease in net sales of commercial products
and services of $4.2 million, or 17%, from $24.2 million in 1999 to $20.0
million in 2000. In the third quarter of 2000, production and net sales for
commercial armoring was at decreased levels as compared to 1999 as a result of
beginning production on a new contract for the U.S. government during the 2000
third quarter. Since production began in the third quarter of 2000 and few
vehicles were completed by the end of the quarter, there was a significant
decrease in the amount of revenue which was recognized between the third quarter
of 1999 and the third quarter of 2000. In 1999, commercial net sales were driven
by a large contract received at the end of the first quarter of 1999 from the
U.S. government to produce over 300 armored vehicles. In 1999, the Security
Products and Services Group was well into production on the 300 vehicle order
and net sales were recognized on vehicles completed.
Also included in net sales for the Security Products and Services Group are
sales of military products and services, which decreased $1.5 million, or 15%,
from $10.0 million in 1999 to $8.5 million in 2000. The decrease in net sales of
military products and services was a result of the completion in the fourth
quarter of 1999 of a contract with the U.S. Military to supply 738 armored High
Mobility Multi-Purpose Wheeled Vehicles ("HMMWVs") to the U.S. Army and the U.S.
Air Force (the "738 Contract"). The 738 Contract which began in 1998 resulted in
higher levels of production and net sales as a result of an aggressive delivery
schedule required by the U.S. Air Force. In 2000, Kroll-O'Gara's military
product sales were based solely on a newer contract for 245 Up-Armored HMMWVs,
which does not provide for an aggressive delivery schedule.
Investigations and Intelligence Group. Net sales for the Investigations and
Intelligence Group increased $6.8 million, or 15%, from $46.1 million in the
third quarter of 1999 to $52.9 million in 2000. Acquisitions completed in 2000
by the Group contributed $0.7 million to the increase in net sales. The
remaining increase primarily stems from internal growth in the Group's Business
Investigations and Intelligence and Corporate Services practices.
Voice and Data Communications Group. Net sales for the Voice and Data
Communications Group decreased approximately $1.4 million, or 22% from $6.6
million in the third quarter of 1999 to $5.1 million in the third quarter of
2000. In the third quarter of 1999, the Group completed the sale of
approximately $3.0 million of satellite communications equipment. The Group did
not receive any contracts of this magnitude in the third quarter of 2000.
Information Security Group. Net sales for the Information Security Group
increased $1.2 million, or 160%, from $0.7 million in 1999 to $1.9 million in
2000. Net sales increased due to work beginning on several large contracts
received at the end of the second quarter of 2000. In 1999, net sales were based
on a limited number of smaller contracts.
COST OF SALES. Cost of sales for the three months ended September 30, 2000
increased $5.5 million, or 10%, from $55.6 million in 1999 to $61.1 million in
2000.
17
<PAGE> 20
Gross margin was 31%, as compared with 36.5% for the same period in 1999.
Gross margin for the Security Products and Services Group decreased
approximately 13.9 percentage points from 30.6% in 1999 to 16.7% in 2000. In the
third quarter of 2000, the Security Products and Services Group elected to take
a physical inventory at the end of the period in anticipation of the separation
of The Kroll-O'Gara Company and also took steps to ensure the integrity of data
for the reimplementation of its enterprise system. These efforts, as well as the
recognition of higher overhead costs due to lower production in the quarter,
resulted in total additional costs of approximately $2.6 million. These costs
negatively affected cost of goods sold and consequently the gross profit margin.
The decrease in production was primarily due to a lag between completing one
U.S. government contract at the end of the first quarter of 2000 and beginning a
new contract during the third quarter of 2000.
Gross margin decreased approximately 3.3 percentage points from 44.9% in
1999 to 41.6% in 2000 for the Investigations and Intelligence Group. The
decrease in gross margin was due to increased fixed costs associated with
increased employee compensation and benefits as well as increased subcontractor
fees associated with generating professional fee revenue.
Gross margin for the Voice and Data Communications Group increased 4.6
percentage points from 8.1% in 1999 to 12.7% in 2000. This increase relates to a
change in sales mix from 1999 to 2000. In 1999, sales were based primarily on
sales of the Group's navigation and satellite communication products. In 2000,
the Group continued work on a large foreign satellite communications integration
contract received in the fourth quarter of 1999. Gross margin based on
integration work is higher than gross margin based on product sales alone.
Gross margin for the Information Security Group decreased from 42% in 1999
to a negative 3% in 2000. Gross margin was negatively impacted in 2000 by a
continuing focus on development of this Group's service capabilities and an
increase in professional personnel to support the establishment of a firm
customer base as development of business lines continues.
OPERATING EXPENSES. Operating expenses for the three months ended September
30, 2000 increased $7.3 million, or 30%, from $24.7 million in 1999 to $32.0
million in 2000. The increase is partially due to an increase in non-recurring
expenses of $3.4 million, from $0.4 million in 1999 to $3.8 million in 2000.
Non-recurring charges in 2000 consist of approximately $0.5 million of costs
associated with the failed recapitalization merger with Blackstone as well as
$2.6 million of costs associated with the separation of Kroll-O'Gara's Security
Products and Services Group and Investigations and Intelligence Group. In
addition, $0.7 million of costs relate to a restructuring charge incurred by the
Security Products and Services Group in order to reduce costs in future periods.
In 1999, non-recurring expenses included $0.4 million of merger-related expenses
primarily for the Background America merger.
Excluding non-recurring expenses, operating expenses increased $4.0
million. Included in this increase was $1.9 million for bad debt expense. In the
third quarter of 1999, the Investigations and Intelligence Group recovered
approximately $1.6 million of a previously written off bad debt which offset all
bad debt expense in the third quarter of 1999. In addition, operating expenses
in the Information Security Group increased $2.8 million as a result of the
continuing focus on development of this Group's software products capabilities
including an increase in professional support personnel to support the increased
development.
As a percent of net sales, operating expenses, before non-recurring
charges, increased from 27.7% in 1999 to 31.9% in 2000. As mentioned previously,
the increase in operating expenses as a
18
<PAGE> 21
percentage of net sales is primarily a result of increased fixed costs to
develop the Information Security Group's software products capabilities and
increased bad debt expense.
INTEREST EXPENSE. Interest expense for the three months ended September 30,
2000 increased $0.5 million, or 42%, from $1.2 million in 1999 to $1.7 million
in 2000. This increase was the result of increased borrowings on Kroll-O'Gara's
revolving credit facility primarily related to the continuing funding of the
working capital needs of the Information Security Group.
OTHER EXPENSE. In October 2000, Kroll-O'Gara settled litigation related to
a suit filed against Kroll-O'Gara's subsidiary, O'Gara-Hess & Eisenhardt, under
the Federal Civil False Claims Act stemming from three of its vendors' alleged
failure to use certified welders. Kroll-O'Gara recorded a $1.1 million charge
which is included in other expense in the third quarter of 2000. For more
information see Note 13 to the Notes to Consolidated Unaudited Financial
Statements.
PROVISION FOR INCOME TAXES. The provision for income taxes for the three
months ended September 30, 1999 was $2.3 million. In the third quarter of 2000,
Kroll-O'Gara recorded a benefit for income taxes of $0.4 million in order to
reflect the appropriate year to date provision for income taxes for certain
foreign subsidiaries which generated income during the year. In addition,
certain domestic and foreign jurisdictions realized losses in the third quarter
of 2000 from which Kroll-O'Gara was not able to benefit for tax purposes due to
the uncertainty relating to the future realizability of the net operating loss
carryforward.
Nine Months Ended September 30, 2000 Compared to Nine Months Ended September 30,
1999
NET SALES. Net sales for the nine months ended September 30, 2000 increased
$11.9 million, or 5%, from $239.6 million in 1999 to $251.5 million in 2000.
Security Products and Services Group. Net sales for the Security Products
and Services Group for the nine months ended September 30, 2000 decreased $8.5
million, or 9%, from $91.6 million in 1999 to $83.1 million in 2000. The
decrease results from a decrease in net sales of military products and services
of $4.1 million, or 15%, from $27.9 million in 1999 to $23.8 million in 2000.
The decrease in net sales of military products and services was a result of the
completion in the fourth quarter of 1999 of the 738 Contract. The 738 Contract
which began in 1998 resulted in higher levels of production and net sales as a
result of an aggressive delivery schedule required by the U.S. Air Force. In
2000, Kroll-O'Gara's military product sales were based solely on a newer
contract for 245 Up-Armored HMMWVs, which does not provide for an aggressive
delivery schedule.
Also included in net sales for the Security Products and Services Group are
sales of commercial armoring products and services, which decreased $4.4
million, or 7%, from $63.8 million in 1999 to $59.4 million in 2000. In the
third quarter of 2000, production and net sales for commercial armoring was at
decreased levels as compared to 1999 as a result of beginning production on a
new contract for the U.S. government during the 2000 third quarter. Since
production began in the third quarter of 2000 and few vehicles were completed by
the end of the quarter, there was a significant decrease in the amount of
revenue which was recognized between the third quarter of 1999 and the third
quarter of 2000. In 1999, commercial net sales were driven by a large contract
received at the end of the first quarter of 1999 from the U.S. government to
produce over 300 armored vehicles. In 1999, the Security Products and Services
Group was well into production on the 300 vehicle order and net sales were
recognized on vehicles completed.
Investigations and Intelligence Group. Net sales for the Investigations and
Intelligence Group increased $20.2 million, or 15%, from $130.7 million in 1999
to $150.9 million in 2000. A portion of this increase is a result of the Buchler
Phillips acquisition completed for the Group in the second quarter of 1999.
Excluding purchase acquisitions, sales increased $15.2 million. This increase
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primarily stems from internal growth in the Group's Business Investigations and
Intelligence and Corporate Services practices.
Voice and Data Communications Group. Net sales for the Voice and Data
Communications Group decreased $0.3 million, or 2%, from $14.0 million in 1999
to $13.7 million in 2000.
Information Security Group. Net sales for the Information Security Group
increased $0.5 million, or 16%, from $3.2 million in 1999 to $3.7 million in
2000. Net sales increased due to work beginning on several large contracts
received at the end of the second quarter of 2000. In 1999, net sales were based
on a limited number of smaller contracts.
COST OF SALES. Cost of sales for the nine months ended September 30, 2000
increased $16.7 million, or 11%, from $149.1 million in 1999 to $165.8 million
in 2000. The increase in cost of sales was partially due to the Buchler Phillips
acquisition completed in the second quarter of 1999. Excluding this acquisition,
cost of sales increased $13.8 million. Gross margin for the nine months ended
September 30, 2000 was 34.1%, as compared with 37.8% for the same period in
1999.
Gross margin for the Security Products and Services Group decreased
approximately 8.9 percentage points from 31.7% in 1999 to 22.8% in 2000. In the
second quarter of 2000, new vehicle models caused additional costs as prototypes
for the new models had to be completed before full production could begin. All
prototype costs were expensed as incurred. In 1999, there were minimal prototype
expenses. In addition, in the third quarter of 2000, the Security Products and
Services Group elected to take a physical inventory at the end of the period in
anticipation of the separation of the Kroll-O'Gara Company and also took steps
to ensure the integrity of data for the reimplementation of its enterprise
system. These efforts, as well as the recognition of higher overhead costs due
to lower production in the period, resulted in total additional costs of
approximately $2.6 million. These costs negatively affected cost of goods sold
and consequently the gross profit margin. The decrease in production was
primarily due to a lag between completing one U.S. government contract at the
end of the first quarter of 2000 and beginning a new contract during the third
quarter of 2000.
Gross margin decreased approximately 1.7 percentage points from 44.8% in
1999 to 43.1% in 2000 for the Investigations and Intelligence Group. The
decrease in gross margin was due to increased fixed costs associated with
increased employee compensation and benefits as well as increased subcontractor
fees associated with generating professional fee revenue.
Gross margin for the Voice and Data Communications Group increased 5.1
percentage points from 9.7% in 1999 to 14.8% in 2000. This increase relates to a
change in sales mix from 1999 to 2000. In 1999, sales were based exclusively on
sales of the Group's navigation and satellite communication products. Due to
softness in the market at the time, these sales were at much lower margins than
had previously been achieved. In 2000, the Group continued work on a large
foreign satellite communications integration contract received in the fourth
quarter of 1999. Because the contract involved integration services, gross
margin in 2000 was higher than in 1999.
Gross margin for the Information Security Group decreased from 42% in 1999
to a negative 8% in 2000. Gross margin was negatively impacted in 2000 by a
continuing focus on development of this Group's service capabilities and an
increase in professional personnel to support the establishment of a firm
customer base as development of business lines continues.
OPERATING EXPENSES. Operating expenses for the nine months ended September
30, 2000 increased $15.6 million, or 21%, from $75.0 million in 1999 to $90.6
million in 2000. This increase is despite a decrease in non-recurring expenses
of $1.0 million, from $7.9 million in 1999 to $6.9 million in 2000.
Non-recurring charges in 2000 consist of approximately $2.5 million of costs
associated with
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the failed recapitalization merger with Blackstone as well as $3.2 million of
costs associated with the separation of Kroll-O'Gara's Security Products and
Services Group and Investigations and Intelligence Group. In addition, $0.5
million of costs relate to additional merger integration costs associated with
the acquisitions completed in 1999 and $0.7 million of costs relate to a
restructuring charge incurred by the Security Products and Services Group in
order to reduce costs in future periods. In 1999, non-recurring expenses
included $3.5 million of merger-related expenses primarily for the Background
America merger as well as a restructuring charge of $4.4 million.
Excluding non-recurring expenses, operating expenses increased $16.6
million. Approximately $1.6 million of this increase is due to operating
expenses incurred by Buchler Phillips in the first quarter of 2000. The Buchler
Phillips acquisition was not completed until the second quarter of 1999 and its
operating expenses are not included in Kroll-O'Gara's historical financial
information until the effective date of the acquisition, April 1, 1999. Also
included in the operating expense increase were $1.4 million for depreciation
and amortization of fixed and intangible assets, including goodwill, and $3.3
million for bad debt expense. In the third quarter of 1999, the Investigations
and Intelligence Group recovered approximately $1.6 million of a previously
written off bad debt which offset all bad debt expense for the first nine months
of 1999. In the first nine months of 2000, slow customer payments prompted
Kroll-O'Gara's Investigations and Intelligence Group to increase its reserve for
uncollectible accounts receivable. In addition, operating expenses in the
Information Security Group increased $6.1 million as a result of the continuing
focus on development of this Group's software products capabilities, including
an increase in professional and support personnel to support the increased
development. The remaining increase relates to an increase in expenses related
to the additional legal, accounting, insurance and information system costs
required to administer the growth experienced by Kroll-O'Gara due to the
acquisitions completed in December 1998 and throughout 1999.
As a percent of net sales, operating expenses, before non-recurring
charges, increased from 28.0% in 1999 to 33.3% in 2000. As mentioned previously,
the increase in operating expenses as a percentage of net sales is primarily a
result of increased fixed costs to develop the Information Security Group's
software products capabilities and to administer the growth experienced by
Kroll-O'Gara due to the acquisitions completed in December 1998 and throughout
1999.
INTEREST EXPENSE. Interest expense for the nine months ended September 30,
2000 increased $1.5 million, or 49%, from $3.1 million in 1999 to $4.6 million
in 2000. This increase was the result of increased borrowings on Kroll-O'Gara's
revolving credit facility. For most of the first six months of 1999,
Kroll-O'Gara had excess funds as a result of a public offering of stock
completed in May 1998 and no borrowings were required on the revolving credit
facility until the purchase of Buchler Phillips on June 3, 1999. In 2000,
increased borrowings on Kroll-O'Gara's revolving credit facility have primarily
related to the continuing funding of the working capital needs of the
Information Security Group.
OTHER EXPENSE. In October 2000, Kroll-O'Gara settled litigation related to
a suit filed against Kroll-O'Gara's subsidiary, O'Gara-Hess & Eisenhardt, under
the Federal Civil False Claims Act stemming from three of its vendors' alleged
failure to use certified welders. Kroll-O'Gara recorded a $1.1 million charge
which is included in other expense in the third quarter of 2000. For more
information see Note 13 to the Notes to Consolidated Unaudited Financial
Statements.
PROVISION FOR INCOME TAXES. The provision for income taxes for the nine
months ended September 30, 2000 was $1.0 million compared to $5.1 million in
1999. Despite a pre-tax loss in the first nine months of 2000, Kroll-O'Gara
recorded a provision for income taxes for certain foreign subsidiaries which
generated income in the period. In addition, certain domestic and foreign
jurisdictions realized losses during the first nine months of 2000 from which
Kroll-O'Gara was not
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able to benefit for tax purposes due to the uncertainty relating to the future
realizability of the net operating loss carryforward.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Kroll-O'Gara had
previously capitalized costs associated with the start-up of activities,
including pre-operating costs, organization costs and other start-up costs.
These capitalized costs were amortized over periods ranging from one to five
years. The capitalized amount, $1.2 million before tax, was expensed in 1999 in
accordance with the American Institute of Certified Public Accountants Statement
of Position 98-5, "Reporting on the Cost of Start-Up Activities." The amount
expensed is shown net of applicable tax benefit of $0.4 million.
LIQUIDITY AND CAPITAL RESOURCES
General. Kroll-O'Gara historically has met its operating cash needs by
utilizing borrowings under its credit arrangements to supplement cash provided
by operations and other financing activities, excluding non-cash charges such as
depreciation and amortization.
Credit Facility. On September 14, 2000, Kroll-O'Gara amended its credit
agreement to continue to provide for a temporary increase in its revolving line
of credit from $25.0 million to $40.0 million. Pursuant to the amended credit
agreement, the increase in the revolving line of credit is effective until
January 1, 2001, at which time all borrowings in excess of $25.0 million must be
repaid. The credit facility continues to provide for a letter of credit facility
of approximately $7.6 million. Both the letter of credit facility and the line
of credit mature on May 31, 2001. Advances under the revolving line of credit
during the period of the temporary increase bear interest at prime to prime plus
0.75%, or, at Kroll-O'Gara's option, LIBOR plus 1.5% to LIBOR plus 2.5%,
dependent upon a defined financial ratio. On January 1, 2001, advances under the
revolving line of credit will bear interest at rates ranging from prime less
1.75% to prime, or, at Kroll-O'Gara's option, LIBOR plus 0.75% to LIBOR plus
1.75%, dependent upon a defined financial ratio. Borrowings under this line of
credit were approximately $22.8 million and $31.5 million at December 31, 1999
and September 30, 2000, respectively.
This credit agreement includes financial covenants which, among other
restrictions, require the maintenance of certain financial ratios and other
financial requirements, including an interest coverage ratio and net worth
minimum, and impose limitations on foreign investment, goodwill, additional
indebtedness and capital expenditures. Pursuant to the amended credit agreement,
certain of these financial ratios were revised. Kroll-O'Gara was not in
compliance with one of these covenants at September 30, 2000. The lender
subsequently waived this event of non-compliance.
Effective June 3, 1999, with the acquisition of Buchler Phillips,
Kroll-O'Gara acquired a demand note with maximum borrowings of (pound)2.5
million. The demand note bears interest at the Bank of England's base rate plus
1.5%. Maximum borrowings permitted pursuant to this demand note are
approximately $4.0 million. Borrowings outstanding pursuant to this demand note
were $3.4 million and $2.5 million, respectively, as translated at December 31,
1999 and September 30, 2000.
Kroll-O'Gara's $35.0 million of senior unsecured notes also contain
financial covenants, which among other restrictions, require the maintenance of
a minimum level of net worth and a fixed charge coverage ratio. Kroll-O'Gara was
in compliance with these financial covenants at September 30, 2000.
As described above, Kroll-O'Gara intends to separate its two principal
business groups into two independent public companies. Without giving effect to
any such transaction, additional sources of capital
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will be required to supplement operating cash flow for the next twelve months
through amending and increasing Kroll-O'Gara's credit facilities. Kroll-O'Gara
is in discussions with various lenders concerning financing, assuming either
that the split-up is completed or not, and, while there are no assurances,
Kroll-O'Gara is optimistic that financing will be obtained. Failure to obtain
needed financing, particularly in view of the January 1, 2001 maturity date of
the temporary increase in Kroll-O'Gara's revolving line of credit, would
materially adversely affect Kroll-O'Gara. In particular, Kroll-O'Gara has been
informed by its independent public accountants that, in the absence of needed
financing, the audit report for the current fiscal year will likely include an
explanatory fourth paragraph regarding Kroll-O'Gara's ability to continue as a
going concern.
Cash flows from operating activities. In the nine months ended September
30, 2000 cash provided by operating activities was $3.0 million. In the nine
months ended September 30, 1999 cash used in operating activities was $5.3
million. In 1999, cash was used primarily to fund working capital investments
offset by net income. In 2000, cash was provided primarily by reductions in
working capital investments.
Cash flows from investing activities. In the nine months ended September
30, 2000, Kroll-O'Gara incurred $8.3 million of capital expenditures primarily
for upgrades of general information systems as well as additional leasehold
improvements and office furniture and fixtures related to new office space in
the Investigations and Intelligence Group. In the nine months ended September
30, 1999, Kroll-O'Gara incurred capital expenditures of $14.0 million primarily
related to the acquisition and implementation of two new enterprise systems, one
at its Security Products and Services Group and one at its Investigations and
Intelligence Group. In 1999, Kroll-O'Gara sold $12.8 million of its marketable
securities in order to fund its increased capital expenditure requirements.
Additions to databases totaled $3.1 million and $3.6 million for the nine months
ended September 30, 1999 and 2000, respectively.
Cash flows from financing activities. Cash provided by financing activities
for the first nine months of 1999 was $19.4 million. In 2000, cash provided by
financing activities was $4.5 million. In both periods, cash was provided by
borrowings under bank lines of credit, net of repayments of long term debt.
Foreign operations. Kroll-O'Gara attempts to mitigate the risks of doing
business in foreign countries by separately incorporating its operations in
those countries; maintaining reserves for credit losses; maintaining insurance
on equipment to protect against losses related to political risks and terrorism,
and using financial instruments to hedge Kroll-O'Gara's risk from translation
gains and losses.
Kroll-O'Gara utilizes derivative financial instruments, in the form of
forward contracts, to hedge some of its exposure to foreign currency rate
fluctuations. At September 30, 2000, nine such contracts, maturing between
December 2000 and July 2002, were outstanding in connection with intercompany
demand notes with certain subsidiaries. These contracts are intended to hedge
Kroll-O'Gara's exposure to deterioration in the amount outstanding due to
changes in currency translation rates. The notional amount, together with
amortized premium, and the fair market value associated with these forward
contracts was $17.4 and $2.7 million, respectively. 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.
New Pronouncements. See Note 6 to the Notes to Consolidated Unaudited
Financial Statements for more information.
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
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obtaining many new projects each year, most of which are of a relatively short
duration. Period-to-period comparisons within a given year or between years may
not be meaningful or indicative of operating results over a full fiscal year.
Forward-Looking Statements. This quarterly report contains statements which
Kroll-O'Gara believes are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements are made
particularly in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, but also appear elsewhere in this document.
Forward-looking statements can be identified by the use of language such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. Such statements are based upon management's estimates, assumptions and
projections and are subject to substantial risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements. Factors that could cause actual results to differ
materially from those in the forward-looking statements include, among other
things: contract delays, reductions or cancellations; cost overruns with regard
to fixed price contracts; problems and costs associated with integrating past
and future business combinations; various political and economic risks of
conducting business outside the United States, including foreign economic
conditions and currency rate fluctuations; changes in laws and regulations;
adjustments associated with percentage-of-completion accounting; inability of
subcontractors to perform on schedule and meet demand; unexpected competitive
pressures resulting in lower margins and volumes; uncertainties in connection
with start-up operations and opening new offices; higher-than-anticipated costs
of financing the business; loss of senior personnel; and changes in the general
level of business activity.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Kroll-O'Gara has been named as a defendant in eight lawsuits alleging that
its officers and directors breached their fiduciary duties in connection with
the now terminated proposed acquisition of a majority of Kroll-O'Gara's shares
by a company formed by Blackstone Capital Partners III Merchant Banking Fund
L.P. Five of the lawsuits were filed in the Court of Common Pleas, Butler
County, Ohio, and were consolidated on November 29, 1999. The remaining three
lawsuits were filed in the United States District Court for the Southern
District of New York and were consolidated on November 30, 1999. In amended
complaints, the plaintiffs allege that Kroll-O'Gara's officers and directors
breached their fiduciary duties by deferring acquisitions, by negotiating an
inadequate acquisition price, by failing to engage in arms-length negotiations
and by failing to seek redress from Blackstone after Blackstone terminated the
proposed transaction. The plaintiffs also allege that Blackstone Capital
Partners III and AIG aided and abetted the directors' and officers' alleged
breaches of fiduciary duties. The plaintiffs seek to bring their claims
derivatively on behalf of the Company and also seek class certification. On
behalf of Kroll-O'Gara and the putative plaintiff classes of shareholders, they
seek a declaration that the individual defendants breached their fiduciary duty
and damages and attorneys' fees in an unspecified amount. The defendants believe
that the allegations in the complaints are wholly meritless and will defend the
suits vigorously.
During 1999, Kroll-O'Gara learned that an individual had filed a qui tam
suit, which was under seal, against Kroll-O'Gara under the Civil False Claims
Act, 31 U.S.C. ss. 3729 alleging that Kroll-O'Gara and three of its vendors
knowingly violated their contractual requirements with the Army. On January 18,
2000, an attorney for the U.S. Department of Justice stated that it was his
intention to recommend that the Government intervene and take over the suit and
estimated Kroll-O'Gara's liability to be as high as $16,000,000 stemming from
its vendors' alleged failure to have certified welders. On October 12, 2000,
Kroll-O'Gara settled this outstanding litigation with the Department of Justice
for $1.1 million. Kroll-O'Gara admits no wrongdoing as part of the settlement.
The terms of the settlement provide for a payment of $0.55 million on November
15, 2000 with the remainder due on December 30, 2001.
In addition to the matters discussed above, 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 such additional currently
pending litigation, individually or in the aggregate, that is likely to have a
material adverse effect on its business, financial condition, results of
operations or cash flows.
ITEM 6. EXHIBITS
(a) Exhibits
27 Financial Data Schedule
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized as of the 17th day of November, 2000.
THE KROLL-O'GARA COMPANY
By /s/ Nicholas P. Carpinello
Nicholas P. Carpinello
Controller and Treasurer
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