<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 21, 2000
REGISTRATION NO. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
KROLL RISK CONSULTING SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 8748 13-4131019
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer
incorporation or organization Classification Code Number) Identification Number)
</TABLE>
900 Third Avenue
New York, New York 10022
(212) 593-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Jules B. Kroll
Chairman of the Board
Kroll Risk Consulting Services, Inc.
900 Third Avenue
New York, New York 10022
(212) 593-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------
Copies to:
SABRINA H. PEREL, ESQ.
Vice President and General Counsel
Kroll Risk Consulting Services, Inc.
900 Third Avenue
New York, New York 10022
(212) 593-1000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) FEE
<S> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------------
Common Stock, $0.01 par value per
share................................. 8,500,000 shares $11.91 $101,232,000 $26,725.25
---------------------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(2) based on the book value per share of the
registrant's common stock as of June 30, 2000.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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--------------------------------------------------------------------------------
<PAGE> 2
SUBJECT TO COMPLETION OR AMENDMENT, DATED SEPTEMBER 21, 2000
8,500,000 SHARES
[LOGO]
KROLL RISK CONSULTING SERVICES, INC.
COMMON STOCK
------------------------
This prospectus covers shares of the common stock of Kroll Risk Consulting
Services, Inc. ("KRCS") that will be issued in a reorganization and split-up of
The Kroll-O'Gara Company. KRCS currently is a wholly-owned subsidiary of
Kroll-O'Gara. After the split-up, KRCS will be an independent company that
continues Kroll-O'Gara's investigations and intelligence services business.
As part of the split-up, unless you dissent to the reorganization and the
split-up, you will receive a distribution of 0.38 shares of KRCS common stock
for each share of Kroll-O'Gara common stock owned by you on the record date of
the distribution. You will receive only whole shares of KRCS common stock and
cash in payment for any fractional share. In the split-up, you will also receive
shares of common stock of The O'Gara Company, which is covered by The O'Gara
Company's separate prospectus that has been delivered to you with this
prospectus. In addition, a proxy statement of Kroll-O'Gara that describes the
reorganization and split-up has also been provided to you.
There is currently no public market for our common stock, but we have
applied for our common stock to be listed on the Nasdaq National Market under
the symbol "KRCS." We cannot assure you that our stock will be listed on the
Nasdaq National Market.
OWNERSHIP OF OUR COMMON STOCK INVOLVES SOME RISK. SEE "RISK FACTORS"
BEGINNING ON PAGE 9 FOR A DISCUSSION OF FACTORS THAT YOU SHOULD CONSIDER.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this prospectus is , 2000.
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT DISTRIBUTE THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO DISTRIBUTE THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO RECEIVE THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR DISTRIBUTION IS NOT PERMITTED.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 9
Forward-Looking Statements.......... 14
Dividend Policy..................... 15
Use of Proceeds..................... 15
The Split-Up........................ 16
Pro Forma Capitalization............ 18
Selected Financial and Operating
Data.............................. 19
Unaudited Pro Forma Combining
Condensed Financial Statements.... 22
Management's Discussion and Analysis
of Pro Forma Financial Condition
and Pro Forma Results of
Operations........................ 33
Business............................ 46
Management.......................... 56
Executive Compensation and Benefit
Plans............................. 60
Relationship with The O'Gara
Company........................... 65
Principal Stockholders and Stock
Holdings of Management............ 67
Certain Relationships and Related
Party Transactions................ 68
Description of Capital Stock........ 70
Legal Matters....................... 72
Independent Public Accountants...... 72
Independent Auditors................ 72
Where You Can Find More
Information....................... 72
Financial Statements of The
Kroll-O'Gara Company.............. F-1
</TABLE>
2
<PAGE> 4
PROSPECTUS SUMMARY
As used in this prospectus, unless the context otherwise requires, "we",
"us", "our" and "KRCS" refer to Kroll Risk Consulting Services, Inc. and its
subsidiaries. This summary highlights information relating to our company and
our common stock being distributed in the split-up of The Kroll-O'Gara Company.
It may not contain all the information that is important to you. See "Where You
Can Find More Information". You should read the entire prospectus carefully,
including the risk factors and the historical and pro forma consolidated
financial statements and the notes to those statements appearing elsewhere in
this prospectus.
THE COMPANY
Governments, businesses and individuals worldwide are increasingly
recognizing the need for services that mitigate the growing risks associated
with uninformed decisions based upon incomplete or inaccurate information, as
well as services designed to reduce risks associated with white-collar crime,
fraud and physical threats. Through our network of 53 offices in 18 countries,
we help our customers solve their risk problems and take advantage of
opportunities through information, analysis, planning and support.
KRCS has its origins in Kroll Associates, Inc., which was founded in 1972
by Jules B. Kroll to provide internal fraud investigative services. During the
late 1970s, Kroll Associates expanded the scope of its operations to include
other services such as business intelligence, due diligence for financial
transactions and intelligence gathering in connection with hostile takeovers and
crisis management. We have continued to expand our service offering to include
the following:
- business investigations and intelligence services, including nonfinancial
due diligence, litigation support, fraud investigations, monitoring
services and special inquiries and intellectual property infringement
investigations;
- corporate services, including pre-employment background checking, drug
testing, surveillance and vendor integrity programs;
- financial services, including forensic accounting, recovery and
restructuring, asset tracing and analysis services and pre-acquisition
financial due diligence;
- security services, including risk and crisis management, security
architecture and design, corporate security planning and executive
protection, and electronic countermeasures; and
- technology services, including computer forensics, data recovery and
litigation and systems support services.
This array of complementary services allows us to provide solutions for a
wide range of issues. In the past five years, we have handled a variety of
matters worldwide for our clients, including more than:
- 11,000 investigative matters;
- 4 million drug tests;
- 740,000 background checks; and
- 2,000 forensic accounting engagements.
We consistently handle high profile cases such as monitoring of the
International Brotherhood of Teamsters' elections at the request of the U.S.
Department of Justice; security consulting for the Port Authority of New York
following the World Trade Center bombing regarding future risk mitigation and
prevention; and searching for Saddam Hussein's assets on behalf of the Kingdom
of Kuwait. For the twelve months ended December 31, 1999, we had pro forma net
sales of $203.4 million; for the six months ended June 30, 2000, we achieved pro
forma net sales of $109.7 million.
3
<PAGE> 5
In late 1997, a subsidiary of The O'Gara Company merged into Kroll
Holdings, Inc., the parent of Kroll Associates, Inc., and The O'Gara Company
changed its name to The Kroll-O'Gara Company. In April 2000, Kroll-O'Gara's
board of directors decided to reorganize the company in order to resolve
internal management conflicts by splitting it into two new public companies
which will continue the principal historical Kroll and O'Gara businesses. KRCS
is the new corporation organized to become the public holding company for, and
to continue to operate and manage, Kroll-O'Gara's investigations and
intelligence services business.
COMPETITIVE STRENGTHS
Global Brand Name. We are one of the leading global providers of
investigations, intelligence and risk mitigation consulting services. The Kroll
brand name has been associated with high quality, performance and reliability
since the 1970's. We believe that the strength of this brand name recognition
enables us to obtain many investigative engagements around the world.
Strong Global Platform. With 53 offices and more than 2,000 employees in 18
countries, we are able to provide risk mitigation consulting services to
governments and multinational corporations. Our global platform allows us to
address those issues with skilled investigators and consultants who have first
hand knowledge of local customs, business practices and information. This
competitive advantage has allowed us to develop our global client base, build
stronger relationships with existing multinational clients for future business
and market our services all over the world. For the six months ended June 30,
2000, approximately 39% of our revenues were derived from services provided
outside the U.S.
Broad Service Offering. We believe that our broad service offering and our
strong global platform have positioned us as one of the leading worldwide
providers of risk mitigation consulting services. We have a wide range of skills
and experience which enables us to provide many different risk mitigation
solutions ranging from preventive measures through responsive actions intended
to minimize damage. As multinational corporations continue to expand into new
locations, we believe that our broad service offering and global platform
position us strongly for the future.
Experienced Management Team. We are led by a strong group of senior
executives experienced in the security and crime enforcement industry. Our
Chairman, Jules B. Kroll, has been a recognized leader in the private security
consulting business since the 1970's. Michael G. Cherkasky, our President and
Chief Executive Officer, who has been with us since 1994, is a former Assistant
District Attorney and was Chief of the District Attorney's Investigation
Division in New York County. Michael D. Shmerling, our Chief Operating Officer,
has been involved in the criminal justice system for more than 13 years, having
formed businesses dealing with prison transportation and correctional facility
management prior to his service at KRCS. Michael J. Slattery, Jr., our Executive
Vice President, has served as a Special Agent of the Federal Bureau of
Investigations for 11 years. Michael A. Beber, Executive Vice President,
Strategic Development, has practiced exclusively in the area of forensic
accounting for more than 15 years and has advised corporations on due diligence
strategies for more than eight years.
Stable, Diversified Client Base. We serve a diverse customer base,
including large multinational corporations, medium and small businesses,
individuals, law firms, investment and commercial banks, U.S. governmental
agencies and foreign governments. We believe that we have a stable client base
because of the fact that approximately 75% of our clients have used our services
within the past 24 months.
4
<PAGE> 6
BUSINESS STRATEGY
We plan to increase our profitability and revenues by developing our
competitive strengths and taking advantage of favorable industry conditions,
including projected industry growth, a consolidating market and international
corporate expansion, as well as the following strategies:
Expand Existing Customer Base. We are able to offer our client base a
single source for global risk mitigation consulting services. In order to take
advantage of marketing opportunities, we utilize a global account manager
program. This program ensures that the full range of our services within each
operating group around the world is effectively marketed to our clients. Our
global account managers are compensated based upon the total relationship with a
client. This program improves communication and client knowledge about our
organization and services and broadens our relationship with our clients.
Capitalize on Growing International Opportunities. With the continued
growth of cross-border business transactions, companies are exposed to greater
economic and political uncertainty. We intend to capitalize on this trend by
using our respected brand name and business platform to attract new business
opportunities. Additionally, we will continue to expand our physical presence
into areas that are of strategic interest to our clients. For example, in the
first half of 2000, we have opened offices in South Africa, Chile, India and
Italy.
Continue to Pursue Acquisition Opportunities. Our acquisition strategy is
to pursue opportunities that will broaden our service offerings, provide
complementary services and expand our geographic presence within the risk
mitigation consulting services industry. We believe that our brand name and
business platform are advantages in attracting acquisition opportunities. Our
disciplined approach in evaluating acquisition opportunities leads us to pursue
only those that fit our profile for quality, reliability, superior customer
service and profitability. In many instances we know these candidates from
previous business relationships. The efficient transfer and integration of
acquired businesses and systems into our existing infrastructure remain one of
our top priorities throughout our strategic growth. Our ability to use KRCS
stock as consideration in potential acquisitions will be limited for two years
following the split-up in order to preserve the split-up's tax free status. See
"Relationship with the O'Gara Company -- Tax Sharing Agreement."
Increase Stability of Revenue Base. We intend to increase revenue stability
through:
- the acquisition of businesses which have recurring revenue streams, such
as our previous acquisitions in the areas of background checking and drug
testing;
- the continued expansion of our service line capabilities in existing
businesses, such as forensic accounting and business valuation;
- the continued expansion of our counter-cyclical businesses, such as
financial recovery, restructuring, fraud investigation, insolvency and
turnaround services; and
- increased geographic diversity.
Maximize Operating Efficiency. We seek to increase our efficiency by using
cost effective methods to minimize response times, improve the quality of
services and reduce costs. We intend to continue implementing systems to help us
improve the organization of workflow, increase employee utilization, minimize
administrative costs and facilitate the integration of acquired companies.
Our principal executive offices are located at 900 Third Avenue, New York,
New York 10022, and our telephone number is (212) 593-1000.
5
<PAGE> 7
SUMMARY FINANCIAL AND OPERATING DATA
The following pages contain tables which present unaudited selected pro
forma financial information for KRCS and historical selected financial
information for Kroll-O'Gara.
The selected unaudited pro forma financial information, except as discussed
below, is derived from the unaudited pro forma financial statements and notes
set forth elsewhere in this prospectus. You should read the selected unaudited
pro forma financial information for KRCS together with the full unaudited pro
forma financial statements and their notes, which are disclosed in "Selected
Financial and Operating Data" and "Unaudited Pro Forma Combining Condensed
Financial Statements." The historical selected financial information, except as
discussed below, is derived from the audited financial statements and notes set
forth elsewhere in this prospectus. You should read the selected historical
financial information for Kroll-O'Gara together with its full historical
financial statements and their notes.
For financial reporting purposes, Kroll-O'Gara will be deemed to be the
predecessor to KRCS. Accordingly, the unaudited pro forma financial information
for KRCS is based upon the historical financial statements of Kroll-O'Gara. The
unaudited pro forma financial information for KRCS also reflects the financial
position and results of operations of The O'Gara Company as discontinued
operations, which are not reflected in a pro forma presentation, as well as
other aspects of the reorganization and split-up as more fully explained in
"Unaudited Pro Forma Combining Condensed Financial Statements." Upon receipt of
shareholder approval of the split-up, the historical financial statements of
KRCS, which are the historical financial statements of Kroll-O'Gara, will be
restated to eliminate the financial results of The O'Gara Company and reflect
them as discontinued operations.
Some of the KRCS unaudited pro forma financial information presented in the
following tables is derived from unaudited pro forma financial statements that
are not included in this prospectus. Specifically, the selected unaudited pro
forma financial information as of December 31, 1995 through 1999 and as of June
30, 1999 and for the years ended December 31, 1995 and 1996 and for the six
months ended June 30, 1999 are derived from the KRCS unaudited pro forma
financial statements, which are not included in this prospectus. You also should
read KRCS's pro forma financial information together with its "Management's
Discussion and Analysis of Pro Forma Financial Condition and Pro Forma Results
of Operations" which is included elsewhere in this prospectus.
Some of the historical financial information presented in the following
tables is derived from financial statements that are not included in this
prospectus. Specifically, the selected historical financial information for
Kroll-O'Gara as of December 31, 1997 and for the year ended December 31, 1996 is
derived from Kroll-O'Gara's audited financial statements. The selected
historical financial information for Kroll-O'Gara as of December 31, 1995 and
1996 and for the year ended December 31, 1995 is derived from Kroll-O'Gara's
unaudited financial statements.
The unaudited pro forma combining condensed financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial position that would have been achieved if the
split-up had been consummated as of the beginning of the periods indicated, nor
are they indicative of future financial position or results of operations.
6
<PAGE> 8
KROLL RISK CONSULTING SERVICES, INC.
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 64,226 $ 91,686 $109,585 $140,505 $203,431 $ 95,079 $109,714
Cost of sales....................... 43,185 63,057 70,830 83,131 119,837 55,119 64,365
-------- -------- -------- -------- -------- -------- --------
Gross profit...................... 21,041 28,629 38,755 57,374 83,594 39,960 45,349
Selling and marketing expenses...... 6,461 6,143 9,008 14,689 18,617 9,206 10,233
General and administrative
expenses.......................... 18,642 21,639 24,148 29,740 54,278 22,557 29,268
Asset impairment.................... -- 125 -- -- -- -- --
Restructuring expenses.............. -- -- -- -- 4,072 4,072 --
Separation expenses................. -- -- -- -- -- -- 396
Merger related expenses............. -- -- 4,272 4,590 3,924 3,058 438
Failed merger related costs......... -- -- -- -- 858 -- 1,170
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)........... (4,062) 723 1,327 8,355 1,845 1,067 3,844
Interest expense.................... (2,118) (2,230) (2,276) (2,255) (2,971) (1,076) (1,705)
Earnings (losses) of equity
investment........................ -- -- -- (825) (719) 67 (1,881)
Other income, net................... 96 444 136 876 255 44 44
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before provision for
income taxes, extraordinary item
and cumulative effect of change
in accounting principle......... (6,084) (1,063) (813) 6,151 (1,590) 102 302
Provision (benefit) for income
taxes............................. (824) (152) 483 2,176 (162) 346 1,054
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations...................... $ (5,260) $ (911) $ (1,296) $ 3,975 $ (1,428) $ (244) $ (752)
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share from
continuing operations............. $ (0.48) $ (0.08) $ (0.09) $ 0.21 $ (0.06) $ (0.01) $ (0.03)
======== ======== ======== ======== ======== ======== ========
Basic weighted average shares
outstanding....................... 11,019 12,112 14,751 19,337 22,006 21,815 22,267
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share
from continuing operations........ $ (0.48) $ (0.07) $ (0.08) $ 0.20 $ (0.06) $ (0.01) $ (0.03)
======== ======== ======== ======== ======== ======== ========
Diluted weighted average shares
outstanding....................... 11,019 12,670 15,560 19,908 22,596 22,548 22,267
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $ 5,021 $ 2,372 $ 18,815 $ 35,306 $ 25,585 $ 27,580 $ 25,696
Net property, plant and equipment... 5,154 6,181 7,898 11,323 19,748 16,217 20,004
Total assets........................ 50,401 51,867 77,896 135,398 182,795 174,347 179,976
Long-term debt, including
line-of-credit and current
portion........................... 20,456 19,008 31,734 24,191 38,957 35,443 41,794
Stockholders' equity................ 10,313 10,032 16,161 75,061 97,226 94,455 99,053
</TABLE>
----------------
(1) See the unaudited pro forma combining condensed financial statements
beginning on page 22 for information regarding the basis of presentation for
the unaudited pro forma financial data as well as for a discussion of
applicable pro forma entries.
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<PAGE> 9
THE KROLL-O'GARA COMPANY SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 94,999 $166,694 $210,324 $272,196 $321,938 $152,041 $163,049
Cost of sales............................ 66,764 118,922 143,213 178,421 203,457 93,553 104,711
-------- -------- -------- -------- -------- -------- --------
Gross profit........................... 28,235 47,772 67,110 93,774 118,481 58,488 58,338
Selling, general and administrative
expenses, including amortization....... 31,886 38,949 49,824 65,167 102,332 42,881 55,541
Asset impairment......................... -- 125 -- -- -- -- --
Restructuring expenses................... -- -- -- -- 4,364 4,364 --
Separation expenses...................... -- -- -- -- -- -- 676
Failed merger related costs.............. -- -- -- -- 1,562 -- 2,000
Merger related expenses.................. -- -- 7,205 5,727 4,069 3,094 438
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)................ (3,651) 8,698 10,081 22,880 6,153 8,149 (317)
Interest expense......................... (2,897) (3,307) (5,244) (4,670) (4,966) (1,875) (2,872)
Other income (expense), net.............. 18 388 (112) 929 98 70 (91)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before minority interest,
provision (benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ (6,530) 5,779 4,725 19,139 1,286 6,344 (3,280)
Minority interest........................ -- -- (156) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before provision (benefit)
for income taxes, extraordinary item
and cumulative effect of change in
accounting principle................. (6,530) 5,779 4,569 19,139 1,286 6,344 (3,280)
Provision (benefit) for income taxes..... (824) 366 3,305 7,353 2,429 2,773 1,380
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary item
and cumulative effect of change in
accounting principle................. (5,706) 5,413 1,264 11,786 (1,144) 3,571 (4,660)
Loss from operations and disposal of
discontinued clinical business, net of
tax.................................... -- (1,274) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle................. (5,706) 4,139 1,264 11,786 (1,144) 3,571 (4,660)
Extraordinary item, net of tax benefit... -- -- (194) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect
of change in accounting principle.... (5,706) 4,139 1,070 11,786 (1,144) 3,571 (4,660)
Cumulative effect of change in accounting
principle.............................. -- -- (360) -- (778) (778) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)........................ $ (5,706) $ 4,139 $ 710 $ 11,786 $ (1,922) $ 2,793 $ (4,660)
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share from
continuing operations.................. $ (0.52) $ 0.45 $ 0.09 $ 0.61 $ (0.05) $ 0.16 $ (0.21)
======== ======== ======== ======== ======== ======== ========
Basic weighted average shares
outstanding............................ 11,019 12,112 14,751 19,337 22,006 21,815 22,267
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share from
continuing operations.................. $ (0.52) $ 0.43 $ 0.08 $ 0.59 $ (0.05) $ 0.16 $ (0.21)
======== ======== ======== ======== ======== ======== ========
Diluted weighted average shares
outstanding............................ 11,019 12,670 15,560 19,908 22,006 22,548 22,267
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 5,044 $ 10,626 $ 38,329 $ 84,890 $ 62,042 $ 70,289 $ 53,994
Net property, plant and equipment........ 8,325 11,106 18,189 24,640 38,908 32,681 39,822
Total assets............................. 75,500 93,739 155,687 253,744 299,393 289,513 290,671
Long-term debt, including line-of-credit
and current portion.................... 31,729 31,249 54,239 41,347 66,584 63,594 75,808
Shareholders' equity..................... 11,404 22,874 42,861 144,496 155,868 154,531 147,234
</TABLE>
8
<PAGE> 10
RISK FACTORS
You should carefully consider each of the following risks and all of the
other information set forth in this prospectus. The risks and uncertainties
described below are not the only ones facing our company. Additional risks and
uncertainties not presently known to us or that we currently believe to be
immaterial may also adversely affect our business. If any of the following risks
and uncertainties develop into actual events, this could have a material adverse
effect on our business, financial condition or results of operations. In that
case, the trading price of our common stock could decline.
RISKS RELATED TO SECURITIES MARKETS
OUR STOCK PRICE MAY FLUCTUATE SIGNIFICANTLY FOLLOWING THE SPLIT-UP OF KRCS FROM
KROLL-O'GARA; STOCKHOLDERS WHO OWN OUR COMMON STOCK MAY LOSE ALL OR PART OF THE
VALUE OF THEIR COMMON STOCK, DEPENDING ON THE PRICE OF THE COMMON STOCK FROM
TIME TO TIME.
There is currently no public market for our common stock, but we have
applied for our common stock to be listed on the Nasdaq National Market under
the symbol "KRCS." After the split-up, trading prices for our common stock will
be established by the public markets. We have not established a price for our
common stock. An active trading market may not develop or be sustained in the
future. We cannot predict the prices at which our common stock may trade after
the split-up. The market price of our common stock may fluctuate significantly
due to a number of factors, some of which may be beyond our control, including:
- sale of our shares by shareholders after the split-up because our
business profile does not fit their investment objectives;
- actual or anticipated fluctuations in our operating results;
- changes in earnings estimated by securities analysts or our ability to
meet those estimates;
- the operating and stock price performance of other comparable companies;
- overall market fluctuations;
- developments and publicity regarding the investigative and intelligence
services industry, the risk mitigation and consulting industry, or any of
our significant customers;
- general economic conditions.
In particular, the realization of any of the risks described in this risk
factors section could have a significant and adverse impact on the market price
of our common stock. In addition, the stock market in general has experienced
extreme volatility that has often been unrelated to the operating performance of
particular companies. These broad market fluctuations may adversely affect the
trading price of our common stock, regardless of our actual performance.
RISKS RELATED TO OUR BUSINESS
WE MAY NOT BE ABLE TO DEVELOP AND IMPLEMENT OUR GROWTH STRATEGY FOLLOWING THE
REORGANIZATION.
We made multiple acquisitions in 1998 and 1999 and currently intend to
continue our acquisition strategy. While we have experience in identifying and
integrating acquisitions, we may not be able to identify suitable acquisition
candidates, obtain the capital necessary to pursue our acquisition strategy or
complete acquisitions on satisfactory terms or at all. In addition, acquisitions
by KRCS using its common stock as consideration will be limited for two years
following the split-up in order to preserve the split-up's tax-free status. See
"Relationship with The O'Gara Company -- Tax Sharing
9
<PAGE> 11
Agreement." When companies are acquired, we may not be able to integrate or
manage these businesses so as to produce returns that justify the investment.
Additionally, issues relating to new acquisitions may divert our management's
attention from existing operations. We also will need to enhance the
capabilities of our operational systems and will require additional employees,
management and operational and financial resources to support our growth
strategy. If we cannot manage our growth for any of these reasons, our financial
condition, results of operations and cash flow could be adversely affected.
WE WILL NEED TO USE A SIGNIFICANT PORTION OF OUR CASH FLOW TO SERVICE OUR DEBT.
Based on our June 30, 2000 pro forma balance sheet, we had as of June 30,
2000 total indebtedness of approximately $42 million and total stockholder's
equity of approximately $99 million, resulting in a debt to equity ratio of
0.42.
We will have to use a significant percentage of our cash flow from
operations to pay the principal and interest on our existing debt, which will
both limit the cash available for existing operations and future growth and will
make it more difficult for us to obtain additional debt financing for these
purposes. This, in turn, may adversely affect the price of our common stock.
If we are unable to generate enough cash flow from operations or otherwise
to comply with the terms of our debt, we may be forced to try to refinance all
or a portion of our debt or obtain additional financing. If we cannot refinance
our debt or obtain additional financing when needed, we may default on our debt
obligations and we may have to seek protection under the bankruptcy laws.
WE MAY NOT BE ABLE TO OBTAIN ADDITIONAL FINANCING WHEN WE NEED IT OR OBTAIN IT
ON ACCEPTABLE TERMS.
We believe that our current operations and our credit facility will
generate enough cash flow to meet all of our cash requirements and support our
growth strategy. However, we may need additional capital in order to finance
internal growth or pursue new acquisitions. In addition, we may experience
unexpected circumstances, including the occurrence of any of the risk factors
discussed in this section, which may have a material adverse effect on our cash
flow and would require us to obtain additional capital. We may decide to sell
additional shares of common stock in the future in order to obtain additional
capital. If we sell more shares, the price of our stock may decline
significantly and your ownership may be substantially diluted. However, our
ability to issue additional shares of our stock will be limited for two years
following the split-up in order to preserve the split-up's tax free status. See
"Relationship with The O'Gara Company -- Tax Sharing Agreement."
If we require additional capital, we may have to borrow funds under new
credit facilities or issue equity, equity-related or debt securities. We cannot
assure you that additional financing will be available, and if so, whether it
will be on acceptable terms. Our inability to obtain any needed financing, on
the terms on which it may be available, could have a material adverse effect on
our financial condition, results of operations and cash flow.
THE CREDIT FACILITY AND ANY FUTURE INDEBTEDNESS MAY LIMIT OUR ABILITY TO TAKE
VARIOUS CORPORATE ACTIONS.
Our credit facility contains covenants that require us to satisfy on-going
financial requirements and that limit our ability to borrow additional money,
pay dividends, sell assets and make additional corporate investments. These
covenants may limit our ability to respond to changing business or economic
conditions or to substantial declines in operating results. Any indebtedness we
incur in the future is likely to contain additional limitations.
10
<PAGE> 12
OUR BUSINESS OUTSIDE THE UNITED STATES EXPOSES US TO NUMEROUS RISKS, WHICH,
SINGLY OR TOGETHER, COULD MATERIALLY AND ADVERSELY AFFECT OUR BUSINESS.
In addition to our U.S. facilities, we have operations and assets in
Argentina, Brazil, Canada, Chile, China, France, Germany, Hong Kong, India,
Italy, Japan, Mexico, the Philippines, Russia, Singapore, South Africa and the
United Kingdom. We also offer our services in other foreign countries and are
seeking to increase our level of international business activity. Our
international business exposes us to various risks. Currently, the most
significant risks relate to regional economic downturns in Central and South
America and in certain regions in Asia. Other risks of doing business outside
the United States include exchange rate fluctuations, foreign currency
restrictions, U.S. government-imposed prohibitions against offering services to
specific countries, expropriation of assets, war, civil uprisings and riots,
government instability, difficulties enforcing contracts under foreign legal
systems, and unanticipated taxes, duties or other governmental assessments. Any
of these risks could result in a loss of business, significant unexpected
write-offs of assets or other unexpected costs which could have a material
adverse effect on our financial condition, results of operations and cash flow.
In the past, we have occasionally had difficulties in collecting significant
accounts receivable for our services, particularly when the receivable obligor
was located in a foreign country.
OUR INABILITY OR FAILURE TO COMPLY WITH GOVERNMENTAL REGULATIONS AND LICENSING
REQUIREMENTS COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS.
Our services are subject to various federal, state, local and foreign laws,
including privacy laws. A number of our subsidiaries hold private investigative
licenses from, and their investigative activities are regulated by, state and
local government agencies in various jurisdictions. We also use some data from
outside sources, including data from third party vendors and various government
and public record services, in performing our services. To date, applicable laws
and regulations have not interfered materially with the manner in which we
obtain information and conduct our operations, including our access to data used
in our business. However, changes in these laws and regulations, particularly
those relating to privacy, could interfere with our method of operations and
access to data and, as a result, have a material adverse effect on us. If
additional restrictions were imposed, they could have a material adverse effect
on our financial condition, results of operations and cash flows.
Additionally, the laboratory of our drug testing subsidiary, Laboratory
Specialists of America, Inc., is certified on the federal level and licensed in
a number of states. If the subsidiary fails to continue to meet all applicable
requirements, its certification could be suspended or lost, which would result
in us not being eligible to perform testing for various clients and would have a
material adverse effect on the drug testing services aspect of our business.
WE ARE HIGHLY DEPENDENT ON EXECUTIVE MANAGEMENT AND OTHER KEY EMPLOYEES AND OUR
SUCCESS IS LARGELY DEPENDENT UPON OUR ABILITY TO HIRE AND RETAIN SKILLED
PROFESSIONALS.
We rely heavily on our executive management and key employees for continued
business development. Competition for these personnel is intense. Our business
could be materially and adversely affected if a number of our senior managers or
key employees were to leave and if we were unable to attract and retain
qualified replacements.
Competition for consulting professionals, particularly for personnel with
specific risk mitigation skills necessary to perform the services which we
offer, has caused wages to increase at a rate greater than the general rate of
inflation. Our success is largely dependent upon the ability to hire and retain
people at a time when the industry is generally experiencing a shortage of
skilled professionals and a high rate of employee turnover.
11
<PAGE> 13
THE RISK MITIGATION INDUSTRY IS VERY COMPETITIVE; WE MAY BE UNABLE TO COMPETE
FAVORABLY.
KRCS competes with local, regional, national and international firms,
including consulting firms, investigative firms and consultants in specialized
areas such as crisis response. We believe that we are one of the largest
companies in the world that provide a broad array of corporate investigation,
risk and crisis management and business intelligence services on a global basis.
We believe that we enjoy strong name recognition in our industry.
Nevertheless, the markets in which we do, and intend to do, business are
highly competitive. In most service areas in which we operate, there is at least
one competitor that is significantly larger or more established than we are.
Many of the national and international accounting firms, along with other
companies such as Decision Strategies/Fairfax International, LLC and
Investigations Group, Inc., provide consulting services similar to some of the
services we provide. Some of these firms have indicated an interest in providing
corporate investigation and business intelligence services similar to ours on a
broader scale and may prove to be formidable competitors if they elect to devote
the necessary resources to these competitive businesses. The accounting firms
have significantly larger financial and other resources than we have and have
long-established relationships with their clients, which also are likely to be
clients or prospective clients of ours. In addition, large multinational
security services providers have indicated an interest in expanding their
services to include value-added services such as some of the investigation and
risk mitigation consulting services provided by us. Competitive conditions could
have a material adverse effect on our financial condition, results of operations
and cash flows.
IF THE SPLIT-UP IS NOT TAX-FREE, WE COULD BE LIABLE FOR THE RESULTING TAXES,
WHICH WOULD SIGNIFICANTLY HARM OUR BUSINESS.
KRCS and The O'Gara Company have agreed to enter into a tax sharing
agreement under which each company will indemnify the other in the event the
split-up is not tax-free as a result of various actions taken by or with respect
to that company or the company's failure to take various actions. KRCS and The
O'Gara Company may not be able to control some of the events that could trigger
this liability. In particular, any acquisition of us by a third party within two
years of the split-up could result in the split-up becoming a taxable
transaction and give rise to our obligation to indemnify The O'Gara Company for
any resulting tax liability. If we were to become obligated to indemnify The
O'Gara Company for this tax liability, our financial condition and business
would be materially and adversely affected. In addition, if the split-up
otherwise failed to qualify for tax-free treatment, we would be subject to a
substantial tax liability and our financial condition and business would be
materially and adversely affected.
WE MAY BE SUBJECT TO POTENTIALLY SIGNIFICANT LIABILITY CLAIMS.
The very nature of our business exposes us to liability claims in instances
in which our clients suffer losses in spite of our efforts to mitigate their
risks. We maintain professional liability insurance with a policy aggregate
limit of $15 million including loss and claim expense. If one or more successful
claims substantially exceeded coverage limits, it would have a material adverse
effect on us. Also, in the ordinary course of our business, we are subject to
claims of third parties other than clients alleging trespass, invasion of
privacy and other tortious conduct by our investigators and other personnel,
which are not covered by insurance. Although we endeavor to minimize the risk of
these claims, a substantial successful claim could have a material adverse
effect on us.
12
<PAGE> 14
OUR BUSINESS IS NOT PREDICTABLE AND VARIES FROM PERIOD TO PERIOD.
We generally do not have long term contracts with our clients and our
ability to generate net sales is dependent upon obtaining many new projects each
year, most of which are of relatively short duration. As a result, our net sales
and net income from year-to-year and period-to-period are not necessarily
predictable and historically there has not been a consistent year-to-year
pattern of growth. 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. Additionally, the demand for our services is affected by general
economic conditions and the level of corporate acquisitions and other financial
transactions, and clients may reduce their reliance on our services during
periods when there is a decline in those activities. See "Management's
Discussion and Analysis of Pro Forma Financial Condition and Pro Forma Results
of Operations."
OUR HISTORICAL INFORMATION HAS LIMITED RELEVANCE TO OUR RESULTS OF OPERATIONS AS
A SEPARATE COMPANY.
The historical financial information we have included in this prospectus
does not reflect what our results of operations, financial position and cash
flows would have been had we been a separate, stand-alone entity during the
periods presented or what our results of operations, financial position and cash
flows will be in the future. This is because Kroll-O'Gara did not account for us
as, and we were not operated as, a single stand-alone business for the periods
presented. For more information about the preparation of our financial
statements from the financial statements of Kroll-O'Gara, see "Unaudited Pro
Forma Combining Condensed Financial Statements," "Selected Financial and
Operating Data" and "Management's Discussion and Analysis of Pro Forma Financial
Condition and Pro Forma Results of Operations."
OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT ALLOW FOR
THE INDEMNIFICATION OF DIRECTORS AND OFFICERS (OR ANY PREDECESSOR THEREOF) OF
KRCS TO THE FULLEST EXTENT PERMITTED UNDER DELAWARE LAW AND FOR THE
INDEMNIFICATION, PURSUANT TO THE DISCRETION OF THE BOARD OF DIRECTORS, OF
EMPLOYEES AND AGENTS UNDER THE SAME TERMS.
Our certificate of incorporation and bylaws also provide that a director of
KRCS shall not be personally liable to KRCS or its stockholders for monetary
damages for breach of fiduciary duty as a director. However, a director shall
remain liable for any breach of the director's duty of loyalty to KRCS or its
stockholders, for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, for unlawful payment of
dividends or unlawful stock purchase or redemption (except that any director who
may have been absent when any of these acts were performed may be exonerated
from such liability by causing his or her dissent to be entered in the minutes
of KRCS at the time of the unlawful act, or immediately after the director
received notice of that act), or for any transaction from which the director
derived any improper personal benefit.
WE DO NOT INTEND TO PAY DIVIDENDS.
We intend to retain future earnings, if any, that may be generated from our
operations to help finance our operations and expansion, and accordingly we do
not plan to pay cash dividends to our stockholders for the foreseeable future.
See "Dividend Policy".
13
<PAGE> 15
JULES B. KROLL, WHO OWNS APPROXIMATELY 22% OF OUR OUTSTANDING COMMON STOCK, WILL
HAVE SIGNIFICANT INFLUENCE OVER THE MANAGEMENT AND DIRECTION OF KRCS.
After the split-up, Jules B. Kroll, the Chairman of the Board of KRCS, will
own approximately 22% of the outstanding shares of KRCS common stock. As a
result, Mr. Kroll will have significant influence over the management and
direction of KRCS. In addition, after the split-up, the executive officers and
directors of KRCS, including Mr. Kroll, will own approximately 29% of the
outstanding shares of KRCS common stock. Therefore, management will be able to
influence significantly or control most matters requiring shareholder approval,
including the election of directors.
ANTI-TAKEOVER PROVISIONS AND OUR RIGHT TO ISSUE PREFERRED STOCK COULD DETER OUR
ACQUISITION BY A THIRD PARTY.
Our certificate of incorporation and bylaws contain several provisions
which may be deemed to have anti-takeover effects and may discourage, delay or
prevent a takeover attempt that a stockholder might consider in its best
interest. These provisions include: (1) the requirement that there shall be
three classes of directors and that their terms be staggered; (2) the
requirement that a stockholder comply with specified procedures, including
advance written notice, before bringing matters, including the nomination of
directors, before a stockholders' meeting; (3) the specific denial of
stockholders' ability to take action by written consent, and (4) the restriction
of the right to call special meetings to only the Chairman of the Board, the
Chief Executive Officer or the board of directors pursuant to a board
resolution. In addition, our board of directors has the authority to authorize
the issuance of preferred stock. The issuance of preferred stock may have the
effect of delaying, deferring or preventing a change in control, and may
adversely affect the voting and other rights of the holders of our capital
stock. See "Description of Capital Stock".
FORWARD-LOOKING STATEMENTS
Some of the statements in this prospectus, including some statements in
"Prospectus Summary," "Risk Factors," "Unaudited Pro Forma Combining Condensed
Financial Statements," "Management's Discussion and Analysis of Pro Forma
Financial Condition and Pro Forma Results of Operations" and "Business," are
statements about what may happen in the future, so-called "forward-looking
statements." They include statements regarding our current beliefs, goals and
expectations and address many topics, including our expected financial position
and operating results, our business strategy and our financial plans. These
statements can sometimes be identified by our use of forward-looking words such
as "anticipate," "believe," "estimate," "expect," "intend," "may," "will" and
similar expressions. We cannot guarantee that our forward-looking statements
will turn out to be correct or that our beliefs, goals and expectations will not
change. Our actual results could be very different from and materially worse
than our expectations for various reasons, including those discussed in "Risk
Factors."
Our fiscal year ends on December 31st. Our consolidated financial
statements and other financial information contained herein have been prepared
from the records maintained by Kroll-O'Gara and may not necessarily be
indicative of the conditions or results that would have existed if we had been
operated as an unaffiliated company during the periods indicated. Portions of
some transactions during the periods covered by these financial statements and
other financial information represent allocations of costs or expenses or other
items incurred by Kroll-O'Gara as a whole and are not necessarily applicable to
KRCS and its subsidiaries as a whole or indicative of costs or expenses to be
incurred by KRCS in the future.
14
<PAGE> 16
DIVIDEND POLICY
We anticipate that any future earnings will be retained to finance its
operations and for the growth and development of our business. Accordingly, we
do not anticipate paying cash dividends on our shares of common stock for the
foreseeable future. Additionally, the terms of our credit facility will require
maintenance of financial ratios and other covenants which may limit the funds
available for cash dividends. The payment of any future dividends will be
subject to the discretion of our board of directors and will depend on our
results of operations, financial position and capital requirements, general
business conditions, restrictions imposed by financing arrangements, if any,
legal restrictions on the payment of dividends and other factors our board of
directors deems relevant.
USE OF PROCEEDS
Our common stock is being issued in connection with the split-up of
Kroll-O'Gara. Neither Kroll-O'Gara nor KRCS will receive any proceeds from the
distribution of our stock.
15
<PAGE> 17
THE SPLIT-UP
The information given below highlights the principal features of the
split-up of The Kroll-O'Gara Company. The split-up is described in detail in
Kroll-O'Gara's proxy statement, which has been provided to you and has been
filed with the Securities and Exchange Commission. You should read the proxy
statement with care.
Parent Company................ The Kroll-O'Gara Company, an Ohio corporation.
Subsidiary Company............ Kroll Risk Consulting Services, Inc., a
Delaware corporation ("KRCS").
Reasons for the Split-up...... The purpose of the split-up is to resolve
internal management conflicts by separating the
principal historical Kroll and O'Gara
businesses into two new public companies: KRCS,
which will be led by Jules B. Kroll, and The
O'Gara Company, which will be led by Thomas M.
and Wilfred T. O'Gara. Kroll-O'Gara's board of
directors believes that the separation of these
businesses will permit the management of each
company to focus exclusively on its business
plan and is the best available means to enhance
the future success and efficiency of each
business.
Mechanics of the Split-up..... In the reorganization, Kroll-O'Gara will
transfer its investigations and intelligence
and voice and data communications businesses to
KRCS and its security products and services
business to The O'Gara Company in exchange for,
respectively, shares of common stock of KRCS
and shares of common stock of The O'Gara
Company. All Kroll-O'Gara senior debt will be
assumed by KRCS and The O'Gara Company, and
immediately paid off by them. Each of KRCS and
The O'Gara Company will assume a portion of
Kroll-O'Gara's liabilities that are not related
exclusively to a particular business group.
Mr. Kroll and 16 other members of management of
KRCS and its subsidiaries will exchange all of
their Kroll-O'Gara common stock for KRCS common
stock. Messrs. O'Gara and two other members of
The O'Gara Company's management will exchange
all of their Kroll-O'Gara common stock for
O'Gara Company common stock.
Kroll-O'Gara will then distribute, on a pro
rata basis, all remaining shares of KRCS common
stock and The O'Gara Company common stock to
the remaining holders of Kroll-O'Gara common
stock, and KRCS and The O'Gara Company will
become separate, independent publicly-held
companies.
As a result of the split-up, Mr. Kroll will
have no interest in The O'Gara Company and
Messrs. O'Gara will have no interest in KRCS.
Kroll-O'Gara's public shareholders will own
approximately 71% of each of The O'Gara Company
and KRCS, the same percentage they now own of
Kroll-O'Gara.
After the split-up, Kroll-O'Gara will be
dissolved.
What You Will Receive in the
Distribution................ You will receive approximately 0.38 shares of
KRCS common stock and approximately 0.27 shares
of The O'Gara Company
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<PAGE> 18
common stock for each share of Kroll-O'Gara
common stock owned by you on the record date
for the distribution.
Record Date for the
Distribution.................. We currently expect that the record date for
the distribution will be the close of business,
New York time, on , 2000, although
the actual record date could be different.
Mailing of Share
Certificates.................. We expect to begin mailing certificates for the
shares of KRCS common stock distributed
approximately ten business days after the
record date.
No Fractional Shares.......... We will not issue any fractional shares in the
split-up. If you are entitled to receive a
fractional share of KRCS common stock, you will
receive cash in payment for that fractional
share.
Total Shares to be Outstanding
After the Split-Up............ 8,500,000 shares of KRCS common stock.
Trading Market and Listing.... There is currently no trading market for our
shares of common stock. We have applied for
listing of our common stock on the Nasdaq
National Market under the symbol "KRCS."
Trading of KRCS common stock is expected to
begin on a "when-issued" basis on the record
date.
Tax Consequences.............. We expect that you will not recognize any gain
or loss for U.S. federal income tax purposes as
a result of the split-up, except in connection
with any cash that you receive instead of a
fractional share. Kroll-O'Gara has requested a
tax ruling from the Internal Revenue Service
that this is the case. Your tax treatment will
depend on your specific situation, however, and
you should consult your tax advisor for a full
understanding of the tax consequences of the
split-up to you.
Relationship with The O'Gara
Company after the
Split-up.................... As part of the split-up, KRCS, Kroll-O'Gara and
The O'Gara Company have entered into an
agreement and plan of reorganization and
dissolution and will enter into a
cross-indemnification agreement. In addition,
KRCS, The O'Gara Company and Securify Inc., a
subsidiary of Kroll-O'Gara, will enter into a
tax sharing agreement. KRCS and The O'Gara
Company will have an ongoing relationship after
the split-up as a result of these agreements.
Management of KRCS............ After the reorganization, Jules B. Kroll will
be Chairman of the Board of KRCS. Michael G.
Cherkasky will be President and Chief Executive
Officer, Michael D. Shmerling will be the Chief
Operating Officer and Nazzareno E. Paciotti
will be Chief Financial Officer. See
"Management" for a list of, and biographical
information for, all of the officers and
directors of KRCS.
Distribution Agent............ Fifth Third Bank, Cincinnati, Ohio
Transfer Agent and
Registrar.....................
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<PAGE> 19
PRO FORMA CAPITALIZATION
The following table sets forth our pro forma capitalization as of June 30,
2000 as adjusted to give effect to the split-up. The following table should be
read in conjunction with "Unaudited Pro Forma Combining Condensed Financial
Statements", "Selected Financial and Operating Data," "Management's Discussion
and Analysis of Pro Forma Financial Condition and Pro Forma Results of
Operations" and the consolidated financial statements and related notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
AT JUNE 30, 2000
----------------------
PRO FORMA
----------------------
(DOLLARS IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 3,663
========
Short-term debt and current maturities of long-term
debt(1)................................................... 21,905
Long-term debt, less current maturities(1).................. 19,889
Stockholders' equity:
Preferred Stock, 2,500,000 shares authorized; no shares
issued or outstanding.................................. --
Common Stock, $0.01 par value, 25,000,000 shares
authorized; and 8,500,000 shares issued and outstanding
on June 30, 2000, as adjusted(2)....................... 85
Additional paid-in capital.................................. 121,382
Retained deficit............................................ (21,032)
Deferred compensation....................................... --
Accumulated other comprehensive loss........................ (1,382)
--------
Total stockholders' equity.................................. 99,053
--------
Total capitalization........................................ $140,847
========
</TABLE>
---------------
(1) For a description of our debt, see "Management's Discussion and Analysis of
Pro Forma Financial Condition and Pro Forma Results of
Operations -- Liquidity and Capital Resources."
(2) Outstanding shares excludes 1,700,000 shares of common stock reserved for
issuance upon the exercise of options to purchase common stock under the
stock option plans described in "Executive Compensation and Benefit Plans."
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<PAGE> 20
SELECTED FINANCIAL AND OPERATING DATA
The following pages contain tables which present unaudited selected pro
forma financial information for KRCS and historical selected financial
information for Kroll-O'Gara.
The selected unaudited pro forma financial information, except as discussed
below, is derived from the unaudited pro forma financial statements and notes
set forth elsewhere in this prospectus. You should read the selected unaudited
pro forma financial information for KRCS together with the full unaudited pro
forma financial statements and their notes, which are disclosed in "Selected
Financial and Operating Data" and "Unaudited Pro Forma Combining Condensed
Financial Statements." The historical selected financial information, except as
discussed below, is derived from the audited financial statements and notes set
forth elsewhere in this prospectus. You should read the selected historical
financial information for Kroll-O'Gara together with its full historical
financial statements and their notes.
For financial reporting purposes, Kroll-O'Gara will be deemed to be the
predecessor to KRCS. Accordingly, the unaudited pro forma financial information
for KRCS is based upon the historical financial statements of Kroll-O'Gara. The
unaudited pro forma financial information for KRCS also reflects the financial
position and results of operations of The O'Gara Company as discontinued
operations, which are not reflected in a pro forma presentation, as well as
other aspects of the reorganization and split-up as more fully explained in
"Unaudited Pro Forma Combining Condensed Financial Statements." Upon receipt of
shareholder approval of the split-up, the historical financial statements of
KRCS, which are the historical financial statements of Kroll-O'Gara, will be
restated to eliminate the financial results of The O'Gara Company and reflect
them as discontinued operations.
Some of the KRCS unaudited pro forma financial information presented in the
following tables is derived from unaudited pro forma financial statements that
are not included in this prospectus. Specifically, the selected unaudited pro
forma financial information as of December 31, 1995 through 1999 and as of June
30, 1999 and for the years ended December 31, 1995 and 1996 and for the six
months ended June 30, 1999 are derived from the KRCS unaudited pro forma
financial statements, which are not included in this prospectus. You also should
read KRCS's pro forma financial information together with its "Management's
Discussion and Analysis of Pro Forma Financial Condition and Pro Forma Results
of Operations" which is included elsewhere in this prospectus.
Some of the historical financial information presented in the following
tables is derived from financial statements that are not included in this
prospectus. Specifically, the selected historical financial information for
Kroll-O'Gara as of December 31, 1997 and for the year ended December 31, 1996 is
derived from Kroll-O'Gara's audited financial statements. The selected
historical financial information for Kroll-O'Gara as of December 31, 1995 and
1996 and for the year ended December 31, 1995 is derived from Kroll-O'Gara's
unaudited financial statements.
The unaudited pro forma combining condensed financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial position that would have been achieved if the
split-up had been consummated as of the beginning of the periods indicated, nor
are they indicative of future financial position or results of operations.
19
<PAGE> 21
KROLL RISK CONSULTING SERVICES, INC.
SUMMARY UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $ 64,226 $ 91,686 $109,585 $140,505 $203,431 $ 95,079 $109,714
Cost of sales....................... 43,185 63,057 70,830 83,131 119,837 55,119 64,365
-------- -------- -------- -------- -------- -------- --------
Gross profit...................... 21,041 28,629 38,755 57,374 83,594 39,960 45,349
Selling and marketing expenses...... 6,461 6,143 9,008 14,689 18,617 9,206 10,233
General and administrative
expenses.......................... 18,642 21,639 24,148 29,740 54,278 22,557 29,268
Asset impairment.................... -- 125 -- -- -- -- --
Restructuring expenses.............. -- -- -- -- 4,072 4,072 --
Separation expenses................. -- -- -- -- -- -- 396
Merger related expenses............. -- -- 4,272 4,590 3,924 3,058 438
Failed merger related costs......... -- -- -- -- 858 -- 1,170
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)........... (4,062) 723 1,327 8,355 1,845 1,067 3,844
Interest expense.................... (2,118) (2,230) (2,276) (2,255) (2,971) (1,076) (1,705)
Earnings (losses) of equity
investment........................ -- -- -- (825) (719) 67 (1,881)
Other income, net................... 96 444 136 876 255 44 44
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before provision for
income taxes, extraordinary item
and cumulative effect of change
in accounting principle......... (6,084) (1,063) (813) 6,151 (1,590) 102 302
Provision (benefit) for income
taxes............................. (824) (152) 483 2,176 (162) 346 1,054
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations...................... $ (5,260) $ (911) $ (1,296) $ 3,975 $ (1,428) $ (244) $ (752)
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share from
continuing operations............. $ (0.48) $ (0.08) $ (0.09) $ 0.21 $ (0.06) $ (0.01) $ (0.03)
======== ======== ======== ======== ======== ======== ========
Basic weighted average shares
outstanding....................... 11,019 12,112 14,751 19,337 22,006 21,815 22,267
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share
from continuing operations........ $ (0.48) $ (0.07) $ (0.08) $ 0.20 $ (0.06) $ (0.01) $ (0.03)
======== ======== ======== ======== ======== ======== ========
Diluted weighted average shares
outstanding....................... 11,019 12,670 15,560 19,908 22,596 22,548 22,267
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $ 5,021 $ 2,372 $ 18,815 $ 35,306 $ 25,585 $ 27,580 $ 25,696
Net property, plant and equipment... 5,154 6,181 7,898 11,323 19,748 16,217 20,004
Total assets........................ 50,401 51,867 77,896 135,398 182,795 174,347 179,976
Long-term debt, including
line-of-credit and current
portion........................... 20,456 19,008 31,734 24,191 38,957 35,443 41,794
Stockholders' equity................ 10,313 10,032 16,161 75,061 97,226 94,455 99,053
</TABLE>
----------------
(1) See the unaudited pro forma combining condensed financial statements
beginning on page 22 for information regarding the basis of presentation for
the unaudited pro forma financial data as well as for a discussion of
applicable pro forma entries.
20
<PAGE> 22
THE KROLL-O'GARA COMPANY SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................ $ 94,999 $166,694 $210,324 $272,196 $321,938 $152,041 $163,049
Cost of sales............................ 66,764 118,922 143,213 178,421 203,457 93,553 104,711
-------- -------- -------- -------- -------- -------- --------
Gross profit........................... 28,235 47,772 67,110 93,774 118,481 58,488 58,338
Selling, general and administrative
expenses, including amortization....... 31,886 38,949 49,824 65,167 102,332 42,881 55,541
Asset impairment......................... -- 125 -- -- -- -- --
Restructuring expenses................... -- -- -- -- 4,364 4,364 --
Separation expenses...................... -- -- -- -- -- -- 676
Failed merger related costs.............. -- -- -- -- 1,562 -- 2,000
Merger related expenses.................. -- -- 7,205 5,727 4,069 3,094 438
-------- -------- -------- -------- -------- -------- --------
Operating income (loss)................ (3,651) 8,698 10,081 22,880 6,153 8,149 (317)
Interest expense......................... (2,897) (3,307) (5,244) (4,670) (4,966) (1,875) (2,872)
Other income (expense), net.............. 18 388 (112) 929 98 70 (91)
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before minority interest,
provision (benefit) for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................ (6,530) 5,779 4,725 19,139 1,286 6,344 (3,280)
Minority interest........................ -- -- (156) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before provision (benefit)
for income taxes, extraordinary item
and cumulative effect of change in
accounting principle................. (6,530) 5,779 4,569 19,139 1,286 6,344 (3,280)
Provision (benefit) for income taxes..... (824) 366 3,305 7,353 2,429 2,773 1,380
-------- -------- -------- -------- -------- -------- --------
Income (loss) from continuing
operations before extraordinary item
and cumulative effect of change in
accounting principle................. (5,706) 5,413 1,264 11,786 (1,144) 3,571 (4,660)
Loss from operations and disposal of
discontinued clinical business, net of
tax.................................... -- (1,274) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle................. (5,706) 4,139 1,264 11,786 (1,144) 3,571 (4,660)
Extraordinary item, net of tax benefit... -- -- (194) -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Income (loss) before cumulative effect
of change in accounting principle.... (5,706) 4,139 1,070 11,786 (1,144) 3,571 (4,660)
Cumulative effect of change in accounting
principle.............................. -- -- (360) -- (778) (778) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss)........................ $ (5,706) $ 4,139 $ 710 $ 11,786 $ (1,922) $ 2,793 $ (4,660)
======== ======== ======== ======== ======== ======== ========
Basic earnings (loss) per share from
continuing operations.................. $ (0.52) $ 0.45 $ 0.09 $ 0.61 $ (0.05) $ 0.16 $ (0.21)
======== ======== ======== ======== ======== ======== ========
Basic weighted average shares
outstanding............................ 11,019 12,112 14,751 19,337 22,006 21,815 22,267
======== ======== ======== ======== ======== ======== ========
Diluted earnings (loss) per share from
continuing operations.................. $ (0.52) $ 0.43 $ 0.08 $ 0.59 $ (0.05) $ 0.16 $ (0.21)
======== ======== ======== ======== ======== ======== ========
Diluted weighted average shares
outstanding............................ 11,019 12,670 15,560 19,908 22,006 22,548 22,267
======== ======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
---------------------------------------------------- -------------------
1995 1996 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.......................... $ 5,044 $ 10,626 $ 38,329 $ 84,890 $ 62,042 $ 70,289 $ 53,994
Net property, plant and equipment........ 8,325 11,106 18,189 24,640 38,908 32,681 39,822
Total assets............................. 75,500 93,739 155,687 253,744 299,393 289,513 290,671
Long-term debt, including line-of-credit
and current portion.................... 31,729 31,249 54,239 41,347 66,584 63,594 75,808
Shareholders' equity..................... 11,404 22,874 42,861 144,496 155,868 154,531 147,234
</TABLE>
21
<PAGE> 23
UNAUDITED PRO FORMA COMBINING CONDENSED FINANCIAL STATEMENTS
The unaudited pro forma combining condensed financial statements of Kroll
Risk Consulting Services, Inc. give effect to the split-up of Kroll-O'Gara and
have been prepared from Kroll-O'Gara's audited consolidated financial statements
presented elsewhere in this prospectus. These unaudited pro forma statements
should be read in conjunction with the audited consolidated financial statements
of Kroll-O'Gara.
These unaudited pro forma combining condensed financial statements are
presented for illustrative purposes only and are not necessarily indicative of
the operating results or financial position that would have been achieved if the
split-up had been consummated as of the beginning of the periods indicated, nor
are they indicative of future financial position or results of operations.
22
<PAGE> 24
KROLL RISK CONSULTING SERVICES, INC.
UNAUDITED PRO FORMA COMBINING CONDENSED BALANCE SHEET
AS OF JUNE 30, 2000
<TABLE>
<CAPTION>
KROLL- O'GARA SUBTOTAL - PRO FORMA KRCS
O'GARA SPLIT-UP KRCS ADJUSTMENTS PRO FORMA
-------- -------- ---------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash................................. $ 6,260 $ 2,597 $ 3,663 $ -- $ 3,663
Accounts receivable, net............. 94,023 23,560 70,463 -- 70,463
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... 15,241 15,241 -- -- --
Inventories.......................... 30,587 26,787 3,800 -- 3,800
Other current assets................. 11,025 5,742 5,283 -- 5,283
-------- -------- -------- ----------- --------
Total current assets............ 157,136 73,927 83,209 -- 83,209
Property, plant and equipment, net...... 39,822 19,818 20,004 -- 20,004
Databases, net.......................... 10,083 -- 10,083 -- 10,083
Costs in excess of assets acquired and
other intangible assets, net......... 79,077 15,683 63,394 -- 63,394
Other assets............................ 4,553 1,600 2,953 (377)(1) 2,576
Investment in unconsolidated entities... -- -- -- 710(2) 710
-------- -------- -------- ----------- --------
Total assets.................... $290,671 $111,028 $179,643 333 179,976
======== ======== ======== =========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Revolving lines of credit............ $ 37,422 $ 15,652 $ 21,770 $ -- $ 21,770
Current portion of long term debt.... 1,806 1,671 135 -- 135
Accounts payable..................... 34,099 20,943 13,156 -- 13,156
Accrued liabilities.................. 23,137 6,624 16,513 3,552(3) 20,065
Other current liabilities............ 6,678 2,541 4,137 (1,750)(4) 2,387
-------- -------- -------- ----------- --------
Total current liabilities....... 103,142 47,431 55,711 1,802 57,513
Long-term debt, net of current
portion.............................. 36,580 16,691 19,889 -- 19,889
Deferred income taxes................... 1,821 18 1,803 -- 1,803
Other long term liabilities............. 1,894 176 1,718 -- 1,718
-------- -------- -------- ----------- --------
Total liabilities............... 143,437 64,316 79,121 1,802 80,923
Stockholders' equity.................... 147,234 46,712 100,522 (1,469)(5) 99,053
-------- -------- -------- ----------- --------
Total liabilities and
stockholders' equity.......... $290,671 $111,028 $179,643 333 $179,976
======== ======== ======== =========== ========
</TABLE>
---------------
(1) To recognize the write-off of certain intangibles ($79) that cannot be
utilized by Kroll-O'Gara and to recognize the write-off of unamortized
deferred financing costs ($298) resulting from the anticipated prepayment of
the portion of Kroll-O'Gara's third party indebtedness to be assumed by KRCS
as a result of the reorganization and split-up.
(2) To recognize KRCS's minority ownership interest of 40% in the Information
Security Group (ISG).
(3) To recognize transaction costs ($2,381) expected to be incurred in the
reorganization and split-up, as well as to recognize debt prepayment fees
($1,171) associated with the prepayment of the portion of Kroll-O'Gara's
third party indebtedness to be assumed by KRCS.
(4) To recognize related tax benefit to be realized in conjunction with the
reorganization and split-up.
23
<PAGE> 25
(5) Reflects adjustments to stockholders' equity arising out of the
reorganization and split-up as follows (in thousands):
<TABLE>
<S> <C>
Tax benefit of accelerated stock option compensation........ $ 178
Debt prepayment fee ($1,171) and financing cost write-off,
net of tax................................................ (881)
Transaction costs ($2,381), net of tax...................... (1,429)
Intangible asset write-off, net of tax...................... (47)
KRCS' minority ownership interest of 40% in ISG............. 710
--------
$ (1,469)
========
</TABLE>
24
<PAGE> 26
KROLL RISK CONSULTING SERVICES, INC.
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
KROLL- O'GARA SUBTOTAL - PRO FORMA(3)(4)(5) KRCS
O'GARA SPLIT-UP KRCS ADJUSTMENTS(6)(7)(9) PRO FORMA
------ -------- ---------- -------------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales....................... $163,049 $53,335 $109,714 $ -- $109,714
Cost of sales................... 104,712 40,347 64,365 -- 64,365
-------- ------- -------- ------- --------
Gross profit............... 58,337 12,988 45,349 -- 45,349
Selling and marketing
expenses...................... 14,623 4,390 10,233 -- 10,233
General and administrative
expenses...................... 40,918 11,650 29,268 -- 29,268
Separation expenses............. 676 280 396 -- 396
Merger related expenses......... 438 -- 438 -- 438
Failed merger expenses.......... 1,999 829 1,170 -- 1,170
-------- ------- -------- ------- --------
Operating income (loss).... (317) (4,161) 3,844 -- 3,844
Interest expense................ (2,872) (1,167) (1,705) --(10) (1,705)
Earnings (losses) of equity
investment.................... -- -- -- (1,881)(1) (1,881)
-------- ------- -------- ------- --------
Other income (expense).......... (90) (134) 44 -- 44
-------- ------- -------- ------- --------
Income (loss) from
continuing operations
before provision for
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle................ (3,279) (5,462) 2,183 (1,881) 302
Provision for income taxes...... 1,381 327 1,054 --(2) 1,054
-------- ------- -------- ------- --------
Income (loss) from
continuing operations.... $ (4,660) $(5,789) $ 1,129 $(1,881) $ (752)
======== ======= ======== ======= ========
Basic loss per share from
continuing operations......... $ (0.21) $ (0.03)
======== ========
Basic weighted average shares
outstanding................... 22,267 22,267(8)
======== ========
Diluted loss per share from
continuing operations......... $ (0.21) $ (0.03)
======== ========
Diluted weighted average shares
outstanding................... 22,267 22,267(8)
======== ========
</TABLE>
---------------
(1) To recognize KRCS's minority ownership interest of 40% in the Information
Security Group (ISG).
(2) Pro forma adjustments exclude a benefit for income taxes on KRCS's share of
the ISG net loss as no benefit was recognized in the historical
Kroll-O'Gara results of operations for the six months ended June 30, 2000.
(3) Pro forma adjustments exclude the impact of compensation expense, if any,
that might result from the exchange of Kroll-O'Gara common shares by
certain management shareholders for shares of KRCS, based on the respective
fair values at the exchange date.
(4) Pro forma adjustments exclude the impact of compensation expense of
approximately $0.3 million, net of estimated tax benefit of approximately
$0.2 million, for a non-recurring charge associated with the
25
<PAGE> 27
accelerated vesting of certain restricted stock grants resulting from the
reorganization and split-up transaction.
(5) Pro forma adjustments exclude an extraordinary charge that will occur in
conjunction with the reorganization and split-up transaction resulting from
the anticipated prepayment of the portion of Kroll-O'Gara's third party
indebtedness assumed by KRCS. The portion of the charge allocated to KRCS
is estimated to be approximately $0.9 million, net of estimated tax benefit
of approximately $0.6 million, and includes a prepayment fee and the write
off of unamortized deferred financing costs.
(6) KRCS expects to incur additional charges currently estimated to be
approximately $1.4 million, net of estimated tax benefit of approximately
$1.0 million, to reflect costs associated with the reorganization and
split-up transaction. These non-recurring charges are not reflected in the
unaudited pro forma combining condensed statements of operations.
(7) Management does not believe that corporate overhead costs associated with
the operations of a stand-alone public company will be significantly
different from those expenses reflected in the historical statements of
operations above.
(8) For financial reporting purposes, Kroll-O'Gara will be deemed to be the
predecessor to KRCS. Accordingly, pro forma loss per share of KRCS from
continuing operations is based upon the historical weighted average shares
outstanding of Kroll-O'Gara. Upon completion of the reorganization and
split-up transaction, KRCS is expected to be capitalized initially with 8.5
million shares of common stock and thus from that date forward, KRCS's
weighted average shares outstanding will be determined based upon the new
capitalization.
(9) Pro forma adjustments exclude a non-recurring charge estimated to be
approximately $0.05 million, net of tax benefit, associated with the
write-off of certain assets (certain trademarks) that cannot be utilized by
the company as a result of the reorganization and split-up transaction.
(10) The pro forma statement of operations above does not give any effect to any
potential reductions or increases in interest expense relating to the debt
being assumed and repaid by KRCS as part of the reorganization and
split-up.
26
<PAGE> 28
KROLL RISK CONSULTING SERVICES, INC.
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
KROLL- O'GARA SUBTOTAL - PRO FORMA(3)(4)(5) KRCS
O'GARA SPLIT-UP KRCS ADJUSTMENTS(6)(7)(9) PRO FORMA
-------- -------- ---------- -------------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales.................... $321,938 $118,507 $203,431 $ -- $203,431
Cost of sales................ 203,457 83,620 119,837 -- 119,837
-------- -------- -------- -------- --------
Gross profit............ 118,481 34,887 83,594 -- 83,594
Selling and marketing
expenses................... 27,471 8,854 18,617 -- 18,617
General and administrative
expenses................... 74,862 20,584 54,278 -- 54,278
Restructuring expenses....... 4,364 292 4,072 -- 4,072
Merger related expenses...... 4,069 145 3,924 -- 3,924
Failed merger expenses....... 1,562 704 858 -- 858
-------- -------- -------- -------- --------
Operating income........ 6,153 4,308 1,845 -- 1,845
Interest expense............. (4,966) (1,995) (2,971) --(10) (2,971)
Earnings (losses) of equity
investment................. -- -- -- (719)(1) (719)
-------- -------- -------- -------- --------
Other income (expense)....... 98 (157) 255 -- 255
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before provision for
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle............. 1,285 2,156 (871) (719) (1,590)
Provision for income taxes... 2,429 2,303 126 (288)(2) (162)
-------- -------- -------- -------- --------
Loss from continuing
operations............ $ (1,144) $ (147) $ (997) $ (431) $ (1,428)
======== ======== ======== ======== ========
Basic loss per share from
continuing operations...... $ (0.05) $ (0.06)
======== ========
Basic weighted average shares
outstanding................ 22,006 22,006(8)
======== ========
Diluted loss per share from
continuing operations...... $ (0.05) $ (0.06)
======== ========
Diluted weighted average
shares outstanding......... 22,006 22,006(8)
======== ========
</TABLE>
---------------
(1) To recognize KRCS's minority ownership interest of 40% in the Information
Security Group (ISG).
(2) To recognize the benefit for income taxes on the ISG net loss at an
effective rate of 40%, equivalent to the benefit recognized in the
historical Kroll-O'Gara results of operations.
(3) Pro forma adjustments exclude the impact of compensation expense, if any,
that might result from the exchange of Kroll-O'Gara common shares by
certain management shareholders for shares of KRCS, based on the respective
fair values at the exchange date.
27
<PAGE> 29
(4) Pro forma adjustments exclude the impact of compensation expense of
approximately $0.4 million, net of estimated tax benefit of approximately
$0.2 million, for a non-recurring charge associated with the accelerated
vesting of certain restricted stock grants resulting from the
reorganization and split-up transaction.
(5) Pro forma adjustments exclude an extraordinary charge that will occur in
conjunction with the reorganization and split-up transaction resulting from
the anticipated prepayment of the portion of Kroll-O'Gara's third party
indebtedness assumed by KRCS. The portion of the charge allocated to KRCS
is estimated to be approximately $0.9 million, net of estimated tax benefit
of approximately $0.6 million, and includes a prepayment fee and the
write-off of unamortized deferred financing costs.
(6) KRCS expects to incur additional charges (in addition to the $0.4 million
of charges recognized for the six months ended June 30, 2000) currently
estimated to be approximately $1.4 million, net of estimated tax benefit of
approximately $1.0 million, to reflect costs associated with the
reorganization and split-up transaction. These non-recurring charges are
not reflected in the unaudited pro forma combining condensed statements of
operations.
(7) Management does not believe that corporate overhead costs associated with
the operations of a stand-alone public company will be significantly
different from those expenses reflected in the historical statements of
operations above.
(8) For financial reporting purposes, Kroll-O'Gara will be deemed to be the
predecessor to KRCS. Accordingly, pro forma loss per share of KRCS from
continuing operations is based upon the historical weighted average shares
outstanding of Kroll-O'Gara. Upon completion of the reorganization and
split-up transaction, KRCS is expected to be capitalized initially with 8.5
million shares of common stock and thus from that date forward, KRCS's
weighted average shares outstanding will be determined based upon the new
capitalization.
(9) Pro forma adjustments exclude a non-recurring charge estimated to be
approximately $0.05 million, net of tax benefit, associated with the
write-off of certain assets (certain trademarks) that cannot be utilized by
the company as a result of the reorganization and split-up transaction.
(10) The pro forma statement of operations above does not give any effect to any
potential reductions or increases in interest expense relating to the debt
being assumed and repaid by KRCS as part of the reorganization and
split-up.
28
<PAGE> 30
KROLL RISK CONSULTING SERVICES, INC.
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
KROLL- O'GARA SUBTOTAL- PRO FORMA(3)(4)(5) KRCS
O'GARA SPIN-OFF KRCS ADJUSTMENTS(6)(7)(8) PRO FORMA
------------ -------- ---------- -------------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales................... $272,195 $131,690 $140,505 $ -- $140,505
Cost of sales............... 178,421 95,290 83,131 -- 83,131
-------- -------- -------- -------- --------
Gross profit.............. 93,774 36,400 57,374 -- 57,374
Selling and marketing
expenses.................. 22,332 7,643 14,689 -- 14,689
General and administrative
expenses.................. 42,835 13,095 29,740 -- 29,740
Merger related expenses..... 5,727 1,137 4,590 -- 4,590
-------- -------- -------- -------- --------
Operating income.......... 22,880 14,525 8,355 -- 8,355
Interest expense............ (4,670) (2,415) (2,255) --(9) (2,255)
Earnings (losses) of equity
investment................ -- -- -- (825)(1) (825)
-------- -------- -------- -------- --------
Other income................ 929 53 876 -- 876
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before provision for
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle.............. 19,139 12,163 6,976 (825) 6,151
Provision for income
taxes..................... 7,353 5,016 2,337 (161)(2) 2,176
-------- -------- -------- -------- --------
Income from continuing
operations............. $ 11,786 $ 7,147 $ 4,639 $ (664) $ 3,975
======== ======== ======== ======== ========
Basic earnings (loss) per
share from continuing
operations................ $ 0.61 $ 0.21
======== ========
Basic weighted average
shares outstanding........ 19,337 19,337(7)
======== ========
Diluted earnings (loss) per
share from continuing
operations................ $ 0.59 $ 0.20
======== ========
Diluted weighted average
shares outstanding........ 19,908 19,908(7)
======== ========
</TABLE>
---------------
(1) To record KRCS's minority ownership interest of 40% in the Information
Security Group (ISG).
(2) To recognize the benefit for income taxes realized on the ISG net loss at an
effective rate of 20%, equivalent to the benefit recognized in the
historical Kroll-O'Gara results of operations.
(3) Pro forma adjustments exclude the impact of compensation expense, if any,
that might result from the exchange of Kroll-O'Gara common shares by certain
management shareholders for shares of KRCS, based on the respective fair
values at the exchange date.
(4) Pro forma adjustments exclude an extraordinary charge that will occur in
conjunction with the reorganization and split-up transaction resulting from
the anticipated prepayment of the portion of Kroll-O'Gara's third party
indebtedness assumed by KRCS. The portion of the charge allocated to KRCS is
29
<PAGE> 31
estimated to be approximately $0.9 million, net of estimated tax benefit of
approximately $0.6 million, and includes a prepayment fee and the write-off
of unamortized deferred financing costs.
(5) KRCS expects to incur additional charges (in addition to the $0.4 million of
charges recognized for the six months ended June 30, 2000) currently
estimated to be approximately $1.4 million, net of estimated tax benefit of
approximately $1.0 million, to reflect costs associated with the
reorganization and split-up transaction. These non-recurring charges are not
reflected in the unaudited pro forma combining condensed statements of
operations.
(6) Management does not believe that corporate overhead costs associated with
the operations of a stand-alone public company will be significantly
different from those expenses reflected in the historical statements of
operations above.
(7) For financial reporting purposes, Kroll-O'Gara will be deemed to be the
predecessor to KRCS. Accordingly, pro forma earnings per share of KRCS from
continuing operations is based upon the historical weighted average shares
outstanding of Kroll-O'Gara. Upon completion of the reorganization and
split-up transaction, KRCS is expected to be capitalized initially with 8.5
million shares of common stock and thus from that date forward, KRCS's
weighted average shares outstanding will be determined based upon the new
capitalization.
(8) Pro forma adjustments exclude a non-recurring charge estimated to be
approximately $0.05 million, net of tax benefit, associated with the
write-off of certain assets (certain trademarks) that cannot be utilized by
the company as a result of the reorganization and split-up transaction.
(9) The pro forma statement of operations above does not give any effect to any
potential reductions or increases in interest expense relating to the debt
being assumed and repaid by KRCS as part of the reorganization and split-up.
30
<PAGE> 32
KROLL RISK CONSULTING SERVICES, INC.
UNAUDITED PRO FORMA COMBINING CONDENSED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
KROLL- O'GARA SUBTOTAL- PRO FORMA(1)(2)(3) KRCS
O'GARA SPIN-OFF KRCS ADJUSTMENTS(4)(6) PRO FORMA
-------- -------- ---------- ------------------ ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales...................... $210,324 $100,739 $109,585 $ -- $109,585
Cost of sales.................. 143,213 72,383 70,830 -- 70,830
-------- -------- -------- -------- --------
Gross profit.............. 67,111 28,356 38,755 -- 38,755
Selling and marketing
expenses..................... 15,532 6,524 9,008 -- 9,008
General and administrative
expenses..................... 34,292 10,144 24,148 -- 24,148
Merger related expenses........ 7,205 2,933 4,272 -- 4,272
-------- -------- -------- -------- --------
Operating income.......... 10,082 8,755 1,327 -- 1,327
Interest expense............... (5,244) (2,968) (2,276) --(7) (2,276)
Other income (expense)......... (112) (248) 136 -- 136
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before minority
interest, provision for
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle............... 4,726 5,539 (813) -- (813)
Minority interest.............. (156) (156) -- -- --
-------- -------- -------- -------- --------
Income (loss) from
continuing operations
before provision for
income taxes,
extraordinary item and
cumulative effect of
change in accounting
principle............... 4,570 5,383 (813) -- (813)
Provision for income taxes..... 3,305 2,822 483 -- 483
-------- -------- -------- -------- --------
Income (loss) from
continuing operations... $ 1,265 $ 2,561 $ (1,296) $ -- $ (1,296)
======== ======== ======== ======== ========
Basic earnings (loss) per share
from continuing operations... $ 0.09 $ (0.09)
======== ========
Basic weighted average shares
outstanding.................. 14,751 14,751(5)
======== ========
Diluted earnings (loss) per
share from continuing
operations................... $ 0.08 $ (0.08)
======== ========
Diluted weighted average shares
outstanding.................. 15,560 15,560(5)
======== ========
</TABLE>
---------------
(1) Pro forma adjustments exclude the impact of compensation expense if any,
that might result from the exchange of Kroll-O'Gara common shares by certain
management shareholders for shares of KRCS, based on the respective fair
values at the exchange date.
31
<PAGE> 33
(2) Pro forma adjustments exclude an extraordinary charge that will occur in
conjunction with the reorganization and split-up transaction resulting from
the anticipated prepayment of the portion of Kroll-O'Gara's third party
indebtedness assumed by KRCS. The portion of the charge allocated to KRCS is
estimated to be approximately $0.9 million, net of estimated tax benefit of
approximately $0.6 million, and includes a prepayment fee and the write-off
of unamortized deferred financing costs.
(3) KRCS expects to incur additional charges (in addition to the $0.4 million of
charges recognized for the six months ended June 30, 2000) currently
estimated to be approximately $1.4 million, net of estimated tax benefit of
approximately $1.0 million, to reflect costs associated with the
reorganization and split-up transaction. These non-recurring charges are not
reflected in the unaudited pro forma combining condensed statements of
operations.
(4) Management does not believe that corporate overhead costs associated with
the operations of a stand-alone public company will be significantly
different from those expenses reflected in the historical statements of
operations above.
(5) For financial reporting purposes, Kroll-O'Gara will be deemed to be the
predecessor to KRCS. Accordingly, pro forma loss per share of KRCS from
continuing operations is based upon the historical weighted average shares
outstanding of Kroll-O'Gara. Upon completion of the reorganization and
split-up transaction, KRCS is expected to be capitalized initially with 8.5
million shares of common stock and thus from that date forward, KRCS's
weighted average shares outstanding will be determined based upon the new
capitalization.
(6) Pro forma adjustments exclude a non-recurring charge estimated to be
approximately $0.05 million, net of tax benefit, associated with the
write-off of certain assets (certain trademarks) that cannot be utilized by
the company as a result of the reorganization and split-up transaction.
(7) The pro forma statement of operations above does not give any effect to any
potential reductions or increases in interest expense relating to the debt
being assumed and repaid by KRCS as part of the reorganization and split-up.
32
<PAGE> 34
MANAGEMENT'S DISCUSSION AND ANALYSIS OF PRO FORMA FINANCIAL CONDITION
AND PRO FORMA RESULTS OF OPERATIONS
The following discussion of our pro forma results of operations and
financial condition is based upon and should be read in conjunction with our pro
forma financial statements presented in "Unaudited Pro Forma Combining Condensed
Financial Statements". For financial reporting purposes, Kroll-O'Gara will be
deemed to be the predecessor to KRCS. Accordingly, the unaudited pro forma
financial information for KRCS is based upon the historical financial statements
of Kroll-O'Gara. The unaudited pro forma financial information for KRCS also
reflects the financial position and results of operations of The O'Gara Company
as discontinued operations, which are not presented in a pro forma presentation,
as well as other aspects of the reorganization and split-up as more fully
explained in "Unaudited Pro Forma Combining Condensed Financial Statements."
Upon receipt of shareholder approval of the split-up, the historical financial
statements of KRCS, which are the historical financial statements of
Kroll-O'Gara, will be restated to eliminate the financial results of The O'Gara
Company and reflect them as discontinued operations. Because of the foregoing
and as a result of the acquisitions made in 1997, 1998 and 1999, described
below, financial results from period-to-period are not comparable.
GENERAL INFORMATION AND RECENT DEVELOPMENTS
KRCS is a wholly owned holding company subsidiary that was formed on July
17, 2000 in connection with the split-up of Kroll-O'Gara to operate and manage
the investigations and intelligence services business of Kroll-O'Gara. As part
of the split-up of Kroll-O'Gara, the investigations and intelligence services
business as well as the voice and data communications business of Kroll-O'Gara
will be contributed to KRCS. KRCS intends to sell the voice and data
communications business, which we refer to as the voice and data communications
group, as soon as possible after the split-up.
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. under 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 April 18, 2000 Kroll-O'Gara announced that it would explore a split-up
of its principal businesses into two stand-alone companies. On August 30, 2000
Kroll-O'Gara announced that its board of directors had approved an agreement and
plan of reorganization and dissolution that will separate its two principal
operating segments, the security products and services business and the
investigations and intelligence services business into two distinct companies.
Under this agreement, we will receive substantially all of the assets and
liabilities of Kroll-O'Gara's investigations and intelligence services business
and voice and data communications business and 40% of Kroll-O'Gara's ownership
interest in the common stock of Securify, as well as approximately 58% of
Kroll-O'Gara's assets and liabilities that are not attributable to a particular
business group. The remaining business of Kroll-O'Gara, the security products
and services group and 60% of Kroll-O'Gara's ownership interest in the common
stock of Securify, as well as approximately 42% of the other assets and
liabilities that are not attributable to a particular business group, will be
transferred to and assumed by The O'Gara Company. After this reorganization,
some management shareholders of Kroll-O'Gara will exchange all of their shares
of Kroll-O'Gara common stock for shares of KRCS common stock, and other
management shareholders of Kroll-O'Gara will exchange all of their shares of
Kroll-O'Gara common stock for shares of The O'Gara Company common stock. After
these exchanges, Kroll-O'Gara will distribute the remaining shares of KRCS
common stock and The O'Gara Company common stock held by it to its shareholders.
The exchanging management shareholders will not participate in this
distribution.
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<PAGE> 35
Following the split-up, we and The O'Gara Company will be separate publicly
traded companies and Kroll-O'Gara will be dissolved. Completion of the split-up
is subject to a number of conditions, including the receipt of a favorable tax
ruling and the approval of the Kroll-O'Gara shareholders. We expect that
completion of the split-up will occur in the fourth quarter of 2000 or first
quarter of 2001.
Costs associated with the split-up for the six months ended June 30, 2000
were approximately $0.4 million ($0.02 per diluted share) and consisted
primarily of fees for attorneys, accountants and other related charges. We
anticipate additional expenses will be incurred in the second half of 2000.
We are a leading global provider of investigations, intelligence and risk
mitigation consulting services. Through a network of 53 offices and more than
2,000 employees located in 18 countries, we provide risk mitigation consulting
services to governments and multinational corporations. Our global platform
allows us to address those issues with skilled investigators and consultants who
have first hand knowledge of local customs, business practices and information.
We report our revenue from continuing operations through two groups. The
investigations and intelligence services business consists of the following
categories: business intelligence and investigation services, corporate
services, financial services, security services and technology services. The
voice and data communications business offers three types of products: satellite
communication and navigation equipment, packages of satellite airtime and
customized design, hardware and software integration services relating to
satellite communication.
REVENUE RECOGNITION
KRCS recognizes revenue as services are performed. We record either billed
or unbilled accounts receivable based on case-by-case invoicing determinations.
Revenues are recognized on a "time and materials" or "proportional performance
method" basis, depending upon the arrangement with the customer. Revenue related
to time and materials arrangements are recognized in the period in which the
services are performed as follows: revenues from standard hourly rate
engagements are recognized as hours are recorded and costs are recognized as
incurred and revenues from standard daily rate arrangements are recognized at
amounts represented by the agreed-upon billing amounts and costs are recognized
as incurred. Revenues related to fixed price arrangements are recognized based
upon costs incurred as a percentage of the estimated total direct costs of the
respective arrangements. The cumulative impact of any revisions in estimated
total revenues and direct contract costs are recognized in the period in which
they become known.
We usually enter into engagement letters with our customers prior to the
time we begin work on a project. We do not believe it is appropriate to
characterize these arrangements as backlog because these arrangements generally
provide that they can be terminated without significant advance notice or
penalty. Generally, in the event that a client terminates a project, the client
remains obligated to pay us for services performed and expenses incurred through
the date of termination.
COST OF SALES
Our cost of sales includes professional compensation, other direct contract
expenses and some other costs of service.
Competition for consulting professionals, particularly for personnel with
specific risk mitigation skills necessary to perform the services which we
offer, has caused wages to increase at a rate greater than the general rate of
inflation. As with other professional service firms, we must adequately
anticipate wage increases. See "Risk Factors - Risks Related to our Business."
Our success is largely dependent upon the ability to hire and retain talented
people at a time when the industry is generally experiencing a shortage of
skilled professionals and a high rate of employee turnover.
34
<PAGE> 36
Other direct contract expenses include costs directly attributable to
client contracts. These costs include such items as contractor expenses, travel
expenses for professional staff and independent contractors, hardware and
supplies purchases and reproductions costs.
Other costs of service primarily consist of the costs attributable to the
support and maintenance of our professional staff, as well as other costs of
servicing our clients. These costs include occupancy and communications costs
relating to office space utilized by professional staff, the costs of training
and recruiting professional staff, bad debts and the amortization of our
accumulated databases assets that are utilized in investigative research for
clients.
ACQUISITIONS
KRCS has pursued a strategy of growth and completed a number of
acquisitions in 1998 and 1999, some of which have been accounted for as poolings
of interest and others of which have been accounted for as purchases.
Most recently, on May 16, 2000, KRCS 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
paid in cash of $0.4 million and a note payable of $0.2 million to the former
owner. The acquisition has been accounted as a purchase. Goodwill related to
this transaction was approximately $0.4 million and is being amortized over 25
years. The Search Is On specializes in obtaining public records information for
use in providing background investigations to clients.
Other acquisitions are listed in the following chart.
A. POOLINGS(1)
<TABLE>
<CAPTION>
COMPANY BUSINESS DATE ACQUIRED CONSIDERATION(4)
------- ---------------------------- ------------------ ------------------------
<S> <C> <C> <C>
Laboratory Specialists of Drug testing December 7, 1998 1,209,053 shares
America, Inc.(2)
Schiff & Associates, Inc. Security architectural December 31, 1998 169,521 shares
services
Financial Research, Inc. Business valuation and March 1, 1999 102,555 shares
economic damage analysis
services
Background America, Inc. Background investigative June 16, 1999 899,243 shares
services
B. PURCHASES(3)
Corplex, Inc. Investigative and executive March 1, 1998 29,207 shares
protection services
Lindquist Avey MacDonald Forensic and investigative June 1, 1998 $4.7 million in cash and
Baskerville, Inc. accounting services; 278,340 shares
headquartered in Canada
Kizorek, Inc. (renamed Video surveillance services July 1, 1998 $0.8 million in cash and
InPhoto Surveillance) 352,381 shares
Holder Associates, S.A. Security services in October 1, 1998 $4.5 million in cash and
Argentina 46,287 shares
Fact Finders Ltd. Investigates intellectual November 1, 1998 $3.2 million in cash,
property infringement cases plus a 3-year earn-out
in Hong Kong and the of up to $3 million
People's Republic of China based on profits
The Buchler Phillips Group Corporate advisory practices April 1, 1999 $12 million in cash and
366,469 shares
</TABLE>
---------------
(1) Pooling of interest accounting requires the restating of all prior period
consolidated financial information as though the acquired entity had always
been consolidated with KRCS.
35
<PAGE> 37
(2) In 1997 and 1998 Laboratory Specialists paid a total of approximately $5.9
million to acquire customer lists and related assets from Pathology
Laboratories, Ltd., Harrison Laboratories, Inc., Accu-Path Medical
Laboratory, Inc. and TOXWORX Laboratories, Inc.
(3) KRCS's consolidated financial statements include the reported results of
each entity from the effective date of the acquisition.
(4) References to shares mean shares of common stock of Kroll-O'Gara.
RESTRUCTURING OF OPERATIONS
Due to multiple acquisitions completed by KRCS in 1998 and 1999,
integration of the operations of the acquired companies with existing operations
became a strategic initiative for our management in 1999. As part of this
initiative, management evaluates our business segments to determine if our core
businesses within the segments are operating efficiently. As a result of
management's evaluation, several less profitable operating facilities were
closed to enable us to focus on integrating existing facilities with the newly
acquired businesses. Management concluded that a cost savings initiative was
required and would be achieved largely through operating efficiencies and a
corresponding decrease in personnel.
In the first quarter of 1999, KRCS began implementing a plan to reduce
costs and improve operating efficiencies and recorded a non-recurring pre-tax
restructuring charge of approximately $0.5 million. In the second quarter of
1999, KRCS completed the restructuring plan and recorded an additional
non-recurring pre-tax restructuring charge of $3.9 million. The principal
elements of the restructuring plan were the closing of two offices, the
relocation of another office and the staff reduction of approximately 27
employees. The primary components of the restructuring charge were severance
costs and lease termination costs.
INTENTION TO SELL THE VOICE AND DATA COMMUNICATIONS BUSINESS
As part of the split-up, Kroll-O'Gara will contribute the voice and data
communications business to KRCS. This business was previously accounted for as a
discontinued operation in the financial statements of Kroll-O'Gara, when
Kroll-O'Gara was negotiating its sale. In May 2000, Kroll-O'Gara terminated all
then pending negotiations to sell this business. Accordingly, the results of
operations of the voice and data communications business for all prior periods
have been reclassified from discontinued operations to continuing operations. We
intend to sell this business as soon as possible after the split-up. Management
expects proceeds from the sale to cover our investment in net assets as well as
any costs incurred in the sale. However, there can be no assurance that
management will be successful in selling the business or on favorable terms.
KRCS recognizes revenue from the voice and data communications business 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.
A summary of the operating results of the voice and data communications
group is as follows:
<TABLE>
<CAPTION>
FOR THE YEARS ENDED FOR THE SIX MONTHS ENDED JUNE 30,
------------------------------------------------------- ----------------------------------
1997 1998 1999 1999 2000
----------------- ----------------- ----------------- ---------------- ----------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $17,437 100.0% $17,653 100.0% $19,931 100.0% $6,687 100.0% $8,297 100.0%
======= ======= ======= ======= ======= ======= ====== ======= ====== =======
Gross profit......... $ 3,125 17.9% $ 3,522 20.0% $ 2,415 12.1% $ 823 12.3% $1,372 16.5%
======= ======= ======= ======= ======= ======= ====== ======= ====== =======
Operating income
(loss)............. $ 69 0.4% $ (635) (3.6)% $(2,598) (13.0)% $ (987) (14.8)% $ 799 (9.6)%
======= ======= ======= ======= ======= ======= ====== ======= ====== =======
</TABLE>
36
<PAGE> 38
The loss from operations of the voice and data communications group
increased $2.0 million from $0.6 million for the year ended December 31, 1998 to
$2.6 million for the year ended December 31, 1999. This increase was partially
due to an increase in its inventory reserve, which resulted from technology
changes in the telecommunications market that reduced demand and lowered sales
prices for certain items in inventory, as well as the overall impact on gross
margins resulting from the decrease in sales prices. Income from operations of
the voice and data communications group decreased $0.7 million from $0.1 million
for the year ended December 31, 1997 to a loss of $0.6 million for the year
ended December 31, 1998. The decrease in operating income was primarily
attributable to an increase in selling expenses to support expected revenue
growth in 1998. Revenue growth did not occur and sales levels remained
consistent with 1997 levels.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales. As indicated above, the table and detailed
discussion of the pro forma results of operations and pro forma financial
condition that follow relate only to the investigations and intelligence
services business and do not include the voice and data communications business,
which is expected to be sold as soon as possible after the split-up.
<TABLE>
<CAPTION>
FOR THE SIX
MONTHS
FOR THE YEARS ENDED: ENDED JUNE
--------------------- -------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales................................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of sales............................................. 61.3% 56.2% 55.8% 55.7% 56.6%
----- ----- ----- ----- -----
Gross margin......................................... 38.7% 43.8% 44.2% 44.3% 43.4%
Operating Expenses:
Selling and marketing..................................... 7.4% 9.6% 8.9% 9.4% 9.1%
General and administrative................................ 25.3% 23.2% 28.1% 24.5% 27.7%
Restructuring charge...................................... -- -- 2.2% 4.6% --
Merger related costs...................................... 4.6% 3.7% 2.1% 3.5% 0.4%
Failed merger costs....................................... -- -- 0.5% -- 1.5%
----- ----- ----- ----- -----
Operating income.......................................... 1.4% 7.3% 2.4% 2.3% 4.6%
Other income (expense):
Interest expense.......................................... (2.1)% (1.4)% (1.4)% (1.0)% (1.4)%
Interest income........................................... 0.2% 0.5% 0.2% 0.2% 0.1%
Earnings (losses) of equity investment.................... -- (0.7)% (0.4)% 0.1% (1.9)%
Other, net................................................ -- 0.7% -- (0.2)% 0.1%
----- ----- ----- ----- -----
Income (loss) from continuing operations before provision
for income taxes and cumulative effect of accounting
change.................................................. (0.6)% 7.1% 1.2% 1.3% 3.3%
Provisions for income taxes............................... 0.5% 2.1% 0.1% 2.9% 1.0%
----- ----- ----- ----- -----
Net income (loss) from continuing operations.............. (1.1)% 4.9% 1.1% (1.6)% 2.3%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999 "PRO
FORMA"
NET SALES
Net sales increased $13.0 million, or 14.7%, to $101.4 million for the six
months ended June 30, 2000 from $88.4 million for the six months ended June 30,
1999. A substantial portion of this increase is the result of our acquisition of
Buchler Phillips, which was only included for the last three months of
37
<PAGE> 39
the six months ended June 30, 1999. Net sales attributable to this acquisition
amounted to $4.7 million for the first six months of 1999 compared to $10.1
million for the first six months of 2000, an increase of $5.4 million. Excluding
net sales of Buchler Phillips, net sales increased $7.6 million or 9.1% for the
six months ended June 30, 2000. This increase is primarily due to the increase
in net sales of the corporate services group and domestic business
investigations and intelligence group, which increased $2.1 million and $3.6
million, respectively, for the six months ended June 30, 2000 compared to the
six months ended June 30, 1999.
COST OF SALES
Cost of sales increased $8.2 million, or 16.6%, to $57.4 million for the
six months ended June 30, 2000 from $49.3 million for the six months ended June
30, 1999. The increase in cost of sales was primarily due to our acquisition of
Buchler Phillips, which was only included for the last three months of the six
months ended June 30, 1999. Cost of sales of Buchler Phillips increased $2.6
million to $5.1 million for the six months ended June 30, 2000 from $2.5 million
for the six months ended June 30, 1999. Excluding cost of sales of Buchler
Phillips, cost of sales increased $5.7 million or 11.9% for the six months ended
June 30, 2000. Gross profit as a percent of net sales was 43.4% for the six
months ended June 30, 2000 compared to 44.3% for the six months ended June 30,
1999. The decrease in gross profit as a percentage of net sales is primarily due
to the increased employee compensation costs and subcontractor fees associated
with generating professional fee revenue. In addition, provisions for bad debt
increased $1.1 million for the six months ended June 30, 2000 from the six
months ended June 30, 2000.
OPERATING EXPENSES
Operating expenses increased $2.3 million, or 6.1%, to $39.3 million for
the six months ended June 30, 2000 from $37.1 million for the six months ended
June 30, 1999. For the six months ended June 30, 1999, KRCS recorded $7.2
million of restructuring and merger costs in connection with the restructuring
of its corporate services group and the acquisition of Background America, Inc.,
which was accounted for as a pooling of interests. For the six months ended June
30, 2000, KRCS recorded $2.0 million of separation, failed merger and merger and
integration costs associated with (1) the split-up of Kroll-O'Gara, (2) the
termination of the Blackstone transaction and (3) continuing integration costs
associated with the acquisition of Buchler Phillips.
Excluding restructuring, separation, failed merger and merger and
integration charges, operating expenses increased $7.4 million, or 24.6%, to
$37.3 million for the six months ended June 30, 2000 from $30.0 million for the
six months ended June 30, 1999. A significant portion of this increase is due to
the acquisition of Buchler Phillips, which was only included for the last three
months of the six months ended June 30, 1999. Excluding the operating expenses
of Buchler Phillips, operating expenses increased $4.8 million or 16.8% for the
six months ended June 30, 2000 due to personnel and professional services
required to administer the growth experienced for the acquisitions completed
since 1998, depreciation and amortization of systems development and related
consulting support costs for the new accounting and operations system placed
into service for the year 2000, and the additional amortization of goodwill.
As a percentage of net sales, operating expenses decreased from 42.0% for
the six months ended June 30, 1999 to 38.8% for the six months ended June 30,
2000. Excluding restructuring, separation, failed merger and merger and
integration charges, as a percentage of net sales, operating expenses increased
from 33.9% for the six months ended June 30, 1999 to 36.8% for the six months
ended June 30, 2000, as explained above.
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<PAGE> 40
OTHER INCOME (EXPENSE)
Interest expense increased $0.5 million, or 60%, to $1.4 million for the
six months ended June 30, 2000 from $0.9 million for the six months ended June
30, 1999. This increase was the result of the portion of increased borrowings
under Kroll-O'Gara's revolving credit facility that was allocated to KRCS. For
most of the first six months of 1999, KRCS had excess funds as a result of the
funds from Kroll-O'Gara's public offering of stock completed in May 1998 that
were allocated to KRCS, and no additional borrowings were required under the
revolving credit facility until the purchase of Buchler Phillips on June 3,
1999.
Earnings (losses) of equity investment represents KRCS's 40% ownership
interest in Securify. Earnings on equity investment decreased $2.0 million to a
loss of $1.9 million for the six months ended June 30, 2000 from earnings of
$0.1 million for the six months ended June 30, 1999. This loss was primarily due
to a decrease in sales and an increase in personnel costs from a continuing
focus on Securify service capabilities and the related inability to establish a
firm customer base until the development of the business is complete.
PROVISION FOR INCOME TAXES
The provision for income taxes for the six months ended June 30, 2000 was
$1.1 million compared to $2.6 million for the six months ended June 30, 1999.
The effective tax rates for the periods were 215.8% in 1999 and 31.4% in 2000.
The 1999 effective tax rate does not reflect the benefit of some foreign
jurisdiction net operating losses that KRCS was not able to recognize for tax
purposes due to the uncertainty relating to the future ability to realize the
net operating loss carryforward. In 2000, the effective tax rate reflects the
favorable impact of the reversal of the valuation allowance previously provided
in 1999 related to those foreign jurisdiction net operating loss carryforwards,
net of other foreign losses that do not have a current benefit.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 "PRO
FORMA"
NET SALES
Net sales increased $60.6 million, or 49.4%, to $183.5 million for the year
ended December 31, 1999 from $122.9 million for the year ended December 31,
1998. A substantial portion of this increase is the result of acquisitions
completed in 1998 and the first half of 1999. Net sales of these acquired
companies accounted for under the purchase method of accounting increased $44.9
million, or 231.4%, from $19.4 million for the year ended December 31, 1998 to
$64.3 million for the year ended December 31, 1999. Excluding the net sales of
these acquired companies, net sales increased $15.7 million or 15.2% for the
year ended December 31, 1999. This increase is primarily due to the increase in
net sales of the corporate services and business investigations and intelligence
groups.
COST OF SALES
Cost of sales increased $33.3 million, or 48.3%, to $102.3 million for the
year ended December 31, 1999 from $69.0 million for the year ended December 31,
1998, primarily due to the acquisitions completed in the second half of 1998 and
the first half of 1999. Excluding cost of sales of these acquired companies,
cost of sales increased $9.3 million or 15.6% for the year ended December 31,
1999. Gross profit as a percent of net sales was 44.2% for the year ended
December 31, 1999 compared to 43.8% for the year ended December 31, 1998. This
increase in gross profit as a percentage of net sales is due to the fact that in
1999, KRCS received $1.5 million in settlement for receivables that had been
written off as uncollectible in a previous year. Without this settlement, gross
profit as a percentage of net sales for the year ended December 31, 1999 would
have been 43.4%. The remaining increase in
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gross profit as a percentage of net sales is primarily due to the relatively
higher margin derived from the services provided by Buchler Phillips.
OPERATING EXPENSES
Operating expenses increased $31.9 million, or 71.0%, to $76.7 million for
the year ended December 31, 1999 from $44.9 million for the year ended December
31, 1998. This increase is primarily due to the acquisitions completed in the
second half of 1998 and first half of 1999, as well as restructuring charges and
merger-related costs recorded during 1999. Excluding restructuring, failed
merger and merger related costs, operating expenses increased $27.7 million for
the year ended December 31, 1999. Operating expenses of $24.5 million were
attributable to acquired companies in 1999. Restructuring charges, failed merger
and merger-related costs were $8.9 million for the year ended December 31, 1999
compared to merger-related costs of $4.6 million for the year ended December 31,
1998. Of the restructuring charges in 1999, $1.8 million is related to the
integration of InPhoto Surveillance, which was acquired in 1998.
Excluding operating expenses of acquired companies, operating expenses
increased $13.5 million for the year ended December 31, 1999. In 1999,
restructuring charges and merger related expenses increased $4.3 million,
primarily as a result of a restructuring charge of $3.9 million for the
reorganization of the corporate services group. In addition, in 1999 KRCS
recorded approximately $0.9 million in failed merger expenses associated with
the terminated transaction with Blackstone. The remaining increase in operating
expenses is attributable to increased costs for marketing and promotion to
develop a unified marketing approach for new businesses and our expanded service
capabilities. KRCS also recorded a one time charge of $0.5 million for the
reorganization of the corporate marketing department, which primarily consisted
of severance payments. Amortization of goodwill associated with acquisitions
increased approximately $1.2 million for the year ended December 31, 1999. In
addition, KRCS incurred an overall increase in compensation and benefits and an
increase in personnel and professional services required to administer its
growth from the acquisitions completed in 1998 and 1999.
As a percentage of net sales, operating expenses, before restructuring,
merger-related costs and failed merger costs were 32.8% for the year ended
December 31, 1998 and 37.0% for the year ended December 31, 1999. The increase
in operating expenses as a percentage of net sales is primarily the result of
increased fixed costs to administer the growth of KRCS since the beginning of
1998.
OTHER INCOME (EXPENSE)
Interest expense increased $0.7 million, or 41.0%, to $2.5 million for the
year ended December 31, 1999 from $1.8 million for the year ended December 31,
1998. Upon the completion of a stock offering by Kroll-O'Gara in May 1998,
Kroll-O'Gara repaid a significant portion of its debt. As a result, lower
interest expense starting in the third quarter of 1998 and continuing through
the first quarter of 1999 was allocated to KRCS. However, due to the significant
number of acquisitions completed in the second half of 1998 and first half of
1999, KRCS began to draw on Kroll-O'Gara's $25.0 million credit facility in
1999, primarily to fund the acquisition of Buchler Phillips and to fund its
growth and working capital requirements. The increase in borrowings after the
first quarter of 1999 under Kroll-O'Gara's credit facility resulted in an
increase in interest expense for the fiscal year ended December 31, 1999.
Loss on equity investment decreased $0.1 million to $0.7 million for the
year ended December 31, 1999 from $0.8 million for the year ended December 31,
1998. Kroll-O'Gara acquired Securify, which began operations in February 1998,
in December 1998 and accounted for the transaction as a pooling of interests. In
1998, KRCS recognized its allocated portion of Securify's start-up losses.
Although the first
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half of 1999 was marginally profitable, Securify experienced a decrease in sales
and an increase in personnel costs in the second half of the year as it focused
on its service capabilities and further developed its business plan.
PROVISION FOR INCOME TAXES
The provision for income taxes was $0.1 million for the year ended December
31, 1999 compared to $2.6 million for the year ended December 31, 1998. The
effective tax rates for the periods were 5.8% in 1999 and 30.3% in 1998. The
1999 tax provision reflects the favorable impact of the reversal of the
valuation allowance related to some foreign jurisdiction net operating loss
carryforwards, net of other foreign losses that do not have a current benefit.
NET INCOME
Net income decreased $4.0 million to $2.1 million for the year ended
December 31, 1999 from $6.1 million for the year ended December 31, 1998. This
decrease was due primarily to a $31.9 million increase in operating expenses,
partially offset by $27.3 million in increased gross profit and a decreased
provision for income taxes, as described above.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997 "PRO
FORMA"
NET SALES
Net sales increased $30.7 million, or 33.3%, to $122.9 million for the year
ended December 31, 1998 from $92.1 million for the year ended December 31, 1997.
This increase was primarily due to the inclusion of net sales from the
acquisitions of Lindquist Avey MacDonald Baskerville, Inc., InPhoto
Surveillance, Inc., Corplex, Inc., Fact Finders Ltd. and Holder Associates,
S.A., which were acquired in 1998 and accounted for under the purchase method of
accounting. Excluding net sales of these acquired companies, net sales for KRCS
would have been $103.5 million for the year ended December 31, 1998 compared to
$92.1 million for the year ended December 31, 1997, an increase of $11.4
million, or 12.4%.
The increase in net sales, excluding net sales of acquired companies for
KRCS, was due to an increase in net sales of the corporate services group, where
revenues increased $6.4 million, or 37.7%, to $23.4 million for the year ended
December 31, 1998 from $17.0 million for the year ended December 31, 1997. The
remaining increase was the result of internal growth in the business
investigations and intelligence group, which opened new offices in Dallas,
Boston, Houston and Mexico City.
COST OF SALES
Cost of sales increased $12.5 million, or 22.1%, to $69.0 million for the
year ended December 31, 1998 from $56.5 million for the year ended December 31,
1997. This increase in cost of sales was primarily due to the cost of sales of
companies acquired in 1998 and accounted for under the purchase method of
accounting. Cost of sales of companies acquired in 1998 amounted to $10.4
million for the year ended December 31, 1998. Excluding the cost of sales of
these acquired companies, cost of sales increased $2.1 million, or 3.7%, for the
year ended December 31, 1998. The remaining increase in cost of sales was due to
the increased level of business activity experienced in the core businesses in
1998. Gross profit as a percentage of net sales was 43.8% for the year ended
December 31, 1998 compared to 38.7% for the year ended December 31, 1997. This
increase was primarily due to higher average gross margins of 46.4% from the
companies acquired in 1998, and the increased gross profit as a percentage of
net sales of the business investigations and intelligence group. This increase
in gross profit as a
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percentage of net sales for the business investigations and intelligence group
was a result of several large, higher margin engagements that were booked during
1998; these types of engagement are historically infrequent in nature.
OPERATING EXPENSES
Operating expenses increased $10.5 million, or 30.5%, to $44.9 million for
the year ended December 31, 1998 from $34.4 million for the year ended December
31, 1997. Included in operating expenses in 1997 were approximately $4.3 million
in expenses related to the merger between Kroll Holdings, Inc and The O'Gara
Company. In 1998, KRCS recorded approximately $4.6 million in merger-related
expenses primarily associated with the acquisitions of Laboratory Specialists of
America, Schiff & Associates, Securify and Background America, all of which were
accounted for under the pooling of interests method of accounting.
Before merger-related expenses, operating expenses increased $10.2 million,
or 33.8%, to $40.3 million for the year ended December 31, 1998 from $30.1
million for the year ended December 31, 1997. The increase was primarily due to
operating expenses incurred by companies acquired in 1998, which accounted for
$6.1 million of the increase from 1997. The additional increase in operating
expenses is attributable to an increase in the level of personnel and
professional services required to administer KRCS's growth in 1998.
As a percentage of net sales, operating expenses, before merger related
costs, were 32.7% and 32.8% for the years ended December 31, 1997 and 1998,
respectively. As a result of investments made by KRCS in facilities and
personnel in previous periods, KRCS did not require additional commitments of
fixed costs relative to the level of net sales in 1998.
OTHER INCOME (EXPENSE)
Interest expense decreased $0.2 million, or 9.9%, to $1.8 million for the
year ended December 31, 1998 from $2.0 million for the year ended December 31,
1997. Upon completion of a stock offering in May 1998, Kroll-O'Gara repaid
approximately $14.8 million of its debt. As a result, interest expense decreased
starting in the third quarter of 1998.
On May 30, 1997, Kroll-O'Gara entered into an agreement with institutional
investors to issue and sell $35.0 million aggregate principal amount of senior
notes. This agreement provided for a reduction of the interest rate if specified
criteria were met. Kroll-O'Gara complied with the criteria and the interest rate
was decreased, beginning in the second quarter of 1998. The reduction changed
the interest rate from 9.56% to 8.56% and contributed to the decrease in
interest expense for the year ended December 31, 1998.
Losses from KRCS's equity investment in Securify were $0.8 million for the
year ended December 31, 1998, the initial year of Securify's operations and the
year in which Kroll-O'Gara acquired it.
PROVISION FOR INCOME TAXES
The provision for income taxes was $2.6 million for the year ended December
31, 1998 compared to $0.5 million for the year ended December 31, 1997. The
effective tax rates for the periods were 30.3% in 1998 and 95.2% in 1997. In
1997, KRCS recorded taxes at an effective rate significantly higher than it had
previously experienced because some of the merger-related expenses incurred in
the period were not deductible for tax purposes. In 1998, KRCS determined that
some of the merger expenses incurred in 1997 would be deductible in the future,
which had the effect of reducing the
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effective tax rate in 1998. In addition, the 1998 tax provision also reflected
the favorable impact of foreign locations with statutory tax rates at levels
below U.S. tax rates and the reversal of the valuation allowance related to some
foreign net operating loss carryforwards.
NET INCOME (LOSS)
Net income increased $7.4 million to $6.1 million for the year ended
December 31, 1998 from a net loss of $1.4 million for the year ended December
31, 1997. The increase was due primarily to an increase in gross profit of $18.2
million, offset by $10.5 million in increased operating expenses and an
increased provision for income taxes, as described above.
LIQUIDITY AND CAPITAL RESOURCES
General. We have historically met our operating cash needs by utilizing
advances from Kroll-O'Gara to supplement cash provided by operations and other
financing activities, excluding non-cash charges such as depreciation and
amortization.
Financing. We expect to obtain debt funding prior to completion of the
split-up and to use substantially all of the proceeds to repay debt of
Kroll-O'Gara that we will assume under the agreement and plan of reorganization
and dissolution and to provide funds for working capital purposes.
Kroll-O'Gara's currently existing credit agreement includes certain
financial covenant restrictions. Kroll-O'Gara was not in compliance with certain
of these covenants as of December 31, 1999 and as of June 30, 2000. All the
events of non-compliance have been subsequently amended or waived by the lenders
or the relevant agreement has been amended. If the lenders had not provided a
waiver or amendment, all amounts outstanding under the credit agreement would
have been subject to acceleration by the lenders.
On September 14, 2000, Kroll-O'Gara amended its credit agreement to provide
for an extension of its 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 bear interest at
rates ranging from prime to prime plus 0.75%, or, at Kroll-O'Gara's option,
LIBOR plus 1.50% to LIBOR plus 2.50%, dependent upon a defined financial ratio.
Cash flows from operating activities. Cash used in operating activities
increased from $3.4 million for the first six months of 1999 to $5.8 million for
the six months of 2000. In 1999 and 2000, cash was used primarily to fund
working capital investments. Cash used in operating activities increased from
$1.9 million for the year ended December 31, 1998 to $3.5 million for the year
ended December 31, 1999. In both years, cash was used primarily to fund working
capital investments.
Cash flows from investing activities. For the six months ended June 30,
2000, KRCS used $5.0 million for investing activities, comprised of $2.6 million
for capital expenditures relating to leasehold improvements, vehicles, furniture
and fixtures and office equipment, $2.2 million for additions to databases and
$0.3 million for acquisitions. For the six months ended June 30, 1999, KRCS used
$13.0 million for investing activities, comprised of $5.1 million for capital
expenditures relating to leasehold improvements, vehicles, furniture and
fixtures and office equipment, $1.8 million for additions to databases, and
$12.0 million for acquisitions. This activity in 1999 was offset by proceeds
realized from the sale of marketable securities of approximately $6.0 million.
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For the year ended December 31, 1999, KRCS used $20.4 million for investing
activities, comprised of $6.4 million for capital expenditures relating to
leasehold improvements, vehicles, furniture and fixtures and office equipment,
$3.9 million for additions to databases, $4.8 million for the acquisition and
implementation of a new enterprise system and upgrades of general information
systems unrelated to KRCS's Year 2000 compliance efforts and $12.0 million for
the acquisition of Buchler Phillips. This activity in 1999 was offset by
proceeds realized from the sale of marketable securities of approximately $6.7
million. The levels of total capital expenditures made by Kroll-O'Gara in 1999
were in excess of the amounts permitted by its credit agreement with KeyBank.
KeyBank has provided Kroll-O'Gara a waiver from the requirements of this
covenant.
For the year ended December 31, 1998, KRCS used $22.9 million for investing
activities, comprised of $3.3 million for capital expenditures relating to
leasehold improvements, furniture and fixtures and office equipment, $4.2
million for additions to databases and $15.4 million for the acquisition of
Lindquist Avey Macdonald Baskerville, InPhoto Surveillance, Holder Associates
and Fact Finders and the purchase of assets of Pathology Laboratories, Accu-Path
Medical Laboratory, Harrison Laboratories and TOXWORX Laboratories.
We anticipate that, to the extent KRCS continues to pursue strategic
acquisitions, additional cash outlays will be required.
Cash flows from financing activities. Cash provided by financing activities
for the first six months of 1999 was $19.1 million. For the first six months of
2000, cash provided by financing activities was $4.3 million. In both periods,
cash was provided by advances from Kroll-O'Gara, net of repayments of long term
debt. Cash provided by financing activities decreased from $29.4 million for the
year ended December 31, 1998 to $26.9 million for the year ended December 31,
1999. Cash provided by financing activities in 1999 was primarily provided by
borrowings under Kroll-O'Gara's credit agreement as well as additional advances
from Kroll-O'Gara. Cash provided by financing activities in 1998 included
proceeds from Kroll-O'Gara's stock offering, net of repayments of long term
debt.
Foreign operations. We attempt to mitigate the risks of doing business in
foreign countries by separately incorporating our operations in those countries;
maintaining reserves for credit losses; and maintaining insurance on equipment
to protect against losses related to political risks and terrorism.
Quarterly fluctuations. Our operations may fluctuate on a quarterly basis
as a result of the nature of our business. See "Risk Factors -- Risks Related to
Our Business." 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 "Management's Discussion and Analysis of
Pro Forma Financial Condition and Pro Forma Results of Operations" contains
statements which we believe are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements are based
upon management's estimates, assumptions and projections and are subject to
substantial risks and uncertainties. Factors that could cause actual results to
differ materially from those in the forward-looking statements include, among
other things: contract 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 independent
contractors 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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Potential Accounting Pronouncements. 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 proposed views would require KRCS to expense some or all of
the database costs that KRCS 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 our financial
position and results of operations. To date, the EITF has not made any official
determinations on this issue.
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BUSINESS
OVERVIEW
We are a leading provider of investigations, intelligence and risk
mitigation consulting services. Through a network of 53 offices located in 18
countries, we provide information, analysis and advice, including:
- business investigations and intelligence services, including nonfinancial
due diligence, litigation support, fraud investigations, monitoring
services and special inquiries and intellectual property infringement
investigations;
- corporate services, including pre-employment background checking, drug
testing, surveillance and vendor integrity programs;
- financial services, including forensic accounting, recovery and
restructuring, asset tracing and analysis services and pre-acquisition
financial due diligence;
- security services, including risk and crisis management, security
architecture and design, corporate security planning and executive
protection, and electronic countermeasures; and
- technology services, including computer forensics, data recovery and
litigation and systems support services.
BUSINESS STRATEGY
We plan to increase our profitability and revenues by developing our
competitive strengths and taking advantage of favorable industry conditions,
including projected industry growth, a consolidating market and international
corporate expansion, as well as the following strategies:
Expand Existing Customer Base. We are able to offer our client base a
single source for global risk mitigation consulting services. In order to take
advantage of marketing opportunities, we utilize a global account manager
program. This program ensures that the full range of our services within each
operating group around the world is effectively marketed to our clients. Our
global account managers are compensated based upon the total relationship with a
client. This program improves communication and client knowledge about our
organization and services and broadens our relationship with our clients.
Capitalize on Growing International Opportunities. With the continued
growth of cross-border business transactions, companies are exposed to greater
economic and political uncertainty. We intend to capitalize on this trend by
using our brand name and business platform to attract new business
opportunities. Additionally, we will continue to expand our physical presence
into areas that are of strategic interest to our clients. For example, in the
first half of 2000, we have opened offices in South Africa, Chile, India and
Italy.
Continue to Pursue Acquisition Opportunities. Our acquisition strategy is
to pursue opportunities that will broaden our service offerings, provide
complementary services and expand our geographic presence within the risk
mitigation consulting services industry. We believe that our brand name and
business platform are advantages in attracting acquisition opportunities. Our
disciplined approach in evaluating acquisition opportunities leads us to pursue
only those that fit our profile for quality, reliability, superior customer
service and profitability. In many instances we know these candidates from
previous business relationships. The efficient transfer and integration of
acquired businesses and systems into our existing infrastructure remain one of
our top priorities throughout our strategic growth. Our ability to use our stock
as consideration in potential acquisitions will be limited for two years
following the split-up in order to preserve the split-up's tax free status. See
"Relationship with The O'Gara Company -- Tax Sharing Agreement."
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Increase Stability of Revenue Base. We intend to increase revenue stability
through:
- the acquisition of businesses which have recurring revenue streams, such
as our previous acquisitions in the areas of background checking and drug
testing;
- the continued expansion of our service line capabilities in existing
businesses, such as forensic accounting and business valuation;
- the continued expansion of our counter-cyclical businesses, such as
financial recovery, restructuring, fraud investigation, insolvency and
turnaround services; and
- increased geographic diversity.
Maximize Operating Efficiency. We seek to increase our efficiency by using
cost effective methods to minimize response times, improve the quality of
services and reduce costs. We intend to continue implementing systems to help us
improve the organization of workflow, increase employee utilization, minimize
administrative costs and facilitate the integration of acquired companies.
SERVICES
Our investigations and intelligence services are divided into five major
categories. The following table presents the aggregate net sales for each of our
five service categories for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31 JUNE 30
----------------------------- -------------------
1997 1998 1999 1999 2000
------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Business investigations and
intelligence....................... $52,719 $ 56,823 $ 71,584 $ 34,720 $ 40,214
Corporate services................... 17,152 32,764 43,350 21,581 22,775
Financial services................... 7,506 15,033 37,258 17,128 23,498
Security services.................... 14,770 18,232 30,682 14,770 14,044
Technology services.................. 0 0 625 193 886
------- -------- -------- -------- --------
Total........................... $92,147 $122,852 $183,499 $ 88,392 $101,417
======= ======== ======== ======== ========
</TABLE>
BUSINESS INVESTIGATIONS AND INTELLIGENCE SERVICES
Our business investigations and intelligence services include nonfinancial
due diligence, litigation support, fraud investigations, monitoring services and
special inquiries, and intellectual property infringement investigations.
Nonfinancial due diligence. We help our clients conduct in-depth,
insightful investigations into prospective transactions to minimize risk and
help ensure success. Without proper due diligence, businesses are exposed to an
increased likelihood of financial losses and liabilities as well as injured
reputations. We provide comprehensive background information and intelligence in
areas such as personal and business reputation, financial and operating history,
verification of key representations, records of litigation, liens or judgements,
environmental liabilities and other actual or potential problems.
Litigation Support. We provide litigation support services to a client's
outside counsel and in-house lawyers in preparation for litigation or
arbitration proceedings and in designing settlement strategies. These services
include developing evidence to support a claim or a defense, identifying and
locating material witnesses, investigating adverse witnesses, locating and
evaluating recoverable or relevant assets of adverse parties, assessing the
strategic goals and financial commitment of the opposition and helping to assess
whether an adequate recovery can be obtained if a lawsuit is successful. Our
wide-ranging information gathering can help businesses and legal strategists
decide whether to sue, go to trial or employ alternative dispute resolution and
whether, and at what level, to negotiate a
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settlement. In complex litigation, we use sophisticated software to track and
process voluminous documentation, as well as extensive database material, in
order to identify elusive connections and produce investigative leads.
Fraud Investigations. Through our forensic accounting professionals and
corporate investigators, we have the financial expertise and investigative
capability to respond to suspected wrongdoing wherever it may occur. Our fraud
investigations services encompass civil and criminal fraud, employee fraud and
theft, management fraud and theft, procurement fraud and the identification of
secret commissions and kickbacks. We have broad experience in detecting,
investigating and assisting clients in asset tracing and recovery, systems
consulting, security and internal control reviews and training on fraud
awareness, prevention and related topics.
Monitoring Services and Special Inquiries. We provide monitoring services
to, and conducts special inquiries for, clients that require an independent fact
finder to uncover and end fraud and install systems that monitor compliance. Our
lawyers, forensic accountants, investigators, analysts and industry experts seek
to identify violations of federal or state regulatory requirements or corporate
policies and consult with clients regarding establishing systems to audit and
ensure compliance with these regulatory requirements or policies. We serve as an
objective fact finder, whose work product could be turned over to a questioning
government regulator or a skeptical and vocal segment of the public. Our fact
finding efforts have been enlisted by managements and by audit committees
concerned about problems that need to be resolved within an enterprise.
Intellectual Property and Infringement Investigations. Our investigators
help to investigate and devise strategies to solve problems such as thefts of
trade secrets, threats and hostile acts, gray market and counterfeit products
and patent and trademark infringements. We attempt to determine the source and
extent of the problem, develop information about the parties responsible,
minimize damage to the client and propose effective measures to prevent further
losses.
CORPORATE SERVICES
Our corporate services include pre-employment background checking, drug
testing, surveillance and vendor integrity programs.
Pre-Employment Background Checking. We verify job applicant background
information for employers. The background investigations are made through the
use of databases and independent contractors. The searches include reviews of
credit histories, reference checks, criminal records, workers' compensation
histories and driving records as well as education and credential verification.
Drug Testing. We own and operate a state-of-the-art laboratory providing
drug testing services to corporate and institutional clients seeking to detect
and deter the use of illegal drugs. The laboratory is certified by the federal
Substance Abuse and Mental Health Services Administration to conduct drug
testing using forensic procedures required for legal defensibility of test
results. Our drug testing services also include assisting clients with the
development of drug testing programs, training client personnel, managing
specimen collections, arranging for transportation of specimens to our
laboratory, identifying trends in local and national drug use, interpreting test
results and providing expert testimony concerning test results.
Surveillance. We provide video surveillance services to its clients in
connection with investigating exaggerated disability claims and other frauds. In
performing surveillance, we utilize our fleet of more than 125 vans stationed
throughout the United States, each containing state-of-the-art equipment
designed to obtain clear footage without detection. Agents with extensive
training and experience man the surveillance vans.
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Vendor Integrity Programs. We provide profiles of a client's vendors, using
information provided by the vendors and obtained from independent sources. A
client utilizes these profiles to insure that its vendors adhere to the client's
standards for ethical business practices. The fees for this service may be paid
either through nominal fees charged to each participating vendor or billed
directly to the client.
FINANCIAL SERVICES
Our financial services include forensic accounting, recovery and
restructuring, asset tracing and analysis services and pre-acquisition due
diligence.
Forensic Accounting. Our forensic and investigative accountants work with
corporations, governments, law firms, financial institutions and individuals to
assist them in successfully resolving complex, high risk, financial and
investigative concerns on a worldwide basis. Forensic accounting, by definition,
is the application of financial knowledge and skills, in conjunction with
investigative strategies and techniques, to resolve matters that are financial
in nature in a legally defensible manner. Our services include commercial
litigation support, corporate investigations, statutory and regulatory
compliance, insurance claims, business valuations, financial due diligence and
visual strategies.
Recovery and Restructuring. Our clients include creditors, lenders and
investors as well as companies in difficult financial situations. The services
we provide relate to turnarounds, liquidations, corporate recovery and
pre-lending and refinancing reviews. We have helped hundreds of troubled
companies recover and restructure their operations by investigating and
reviewing their management accounts, financial systems and operations. We also
help them implement turnaround strategies and design innovative solutions that
can increase sales and profits, lower costs and improve efficiency. Our bank
clients also turn to us for financial forecasts, advice and intelligence prior
to taking on new loans or advancing additional funds to current customers.
Asset Tracing and Analysis. Our asset tracing services consist of tracing
and locating assets anywhere in the world. This includes developing financial
profiles and lifestyle assessments in connection with bankruptcy cases, loan
defaults, internal investigations and other due diligence requests by clients.
In many cases, we have worked with trustees in bankruptcy and insolvency,
creditors' committees, bankers in workout and restructuring departments and
litigation and bankruptcy attorneys in conducting searches for concealed or
undisclosed assets. In other contexts, clients may be interested in a financial
profile or asset analysis of a person in connection with a potential business
relationship, lawsuit or internal investigation. We believe that our asset
searching and analysis techniques are effective both in uncovering assets and in
bringing debtors to the negotiating table. In identifying assets, we rely both
on a range of investigative techniques and on the use of sophisticated
electronic databases. Tactics employed include searching publicly available, but
sometimes obscure, local records, reviewing financial documents and conducting
discreet interviews with people associated with the subject.
Pre-Acquisition Due Diligence. The due diligence and background information
and analysis furnished by KRCS is intended to be useful for lenders,
underwriters, potential acquirers and other businesses concerned with assessing
and attempting to minimize the risks related to critical financial and other
business decisions. These services include pre-transaction intelligence, due
diligence investigations, competitor intelligence and analysis, intelligence in
contests for corporate control, new market entry intelligence and intelligence
on business partners, customers and critical vendors.
SECURITY SERVICES
Our security services include risk and crisis management, security
architecture and design, corporate security planning and executive protection,
and electronic countermeasures.
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Risk and Crisis Management. We provide consulting services to assist
businesses in managing risks to their personnel and assets and in meeting and
managing unexpected crises. Our crisis management services are provided in a
variety of contexts, such as the crisis response to a kidnapping of a company's
executive, the safety of consumers, the contamination of a consumer product or
the environment and the potential damage to the reputation of a corporate client
as a result of disclosure of adverse events. We maintain a crisis management
center in Vienna, Virginia where personnel are available 24 hours a day, 365
days a year, to handle requests for information and provide initial advice and
immediate contact with members of our professional staff specializing in the
particular crisis presented.
As part of our risk and crisis management service, we furnish periodic
information including: reports providing city-specific advisories to business
travelers on conditions and other relevant information with respect to almost
300 cities around the world; a comprehensive country security risk assessment
service that includes daily intelligence briefings containing early warnings of
events and up-to-date information about political unrest, terrorist activities,
product contaminations, health emergencies and other similar events; a monthly
bulletin that reviews and analyzes safety and security issues relating to air
travel around the world; a monthly intelligence review that provides a global
survey of political risk development in countries around the world; and special
reports on topics, such as kidnapping or specific regions or countries, that are
relevant to business travelers.
Security Architecture and Design. We offer comprehensive planning,
engineering and design services customized to meet the requirements of customers
for physical site protection. These services are primarily intended to protect
business facilities, embassies, VIPs' homes and public facilities against
unauthorized intrusions. Generally, a project begins with a security survey,
which identifies areas of vulnerability and recommends methods for protecting
the facility. Specific pieces of hardware are selected, processes and procedures
are outlined, engineering documentation is provided and control centers are
detailed.
Corporate Security Planning and Executive Protection. We design corporate
security programs that help to safeguard clients' operations and premises.
Security programs and systems are designed to protect the safety of key
executives, preserve assets and protect the integrity of computer and
telecommunications systems. Additionally, in several areas of the world, we
provide special escort and general protective services to executives and VIPs.
Electronic Countermeasures. We protect our clients by ensuring that they
are able to operate their businesses and communicate confidential matters freely
without electronic intrusion from outsiders. Our clients may face the risk of
electronic eavesdropping from outsiders who wish to procure confidential and
proprietary information in order to gain a competitive advantage in the
marketplace. Other electronic eavesdroppers may wish to jeopardize the personal
safety of our clients. Through sophisticated inspections and equipment we are
able to detect listening devices and disable or remove them before our clients
are compromised.
TECHNOLOGY SERVICES
Our technology services include computer forensics, data recovery and
litigation and systems support.
Computer Forensics and Data Recovery. Businesses face a variety of risks
relating to the use of computers and technology at the workplace, both from
employees and from outsiders. We provide investigative resources to assist
clients in matters such as collecting data from computers, logs, networks and
other sources to facilitate investigations and tracing disgruntled employees,
competitors and others using Internet bulletin boards to start rumors about
stocks, to post trade secrets or to conduct other kinds
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of cyberterrorism. By using sophisticated forensic software, we also help
clients access information recovered from hard drives and reconstruct computer
data that may be introduced as evidence in legal proceedings.
Litigation and Systems Support. We provide litigation support through
assistance in designing strategy and tactics and also analyse data provided in
the discovery stage of litigation. We also help clients track down web-based
intellectual property thefts, counterfeit goods and criminals that use the
Internet to steal information or property and commit fraud. We provide network
security testing in which we help clients gauge objectively the level of network
protection so that security flaws can be identified and cured.
VOICE AND DATA COMMUNICATIONS PRODUCTS
KRCS will also receive the voice and data communications business from
Kroll-O'Gara in the split-up. The voice and data communications group provides
three types of products. The group distributes satellite communication and
navigation equipment, including portable satellite terminals, mobile antennas
and global positioning satellite systems. The group sells packages of satellite
airtime to customers through its arrangements with several satellite earth
stations. In addition, the group offers customized design and hardware and
software integration services customized to meet specific satellite
communication requirements of its customers.
We intend to sell the voice and data communications business as soon as
possible following the split-up.
OWNERSHIP OF SECURIFY INC.
As part of the reorganization, Kroll-O'Gara will transfer 40% of its equity
in Securify Inc., a Delaware corporation and its currently wholly owned
subsidiary, to KRCS. Securify offers information and computer security services,
including network and system security review and repair. We will not participate
in the business of Securify and will not vote in the election of directors. We
have agreed to give the preferred stockholders of Securify a right to buy its
interest in Securify should we want to sell or, in the alternative, the right to
participate in that sale.
As of August 31, 2000, Kroll-O'Gara had loaned $9.5 million to Securify and
has agreed to lend Securify up to an additional $0.1 million during September
2000. Of the total amount loaned by Kroll-O'Gara, Securify will be required to
repay 58% to KRCS and 42% to The O'Gara Company. We cannot assure you that
Securify will be able to repay these loans.
CUSTOMERS
Our clients for investigative and intelligence services include
multinational corporations, leading law firms, financial institutions,
government agencies and individuals in a wide range of business sectors. The
financial institutions to which we provide services include many of the largest
international investment banks, numerous commercial banks, insurance companies
and other significant credit institutions. We classify our sales by where the
services are delivered; international sales are services delivered outside the
United States. For the years ended December 31, 1997, 1998 and 1999, 74%, 71%,
and 58%, respectively, of our net sales were attributable to services delivered
in the United States; the balance were attributable to services delivered
outside the United States. For the first half of 2000, 61% of our net sales were
attributable to services delivered in the United States and 39% of our net sales
were attributable to services delivered outside the United States. Although many
of our clients utilize these services on a periodic basis, comparatively few
clients utilize our services on a long-term
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continuing basis and the clients that account for a material percentage of net
sales in any year may vary widely.
In the United States, we generally charge for our services on an hourly
basis at varying rates, depending upon the type of service being provided and
the competition that exists in providing the service. We also provide our
services, particularly outside the United States, on a negotiated project, or
fixed fee, basis. Providing services on a fixed fee basis enhances the potential
for higher profit margins. However, these arrangements can also result in
unexpected losses on a particular project. We believe that this risk is reduced
by being spread over a number of fixed fee arrangements and through our
contracting process that specifies the actual steps that are required to be
performed for the fixed fee.
A significant portion of our business of investigating and negotiating
ransom demands in connection with kidnapping and of investigating incidents of
product tampering or disparagement arise from a contract with American
International Group, Inc., an international multi-risk insurance company, under
which we investigate claims by AIG's insured customers. Although we are paid by
AIG after claims are made, our customer is the affected person or entity. The
customers for our information services relating to travel safety are
multinational corporations and individuals. We market our information services
to many of our customers for other services.
MARKETING AND SALES
Our services are marketed and sold by three different types of sales
personnel. As of June 30, 2000 we have four global key account managers who
market and sell all our varied services, both domestically and internationally,
to our most significant multinational corporate clients, 667 professional
service providers who are also expected to provide marketing services and 67
full time sales and marketing employees who work in regional markets.
Our global key account managers are expected to work with targeted clients
with which we have done significant business in the past to expand their
relationships with KRCS by selling them a broader range of services. In
addition, we rely on our professional service providers not only to service
existing clients, but also for new business development and marketing. We obtain
engagements from a client's board of directors, executive officers and
management and a variety of other corporate officials. Our senior professionals
act as relationship managers for our major clients. A significant part of our
marketing efforts consist of maintaining and developing these personal
relationships. Our full time regional marketing staff coordinates local sales
and marketing efforts around the world. These marketing efforts include
seminars, briefings, receptions, breakfast and lunch meetings, direct mail and
selected advertising in trade and other journals. Our services and marketing
events are promoted through our Internet website and publications mailed
periodically to approximately 20,000 clients and prospective clients.
Our marketing efforts attempt to increase business with existing clients by
expanding clients' awareness of the range of services offered by us and by
increasing the number of decision makers within a client's organization that are
aware of the range of services offered by us. Our business development staff
periodically conducts surveys of clients to assess their perception of the range
and quality of our services and, after the completion of an assignment, clients
are often asked to complete a quality control questionnaire.
We do not believe that our business is seasonal, although historically the
first quarter has been weaker than the other three.
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COMPETITION
We compete with local, regional, national and international firms,
including investigative and security firms, guard companies and consultants in
specialized areas such as kidnapping. We believe that we are one of the largest
companies in the world, providing a broad array of corporate investigation, risk
and crisis management and business intelligence services on a global basis, and
that we enjoy strong name recognition in our industry.
Nevertheless, the markets in which we do, and intend to do, business are
highly competitive. In most individual service areas in which we operate, there
is at least one competitor that is significantly larger or more established than
us in the delivery of that individual service. In general, many of the national
and international accounting firms, along with other companies such as Decision
Strategies/ Fairfax International, LLC, Investigations Group, Inc. and
ChoicePoint, Inc., provide consulting services similar to some of the services
provided by KRCS. Some of these firms have indicated an interest in providing
corporate investigation and business intelligence services similar to ours on a
broader scale and may prove to be formidable competitors if they elect to devote
the necessary resources to these competitive businesses. The accounting firms
have significantly larger financial and other resources than us and have
long-established relationships with their clients, which also are likely to be
clients or prospective clients of KRCS. In addition, large multinational
security service providers have indicated an interest in expanding their
services to include value-added services such as some of the investigation and
consulting services provided by us. Competitive conditions could have a material
adverse effect on our financial condition, results of operations and cash flows.
GOVERNMENT REGULATION
Our services are subject to various federal, state, local and foreign laws,
including laws designed to protect the privacy of persons. Subsidiaries of KRCS
hold private investigative licenses from, and their investigative activities are
subject to regulation by, the state and local licensing authorities in the
locations where these subsidiaries do business. We also utilize data from
outside sources, including data from third party vendors and various government
and public record services, in performing our services. Use of this data is
subject to compliance with applicable law. Additionally, our drug testing
laboratory is certified on the federal level and licensed in a number of states.
If the laboratory's certification were suspended or lost, it would have a
material adverse effect on this aspect of our business. Foreign countries in
which we do business have laws and regulations which may restrict our business.
We believe that we currently conduct our activities and operations in
substantial compliance with applicable governmental laws and regulations.
ENVIRONMENTAL MATTERS
We and our operations are subject to a number of environmental laws,
regulations and ordinances, both in the United States and various foreign
countries, governing activities that may have adverse environmental effects,
such as discharges to air and water, as well as handling, storage and disposal
practices for solid and hazardous materials. These laws also impose liability
for the cost of remediating, and damages resulting from, sites of past releases
of hazardous materials. We believe that we currently conduct our activities and
operations in substantial compliance with applicable environmental laws.
EMPLOYEES
As of June 30, 2000, we had a total of 2,014 full-time employees, of which
67 were in marketing and sales, 860 were in operations, 667 were in professional
services and 416 performed general and administrative services. In addition, we
had 158 part-time employees. Our employees in the United
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States are not represented by any union and are not covered by any collective
bargaining agreements. We have not experienced any work stoppages or employee
related slowdowns and believe that our relationship with our employees is good.
PROPERTY
We maintain our principal executive offices and a regional headquarters in
New York, New York, and other regional headquarters in London, Toronto, Hong
Kong, and Miami. In addition to these offices, we maintain 23 domestic offices
or facilities in 13 states and 25 foreign offices or facilities in 13 foreign
countries around the world. Our principal properties and facilities of over
15,000 square feet as of June 30, 2000 were as follows:
<TABLE>
<CAPTION>
LOCATION TOTAL SQ. FOOTAGE STATUS
-------- ----------------- ------
<S> <C> <C>
New York, New York............................. 47,500 Leased
Philadelphia, Pennsylvania..................... 21,000 Leased
Toronto, Canada................................ 20,274 Leased
Gretna, Louisiana.............................. 20,000 Owned
Nashville, Tennessee........................... 15,939 Leased
</TABLE>
NEW YORK, NEW YORK. This facility contains our principal executive offices
and serves as a regional headquarters for KRCS. The space is leased for a term
expiring in December, 2007. For accounting purposes, this lease is treated as an
operating lease. In addition, we lease a smaller office near the headquarters
for administrative purposes. The total annual rent for these two offices in New
York is $1,664,453.
PHILADELPHIA, PENNSYLVANIA. This facility primarily houses the U.S. offices
of Kroll Lindquist Avey, our forensic accounting, litigation consulting and
business valuation services subsidiary. The total annual rent is $372,756.
TORONTO, CANADA. This facility houses the headquarters of Kroll Lindquist
Avey and Kroll Associates Canada. The total annual rent is $331,167.
GRETNA, LOUISIANA. This facility houses our drug testing laboratory as well
as serving as offices for our drug testing subsidiary, Laboratory Specialists of
America, Inc.
NASHVILLE, TENNESSEE. This facility serves as the headquarters of Kroll
Background America, Inc., our background investigative services subsidiary. It
consists of two office locations near each other and the total annual rent is
$276,145.
TRADEMARKS AND PATENTS
We have numerous federally registered trademarks and copyrights and have
registered our trademarks in numerous foreign countries. Although we have taken
steps to protect our proprietary rights to the extent that we believe
appropriate, there can be no assurance that our protective measures will deter
or prevent unauthorized use. In other countries, our proprietary rights may not
be protected to the same extent as in the United States.
LEGAL PROCEEDINGS
We are involved in litigation from time to time in the ordinary course of
our business. However, we do not believe that there is any currently pending
litigation, individually or in the aggregate, that is likely to have a material
adverse effect on our business, financial condition, results of operations or
cash flows.
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KRCS may incur liability under some legal proceedings filed against
Kroll-O'Gara. 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 lawsuits were filed in Ohio and three lawsuits were filed
in New York; they were consolidated in each state at the end of November, 1999.
The plaintiffs seek to bring their claims derivatively on behalf of Kroll-O'Gara
and its shareholders and seek class certification; they also seek damages and
attorneys' fees in an unspecified amount. KRCS has agreed to indemnify The
O'Gara Company for approximately 58% of any liability awarded and paid, and fees
and expenses incurred, in these lawsuits. The O'Gara Company has agreed to
indemnify KRCS for approximately 42% of any liability awarded and paid, and fees
and expenses incurred, in these lawsuits.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of KRCS are as follows:
<TABLE>
<CAPTION>
NAME AGE TITLE
---- --- -----
<S> <C> <C>
Jules B. Kroll............................... 58 Chairman of the Board
Michael G. Cherkasky......................... 50 President, Chief Executive Officer and
Director
Michael D. Shmerling......................... 45 Chief Operating Officer
Nazzareno E. Paciotti........................ 54 Chief Financial Officer and Treasurer
Michael J. Slattery, Jr...................... 49 Executive Vice President
Michael A. Beber............................. 40 Executive Vice President, Strategic
Development
Marc S. Curvin............................... 37 Chief Information Officer
Sabrina H. Perel............................. 38 Vice President, General Counsel and
Secretary
Michael A. Petrullo.......................... 32 Vice President - Finance
Prior to the split-up, Michael D. Shmerling and the following individuals are expected to become
directors of KRCS:
Thomas E. Constance.......................... 63 Director
Marshall S. Cogan............................ 63 Director
Raymond E. Mabus............................. 51 Director
J. Arthur Urciuoli........................... 62 Director
</TABLE>
JULES B. KROLL, age 58, has been Chairman of the Board of KRCS since August
2000. He has been Chairman of the Board of Kroll-O'Gara since December 1997 and
was its Chief Executive Officer from December 1997 until April 2000. Since April
2000, Mr. Kroll has been Co-Chief Executive Officer of Kroll-O'Gara and Chief
Executive Officer of Kroll-O'Gara's investigations and intelligence group. He
founded Kroll Associates, Inc. in 1972 and was the Chairman of the Board and
Chief Executive Officer of Kroll Associates from 1974 until August 2000. Mr.
Kroll also is a director of Presidential Life Insurance Company. Upon
consummation of the split-up, Mr. Kroll will resign from his positions with
Kroll-O'Gara.
MICHAEL G. CHERKASKY, age 50, has been President and Chief Executive
Officer of KRCS since August 2000. He has been President and Chief Operating
Officer of Kroll-O'Gara's investigations and intelligence group, and a director
of Kroll-O'Gara, since December 1997. Prior to December 1997, he had been an
Executive Managing Director of Kroll Associates since April 1997 and Chief
Operating Officer of Kroll Associates since January 1997. From November 1995 to
January 1997, he was the head of Kroll Associates' North American Region and
from February 1994 to November 1995 he was the head of Kroll Associates'
Monitoring Group. From June 1993 to November 1993, Mr. Cherkasky was a candidate
for public office. From 1978 to June 1993, Mr. Cherkasky was with the District
Attorney's office for New York County, his last position being Chief of the
Investigation Division. Upon consummation of the split-up, Mr. Cherkasky will
resign from his positions with Kroll-O'Gara.
MICHAEL D. SHMERLING, age 45, has been Chief Operating Officer of KRCS
since August 2000. He has been President of the Corporate Services Division of
Kroll-O'Gara's investigations and intelligence group since June 1999 and has
been involved in the criminal justice system for over 13 years. From September
1995 to June 1999, Mr. Shmerling was one of the founders of Background America,
Inc., a company providing background investigations services to governments,
corporations and other
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professional clients, which was acquired by Kroll-O'Gara in 1999. In 1989, he
co-founded Transcor America, Inc., a nationwide prison transportation company.
In 1990, he founded Correction Management Affiliates, Inc., a private
correctional facility management company. He served as Chairman of the Board of
Transcor America, Inc. until he resigned to dedicate his time to Correction
Partners, Inc., a private prison management company majority-owned by Correction
Management Affiliates, Inc. In 1994 and 1995, all of the above correctional
management companies were sold to Corrections Corporation of America. Mr.
Shmerling is also a Certified Public Accountant, although not currently active,
and a member of the American Institute of Certified Public Accountants. He
practiced as an accountant for more than 15 years. From 1977 to 1980, he was a
member of the professional staff of certified public accountants at Ernst &
Young.
NAZZARENO E. PACIOTTI, age 54, has been Chief Financial Officer and
Treasurer of KRCS since August 2000. He has been the Chief Financial Officer of
Kroll-O'Gara since December 1997. From 1992 until December 1997 he was the Chief
Financial Officer of Kroll Associates. From 1990 to 1992, he was a Managing
Director and the Controller of the Henley Group (the parent of PneumoAbex Inc.
and Fisher Scientific, a laboratory supply company) and from 1988 to 1990, he
was a Vice President and the Controller of PneumoAbex Inc., an aerospace
contractor specializing in the manufacture of landing gear and flight actuating
systems. Upon consummation of the split-up, Mr. Paciotti will resign from his
position with Kroll-O'Gara.
MICHAEL J. SLATTERY, JR., age 49, has been Executive Vice President of KRCS
since August 2000. He has been Executive Vice President of Corporate Operations
and Administration for Kroll Associates since December 1997. For more than 13
years, Mr. Slattery has served in a variety of positions at Kroll Associates
including Executive Managing Director for North American operations and Managing
Director for Kroll Associates' Northeast Region of the United States. Prior to
joining Kroll Associates in September of 1987, Mr. Slattery served for eleven
years as Special Agent of the Federal Bureau of Investigation. He also served as
a Special Investigator/Auditor for the Office of the New York State Prosecutor
investigating corruption in New York City's Police Department and Criminal
Justice System in the early 1970's.
MICHAEL A. BEBER, age 40, has been Executive Vice President, Strategic
Development of KRCS since August 2000. He has been the Executive Vice President
of Strategic Development of Kroll-O'Gara's investigations and intelligence group
since February 1999. Mr. Beber joined Kroll-O'Gara's investigations and
intelligence group in June 1998 when Kroll-O'Gara acquired Lindquist Avey
Macdonald Baskerville Inc. Mr. Beber is a chartered accountant and is a founding
stockholder of Lindquist Avey. He has been a Principal with Lindquist Avey since
its inception in 1991 and a member of its Executive Operating Committee since
1995.
MARC S. CURVIN, age 37, has been Chief Information Officer of KRCS since
August, 2000. He has been Chief Information Officer of Kroll-O'Gara since
December 1999. He was the Executive Vice President and Chief Information Officer
of Background America, Inc. from August 1995 to December 1999. Mr. Curvin was
one of four original employees of Background America, Inc. Prior to Background
America, Inc., Mr. Curvin served as Chief Information Officer of Amicus
Staffing, Inc. from June 1994 to March 1997 and was Director of MIS of
Corrections Partners, Inc. from May 1994 to August 1995, both of which were
acquired by publicly traded companies. Upon consummation of the split-up, Mr.
Curvin will resign from his position with Kroll-O'Gara.
SABRINA H. PEREL, age 38, has been Vice President, General Counsel and
Secretary of KRCS since August 2000. She has been Vice President, Deputy General
Counsel and Managing Director of The Kroll-O'Gara Company since January 1998.
From October 1996 until December 1997, she served as Deputy General Counsel of
Kroll Associates. From 1988 until 1996, Ms. Perel was with the law firm of
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Riker, Danzig, Scherer, Hyland & Perretti LLP in Morristown, New Jersey. She
also served as a law clerk to a state appellate judge from 1987 to 1988. Upon
consummation of the split-up, Ms. Perel will resign from her position with
Kroll-O'Gara.
MICHAEL A. PETRULLO, age 32 has been Vice President-Finance since August
2000. He has been Vice President-Finance of Kroll-O'Gara's investigations and
intelligence group since February 1999. He was Controller of that group from
February 1998 until February 1999. He served as Assistant Controller of Kroll
Associates from April 1995 to February 1998. From 1990 until April 1995 he was
with KPMG Peat Marwick LLP in the audit/assurance practice and in the forensic
accounting group.
Prior to the split-up, Michael D. Shmerling and the following individuals are
expected to become directors of KRCS:
THOMAS E. CONSTANCE, age 63, has been a partner with the law firm of Kramer
Levin Naftalis & Frankel LLP since 1994. From 1973 to 1994, Mr. Constance was
Chairman and a partner with the law firm of Shea & Gould. He is a director of
Uniroyal Technology Group and serves on the Advisory Board of Barington Capital
Group L.P. , Atwood Richards Inc., and Lions Eye Bank of North Shore Hospital.
He is a trustee of the M.D. Sass Foundation and St Vincent's Services for
Children.
MARSHALL S. COGAN, age 63, has been Chairman of Foamex International, Inc.,
a manufacturer of polyurethane foam products, since May 1997. Mr. Cogan was
Chairman and Chief Executive Officer of United Auto Group, a franchisor of car
and light truck dealerships, from 1997 to 1999. He was Chairman of the Executive
Committee of Foamex International from 1993 until 1997 and was Chief Executive
Officer of Foamex International from 1994 until 1997. Since 1974 he has been the
principal shareholder, Chairman or Co-Chairman of the board of directors, and
Chief Executive Officer or Co-Chief Executive Officer, of Trace International
Holdings, Inc., a holding company operating businesses in the auto sales, foam,
textile and publishing industries. Mr. Cogan is a director of United Auto Group.
Mr. Cogan has been a director of Kroll-O'Gara since December 1997.
RAYMOND E. MABUS, age 51, is President of Frontline Global Resources
Development Group Ltd., a provider of workforce analysis, foreign investment
planning and resource generation services, and of counsel to the law firm of
Baker, Donaldson, Bearman and Caldwell. He also manages a family timber
business. He served as the United States Ambassador to the Kingdom of Saudi
Arabia from 1994 until 1996, as a consultant to Mobil Telecommunications
Technology from 1992 until 1994 and as Governor of the State of Mississippi from
1988 until 1992. Mr. Mabus has been a director of Kroll-O'Gara since November
1996. He is also a director of Friede Goldman Halter which builds and repairs
offshore oil platforms and boats.
J. ARTHUR URCIUOLI, age 62, has been Chairman of Archer Corporation, a
provider of private investment and consulting services, since 1999. Mr. Urciuoli
served with Merrill Lynch & Company, Inc. from 1969 to 1999. He was Chairman of
Merrill Lynch's International Private Client Group and was responsible for
strategic development and acquisitions from 1997 to 1999. He was Director of the
Marketing Group of Merrill Lynch Private Client Group from 1993 to 1997. He
served as Chairman of the Mutual Fund Forum/Forum for Investor Advice from 1997
to 1998 and also as Chairman of Sales and Marketing for the Securities Industry
Association from 1986 to 1989.
Our bylaws provide that the number of KRCS directors will not be less than
two nor more than 10, the exact number of which will be determined from time to
time by the board of directors. Upon the effective time of the split-up, the
directors will be classified regarding the term for which they severally hold
office into three classes, each of which will be comprised of approximately the
same number of directors. The current KRCS board will appoint the initial class
I, II and III directors upon the effective time of the split-up. The initial
class I directors will serve until the first annual meeting after the split-
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up. The initial class II directors shall serve until the second annual meeting
after the split-up. The initial class III directors shall serve until the third
annual meeting after the split-up. Directors in each class will remain directors
until their successors are duly elected and qualified or until their earlier
death, disqualification, resignation or removal. At each annual meeting, the
successors of the class of directors whose term expires at that meeting will be
elected by a plurality vote of all votes cast at that meeting to hold office for
a term expiring at the annual meeting held three years after their election.
DIRECTORS' MEETINGS, FEES AND COMMITTEES
The board of directors expects to hold regularly scheduled meetings, and
will hold special meetings as it deems advisable to review significant matters
affecting KRCS and to act upon matters requiring KRCS board approval.
Non-employee directors will receive an annual retainer of $20,000, plus $2,000
for personally attending each regular or special KRCS board or committee
meeting, and $750 for attending each meeting by telephone. KRCS also has a stock
option plan for non-employee directors which will automatically grant to each
non-employee director at every annual meeting options to purchase 3,600 shares
of common stock at the fair market value of the common stock on the date of
grant, which will vest in four equal quarterly installments beginning on the
date of grant. See "Executive Compensation and Benefit Plans". Directors of KRCS
who are also employees of KRCS will not be separately compensated for their
services as directors.
KRCS's board of directors has an audit committee and a compensation
committee. The audit committee will be composed of Mr. Mabus as chairman and
Messrs. Cogan, Constance and Urciuoli. The audit committee will recommend the
appointment of independent accountants and review and discuss with the
accountants the scope of their examination, their proposed fee and the overall
approach to the audit. The audit committee also will review with the accountants
and KRCS's financial management the annual financial statements and discuss the
effectiveness of internal accounting controls. The compensation committee will
be composed of Mr. Urciuoli as Chairman and Messrs. Cogan, Constance and Mabus.
The compensation committee will have responsibility for establishing executive
officers' compensation and fringe benefits. It will also administer the KRCS
stock option and employee stock purchase plans and is authorized to grant
options under these plans. See "Executive Compensation and Benefit Plans". The
KRCS board will not have a nominating committee.
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<PAGE> 61
EXECUTIVE COMPENSATION AND BENEFIT PLANS
HISTORICAL COMPENSATION INFORMATION
The following table describes the compensation paid by Kroll-O'Gara during
the last three years to Mr. Cherkasky, KRCS's Chief Executive Officer, and to
each of the other four individuals initially expected to be the most highly
compensated executive officers of KRCS. These persons are sometimes referred to
as the "named executive officers." The principal positions listed in the table
are those which will be held by KRCS named executive officers following the
split-up.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
AWARDS
ANNUAL COMPENSATION -----------------------------
--------------------------------------- RESTRICTED SECURITIES
OTHER ANNUAL STOCK UNDERLYING STOCK ALL OTHER
NAME AND SALARY BONUS COMPENSATION AWARDS OPTION GRANTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) (#) ($)(1)
------------------ ---- ------- ------- ------------ ---------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Jules B. Kroll................. 1999 375,000 -- -- -- -- 14,661
Chairman of the Board 1998 375,000 -- -- -- -- 31,915
1997 489,583 -- -- -- -- 32,965
Michael G. Cherkasky........... 1999 400,000 100,000 -- 155,628(2) 50,000 25,930
President and Chief 1998 400,000 -- -- -- -- 28,914
Executive Officer 1997 400,000 -- -- -- 25,000 26,767
Michael D. Shmerling........... 1999 87,500(3) 31,250 -- -- -- --
Chief Operating Officer
Nazzareno E. Paciotti.......... 1999 275,520 66,667 -- -- 10,000 8,777
Chief Financial Officer, 1998 275,520 66,667 -- -- -- 19,813
Treasurer 1997 275,520 66,667 -- -- 15,000 26,984
Michael Slattery, Jr........... 1999 292,500 66,666 -- 139,500(2) -- --
Executive Vice President 1998 270,000 66,666 -- -- 10,000 --
1997 270,000 66,358 -- -- 14,000 --
Michael A. Beber............... 1999 275,000 15,000 -- -- 10,000 --
Executive Vice President, 1998 103,000(4) 13,000 -- -- -- --
Strategic Development
</TABLE>
---------------
(1) Represents profit-sharing contributions of $2,400 for each person;
supplemental disability plan benefits of $7,674 for Mr. Kroll, $4,639 for
Mr. Cherkasky and $4,002 for Mr. Paciotti; and group term life insurance
benefits of $4,567 for Mr. Kroll, $2,701 for Mr. Cherkasky and $2,375 for
Mr. Paciotti.
(2) Represents 6,000 shares of restricted stock for Mr. Cherkasky and 4,000
shares of restricted stock for Mr. Slattery, awarded to Mr. Cherkasky on
March 25, 1999 and to Mr. Slattery on January 4, 1999 under Kroll-O'Gara's
1998 Stock Incentive Plan and having an aggregate value at December 31, 1999
of $93,000 and $62,000, respectively. No other shares of restricted stock
are held by Mr. Cherkasky or Mr. Slattery. The shares vest over a three year
period, with 50% vesting ratably over the first 12 months after the date of
grant and an additional 25% vesting ratably over each of the second and
third 12 months after the date of grant. Until vested, the shares have no
dividend rights.
(3) Represents compensation from June 1999 to December 1999. Mr. Shmerling
joined KRCS in June 1999.
(4) Represents compensation from July 1998 to December 1998. Mr. Beber joined
KRCS in July 1998.
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<PAGE> 62
The following table presents information with respect to option grants to
the named executive officers during 1999 pursuant to Kroll-O'Gara's 1996 Stock
Option Plan. The Plan does not provide for the grant of stock appreciation
rights.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS(1)
---------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS PRICE APPRECIATION FOR
OPTIONS GRANTED TO EXERCISE OR OPTION TERM
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ----------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Jules B. Kroll................... -- -- -- -- -- --
Michael G. Cherkasky............. 50,000 7.7 26.938 3/25/09 847,121 2,146,771
Michael D. Shmerling............. -- -- -- -- -- --
Nazzareno E. Paciotti............ 10,000 1.5 26.938 3/25/09 169,424 429,354
Michael Slattery, Jr............. -- -- -- -- -- --
Michael A. Beber................. 10,000 1.5 26.938 3/25/09 169,424 429,354
</TABLE>
---------------
(1) All options vest in three equal annual installments beginning one year after
the date of grant. The exercise price of all options may be paid in cash or
by the transfer of shares of Kroll-O'Gara's common stock valued at their
fair market value on the date of exercise. Each option becomes exercisable
in full after the execution of an agreement of merger, consolidation or
reorganization pursuant to which Kroll-O'Gara is not to be the surviving
corporation or the execution of an agreement of sale or transfer of all or
substantially all of the assets of Kroll-O'Gara. The Kroll-O'Gara option
plans terminate upon, among other events, the transfer by Kroll-O'Gara of
all or substantially all of its assets, and thus all options will terminate
upon the delivery of KRCS common stock and The O'Gara Company common stock
to the distribution agent.
With respect to each named executive officer, the following table sets
forth information concerning stock options exercised during 1999 and unexercised
stock options held at December 31, 1999.
AGGREGATED OPTION EXERCISES IN 1999
AND OPTION VALUES AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
VALUE UNEXERCISED IN-THE-MONEY
REALIZED($) OPTIONS AT OPTIONS AT
---------------- FY-END(#) FY-END($)
SHARES (MARKET PRICE ON -------------- -------------
ACQUIRED ON EXERCISE LESS EXERCISABLE/ EXERCISABLE/
NAME EXERCISE(#) EXERCISE PRICE) UNEXERCISABLE UNEXERCISABLE
---- ----------- ---------------- -------------- -------------
<S> <C> <C> <C> <C>
Jules B. Kroll..................... -- -- -- --
Michael G. Cherkasky............... -- -- 109,445/62,084 1,188,931/0
Michael D. Shmerling............... -- -- 0/14,000 0/0
Nazzareno E. Paciotti.............. -- -- 100,529/15,000 1,188,931/0
Michael Slattery, Jr............... -- -- 17,333/6,667 0/0
Michael A. Beber................... -- -- 0/10,000 0/0
</TABLE>
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<PAGE> 63
EMPLOYMENT AGREEMENTS
KRCS will enter into new employment agreements with each of the following
executive officers providing for annual base salaries in the listed amounts:
Jules B. Kroll, $ , expiring on , Nazzareno E. Paciotti,
$ , expiring on , and Michael Shmerling, $300,000,
expiring on . Each of these executive officers will also be entitled
to participate in an annual bonus plan established by the Compensation Committee
of the board of directors of KRCS and to receive up to 50% of the bonus in
shares of KRCS common stock. Under these employment agreements, KRCS can
terminate their employment at any time with or without cause, except that, in a
case of termination without cause, the employee is entitled to receive
compensation for the greater of the balance of the term of the agreement or one
year. The agreements will also provide that if KRCS does not renew the agreement
for one year or more at the end of the term, the employee will receive an amount
equal to one year's base salary. Each employment agreement will restrict the
executive officer from competing with KRCS during the term of the agreement, and
for two years thereafter if termination of employment is for cause or at the
volition of the employee. Mr. Kroll will be required by the employment agreement
to agree that during his employment and for a period of 10 years thereafter he
will not directly or indirectly own any interest in or perform any services for
any entity which uses the word "Kroll" as a business or trade name and competes
with KRCS. See "-- Benefit Plans" under this section for information about
options to be granted to the named executive officers under the KRCS 2000 stock
incentive plan.
KRCS will assume Mr. Cherkasky's employment agreement with Kroll-O'Gara. In
May 1999 Mr. Cherkasky entered into an employment agreement with Kroll-O'Gara
for an "evergreen" two year term. The agreement provides for a base salary of
$400,000 for 1999 and for subsequent annual calendar year increases of at least
4%. Mr. Cherkasky also is entitled to participate in KRCS's annual bonus, stock
option, stock incentive and other benefit plans. Under the agreement, he
received a signing bonus of $140,000, payable $40,000 in May 1999 and $100,000
in January 2000. On each three-year anniversary of the agreement he will receive
an additional $350,000. If the agreement is terminated due to Mr. Cherkasky's
death or disability or by KRCS for other than cause or by Mr. Cherkasky for good
reason, he is entitled to receive a lump sum payment equal to the value of his
salary, annual bonus, the three-year anniversary payment, stock options and
incentive stock for the remainder of the term. During his employment and for two
years after his employment terminates, if the termination occurs during the
first two years of the agreement and is by KRCS for cause or by him for other
than good reason, Mr. Cherkasky is restricted from directly or indirectly
engaging in the investigations and intelligence services business. For purposes
of the agreement, "cause" means conviction of a felony and "good reason"
includes a change in duties or responsibilities, a reduction in compensation or
any person or group other than Jules Kroll becoming the beneficial owner of 35%
or more of the voting power of KRCS's securities.
Michael Slattery, Jr., has an employment agreement with Kroll Associates.
In July 1999, Mr. Slattery entered into an employment contract with Kroll
Associates for a term of not less than two years. The agreement provides for a
base salary of not less than $350,000 and an annual increase of at least 4% or
more, as determined by senior management or the board of directors. In addition
to his base salary, Mr. Slattery is also entitled to receive a bonus of $250,000
if he remains employed by Kroll Associates on July 1, 2004. This bonus will be
renewed every five years for as long as Mr. Slattery remains employed under this
contract. If Kroll Associates terminates his employment at any time, with or
without cause, or if Kroll Associates terminates his employment at the end of
his term, Mr. Slattery will receive the $250,000 bonus. "Cause" means wilfulness
or gross negligence by Mr. Slattery in the performance of his duties, if such
conduct is not cured within 15 days after written notice; a wilful breach by him
of any terms and conditions of his employment agreement after 15 days'
opportunity to
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<PAGE> 64
cure; grossly insubordinate conduct or conduct that would constitute a breach of
loyalty as defined by New York law; or his pleading no contest or guilty to a
felony charge or being convicted of a felony. If Mr. Slattery's employment is
terminated at the end of his term, he will also be paid any accrued and unpaid
base salary, and an amount equal to two year's base salary, payable at Kroll
Associates' discretion either in a lump sum or in 24 equal monthly installments.
Mr. Slattery must give Kroll Associates two years' prior notice before he
resigns.
Michael A. Beber has an employment agreement with Kroll Lindquist Avey. In
June 1998, Mr. Beber entered into an employment agreement with Kroll Lindquist
Avey which provides that he shall be employed until terminated by Kroll
Lindquist Avey or until he voluntary resigns, for which he shall provide 3
months' notice. The agreement provides for an annual base salary of $300,000, in
addition to stock options and an incentive compensation package as determined by
the compensation committee of the board of directors. Once declared, the
incentive compensation must be paid to Mr. Beber upon termination of his
employment. Up to 50% of the incentive compensation may be in the form of shares
of stock in KRCS, as determined by the compensation committee. For purposes of
eligibility for membership and entitlement under the terms of KRCS's pension
plan, Mr. Beber is deemed to have been employed by KRCS since August 1, 1991.
BENEFIT PLANS
The plans below are administered by the compensation committee of the board
of directors or any other committee of the board of directors that the board of
directors may appoint.
KRCS 2000 Stock Incentive Plan.
The KRCS 2000 Stock Incentive Plan is designed primarily to provide key
individuals, on whose initiative and efforts the successful conduct of the
business of KRCS largely depends, and who are largely responsible for the
management, growth and protection of the business of KRCS, with incentives and
rewards to encourage them to continue their association with KRCS, and to
maximize their performance and to provide "performance-based compensation" to
these key individuals. The KRCS 2000 Stock Incentive Plan specifically provides
for the grant of (i) non-qualified stock options, (ii) incentive stock options
and (iii) shares of restricted stock which are known collectively as incentive
awards. The KRCS 2000 Stock Incentive Plan also provides that the compensation
committee may grant other types of stock-based awards in amounts, and on terms
and conditions, as the compensation committee will in its discretion determine.
The maximum number of shares of KRCS common stock for which incentive
awards may be granted under the KRCS 2000 Stock Incentive Plan is 1,350,000. The
maximum number of shares of KRCS common stock for which any individual may be
granted incentive awards during any calendar year is 100,000. Key current
employees of KRCS and its affiliates will be eligible to receive grants of
incentive awards.
KRCS 2000 Employee Stock Purchase Plan.
The purpose of the 2000 Employee Stock Purchase Plan is to provide eligible
employees of KRCS and its designated subsidiaries with an opportunity to
purchase KRCS common stock and, therefore, to have an additional incentive to
contribute to the prosperity of KRCS. The maximum number of shares of KRCS
common stock for which awards may be granted under the Employee Stock Purchase
Plan is 250,000 shares. Any employee of KRCS or any KRCS subsidiary designated
by the compensation committee is eligible to participate in the Employee Stock
Purchase Plan during the offering period beginning on an enrollment date
established by the compensation committee. However, no employee is
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<PAGE> 65
eligible to participate in the Employee Stock Purchase Plan if, immediately
after the grant, the employee would have owned five percent of either the voting
power or the value of KRCS's common stock, and no employee's rights to purchase
KRCS's common stock pursuant to the Employee Stock Purchase Plan may accrue at a
rate that exceeds $25,000 per calendar year. As of , 2000, all
employees of KRCS other than Jules B. Kroll were eligible to participate in the
Employee Stock Purchase Plan.
Shares of KRCS common stock may be purchased under the Employee Stock
Purchase Plan at a price not less than 85% of the lesser of (1) the fair market
value of the common stock on the enrollment date or (2) the fair market value of
the common stock on the last trading day of the offering period. The length of
the offering period will be established by the compensation committee but may
not exceed two years.
KRCS 2000 Non-Employee Director Plan.
The KRCS 2000 Non-Employee Director Plan is designed primarily to increase
the ownership interest in KRCS of non-employee directors whose services are
considered essential to KRCS's continued progress, to align those interests with
those of the stockholders of KRCS and to provide a further incentive to serve as
a director of KRCS. The Non-Employee Director Plan specifically provides for the
grant of non-qualified stock options only. The maximum number of shares of KRCS
common stock for which awards may be granted under the Non-Employee Director
Plan is 100,000 shares. The Non-Employee Director Plan will automatically grant
to each non-employee director at every annual board meeting options to purchase
3,600 shares of common stock at the fair market value of the common stock on the
date of grant, which will vest in four quarterly installments beginning on the
date of grant. Options granted under the 2000 non-employee director plan
terminate 10 years after the date of grant. All non-employee directors of KRCS
will be eligible to receive grants of options. A "non-employee director" is a
director of KRCS who is not an employee of KRCS or any of its subsidiaries. As
of , 2000, four KRCS non-employee directors were eligible to
participate in the Non-Employee Director Plan.
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<PAGE> 66
RELATIONSHIP WITH THE O'GARA COMPANY
KRCS, Kroll-O'Gara and The O'Gara Company have entered into an agreement
and plan of reorganization and dissolution, which provides for the split-up of
Kroll-O'Gara. As part of the split-up, KRCS, The O'Gara Company and Securify
will enter into a tax sharing agreement and KRCS, Kroll-O'Gara and The O'Gara
Company will enter into a cross-indemnification agreement. These agreements have
been filed as exhibits to the registration statement of which this prospectus is
a part. See "Where You Can Find More Information." As a result of these
agreements, KRCS and The O'Gara Company will have an ongoing relationship after
the split-up.
TAX SHARING AGREEMENT
KRCS, The O'Gara Company and Securify will enter into a tax sharing
agreement regarding the payment and refund of taxes that are attributable to
periods beginning prior to and including the date of the distribution and any
taxes resulting from the distribution. The agreement generally will provide that
for any taxable period, KRCS and The O'Gara Company will make payments to each
other so that, to the extent that either company or any of its subsidiaries is
included in (1) Kroll-O'Gara's consolidated group for U.S. federal income tax
purposes or (2) any consolidated, combined or unitary group which includes
Kroll-O'Gara or any of its subsidiaries for state, local or foreign income tax
purposes, that company will be responsible for only a portion of the taxes. Each
company's portion will be based on that company's relative contribution to the
group.
Each member of a consolidated group for U.S. federal income tax purposes is
jointly and severally liable for the federal income tax liability of each other
member of the consolidated group. Accordingly, although the agreement will
allocate tax liabilities between KRCS and The O'Gara Company, for any period in
which either company or any of its subsidiaries was included in Kroll-O'Gara's
consolidated group, that company or any of its subsidiaries could be liable for
any federal tax liability that was incurred, but not discharged, by the other.
Under the agreement, each company will indemnify the other for those
liabilities.
The agreement will prohibit KRCS and The O'Gara Company from taking actions
that could jeopardize the tax treatment of the distribution.
For example, we will not take certain actions for two years following the
distribution unless we obtain either an IRS ruling or an opinion of counsel (to
be determined by The O'Gara Company in its reasonable discretion) to the effect
that these actions will not affect the tax-free nature of the distribution.
These actions include transactions with respect to:
- some issuances of stock (in connection with acquisitions or otherwise),
or any other instrument that could constitute equity for federal income
tax purposes, of KRCS (or any instruments or contracts, including
options, warrants, rights or securities exercisable for, or convertible
into, stock, or any instrument that could constitute equity for federal
income tax purposes, of KRCS);
- some transactions with respect to the capital stock of, or other equity
interest in, KRCS, including some redemptions, repurchases, stock
acquisitions or stock dispositions or the dissolution, merger,
consolidation or complete or partial liquidation of KRCS; and
- some recapitalizations of KRCS, including some stock splits, reverse
stock splits, stock dividends or other changes in capital structure.
The agreement will allocate responsibility for any taxes arising from
restructurings related to the split-up, and KRCS and The O'Gara Company will
indemnify each other with respect to taxes allocated to it. In addition, the
agreement will provide that KRCS and The O'Gara Company will indemnify each
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<PAGE> 67
other for any taxes arising out of the failure of the split-up to qualify as
tax-free as a result of actions taken, or the failure to take required actions,
by it. The tax sharing agreement also will provide that KRCS and The O'Gara
Company will cooperate in the preparation of tax returns and will exchange
information and retain records which may affect their income tax liabilities.
CROSS-INDEMNIFICATION AGREEMENT
KRCS, Kroll-O'Gara and The O'Gara Company will enter into a
cross-indemnification agreement. Under the cross-indemnification agreement, KRCS
will indemnify Kroll-O'Gara and The O'Gara Company against liabilities relating
to the operation of the investigations and intelligence and voice and data
communications businesses, whether those liabilities arise on, prior to or after
the split-up. The O'Gara Company will indemnify Kroll-O'Gara and KRCS against
liabilities relating to the operation of the security products and services
business, whether those liabilities arise on, prior to or after the split-up and
matters arising out of The O'Gara Company's financial information included in
KRCS's registration statement. If a contingent liability does not exclusively
relate to one business or the other, it will be considered a shared contingent
liability, and The O'Gara Company will be responsible for approximately 41.5%
and KRCS will be responsible for approximately 58.5% of that liability. The
cross-indemnification agreement does not apply to tax claims or liabilities,
which are covered by the tax sharing agreement described above.
VOICE AND DATA COMMUNICATIONS BUSINESS
The KRCS subsidiaries that are involved in the voice and data
communications business will enter into a license agreement for the use of the
O'Gara name in its voice and data communications business and a strategic
alliance agreement with The O'Gara Company's subsidiary, O'Gara-Hess &
Eisenhardt Armoring Company, for the sale of its voice and data communications
products and services in or with The O'Gara Company's products and services.
SECURIFY
In the agreement and plan of reorganization and dissolution, KRCS and The
O'Gara Company have entered into arrangements regarding the sale of their
Securify common stock and their respective registration rights.
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<PAGE> 68
PRINCIPAL STOCKHOLDERS AND STOCK HOLDINGS OF MANAGEMENT
The following table sets forth the anticipated beneficial ownership of KRCS
common stock after the split-up by (1) each beneficial owner of more than five
percent of KRCS common stock, (2) each director and named executive officer
individually and (3) all directors and executive officers of KRCS as a group.
These anticipated holdings are based on some assumptions regarding the interests
of Kroll-O'Gara's executive officers and exchanging shareholders in the split-up
of Kroll-O'Gara that are described in the proxy statement. The actual holdings
of KRCS common stock will vary based on the number of shares of Kroll-O'Gara
common stock outstanding immediately prior to the split-up; however, the changes
are not expected to be material. Unless otherwise indicated, all shares are
owned directly and the indicated owner has sole voting and dispositive power
with respect to those shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP(1)
-----------------------
NAME NUMBER PERCENT
---- ---------- ---------
<S> <C> <C>
Jules B. Kroll(1)(2)........................................ 1,851,449 21.8%
Michael G. Cherkasky(1)..................................... 22,057 *
Michael D. Shmerling(1)..................................... 282,861 3.3
Nazzareno E. Paciotti(1).................................... 10,264 *
Michael J. Slattery, Jr.(1)................................. 20,195 *
Michael A. Beber(1)......................................... 26,707 *
Thomas E. Constance......................................... -- --
Marshall S. Cogan........................................... -- --
Raymond E. Mabus............................................ -- --
J. Arthur Urciuoli.......................................... 3,800 *
American International Group, Inc.(1)....................... 548,800 6.5
All directors and executive officers as a group (12
persons)(1)(2)............................................ 2,772,605 26.2
</TABLE>
---------------
* Less than 1%.
(1) Messrs. Kroll, Cherkasky, Shmerling, Paciotti, Slattery and Beber's address
is 900 Third Avenue, New York, New York 10022. AIG's address is 70 Pine
Street, New York, New York 10270.
(2) Does not include 73,172 shares held by trusts for the benefit of Mr. Kroll's
adult children, in which shares Mr. Kroll disclaims any beneficial interest.
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<PAGE> 69
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Described below are some transactions and relationships between
Kroll-O'Gara and KRCS officers, directors and stockholders that have occurred
since January 1, 1997. Except for interest rates charged on some of the
intercompany notes and accounts payable/receivable, KRCS believes that the
material terms of the various transactions were as favorable as could have been
obtained from unrelated third parties.
Immediately prior to the merger into Kroll-O'Gara, Kroll Holdings owed
$6,349,813 to Mr. Kroll, representing unpaid principal of $4,761,958 and accrued
interest of $242,356 on open account advances and loans which had been made by
him to Kroll Holdings from time to time since 1989. An additional $286,308
previously had been repaid. Also immediately prior to the merger, Mr. Kroll owed
Kroll Holdings $1,420,756, representing aggregate borrowings from Kroll Holdings
of $1,345,499 plus $75,257 in accrued interest. Of the outstanding principal
amounts, $4,380,849 owed by Kroll Holdings to Mr. Kroll and $748,000 owed by Mr.
Kroll to Kroll Holdings bore interest at an annual rate equal to the prime rate
plus 1%, $1,129,109 owed by Kroll Holdings to Mr. Kroll bore interest at an
annual rate equal to the brokers' loan rate (7.625% at December 1, 1997) and
$597,499 owed by each of Kroll Holdings and Mr. Kroll to the other bore interest
at an annual rate of 7% (equal to the prime rate at the date of the loan plus
1%). Immediately prior to the merger, the principal and accrued interest on all
outstanding loans from Kroll Holdings to Mr. Kroll were repaid in full and loans
(plus all accrued interest) from Mr. Kroll to Kroll Holdings were repaid to the
extent of the amounts owed to Kroll Holdings by Mr. Kroll. Also upon
consummation of the merger, all $6,040,313 of principal and accrued interest
owed by Kroll Holdings to Mr. Kroll for open account advances were repaid. In
1998, Mr. Kroll was repaid $332,490 in principal and interest owed him on a
promissory note issued by a subsidiary of Kroll Holdings at the time of the
merger. There were no principal payments made with respect to this note prior to
1998.
During 1998 and 1999, Kroll-O'Gara and Mr. Kroll agreed to reimburse
Kroll-O'Gara for a portion of general and administrative expenses, including
outside professional fees, office rent and travel expenses, which were incurred
for the benefit of both Kroll-O'Gara and Mr. Kroll. Amounts due to Kroll-O'Gara
at December 31, 1998 and 1999 pursuant to this agreement were $85,672 and
$281,561, respectively.
During 1997, 1998 and 1999, Kroll-O'Gara rendered risk management services,
including marketing support, and claims investigations services to American
International Group, Inc. and its subsidiaries. Kroll-O'Gara billed AIG and its
subsidiaries $6,412,244 in 1997, $4,877,478 in 1998, and $4,779,449 in 1999 for
these services. The year-end accounts receivable balance for AIG was $897,361,
$1,290,558 and $1,231,685 at December 31, 1997, 1998 and 1999, respectively.
Since 1995, Kroll-O'Gara has purchased some of its liability insurance,
including Professional Errors and Omissions and Directors and Officers liability
insurance, from AIG's subsidiaries. AIG's subsidiaries billed Kroll-O'Gara
$814,154, $474,800 and $361,320 for this insurance during 1997, 1998, and 1999,
respectively. Kroll-O'Gara obtains the coverage through an independent insurance
broker and where possible obtains competitive proposals from unrelated third
parties.
Kroll Background America leases office space in Nashville, Tennessee from
companies controlled by Mr. Shmerling. For the year ended December 31, 1999,
Kroll Background America leased 16,884 square feet of space and paid rent of
$276,145. For the six months ended June 30, 2000, Kroll Background America
leased 20,284 square feet of office space and paid rent of approximately
$158,000. Kroll Background America subleases a portion of its Nashville office
space to KRCS for its information technology department. For the year ended
December 31, 1999, KRCS subleased 945 square feet of office space from Kroll
Background America and paid rent of $17,484. For the six
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<PAGE> 70
months ended June 30, 2000, KRCS subleased 2,668 square feet from Kroll
Background America and paid rent of $25,343.
Mr. Thomas Constance, who is expected to become a director of KRCS prior to
the split-up, is a partner in the law firm of Kramer Levin Naftalis & Frankel
LLP, which provides legal services to KRCS and its subsidiaries.
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<PAGE> 71
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of KRCS consists of 25 million shares of
common stock, par value $0.01 per share, and 2.5 million shares of preferred
stock, par value $0.01 per share. Immediately following the split-up, we expect
to have approximately 8.5 million shares of common stock outstanding. There will
be no preferred stock outstanding. A description of the material provisions of
our certificate of incorporation that affect the relative rights of the common
stock is set forth below. The following description of the capital stock of KRCS
is intended to be a summary only and is qualified in its entirety by reference
to the forms of our certificate of incorporation and bylaws filed as exhibits to
the registration statement of which this prospectus is a part and to the General
Corporation Law of the State of Delaware.
COMMON STOCK
The holders of common stock are entitled to one vote for each share held
and shall be entitled to notice of any stockholders meeting and to vote upon any
matters that properly come before a meeting as provided in the bylaws of KRCS or
as may be provided by law. Except for and subject to those rights expressly
granted to holders of preferred stock, and except as may be provided by the laws
of the State of Delaware, the holders of common stock will have all other rights
of stockholders, including (1) the right to receive dividends, when, as and if
declared by the board of directors, out of assets lawfully available therefor
and (2) in the event of any distribution of assets upon a liquidation or winding
up of KRCS, the right to receive all the assets and funds of KRCS remaining
after the payment to the creditors of KRCS and the holders of the preferred
stock, if any, of the specific amounts which they are entitled to receive upon
that distribution. The common stock is not convertible or redeemable and there
are no sinking fund provisions therefor. All shares of common stock to be
distributed in the split-up will be fully paid and not liable for any call or
assessment.
PREFERRED STOCK
The board of directors may issue preferred stock from time to time, without
the approval of our stockholders, in one or more series. Each series of
preferred stock will have the voting powers, if any, designations and
preferences that are stated in the resolutions adopted by the board of directors
providing for its designation and issue. The board of directors is authorized by
our certificate of incorporation to determine, among other things, the voting,
dividend, redemption, conversion and liquidation powers, rights and preferences
and the limitations of each series of preferred stock. The issuance of preferred
stock may have the effect of delaying, deferring or preventing a change in
control, and may adversely affect the voting and other rights of the holders of
our capital stock.
CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS THAT MAY HAVE AN ANTI-TAKEOVER
EFFECT
Our certificate of incorporation and bylaws contain several provisions
which may be deemed to have anti-takeover effects and may discourage, delay or
prevent a takeover attempt that a stockholder might consider in its best
interest. These provisions include: (1) the requirement that there shall be
three classes of directors and that their terms be staggered; (2) the
requirement that a stockholder comply with specified procedures, including
advance written notice, before bringing matters, including the nomination of
directors, before a stockholders' meeting; (3) the specific denial of
stockholders' ability to take action by written consent, and (4) the restriction
of the right to call special meetings to only the Chairman of the Board, the
Chief Executive Officer or the board of directors pursuant to a board
resolution.
70
<PAGE> 72
Any and all vacancies occurring on the board of directors may be filled by
(1) the affirmative vote of a majority of the remaining directors then in
office, even if the remaining directors constitute less than a quorum of the
board of directors or (2) the KRCS stockholders if the vacancy is not filled by
the remaining directors. See "Management" for more information.
LIMITATION ON DIRECTOR'S LIABILITY
Our certificate of incorporation and bylaws contain provisions that allow
for the indemnification of directors and officers (or any predecessor thereof)
of KRCS to the fullest extent permitted under Delaware law, and for the
indemnification, pursuant to the discretion of the board of directors, of
employees and agents under the same terms. The certificate of incorporation and
bylaws also provide that a director of KRCS shall not be personally liable to
KRCS or its stockholders for monetary damages for breach of fiduciary duty as a
director. However, a director shall remain liable for any breach of the
director's duty of loyalty to KRCS or its stockholders, for acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, for unlawful payment of a dividend or an unlawful stock purchase or
redemption (except that any director who may have been absent when those acts
were performed may be exonerated from liability by causing his or her dissent to
be entered in the minutes of KRCS at the time of the unlawful act, or
immediately after the director received notice of that act), or for any
transaction from which the director derived any improper personal benefit.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for our common stock is .
71
<PAGE> 73
LEGAL MATTERS
The legality of the KRCS common stock covered by this prospectus will be
passed upon for us by Kramer Levin Naftalis & Frankel LLP, in New York, New
York.
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated financial statements of The Kroll-O'Gara Company as of
December 31, 1998 and 1999 and for each of the three years in the period ended
December 31, 1999, included in this prospectus, have been audited by Arthur
Andersen LLP, independent public accountants, as set forth in their report. In
that report, that firm states that with respect to a certain subsidiary its 1997
opinion is based on the report of other independent auditors, namely, Deloitte &
Touche LLP. Reference is also made to said report, which includes an explanatory
paragraph with respect to the change in the method of accounting for costs
incurred in connection with business process reengineering activities in the
fourth quarter of 1997 and the change in the method of accounting for costs of
start-up activities in the first quarter of 1999, both as discussed in Note 2(r)
to the consolidated financial statements.
INDEPENDENT AUDITORS
The consolidated financial statements of Background America for the year
ended December 31, 1997 (not incorporated by reference separately herein) have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and are included in reliance upon the report of such
firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed a registration statement on Form S-1 with the Securities and
Exchange Commission, which we refer to as the SEC, to register the KRCS common
stock that Kroll-O'Gara shareholders will receive in the split-up. This
prospectus is a part of that registration statement and, as allowed by SEC
rules, does not include all of the information you can find in the registration
statement or the exhibits to the registration statement. For information
relating to us, we refer you to the registration statement and its exhibits.
Kroll-O'Gara has also filed a Schedule 14A proxy statement which provides
more complete information about the split-up. For information regarding the
reorganization and the split-up of Kroll-O'Gara, we refer you to the proxy
statement.
Statements in this prospectus regarding the terms of any contract or
document are not necessarily complete and in each instance, if the contract or
document is filed as an exhibit to the registration statement, we refer you to
the copy of the contract or other document filed as an exhibit. Each statement
is qualified in all respects by the relevant reference.
After the split-up, we will file annual, quarterly and special reports,
proxy statements and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. The registration statement
and the proxy statement are, and any of these future filings with the SEC will
be, available to the public over the Internet at the SEC's website at
http://www.sec.gov. You may read and copy any filed document at the SEC's public
reference rooms in Washington, D.C. at 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549, and at the SEC's regional offices in New York at 7 World
Trade Center, 13th Floor, New York, NY 10048, and in Chicago at Suite 1400,
Northwestern Atrium Center, 14th Floor, 500 W. Madison Street, Chicago, IL
60661. Please call the SEC at 1-800-SEC-0330 for further information about the
public reference rooms.
72
<PAGE> 74
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
THE KROLL-O'GARA COMPANY
Reports of Independent Public Accountants................... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999...................................................... F-4
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-6
Consolidated Statements of Shareholders' Equity for the
Years Ended December 31, 1997, 1998 and 1999.............. F-7
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.......................... F-9
Notes to Consolidated Financial Statements.................. F-10
Consolidated Balance Sheets as of December 31, 1999 and June
30, 2000 (unaudited)...................................... F-44
Consolidated Statements of Operations for the Six Months
Ended June 30, 1999 and 2000 (unaudited).................. F-46
Consolidated Statements of Shareholders' Equity for the Six
Months Ended June 30, 2000 (unaudited).................... F-47
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 2000 (unaudited).................. F-48
Notes to Consolidated Unaudited Financial Statements........ F-49
</TABLE>
F-1
<PAGE> 75
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE KROLL-O'GARA COMPANY:
We have audited the accompanying consolidated balance sheets of THE
KROLL-O'GARA COMPANY and subsidiaries as of December 31, 1998 and 1999 and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1997 financial statements of Background
America, Inc., a company acquired during 1999 in a transaction accounted for as
a pooling of interests, as discussed in Note 3. Such statements are included in
the consolidated financial statements of The Kroll-O'Gara Company and reflect
total revenues of 2 percent of the consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us and our opinion,
insofar as it relates to amounts included for Background America, Inc., is based
solely upon the report of the other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits and the report of other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of The Kroll-O'Gara Company and
subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
As explained in Note 2(r) to the consolidated financial statements,
effective in the fourth quarter of 1997, the Company changed its method of
accounting for costs incurred in connection with business process reengineering
activities and, effective in the first quarter of 1999, the Company changed its
method of accounting for costs of start-up activities.
Arthur Andersen LLP
Cincinnati, Ohio
September 14, 2000
F-2
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
Board of Directors and Shareholders
Background America, Inc.
Nashville, Tennessee
We have audited the consolidated statements of operations, redeemable
preferred stock and other shareholders' equity (deficit) and cash flows for the
year ended December 31, 1997 of Background America, Inc. and subsidiaries (the
"Company"). 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 auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements (not presented
separately herein) present fairly, in all material respects, the results of
operations of Background America, Inc. and subsidiaries and their cash flows for
the year ended December 31, 1997, in conformity with accounting principles
generally accepted in the United States of America.
Deloitte & Touche LLP
Nashville, Tennessee
December 18, 1998
(January 21, 1999 as to
first paragraph of Note 15)
F-3
<PAGE> 77
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
ASSETS (NOTE 7)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 14,040,700 $ 13,834,560
Marketable securities..................................... 13,285,322 --
Trade accounts receivable, net of allowance for doubtful
accounts of approximately $3,821,306 and $4,778,906 in
1998 and 1999, respectively (Notes 2 and 4)............ 56,960,753 68,017,062
Unbilled revenues (Note 2)................................ 7,766,015 18,033,811
Related party receivables (Note 6)........................ 2,763,108 2,095,810
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 4)......................... 26,408,097 24,159,724
Inventories (Note 4)...................................... 22,397,939 26,264,388
Prepaid expenses and other................................ 8,001,102 11,579,522
Deferred tax asset (Note 5)............................... -- 823,831
------------ ------------
Total current assets.............................. 151,623,036 164,808,708
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 2 and 8):
Land...................................................... 1,856,003 2,164,197
Buildings and improvements................................ 8,271,967 8,586,985
Leasehold improvements.................................... 6,344,398 7,451,655
Furniture and fixtures.................................... 6,013,679 10,131,191
Machinery and equipment................................... 19,702,242 36,768,571
Construction-in-progress.................................. 2,915,135 --
------------ ------------
45,103,424 65,102,599
Less-accumulated depreciation............................. (20,462,991) (26,194,953)
------------ ------------
24,640,433 38,907,646
------------ ------------
DATABASES, net of accumulated amortization of $22,788,857
and $26,187,348 in 1998 and 1999, respectively (Note 2)... 9,238,903 9,696,162
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS, net of accumulated amortization of $4,449,752 and
$9,028,471 in 1998 and 1999, respectively (Notes 2 and
3)........................................................ 62,148,482 81,676,083
OTHER ASSETS:
Other assets (Note 4)..................................... 6,093,435 4,304,000
------------ ------------
77,480,820 95,676,245
------------ ------------
$253,744,289 $299,392,599
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-4
<PAGE> 78
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit (Note 7)........................ $ -- $ 26,582,688
Current portion of long-term debt (Note 8)................ 2,000,299 3,737,227
Trade accounts payable.................................... 35,989,761 38,822,977
Related party payables (Note 6)........................... 353,233 --
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 182,656 360,725
Accrued liabilities (Note 4).............................. 22,800,436 28,299,006
Income taxes currently payable............................ 760,340 768,105
Deferred income taxes (Note 5)............................ 781,575 --
Customer deposits......................................... 3,865,219 4,195,762
------------ ------------
Total current liabilities......................... 66,733,519 102,766,490
OTHER LONG-TERM LIABILITIES................................. 1,542,588 2,673,092
DEFERRED INCOME TAXES (Note 5).............................. 1,625,363 1,820,815
LONG-TERM DEBT, net of current portion (Note 8)............. 39,346,555 36,264,163
------------ ------------
Total liabilities................................. 109,248,025 143,524,560
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 9, 12 and 17)
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, 21,584,872 and 22,255,510 shares issued and
outstanding in 1998 and 1999, respectively............. 215,848 222,555
Additional paid-in-capital................................ 157,229,936 170,101,929
Retained deficit.......................................... (10,964,249) (12,639,574)
Deferred compensation..................................... (1,113,936) (1,629,893)
Accumulated other comprehensive loss...................... (871,335) (186,978)
------------ ------------
Total shareholders' equity........................ 144,496,264 155,868,039
------------ ------------
$253,744,289 $299,392,599
============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
F-5
<PAGE> 79
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
NET SALES....................................... $210,323,664 $272,195,513 $321,937,532
COST OF SALES................................... 143,213,182 178,421,433 203,456,962
------------ ------------ ------------
Gross profit............................. 67,110,482 93,774,080 118,480,570
OPERATING EXPENSES:
Selling and marketing......................... 15,532,029 22,332,090 27,470,879
General and administrative.................... 34,292,093 42,834,565 74,861,467
Restructuring charge (Note 4)................. -- -- 4,363,566
Failed merger related costs (Note 17)......... -- -- 1,562,331
Merger related costs (Note 3)................. 7,204,926 5,727,358 4,069,089
------------ ------------ ------------
Operating expenses....................... 57,029,048 70,894,013 112,327,332
------------ ------------ ------------
Operating income......................... 10,081,434 22,880,067 6,153,238
OTHER INCOME (EXPENSE):
Interest expense.............................. (5,244,249) (4,670,010) (4,965,597)
Interest income............................... 172,544 1,273,218 409,892
Other, net.................................... (284,639) (344,279) (311,901)
------------ ------------ ------------
Income before minority interest,
provision for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................. 4,725,090 19,138,996 1,285,632
Minority interest............................. 156,223 -- --
------------ ------------ ------------
Income before provision for income taxes,
extraordinary item and cumulative
effect of change in accounting
principle............................. 4,568,867 19,138,996 1,285,632
Provision for income taxes.................... 3,304,993 7,352,931 2,429,410
------------ ------------ ------------
Income (loss) before extraordinary item
and cumulative effect of change in
accounting principle.................. 1,263,874 11,786,065 (1,143,778)
Extraordinary loss, net of applicable tax
benefit of $129,250 (Note 7)............... (193,875) -- --
------------ ------------ ------------
Income (loss) before cumulative effect of
change in accounting principle........ 1,069,999 11,786,065 (1,143,778)
Cumulative effect of change in accounting
principle, net of applicable tax benefit of
$240,000 in 1997 and $408,000 in 1999 (Note
2(r))...................................... (360,000) -- (778,041)
------------ ------------ ------------
Net income (loss)........................ $ 709,999 $ 11,786,065 $ (1,921,819)
============ ============ ============
Earnings (loss) per share (Note 2(o)):
Basic...................................... $ 0.05 $ 0.61 $ (0.09)
============ ============ ============
Diluted.................................... $ 0.05 $ 0.59 $ (0.09)
============ ============ ============
Weighted average shares outstanding (Note
2(o)):
Basic...................................... 14,750,676 19,336,580 22,005,632
============ ============ ============
Diluted.................................... 15,560,050 19,908,206 22,005,632
============ ============ ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-6
<PAGE> 80
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
COMPREHENSIVE COMMON ADDITIONAL RETAINED DEFERRED
SHARES INCOME (LOSS) STOCK PAID-IN CAPITAL DEFICIT COMPENSATION
---------- ------------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996......... 14,035,151 $140,351 $ 44,143,424 $(21,266,057) $ --
Issuances of stock under employee
benefit plans, including related
tax benefit (Note 11)............ 750,725 7,507 6,301,276 -- --
Issuance of stock in conjunction
with the acquisition of
businesses and minority interest
(Note 3)......................... 823,371 8,234 9,695,009 -- --
Issuance of stock in conjunction
with the settlement of a note
payable.......................... 21,721 217 232,282 -- --
Private offering of common stock,
net of issuance cost of
$36,373.......................... 307,613 3,076 5,964,976 -- --
Purchase and retirement of common
stock (Note 11 (c)).............. (259,036) (2,590) (498,978) (2,194,256) --
Comprehensive income:
Net income....................... -- $ 709,999 -- -- 709,999 --
-----------
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, net of $157,000
tax benefit.................. -- (236,393) -- -- -- --
Unrealized depreciation of
marketable securities, net of
$2,400 tax benefit........... -- (3,698) -- -- -- --
-----------
Other comprehensive loss....... -- (240,091) -- -- -- --
-----------
Comprehensive income......... -- $ 469,908 -- -- -- --
---------- =========== -------- ------------ ------------ -----------
BALANCE, December 31, 1997......... 15,679,545 156,795 65,837,989 (22,750,314) --
Public and private offerings of
common stock, net of issuance
costs of approximately
$1,431,000....................... 4,716,757 47,168 68,289,755 -- --
Net issuances of stock under
employee benefit plans, including
related tax benefit (Note 11).... 428,625 4,286 4,473,859 -- --
Issuance of stock in conjunction
with the acquisition of
businesses (Note 3).............. 767,416 7,674 17,602,830 -- --
Exercise of stock put option (Note
3)............................... (7,471) (75) (166,593) -- --
Deferred compensation related to
stock options.................... -- -- 1,192,096 -- (1,113,936)
Comprehensive income:
Net income....................... -- $11,786,065 -- -- 11,786,065 --
-----------
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, net of $318,000
tax benefit.................. -- (476,956) -- -- -- --
Reclassification adjustment for
gain on securities included
in net income, net of $7,000
tax benefit.................. -- (10,469) -- -- -- --
-----------
Other comprehensive loss....... -- (487,425) -- -- -- --
-----------
Comprehensive income......... -- $11,298,640 -- -- -- --
---------- =========== -------- ------------ ------------ -----------
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- ------------
<S> <C> <C>
BALANCE, December 31, 1996......... $(143,819) $ 22,873,899
Issuances of stock under employee
benefit plans, including related
tax benefit (Note 11)............ -- 6,308,783
Issuance of stock in conjunction
with the acquisition of
businesses and minority interest
(Note 3)......................... -- 9,703,243
Issuance of stock in conjunction
with the settlement of a note
payable.......................... -- 232,499
Private offering of common stock,
net of issuance cost of
$36,373.......................... -- 5,968,052
Purchase and retirement of common
stock (Note 11 (c)).............. -- (2,695,824)
Comprehensive income:
Net income....................... -- 709,999
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, net of $157,000
tax benefit.................. -- --
Unrealized depreciation of
marketable securities, net of
$2,400 tax benefit........... -- --
Other comprehensive loss....... (240,091) (240,091)
Comprehensive income......... -- --
--------- ------------
BALANCE, December 31, 1997......... (383,910) 42,860,560
Public and private offerings of
common stock, net of issuance
costs of approximately
$1,431,000....................... -- 68,336,923
Net issuances of stock under
employee benefit plans, including
related tax benefit (Note 11).... -- 4,478,145
Issuance of stock in conjunction
with the acquisition of
businesses (Note 3).............. -- 17,610,504
Exercise of stock put option (Note
3)............................... -- (166,668)
Deferred compensation related to
stock options.................... -- 78,160
Comprehensive income:
Net income....................... -- 11,786,065
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, net of $318,000
tax benefit.................. -- --
Reclassification adjustment for
gain on securities included
in net income, net of $7,000
tax benefit.................. -- --
Other comprehensive loss....... (487,425) (487,425)
Comprehensive income......... -- --
--------- ------------
</TABLE>
F-7
<PAGE> 81
<TABLE>
<CAPTION>
COMPREHENSIVE COMMON ADDITIONAL RETAINED DEFERRED
SHARES INCOME (LOSS) STOCK PAID-IN CAPITAL DEFICIT COMPENSATION
---------- ------------- -------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1998......... 21,584,872 $215,848 $157,229,936 $(10,964,249) $(1,113,936)
Net issuances of stock under
employee benefit plans, including
related tax benefit (Note 11).... 202,614 2,026 3,293,084 -- --
Issuance of stock in conjunction
with acquisition of businesses
(Note 3)......................... 468,024 4,681 8,007,248 246,494 --
Deferred compensation related to
restricted stock and stock
options (Note 11)................ -- -- 1,571,661 -- (515,957)
Comprehensive income (loss):
Net loss......................... -- $(1,921,819) -- -- (1,921,819) --
-----------
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, net of $456,000
tax provision................ -- 684,357 -- -- -- --
-----------
Other comprehensive income..... -- 684,357 -- -- -- --
-----------
Comprehensive income
(loss)..................... -- $(1,237,462) -- -- -- --
---------- =========== -------- ------------ ------------ -----------
BALANCE, December 31, 1999......... 22,255,510 $222,555 $170,101,929 $(12,639,574) $(1,629,893)
========== ======== ============ ============ ===========
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
------------- ------------
<S> <C> <C>
BALANCE, December 31, 1998......... $(871,335) $144,496,264
Net issuances of stock under
employee benefit plans, including
related tax benefit (Note 11).... -- 3,295,110
Issuance of stock in conjunction
with acquisition of businesses
(Note 3)......................... -- 8,258,423
Deferred compensation related to
restricted stock and stock
options (Note 11)................ -- 1,055,704
Comprehensive income (loss):
Net loss......................... -- (1,921,819)
Other comprehensive income
(loss), net of tax:
Foreign currency translation
adjustment, net of $456,000
tax provision................ -- --
Other comprehensive income..... 684,357 684,357
Comprehensive income
(loss)..................... -- --
--------- ------------
BALANCE, December 31, 1999......... $(186,978) $155,868,039
========= ============
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-8
<PAGE> 82
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 15)
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------ ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 709,999 $11,786,065 $ (1,921,819)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations --
Depreciation and amortization......................... 6,798,668 9,112,221 14,088,149
Bad debt expense...................................... 2,083,080 2,556,506 4,360,227
Shareholder stock compensation........................ 1,356,280 -- --
Loss on write-off of notes receivable................. 35,434 -- --
Share in net income of joint ventures................. (121,650) -- --
Gain on sale of marketable securities................. (14,503) (10,469) --
Noncash compensation expense.......................... -- 226,074 1,055,704
Change in assets and liabilities, net of effects of
acquisitions --
Receivables -- trade and unbilled....................... (10,410,824) (13,668,954) (19,094,085)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 3,499,084 (14,329,633) 2,248,373
Inventories, prepaid expenses and other assets.......... (7,226,253) (4,100,776) (5,189,742)
Accounts payable and income taxes currently payable..... 8,058,527 608,102 966,965
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (1,009,740) (138,006) 178,069
Amounts due to/from related parties..................... 443,290 (2,623,651) 731,612
Deferred taxes.......................................... (156,892) (838,668) (1,409,954)
Accrued liabilities, long-term liabilities and customer
deposits.............................................. 667,999 (1,902,669) (1,333,001)
------------ ----------- ------------
Net cash provided by (used in) operating
activities....................................... 4,712,499 (13,323,858) (5,319,502)
------------ ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net........... (6,016,619) (7,329,376) (19,198,147)
Additions to databases.................................... (3,856,914) (4,186,924) (3,855,750)
Acquisitions, net of cash acquired (Note 3)............... (10,710,128) (18,595,996) (12,014,287)
Sale (purchases) of marketable securities, net............ 35,424 (13,262,353) 13,285,322
Other..................................................... 266,004 -- --
------------ ----------- ------------
Net cash used in investing activities.............. (20,282,233) (43,374,649) (21,782,862)
------------ ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loan financing fees....................................... (723,727) -- --
Net borrowings (repayments) under revolving lines of
credit.................................................. (9,376,835) (559,112) 24,262,221
Proceeds from debt........................................ 44,902,987 284,877 --
Payments of long-term debt................................ (10,042,503) (13,662,425) (1,345,464)
Proceeds from notes payable -- shareholder................ 1,261,000 -- --
Repayment of notes payable -- shareholder................. (8,107,641) (176,057) --
Net proceeds from issuance of common stock................ 4,914,317 68,336,923 --
Purchase and retirement of stock.......................... (2,695,824) (166,668) --
Foreign currency translation.............................. (160,462) (593,494) 1,096,137
Proceeds from exercise of stock options and warrants...... 2,780,966 4,478,145 3,295,110
------------ ----------- ------------
Net cash provided by financing activities.......... 22,752,278 57,942,189 27,308,004
------------ ----------- ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 7,182,544 1,243,682 205,640
Effects of foreign currency exchange rates on cash and cash
equivalents............................................... (75,931) 106,049 (411,780)
CASH AND CASH EQUIVALENTS, beginning of year................ 5,584,356 12,690,969 14,040,700
------------ ----------- ------------
CASH AND CASH EQUIVALENTS, end of year...................... $ 12,690,969 $14,040,700 $ 13,834,560
============ =========== ============
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
F-9
<PAGE> 83
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
(1) NATURE OF OPERATIONS AND BASIS OF PRESENTATION --
The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively "Kroll-O'Gara"), is a leading global provider of
a broad range of specialized products and services that are designed to
provide solutions to a variety of security needs. Kroll-O'Gara's Security
Products and Services Group markets ballistic and blast protected vehicles
and security services. The Investigations and Intelligence Group offers
business intelligence and investigation services. The Information Security
Group offers information and computer security services, including network
and system security review and repair. The Voice and Data Communications
Group offers secure satellite communication equipment and satellite
navigation systems.
In December 1997, a wholly owned subsidiary of The O'Gara Company (O'Gara)
was merged into Kroll Holdings, Inc. (Kroll). At the time of the merger,
The O'Gara Company's name was changed to The Kroll-O'Gara Company. The
consolidated financial statements include the historical consolidated
financial statements of Kroll-O'Gara (and the businesses it has acquired,
since their respective dates of acquisition, under the purchase method of
accounting) and the financial position, results of operations and cash
flows of entities which were merged with Kroll-O'Gara in connection with
pooling of interests business combinations (See Note 3).
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES --
(a) CONSOLIDATION -- The consolidated financial statements include the
accounts of all majority-owned subsidiaries. All material intercompany
accounts and transactions are eliminated. Investments in 20% to 50%
owned entities are accounted for on the equity method and investments
in less than 20% owned entities are accounted for on the cost method.
Affiliated entities are not included in the accompanying consolidated
financial statements, and include entities that are directly or
indirectly owned by current shareholders or former shareholders.
(b) REVENUE RECOGNITION -- Revenue related to contracts for security
products (both government and commercial) results principally from
long-term fixed price contracts and is recognized on the
percentage-of-completion method calculated utilizing the cost-to-cost
approach. The percent deemed to be complete is calculated by comparing
the costs incurred to date to estimated total costs for each contract.
This method is used because management considers costs incurred to be
the best available measure of progress on these contracts. However,
adjustments to this measurement are made when management believes that
costs incurred materially exceed effort expended. Contract costs
include all direct material and labor costs, along with certain direct
overhead costs related to contract production.
Provisions for any estimated total contract losses on uncompleted
contracts are recorded in the period in which it becomes known that
such losses will occur. Changes in estimated total contract costs will
result in revisions to contract revenue. These revisions are recognized
when determined.
Revenue from intelligence and investigation services and information
security services is recognized as the services are performed.
Kroll-O'Gara records either billed or unbilled accounts receivable
based on case-by-case invoicing determinations.
F-10
<PAGE> 84
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue related to voice and data communications equipment and services
is recognized as equipment is shipped or as services are provided.
Revenue and related direct costs of brokered satellite time are
recorded when payments are received from customers.
(c) CASH AND CASH EQUIVALENTS -- Cash equivalents consist of all highly
liquid debt instruments with an initial maturity of three months or
less at the date of purchase. Kroll-O'Gara invests excess cash in
overnight repurchase agreements, which are government collateralized
securities. The carrying amount of cash and cash equivalents
approximates fair value of those instruments due to their short
maturity.
(d) MARKETABLE SECURITIES -- Pursuant to the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," (SFAS 115), Kroll-O'Gara
must classify its debt and marketable securities as either trading,
available-for-sale or held-to-maturity. Kroll-O'Gara's marketable
security investments consist largely of available-for-sale municipal
obligations. These securities are valued at current market value, which
approximates cost.
Unrealized holding gains and losses, net of the related income tax
effect, on the available-for-sale securities are excluded from earnings
and are reported as a separate component of shareholders' equity until
realized. Kroll-O'Gara recorded an unrealized net loss of $3,698 as of
December 31, 1997. There were no such unrealized gains or losses as of
December 31, 1998 and 1999.
(e) CONCENTRATIONS OF CREDIT RISK -- Financial instruments that subject
Kroll-O'Gara to credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to accounts receivable are
limited by the number of clients that comprise Kroll-O'Gara's client
base, along with the different industries and geographic regions in
which Kroll-O'Gara's clients operate. Kroll-O'Gara does not generally
require collateral or other security to support client receivables,
although Kroll-O'Gara does require retainers, up-front deposits or
irrevocable letters-of-credit in many situations. Kroll-O'Gara has
established an allowance for doubtful accounts based upon facts
surrounding the credit risk of specific clients and past history.
Management does not anticipate incurring losses on its trade
receivables in excess of established allowances.
(f) PROPERTY, PLANT AND EQUIPMENT -- Property, plant and equipment are
stated at cost. Depreciation is computed on both straight-line and
accelerated methods over the estimated useful lives of the related
assets as follows:
<TABLE>
<S> <C>
Buildings and improvements............................... 5-40 years
Furniture and fixtures................................... 4-10 years
Machinery and equipment.................................. 3-12 years
Leasehold improvements................................... Life of lease
</TABLE>
(g) DATABASES -- Databases are capitalized costs incurred to obtain
information from third party providers. Kroll-O'Gara relies on this
information to create and maintain its proprietary and non-proprietary
databases. Because of the continuing accessibility of the information
and its usefulness to future investigative procedures, the cost of
acquiring the information is capitalized
F-11
<PAGE> 85
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
and amortized over a five year period. Amortization of databases for
the years ended December 31, 1997, 1998 and 1999 was $2,937,152,
$3,283,232 and $3,520,624, respectively.
(h) IMPAIRMENT OF LONG-LIVED ASSETS -- Pursuant to the provisions of SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" (SFAS 121), long-lived assets,
certain identifiable intangibles and goodwill related to those assets
must be reviewed for impairment by asset group for which the lowest
level of independent cash flows can be identified. In accordance with
this standard, Kroll-O'Gara periodically reviews the carrying value of
these assets and impairments are recognized when the expected
undiscounted future cash flows are less than the carrying amount of the
asset. Based on its most recent analysis, Kroll-O'Gara believes no
impairment existed at December 31, 1999. However, it is possible, due
to a change in circumstances, that carrying values could become
impaired in the future. Such impairment could have a material effect on
the results of operations in a particular reporting period.
(i) COSTS IN EXCESS OF ASSETS ACQUIRED -- Costs in excess of assets
acquired represents the excess of the purchase cost over the fair value
of net assets acquired in a purchase business combination. Costs in
excess of assets acquired, net of accumulated amortization, as of
December 31, 1998 and 1999 were $52,418,302 and $72,269,993,
respectively. Amortization is recorded on a straight-line basis over
periods ranging from 12 to 40 years. Amortization of costs in excess of
assets acquired for the years ended December 31, 1997, 1998 and 1999
were $828,913, $1,636,013 and $3,431,058, respectively.
(j) OTHER INTANGIBLE ASSETS -- Other intangible assets, comprised mainly of
customer lists and non-compete agreements, are amortized on a
straight-line basis. Customer lists are amortized over a fifteen year
period and the non-compete agreements are amortized over the lives of
the respective agreements, which range from 6 months to fifteen years.
Other intangible assets, net of accumulated amortization, as of
December 31, 1998 and 1999 were $9,730,180 and $9,406,090,
respectively. Amortization of other intangible assets for the years
ended December 31, 1997, 1998 and 1999 was $350,309, $972,489 and
$1,147,660, respectively.
(k) FOREIGN CURRENCY TRANSLATION -- Assets and liabilities of foreign
operations are translated using year-end exchange rates and revenues
and expenses are translated using exchange rates prevailing during the
year, with gains or losses resulting from translation included in a
separate component of shareholders' equity.
Gains or losses resulting from foreign currency transactions are
translated to local currency at the rates of exchange prevailing at the
dates of the transactions. Amounts receivable or payable in foreign
currencies, other than the subsidiary's local currency, are translated
at the rates of exchange prevailing at the balance sheet date. The
effect of transactional gains or losses is included in other income
(expense) in the accompanying consolidated statements of operations.
(l) USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-12
<PAGE> 86
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(m) RESEARCH AND DEVELOPMENT -- Research and development costs are expensed
as incurred. Kroll-O'Gara incurred approximately $136,000, $537,000 and
$297,000 for the years ended December 31, 1997, 1998 and 1999,
respectively, for research and development. These costs are included in
general and administrative expenses in the accompanying consolidated
statements of operations.
(n) ADVERTISING -- Kroll-O'Gara expenses the cost of advertising as
incurred. Advertising expenses for the years ended December 31, 1997,
1998 and 1999 were approximately $1,542,996, $2,027,233 and $2,374,096,
respectively.
(o) EARNINGS PER SHARE -- In 1997, Kroll-O'Gara adopted Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS
128). In accordance with SFAS 128, basic earnings per share are
computed by dividing net income by the weighted average number of
shares of common stock outstanding during the year. Diluted earnings
per share are computed by dividing net income by the weighted average
number of shares of common stock and common stock equivalents
outstanding during the year. Dilutive common stock equivalents
represent shares issuable upon assumed exercise of stock options and
warrants, assumed issuance of restricted stock and assumed conversion
of a convertible note payable.
The following is a reconciliation of the numerator and denominator for
basic and diluted earnings per share for the years ended December 31,
1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share............ $709,999 14,750,676 $0.05
=====
Effect of dilutive securities:
Options........................... -- 254,575
Restricted stock.................. -- 443,152
Warrants.......................... -- 97,425
Convertible note payable.......... -- 14,222
-------- ----------
Diluted earnings per share.......... $709,999 15,560,050 $0.05
======== ========== =====
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic earnings per share........... $11,786,065 19,336,580 $0.61
=====
Effect of dilutive securities:
Options.......................... -- 568,849
Warrants......................... -- 2,777
----------- ----------
Diluted earnings per share......... $11,786,065 19,908,206 $0.59
=========== ========== =====
</TABLE>
F-13
<PAGE> 87
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic and diluted loss per share... $(1,921,819) 22,005,632 $(0.09)
=========== ======
Effect of anti-dilutive securities:
Options.......................... 546,614
Restricted stock................. 42,974
Warrants......................... 1,188
----------
Diluted shares..................... 22,596,408
==========
</TABLE>
As a result of the net loss recorded in 1999, 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
extraordinary item and cumulative effect of change in accounting
principle were $0.09 and $0.08, respectively, for the year ended
December 31, 1997. The basic and diluted per share impact of the
extraordinary item were $0.01 and the basic and diluted per share
impact of the change in accounting principle were $0.03 and $0.02,
respectively.
Basic and diluted loss per share based on loss before cumulative effect
of change in accounting principle were $0.05 for the year ended
December 31, 1999. The basic and diluted per share impact of the change
in accounting principle was $0.04.
During 1997, 66,000 warrants to purchase a total of 27,746 shares of
common stock of Kroll-O'Gara at $7.20 per warrant were outstanding but
were not included in the computation of diluted earnings per share
because the warrants' exercise price was greater than the average
market price of the common shares.
During 1998, 11,666 warrants to purchase an equivalent amount of shares
of common stock of Kroll-O'Gara at $25.69 per warrant were outstanding
but were not included in the computation of diluted earnings per share
because the warrants' exercise price was greater than the average
market price of the common shares.
During 1999, 8,719 warrants and 597,155 options to purchase an
equivalent amount of shares of common stock of Kroll-O'Gara at $25.69
per warrant and from $26.94 to $34.88 per option were outstanding but
were not included in the computation of diluted weighted average shares
because the warrants' and options' exercise prices were greater than
the average market price of the common shares.
(p) NEW ACCOUNTING PRONOUNCEMENTS -- In 1998, Kroll-O'Gara adopted
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), which established standards for
reporting and displaying comprehensive income and its components in a
financial statement that is displayed with the same prominence as other
financial statements. Kroll-O'Gara has chosen to disclose comprehensive
income, which encompasses net income, foreign currency translation
adjustments and unrealized holding gains of marketable securities, in
the consolidated statements of shareholders' equity. Prior years have
been restated to conform to the SFAS 130 requirements. The accumulated
other comprehensive income (loss) balance of ($0.4) million at December
31, 1997 consisted of ($0.4) million of foreign currency translation
adjustments and $0.01 million of unrealized appreciation of marketable
securities.
F-14
<PAGE> 88
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The accumulated other comprehensive income (loss) balance of ($0.9)
million and ($0.2) million at December 31, 1998 and 1999, respectively,
consisted entirely of foreign currency translation adjustments.
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 several forward contracts in place in association with demand notes
from certain subsidiaries. These instruments qualify for hedge
accounting. Kroll-O'Gara has not yet quantified the impact of adopting
SFAS 133 on its financial statements and has not determined the timing
of or method of adoption of SFAS 133. However, SFAS 133 could increase
volatility in earnings and other comprehensive income.
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 is 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. Management does not
anticipate that the adoption of Interpretation No. 44 will have a
material impact on Kroll-O'Gara's financial position or results of
operations.
(q) STOCK-BASED COMPENSATION -- Kroll-O'Gara has elected to account for the
cost of its employee stock options and other forms of employee
stock-based compensation plans utilizing the intrinsic value method
prescribed in Accounting Principles Board Opinion No. 25 (APB 25) as
allowed by Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). APB 25 requires
compensation cost for stock-based compensation plans to be recognized
based on the difference, if any, between the fair market value of the
stock on the date of grant and the option exercise price. SFAS 123
established a fair value-based method of accounting for compensation
cost related to stock options and other forms of stock-based
compensation plans. SFAS 123 allows an entity to continue to measure
compensation cost using the principles of APB 25 if certain pro forma
disclosures are made. The pro forma disclosures required by SFAS 123
are presented in Note 11(e).
(r) CHANGES IN ACCOUNTING PRINCIPLE -- In the fourth quarter of 1997,
Kroll-O'Gara changed its method of accounting for costs incurred in
connection with business process reengineering activities relating to
information technology transformation. Consistent with a consensus
reached by the Emerging Issues Task Force (EITF) under Issue 97-13, in
late November 1997, Kroll-O'Gara expensed costs previously capitalized
in earlier quarters of 1997 (approximately $0.4 million, net of tax
benefit of $0.2 million) as a cumulative effect of change in accounting
principle.
F-15
<PAGE> 89
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1998, the American Institute of Certified Public Accountants
released Statement of Position (SOP) 98-5 "Reporting on the Cost of
Start-Up Activities." The SOP requires costs of start-up activities,
including preoperating costs, organization costs and other start-up
costs, to be expensed as incurred. Kroll-O'Gara's former practice was
to capitalize certain of these expenses and amortize them over periods
ranging from one to five years. Included in the accompanying December
31, 1998 consolidated balance sheet is approximately $1.2 million of
preoperating, organization and start-up costs which would have been
expensed had this statement already been implemented. Kroll-O'Gara
adopted the provisions of this statement in the first quarter of fiscal
1999 and recorded a cumulative effect of a change in accounting
principle of $0.8 million, net of a tax benefit of $0.4 million.
(s) DERIVATIVE FINANCIAL INSTRUMENTS -- Financial instruments in the form
of foreign currency exchange contracts are utilized by Kroll-O'Gara to
hedge its exposure to movements in foreign currency exchange rates.
Kroll-O'Gara does not hold or issue derivative financial instruments
for trading purposes. Gains and losses on foreign exchange contracts
are deferred and amortized as an adjustment to the cumulative foreign
currency translation adjustment component of equity over the terms of
the agreements in accordance with hedge accounting standards. The fair
value of foreign currency exchange contracts is not recognized in the
consolidated financial statements since they are accounted for as
hedges.
(t) RECLASSIFICATIONS -- Certain reclassifications have been reflected in
1997 and 1998 to conform with the current period presentation.
(3) MERGERS AND ACQUISITIONS --
Kroll-O'Gara has completed numerous business combinations in the periods
presented. The transactions were accounted for as both purchase business
combinations and pooling of interests business combinations as follows:
(a) POOLING OF INTERESTS TRANSACTIONS -- In December 1997, a wholly owned
subsidiary of O'Gara was merged with and into Kroll. Effective upon the
consummation of the merger with Kroll, each then issued and outstanding
share of Kroll common stock, including shares subject to issuance under
the Kroll restricted stock plan (See Note 11), were converted into
62.52 shares of common stock of Kroll-O'Gara or 6,098,561 shares of
Kroll-O'Gara's common stock in total. Outstanding employee stock
options of Kroll were converted at the same exchange factor into
options to purchase 551,492 shares of Kroll-O'Gara common stock (See
Note 11).
The merger constituted a tax-free reorganization and was accounted for
as a pooling of interests. Accordingly, all prior period consolidated
financial statements presented have been restated to include the
combined results of operations, financial position and cash flows of
Kroll as though it had always been a part of Kroll-O'Gara.
There were no transactions between O'Gara and Kroll prior to the
combination, and immaterial adjustments were recorded to conform
Kroll's accounting policies. Certain reclassifications were made to the
Kroll financial statements to conform to Kroll-O'Gara's presentations.
The results
F-16
<PAGE> 90
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of operations for the separate companies and the combined amounts
included in the consolidated financial statements follow:
<TABLE>
<CAPTION>
O'GARA KROLL COMBINED
----------- ----------- ------------
<S> <C> <C> <C>
Nine months ended
September 30, 1997
(unaudited)
Revenue...................... $82,567,200 $53,823,958 $136,391,158
Extraordinary item........... (193,875) -- (193,875)
Net income................... 4,181,387 1,796,124 5,977,511
</TABLE>
In connection with the Kroll merger, Kroll-O'Gara recorded, in the
fourth quarter in 1997, a charge to operating expenses of approximately
$7.2 million ($5.7 million after taxes, or $0.37 per diluted share) for
direct and other merger-related costs pertaining to the transaction.
Merger transaction costs are nonrecurring and included $0.8 million for
stock based compensation costs triggered by the change in control of
Kroll, $1.8 million for stay bonuses and severance and $4.6 million
which consisted primarily of fees for investment bankers, attorneys,
accountants, financial printing, travel and other related charges.
In December 1998, a wholly owned subsidiary of Kroll-O'Gara was merged
with and into Laboratory Specialists of America, Inc. (LSAI). Effective
upon the consummation of the merger, each then issued and outstanding
share of LSAI common stock was converted into .2102 shares of common
stock of Kroll-O'Gara or 1,209,053 shares of Kroll-O'Gara's common
stock in total. Outstanding stock options and stock warrants of LSAI
were converted at the same exchange factor into options to purchase
39,094 and 24,386 shares, respectively, of Kroll-O'Gara's common stock
(See Note 11). The financial position and results of operations of LSAI
are reported as part of Kroll-O'Gara's Investigations and Intelligence
Group.
In December 1998, a wholly owned subsidiary of Kroll-O'Gara was merged
with and into Schiff & Associates, Inc. (Schiff). Effective upon the
consummation of the merger, each then issued and outstanding share of
Schiff common stock was converted into approximately 131.41 shares of
common stock of Kroll-O'Gara or 169,521 shares of Kroll-O'Gara's common
stock in total. The financial position and results of operations of
Schiff are reported as part of Kroll-O'Gara's Investigations and
Intelligence Group.
In December 1998, a wholly owned subsidiary of Kroll-O'Gara was merged
with and into Securify Inc. (Securify). Effective upon the consummation
of the merger, all of the outstanding stock of Securify was converted
to shares of Kroll-O'Gara's common stock at a rate of .110793 per share
of Series A Preferred, .118273 per share of Series B Preferred and
.0955252 per share of Securify common stock. In total, Kroll-O'Gara
issued 1,430,936 shares of common stock. In addition, outstanding
employee stock options of Securify were converted at the same exchange
factor as Securify common stock into options to purchase 179,877 shares
of Kroll-O'Gara's common stock. Effective with the consummation of the
merger, Kroll-O'Gara created the Information Security Group and
Securify's results of operations and financial position are reported in
this group.
The mergers with LSAI, Schiff and Securify constituted tax-free
reorganizations and have been accounted for as pooling of interests
transactions. Accordingly, all prior period consolidated financial
statements presented have been restated to include the combined results
of operations,
F-17
<PAGE> 91
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial position and cash flows of LSAI, Schiff and Securify as
though they had always been a part of Kroll-O'Gara.
There were no transactions between Kroll-O'Gara and LSAI, Schiff and
Securify prior to the combinations and immaterial adjustments were
recorded to conform LSAI's, Schiff's and Securify's accounting
policies. Certain reclassifications were made to Kroll-O'Gara's,
LSAI's, Schiff's and Securify's financial statements to conform
presentation. The results of operations for the separate companies and
the combined amounts included in the consolidated financial statements
follow:
<TABLE>
<CAPTION>
KROLL-O'GARA
HISTORICAL LSAI SCHIFF SECURIFY COMBINED
------------ ----------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C>
Nine months ended
September 30, 1998
(unaudited)
Revenue.............. $178,943,336 $12,039,154 $3,531,062 $ 48,000 $194,561,552
Net income (loss).... 11,559,576 1,440,725 582,254 (944,196) 12,638,359
Year ended December 31,
1997
Revenue.............. 190,413,349 12,836,953 2,852,303 -- 206,102,605
Extraordinary item... (193,875) -- -- -- (193,875)
Cumulative effect of
change in
accounting
principle......... (360,000) -- -- -- (360,000)
Net income........... 709,866 1,329,103 7,674 -- 2,046,643
</TABLE>
In 1998, Kroll-O'Gara recorded, in the fourth quarter, a charge to
operating expenses of approximately $5.7 million ($4.1 million after
taxes, or $0.21 per diluted share) for direct and other merger and
integration related costs. Merger transaction costs are non-recurring
and included $0.8 million for stay bonuses and $4.5 million, which
consisted primarily of fees for investment bankers, attorneys,
accountants, financial printing, travel and other related charges.
Integration costs related primarily to the merger with Kroll
consummated in December 1997 and were approximately $0.4 million.
In March 1999, a wholly owned subsidiary of Kroll-O'Gara was merged
with and into Financial Research, Inc. (FRI). Effective upon the
consummation of the merger, each then issued and outstanding share of
FRI common stock was converted into 101.555 shares of common stock of
Kroll-O'Gara or 101,555 shares of Kroll-O'Gara's common stock in total.
The merger constituted a tax-free reorganization and has been accounted
for as a pooling of interests. The prior period consolidated financial
statements would not have been materially different from the reported
results and accordingly have not been restated.
In June 1999, a wholly owned subsidiary of Kroll-O'Gara was merged with
and into Background America, Inc. (BAI). Effective upon the
consummation of the merger, each then issued and outstanding share of
BAI common and preferred stock was converted into .2689628 shares of
common stock of Kroll-O'Gara or 899,243 shares of Kroll-O'Gara's common
stock in total. Outstanding stock options and stock warrants of BAI
were converted at the same exchange factor into options to purchase
86,844 and 2,018 shares, respectively, of Kroll-
F-18
<PAGE> 92
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
O'Gara's common stock (see Note 11). The financial position and results
of operations of BAI are reported as part of Kroll-O'Gara's
Investigations and Intelligence Group.
The merger with BAI constituted a tax-free reorganization and has been
accounted for as a pooling of interests. Accordingly, all prior period
consolidated financial statements presented have been restated to
include the combined results of operations, financial position and cash
flows of BAI as though it had always been a part of Kroll-O'Gara.
There were no transactions between Kroll-O'Gara and BAI prior to the
combination. Immaterial adjustments were recorded to conform the
accounting practices of Kroll-O'Gara and BAI and certain
reclassifications were made to the BAI financial statements to conform
to Kroll-O'Gara's presentation.
The combined companies have recorded an income tax benefit of $113,533
in 1998 to reflect a reduction in a valuation allowance applicable to
certain domestic net operating loss carryforwards. Included in the
December 31, 1998 consolidated balance sheet is approximately $573,000
of merger costs incurred by Kroll-O'Gara which, along with other merger
costs subsequently incurred, were expensed immediately upon
consummation of the transaction on a pooling of interests basis in
1999. The results of operations for the separate companies and the
combined amounts presented in the consolidated financial statements
follow:
<TABLE>
<CAPTION>
KROLL-O'GARA
HISTORICAL BAI ADJUSTMENTS COMBINED
------------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Three months ended
March 31, 1999 (unaudited)
Revenue......................... $ 69,007,000 $ 2,492,000 $ -- $ 71,499,000
Cumulative effect of change in
accounting principle......... (778,041) -- -- (778,041)
Net income...................... 2,418,000 110,000 -- 2,528,000
Year ended December 31, 1998
Revenue......................... 264,844,847 7,350,666 -- 272,195,513
Net income (loss)............... 13,088,906 (1,416,374) 113,533 11,786,065
Year ended December 31, 1997
Revenue......................... 206,102,605 4,221,059 -- 210,323,664
Extraordinary item.............. (193,875) -- -- (193,875)
Cumulative effect of change in
accounting principle......... (360,000) -- -- (360,000)
Net income (loss)............... 2,046,643 (1,336,644) -- 709,999
</TABLE>
In 1999, Kroll-O'Gara recorded a charge to operating expenses of
approximately $4.1 million ($3.2 million after taxes, or $0.14 per
diluted share) for direct and other merger and integration related
costs. Merger transaction costs are non-recurring and included $0.3
million for stay bonuses, $0.4 million for stock based compensation
costs triggered by the change in control of BAI and $2.4 million which
consisted primarily of fees for investment bankers, attorneys,
accountants, financial printing, travel and other related charges.
Integration costs related primarily to the mergers and acquisitions
completed in the fourth quarter of 1998 and were approximately $1.0
million.
F-19
<PAGE> 93
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(b) PURCHASE TRANSACTIONS -- In addition to the merger with Kroll,
Kroll-O'Gara completed six other acquisitions in 1997 which were
accounted for as purchase business combinations. Three of the 1997
purchase acquisitions have been included in Kroll-O'Gara's Security
Products and Services Group, two in the Investigations and Intelligence
Group and one in the Voice and Data Communications Group. The aggregate
purchase price of these six acquisitions amounted to approximately
$26.0 million and consisted of $13.4 million in cash, $4.1 million in
seller-provided financing and 753,806 shares of common stock (valued at
approximately $8.5 million or an average of $11.28 per share). In
connection with these acquisitions, Kroll-O'Gara entered into various
employment and non-compete agreements with officers and key employees
of the acquired companies with varying terms and conditions. The
results of operations of the acquired businesses are included in the
consolidated financial statements from the respective effective dates
of acquisition. The resulting goodwill from these transactions is being
amortized over periods ranging from fifteen to thirty years. In
addition to these 1997 acquisitions, Kroll-O'Gara also exercised its
option to acquire the minority interest in its O'Gara Brazilian
subsidiary for approximately 69,565 shares of common stock valued at
approximately $1.2 million.
Kroll-O'Gara made one significant acquisition in 1997 which is included
above. In February 1997, Labbe, S.A. (Labbe), a company located in
France specializing in vehicle armoring systems, was acquired for
approximately $14.2 million, consisting of $10.7 million in cash and
376,597 shares of Kroll-O'Gara's common stock valued at approximately
$3.5 million or $9.29 per share. For accounting purposes, the
acquisition was effective on January 1, 1997 and the results of
operations of Labbe are included in the consolidated results of
operations of Kroll-O'Gara from that date forward.
In addition to the mergers with LSAI, Schiff and Securify, Kroll-O'Gara
completed nine other acquisitions in 1998, all of which were accounted
for as purchase business combinations. Eight of the 1998 purchase
acquisitions have been included in Kroll-O'Gara's Investigations and
Intelligence Group and the ninth has been included in the Security
Products and Services Group. The aggregate purchase price of these nine
acquisitions amounted to approximately $37.1 million and consisted of
$19.5 million in cash and 767,416 shares of common stock (valued at
approximately $17.6 million or an average of $22.93 per share). The
$37.1 million aggregate purchase price for the 1998 acquisitions
excludes a potential earnout of $3.25 million applicable to one of the
acquired companies, which is payable over three years and is contingent
upon the achievement of specified operating income targets.
Approximately $1.1 million was earned and accrued at December 31, 1999
pursuant to this earnout agreement. In conjunction with one of the 1998
purchase acquisitions, the shareholders of the acquired entity had the
option to put the shares of common stock received for cash of $22.31
per share for a certain defined period. The put option relating to
7,471 shares issued in connection with this acquisition was exercised
for $166,668 in cash with the remaining put options expiring
unexercised. In addition, in connection with several of these
acquisitions, Kroll-O'Gara entered into various employment and
non-compete agreements with officers and key employees of the acquired
companies with varying terms and conditions. The results of operations
of the acquired businesses are included in the consolidated financial
statements from the respective effective dates of acquisition. The
resulting goodwill from these transactions is being amortized over
periods ranging from twelve to twenty-five years.
F-20
<PAGE> 94
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Kroll-O'Gara made one significant acquisition in 1998 which is included
above. In September 1998, Kizorek, Inc., now renamed InPhoto
Surveillance, Inc. (InPhoto), a company located in Illinois
specializing in video surveillance services, was acquired for
approximately $9.1 million, consisting of $0.9 million in cash and
352,381 shares of Kroll-O'Gara's common stock valued at approximately
$8.2 million or $23.35 per share. For accounting purposes, the
acquisition was effective on July 1, 1998 and the results of operations
of InPhoto are included in the consolidated results of operations of
Kroll-O'Gara from that date forward. The following unaudited pro forma
combined results of operations for the years ended December 31, 1997
and 1998 assumes the InPhoto acquisition occurred as of January 1, 1997
(in thousands, except per share data):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Sales.............................................. $224,800 $278,581
Income before extraordinary item and cumulative
effect of accounting change...................... 1,716 11,680
Net income......................................... 1,162 11,680
Earnings per share:
Basic............................................ $ 0.08 $ 0.60
Diluted.......................................... $ 0.07 $ 0.58
</TABLE>
In addition to the mergers with BAI and FRI during 1999, Kroll-O'Gara
completed an additional acquisition in 1999 which was accounted for as
a purchase business combination. In June 1999 Kroll-O'Gara completed
the acquisition of substantially all of the assets and liabilities of
The Buchler Phillips Group (BP). BP provides financial recovery,
restructuring, insolvency and turnaround services throughout the United
Kingdom and Europe and has been included in the Investigations and
Intelligence Group. The purchase price amounted to approximately $20.0
million and consisted of approximately $12.0 million in cash and
366,469 shares of Kroll-O'Gara's common stock (valued at approximately
$8.0 million or an average of $21.86 per share). For accounting
purposes, the acquisition was effective on April 1, 1999 and the
results of operations of BP are included in the consolidated results of
operations of Kroll-O'Gara from that date forward. The resulting
goodwill from this acquisition is being amortized over 25 years.
F-21
<PAGE> 95
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In connection with the 1997, 1998 and 1999 purchase acquisitions,
assets were acquired and liabilities assumed were as follows (dollars
in thousands):
<TABLE>
<CAPTION>
OTHER 1997 OTHER 1998 1999
LABBE ACQUISITIONS INPHOTO ACQUISITIONS ACQUISITION
-------- ------------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C>
FAIR VALUE OF ASSETS
ACQUIRED INCLUDING:
Cash................... $ 3,501 $ 125 $ 192 $ 701 $ 4
Accounts receivable.... 4,689 2,072 1,743 5,300 1,174
Inventories............ 3,392 1,829 -- -- --
Unbilled revenue....... -- -- 269 1,561 5,441
Other current assets... 316 11 450 551 852
Property, plant and
equipment........... 3,360 378 955 1,243 1,233
Other non-current
assets.............. 2,357 4 -- 271 319
Costs in excess of
assets acquired and
other intangible
assets.............. 7,802 11,727 9,790 28,874 20,835
-------- ------- ------- -------- --------
25,417 16,146 13,399 38,501 29,858
Less: Cash paid for net
assets.............. (10,730) (2,700) (854) (18,689) (12,018)
Fair value of debt
issued.............. -- (4,126) -- -- --
Fair value of stock
issued.............. (3,431) (5,029) (8,228) (9,381) (8,012)
-------- ------- ------- -------- --------
$ 11,256 $ 4,291 $ 4,317 $ 10,431 $ 9,828
======== ======= ======= ======== ========
LIABILITIES ASSUMED
INCLUDING:
Liabilities assumed and
acquisition costs... $ 9,287 $ 4,272 $ 4,117 $ 9,583 $ 7,508
Debt................... 1,969 19 200 848 2,320
-------- ------- ------- -------- --------
$ 11,256 $ 4,291 $ 4,317 $ 10,431 $ 9,828
======== ======= ======= ======== ========
</TABLE>
(4) BALANCE SHEET ACCOUNTS --
(a) TRADE ACCOUNTS RECEIVABLE AND COSTS AND ESTIMATED EARNINGS IN EXCESS OF
BILLINGS ON UNCOMPLETED CONTRACTS -- The following summarizes the
components of trade accounts receivable and costs and estimated
earnings in excess of billings on uncompleted contracts:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
United States Military:
Billed receivables.......................... $ 3,225,664 $ 4,877,570
Costs and estimated earnings in excess of
billings on uncompleted contracts........ 21,042,185 13,827,929
----------- -----------
Total United States Military........ $24,267,849 $18,705,499
=========== ===========
</TABLE>
F-22
<PAGE> 96
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Other contracts and receivables:
Billed receivables.......................... $53,735,089 $63,139,492
Costs and estimated earnings in excess of
billings on uncompleted contracts........ 5,365,912 10,331,795
----------- -----------
Total other contracts and
receivables....................... $59,101,001 $73,471,287
=========== ===========
Total trade accounts receivable, net.......... $56,960,753 $68,017,062
=========== ===========
Total costs and estimated earnings in excess
of billings on uncompleted contracts........ $26,408,097 $24,159,724
=========== ===========
</TABLE>
Costs and estimated earnings in excess of billings on uncompleted
contracts are net of $107,374,834 and $131,582,751 of progress billings
to the United States Military at December 31, 1998 and 1999,
respectively.
Costs and estimated earnings in excess of billings on uncompleted
contracts represent revenue recognized on long-term contracts in excess
of billings because amounts were not billable at the balance sheet
date. It is anticipated such unbilled amounts attributable to the
United States Military will generally be billed over the next 180 days
from the balance sheet date as the contract is substantially completed.
Amounts receivable on other contracts are generally billed as shipments
are made. It is estimated that substantially all of such amounts will
be billed within one year, although contract extensions may delay
certain collections beyond one year.
The following summarizes activity in the allowance for doubtful
accounts on trade accounts receivable:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO
BEGINNING OF COSTS AND BALANCE END
PERIOD EXPENSES DEDUCTIONS OF PERIOD
------------ ---------- ----------- -----------
<S> <C> <C> <C> <C>
Year ended December 31, 1997....... $2,532,566 $2,083,080 $(1,506,900) $3,108,746
Year ended December 31, 1998....... 3,108,746 2,556,506 (1,843,946) 3,821,306
Year ended December 31, 1999....... 3,821,306 4,360,227 (3,402,627) 4,778,906
</TABLE>
(b) INVENTORIES -- Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method and include the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
<S> <C> <C>
Raw materials................................. $ 8,148,000 $15,347,831
Vehicle costs and work-in-process............. 14,249,939 10,916,557
----------- -----------
$22,397,939 $26,264,388
=========== ===========
</TABLE>
F-23
<PAGE> 97
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes activity in valuation reserves for inventory
obsolescence:
<TABLE>
<CAPTION>
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING OF COSTS AND END OF
PERIOD EXPENSES DEDUCTIONS PERIOD
------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Year ended December 31,
1997...................... $264,114 $113,567 $(23,782) $ 353,899
Year ended December 31,
1998...................... 353,899 7,971 -- 361,870
Year ended December 31,
1999...................... 361,870 804,960 -- 1,166,830
</TABLE>
(c) OTHER ASSETS -- Other assets are stated at cost less accumulated
amortization and are being amortized on a straight line basis over
their estimated useful lives, as applicable. Other assets consist of
the following:
<TABLE>
<CAPTION>
USEFUL DECEMBER 31,
LIFE -----------------------
DESCRIPTION (YEARS) 1998 1999
----------- ----------- ---------- ----------
<S> <C> <C> <C>
Advance to vendor..................... -- $1,130,361 $ --
Preoperating and start-up costs....... -- 1,185,574 --
Security deposits..................... -- 1,003,666 971,405
Pending acquisition costs............. -- 573,035 --
Long-term receivable.................. -- 380,000 1,112,681
Non-refundable deposit on an equipment
lease with a related party.......... 5 537,784 537,784
Deferred financing fees............... 7-30 906,667 920,492
Investment in unconsolidated
subsidiary.......................... -- -- 520,695
Other long-term assets................ -- 585,557 653,935
---------- ----------
6,302,644 4,716,992
Less- accumulated amortization........ (209,209) (412,992)
---------- ----------
$6,093,435 $4,304,000
========== ==========
</TABLE>
Preoperating and start-up costs in 1998 included costs applicable to
bids in process which were deferred when management believed it was
probable that future contracts would be obtained. These costs were
transferred to contract costs when contracts were awarded or were
expensed when the contract award was no longer considered probable.
Preopening and start-up costs also included certain costs incurred in
connection with establishing operations in new locations. In accordance
with SOP 98-5, all such costs were expensed in the first quarter of
fiscal 1999 (see Note 2(r)).
F-24
<PAGE> 98
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(d) ACCRUED LIABILITIES -- Accrued liabilities consist of the following at
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
DESCRIPTION 1998 1999
----------- ----------- -----------
<S> <C> <C>
Payroll and related benefits.................. $ 9,860,811 $11,019,288
Accrued professional fees..................... 3,993,486 2,113,264
Property, sales and other taxes payable....... 2,160,417 2,636,732
Accrued satellite time........................ 1,948,557 1,619,204
Accrued hedge contract settlement............. 710,760 --
Accrued medical costs......................... 483,038 645,132
Accrued interest.............................. 460,923 497,576
Accrued warranty reserve...................... 451,773 442,597
Accrued payments to former owners of acquired
businesses.................................. 515,538 2,868,569
Accrued restructuring costs................... -- 664,900
Other accruals................................ 2,215,133 5,791,744
----------- -----------
$22,800,436 $28,299,006
=========== ===========
</TABLE>
(e) RESTRUCTURING OF OPERATIONS -- In the first quarter of 1999,
Kroll-O'Gara began implementation of a restructuring plan (the "Plan")
to reduce costs and improve operating efficiencies. The Plan was
substantially completed by the end of the second quarter of 1999. The
total non-recurring pre-tax restructuring charge recorded pursuant to
the Plan was approximately $4.4 million. Total payments or writeoffs
made pursuant to the Plan through December 31, 1999 were $3.1 million.
Kroll-O'Gara does not expect to incur any other significant
restructuring charges in future periods related to this Plan. The
principal elements of the restructuring plan 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 December 31, 1999, were as
follows:
<TABLE>
<CAPTION>
DESCRIPTION EXPENSE ACCRUAL
----------- ---------- ----------
<S> <C> <C>
Severance and related costs..................... $3,116,303 $ 540,667
Writedown of property, plant and equipment...... 150,166 --
Lease termination costs......................... 1,064,270 686,301
Other........................................... 32,827 --
---------- ----------
$4,363,566 1,226,968
==========
Less -- Current portion......................... (664,900)
----------
$ 562,068
==========
</TABLE>
(5) INCOME TAXES --
Kroll-O'Gara accounts for income taxes under the liability method pursuant
to Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under the liability
F-25
<PAGE> 99
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
method, deferred tax liabilities and assets are determined based on the
differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates.
Kroll-O'Gara's provision (benefit) for income taxes, excluding extraordinary
item and the cumulative effect of a change in accounting principle, for all
periods is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
Currently payable:
Federal........................ $ 2,800,720 $5,530,085 $ 1,887,333
State and local................ 576,837 965,158 333,059
Foreign........................ 1,364,873 1,834,143 2,235,172
----------- ---------- -----------
4,742,430 8,329,386 4,455,564
----------- ---------- -----------
Deferred:
Federal........................ (1,213,147) (847,018) (1,352,885)
State and local................ (224,290) (129,437) (238,745)
Foreign........................ -- -- (434,524)
----------- ---------- -----------
(1,437,437) (976,455) (2,026,154)
----------- ---------- -----------
$ 3,304,993 $7,352,931 $ 2,429,410
=========== ========== ===========
</TABLE>
A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ----------------- ------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---- ---------- ---- ---------- -----
<S> <C> <C> <C> <C> <C> <C>
Provision for income
taxes at the
federal statutory
rate............... $1,553,415 34.0% $6,583,815 34.4% $ 437,115 34.0%
State and local
income taxes, net
of federal
benefit............ 295,119 6.5 637,004 3.3 47,750 3.7
Nondeductible
expenses........... 1,437,174 31.4 275,294 1.4 2,010,619 156.4
Change in valuation
allowance.......... (319,283) (7.0) (1,035) -- (119,704) (9.3)
Effect of foreign
(income) loss...... 577,743 12.6 (47,924) (0.2) (187,783) (14.6)
Other................ (239,175) (5.2) (94,223) (0.5) 241,413 18.8
---------- ---- ---------- ---- ---------- -----
Provision for
income taxes.... $3,304,993 72.3% $7,352,931 38.4% $2,429,410 189.0%
========== ==== ========== ==== ========== =====
</TABLE>
F-26
<PAGE> 100
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The components of Kroll-O'Gara's consolidated deferred income tax assets and
liabilities as of December 31 are summarized below:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts............. $ 432,027 $ 1,051,436
Depreciation and amortization............... 244,693 320,653
Net operating loss carryforwards............ 3,774,470 3,847,371
Payroll and other benefits.................. 1,721,081 1,452,718
Restructuring............................... -- 658,246
Other accruals.............................. 707,708 961,809
Acquisition costs........................... 1,697,885 1,694,866
Other....................................... 512,382 779,765
----------- -----------
9,090,246 10,766,864
Valuation allowance......................... (3,303,683) (3,183,979)
----------- -----------
Net deferred tax assets.................. 5,786,563 7,582,885
----------- -----------
Deferred tax liabilities:
Nonaccrual service fee receivable........... (156,804) (181,579)
Deferred revenue............................ (3,540,825) (4,220,953)
Database capitalization..................... (2,951,351) (3,107,610)
Customer lists, net of amortization......... (310,667) (121,399)
Percentage of completion on foreign
subsidiaries............................. (381,917) (201,148)
Foreign leasing transactions................ (125,827) (147,146)
Other....................................... (726,110) (600,034)
----------- -----------
(8,193,501) (8,579,869)
----------- -----------
Net deferred tax liability.................... $(2,406,938) $ (996,984)
=========== ===========
</TABLE>
Kroll-O'Gara has certain foreign and domestic net operating loss
carryforwards, which approximated $3.8 million at December 31, 1998 and
1999, respectively. The foreign net operating loss carryforwards relate
primarily to the United Kingdom, Mexico and the Philippines. The
carryforwards expire beginning in 2001. A valuation allowance for the
majority of all existing foreign carryforwards has been provided as it is
not more likely than not that the tax benefit will be realized in the
foreseeable future. Adjustments to the valuation allowance, if any, will be
recorded in the periods in which it is determined the asset is realizable.
F-27
<PAGE> 101
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(6) RELATED PARTY TRANSACTIONS --
(a) SUMMARY OF RELATED PARTY TRANSACTIONS -- The following summarizes
transactions with related parties:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Sales
to Shareholder..................... $6,412,244 $4,877,478 $4,779,449
to affiliated entities............. 1,294,800 821,400 70,595
Purchases
from Shareholder................... 814,154 474,800 361,320
from affiliated entities........... 447,525 1,406,210 382,100
Lease expense to affiliated
entities........................... 856,300 916,600 792,979
Legal services expense provided by
former Director.................... 170,000 190,000 --
Non-interest bearing advances to
shareholders....................... 525,996 568,213 581,779
Air charter fees included in offering
or merger costs.................... 576,000 566,000 --
Interest on shareholder notes
payable............................ 78,950 1,100 --
Forgiveness of note payable to
affiliated entity/shareholder...... 1,053,735 -- --
Non-interest bearing advances to
affiliates......................... 282,346 615,851 282,346
Trade accounts receivable due from
shareholder........................ 897,361 1,290,558 1,231,685
</TABLE>
(b) NOTES PAYABLE -- SHAREHOLDERS -- BAI had certain notes payable to
shareholders. Interest expense associated with these obligations
approximated $78,950 and $1,100 in 1997 and 1998, respectively. In June
1997, approximately $1,053,735 of the principal and accrued interest
payable by BAI to certain shareholders was canceled in partial
consideration for the issuance of stock. The remaining outstanding
balance of $152,000 was paid in full during 1998.
(c) SALES -- SHAREHOLDER -- During 1997, 1998 and 1999, Kroll-O'Gara
rendered services to American International Group, Inc. and its
subsidiaries (AIG) which is also a shareholder of Kroll-O'Gara. Total
revenue recognized for the years ended December 31, 1997, 1998 and 1999
was $6,412,244, $4,877,478 and $4,779,449, respectively. Additionally,
AIG provides certain services to Kroll-O'Gara which have been included
in cost of sales and operating expenses in the accompanying
consolidated statements of operations. These costs were approximately
$814,154, $474,800 and $361,320 for the years ended December 31, 1997,
1998 and 1999, respectively. The yearend accounts receivable balance
for AIG was approximately $1,290,558 and $1,231,685 at December 31,
1998 and 1999, respectively.
(d) BUILDING AND EQUIPMENT LEASES -- AFFILIATED ENTITIES -- Effective June
1, 1998, Kroll-O'Gara reached an agreement to terminate the corporate
aircraft lease which originated in February 1995 with an affiliated
entity. The terms of the aircraft lease addendum provide Kroll-O'Gara
with a future hourly discount from the normal commercial hourly rate in
order to
F-28
<PAGE> 102
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
amortize the remaining portion of existing lease deposits from the
original aircraft lease. Rental expense, including amortization
recognized, approximated $234,000, $292,000 and $82,000 for the years
ended December 31, 1997, 1998 and 1999, respectively. Kroll-O'Gara also
paid this affiliated entity $576,000 in fiscal 1997 for usage of the
aircraft to consummate the merger with Kroll and included such amount
in merger-related costs. Kroll-O'Gara paid $296,000 in 1998 for usage
of the aircraft during the roadshow for a stock offering and included
such amount in stock issuance costs. Kroll-O'Gara also paid $270,000 in
fiscal 1998 for usage of the aircraft to consummate the merger with
Securify and included such amount in merger related costs. Management
is of the opinion that the hourly rate paid by Kroll-O'Gara was
equivalent to the rate charged by the affiliated entity to other
unrelated companies for similar services and it was favorably
comparable to rates charged by another unrelated charter service for
similar aircraft. As of December 31, 1998 and 1999, Kroll-O'Gara had
approximately $484,371 and $402,801, respectively in unamortized lease
deposits with this affiliated entity.
Kroll-O'Gara is also currently leasing various equipment and office
space from several affiliated entities under various three year and
month-to-month lease agreements. Rental expense, net of sub-lease
income, approximated $622,000, $625,000 and $711,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
(7) REVOLVING LINES OF CREDIT --
On September 14, 2000, Kroll-O'Gara amended its existing credit agreement
to extend its 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. See Note 17 for additional discussion. 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 revolving line of
credit mature on May 31, 2001. Advances under the revolving line of credit
bear interest at rates ranging from prime to prime plus 0.75%, or, at
Kroll-O'Gara's option, LIBOR plus 1.50% to LIBOR plus 2.50%, dependent upon
a defined financial ratio. Average borrowings under the revolving line of
credit and its predecessors were $4,568,994, $1,659,131 and $10,838,273
during 1997, 1998 and 1999, respectively, at approximate weighted average
interest rates of 8.46%, 7.96% and 7.02%, respectively. The maximum
borrowings outstanding during 1997, 1998, and 1999 were $11,600,000,
$7,735,029 and $22,822,706, respectively. Borrowings under this line of
credit were approximately $22.8 million at December 31, 1999. There were no
outstanding borrowings pursuant to line of credit agreements at December
31, 1998.
This credit agreement includes financial covenants which, among other
restrictions, 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. Kroll-O'Gara was not in compliance
with certain of these covenants as of December 31, 1999. All such events of
non-compliance were subsequently waived or amended by the lender. Had the
lender not provided a waiver or amendment, all amounts outstanding under
the credit agreement would have been subject to acceleration by the lender.
Effective June 3, 1999, with the acquisition of BP, Kroll-O'Gara acquired a
demand note with maximum borrowings of L2.5 million. The demand note bears
interest at the Bank of England's
F-29
<PAGE> 103
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
base rate plus 1.5%. Average borrowings during 1999 under the demand note
were $2,836,905, as translated, at an approximate weighted average interest
rate of 6.71%. The maximum borrowings outstanding during 1999 were
$3,675,097, as translated. Maximum borrowings permitted and borrowings
outstanding pursuant to this demand note were approximately $4.0 million
and $3.4 million, respectively, as translated at December 31, 1999.
Kroll-O'Gara also had borrowings of approximately $0.4 million outstanding
as of December 31, 1999, pursuant to various overdraft facilities of
certain subsidiaries.
In connection with a refinancing in 1997, Kroll-O'Gara fully amortized the
remaining deferred financing costs from a previous agreement, resulting in
an extraordinary charge to Kroll-O'Gara's net income of $193,875, after
income tax benefits of $129,250, or $0.01 per diluted share.
(8) LONG-TERM DEBT --
The components of long-term debt are as follows at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Senior unsecured notes payable to various institutions,
interest at 8.56% (9.56% prior to May 1998) payable
semi-annually, principal payable at maturity in May 2004,
subject to prepayment penalties........................... $35,000,000 $35,000,000
Economic Development Revenue Bonds, variable interest rate
approximating 85% of the bond equivalent yield of 13 week
U.S. Treasury bills (not to exceed 12%), which
approximated 5.17% at December 31, 1999, payable in
scheduled installments through September 2016, subject to
optional tender by the bondholders and a corresponding
remarketing agreement, secured by certain property, plant
and equipment and a bank letter of credit (Note 12)....... 1,357,224 1,275,974
Notes payable to former shareholders of acquired companies,
interest at fixed rates ranging from 6% to 10%, payable in
scheduled installments through February 2000, certain
notes secured by acquired assets.......................... 2,526,361 1,994,414
Notes payable to banks, variable interest rate at prime plus
1.5%, fixed rates ranging from 6.39% to 20.66%, payable in
scheduled installments through December, 2010 with certain
instruments subject to prepayment penalties,
collateralized by certain real and personal property...... 1,001,204 452,806
Other notes payable, interest at 7% to 10.9%, payable in
scheduled installments through September 2007, certain
notes secured by various equipment........................ 1,462,065 1,278,196
----------- -----------
Less -- current portion..................................... 41,346,854) 40,001,390)
(2,000,299 (3,737,227
----------- -----------
$39,346,555 $36,264,163
=========== ===========
</TABLE>
Kroll-O'Gara's $35.0 million of senior unsecured notes payable also
contains financial covenants, which among other restrictions, requires the
maintenance of a minimum level of net worth and a fixed charge coverage
ratio.
F-30
<PAGE> 104
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of long-term debt at December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000...................................................... $ 3,737,227
2001...................................................... 355,759
2002...................................................... 180,031
2003...................................................... 128,775
2004...................................................... 35,134,848
Thereafter................................................ 464,750
-----------
$40,001,390
===========
</TABLE>
(9) OPERATING LEASES --
Kroll-O'Gara leases office space and certain equipment and supplies under
agreements with terms from one to fifteen years. The following is a
schedule, by year, of approximate future minimum rental or usage payments
required under operating leases that have initial or non-cancelable lease
terms in excess of one year as of December 31, 1999:
Rental expense charged against current operations amounted to approximately
$4,329,000, $6,691,000 and $10,204,000, for the years ended December 31,
1997, 1998 and 1999, respectively.
<TABLE>
<S> <C>
2000...................................................... $ 9,250,804
2001...................................................... 8,606,454
2002...................................................... 6,029,952
2003...................................................... 5,191,308
2004...................................................... 4,057,019
Thereafter................................................ 13,434,484
-----------
$46,570,021
===========
</TABLE>
(10) DEFINED CONTRIBUTION AND BONUS PLANS --
As of December 31, 1999, Kroll-O'Gara had the following employee benefit
plans in place:
(a) DEFINED CONTRIBUTION PLANS -- Kroll-O'Gara and its subsidiaries have
established various profit sharing/401(k) plans covering substantially
all of Kroll-O'Gara's employees. Contributions to the plans are
discretionary and are determined annually by Kroll-O'Gara's Board of
Directors. Certain plans also offer a matching contribution whereby
Kroll-O'Gara will contribute a percentage of the amount a participant
contributes, limited to certain maximum amounts. Plan contribution
expense charged against current operations for all such plans amounted
to approximately $1,211,140, $797,003 and $1,189,841, for the years
ended December 31, 1997, 1998 and 1999, respectively.
(b) PROFIT AND REVENUE SHARING PLANS -- Kroll-O'Gara and its subsidiaries
have established various profit and revenue sharing plans covering
substantially all of Kroll-O'Gara's employees. The plans were
established to provide employees an annual cash incentive bonus based
on various operating and non-operating criteria. Kroll-O'Gara may
amend, modify or terminate these plans at any time.
F-31
<PAGE> 105
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Kroll-O'Gara expensed approximately $516,000, $476,000 and $1,235,000
associated with the profit and revenue sharing plans in 1997, 1998 and
1999, respectively.
(11) EQUITY ARRANGEMENTS --
(a) STOCK OPTION PLANS -- In 1996, Kroll-O'Gara adopted a stock option plan
(the 1996 Plan) for employees, non-employee directors and consultants.
Kroll-O'Gara may grant options for up to 1,757,000 shares under the
1996 Plan. Options for 482,050, 360,000 and 647,195 shares were granted
during 1997, 1998 and 1999, respectively. Options granted under the
plan have been granted at fair market value at the date of grant and
are exercisable over periods not exceeding ten years. Additionally,
effective with the mergers with Kroll, LSAI, Securify and BAI each
outstanding stock option was converted at the respective exchange
factor into options to purchase Kroll-O'Gara common stock. After
conversion, total stock options granted under the previously existing
Kroll, LSAI, Securify and BAI stock option plans in 1997 and 1998 were
174,887 and 248,497, respectively. No options were granted under
previously existing stock option plans in 1999.
In connection with stock options granted by Securify during the year
ended December 31, 1998, Kroll-O'Gara 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. This amount is presented as a
reduction of shareholders' equity, to be expensed ratably over the
vesting periods of the applicable options. Approximately $78,000 and
$298,000 was expensed in 1998 and 1999, respectively, with the balance
to be expensed ratably over the next three years as the options vest.
Effective May 12, 2000, Kroll-O'Gara established a new stock option
plan (the 2000 Plan). Pursuant to this plan, employees were granted
879,400 stock options on May 12, 2000. Additionally, effective May 12,
2000, Kroll-O'Gara amended the 1996 Plan and granted options to certain
employees for 118,000 shares of common stock under that plan.
(b) RESTRICTED STOCK PLAN -- Effective June 14, 1993, Kroll replaced a
previously existing long-term incentive plan with a restricted stock
plan. The restricted stock plan provided for cliff vesting after a
five-year period from the date the stock was awarded. Under the
provisions of the plan, a participant had the ability to put the stock
back to Kroll and receive cash for the then fair value of the stock. In
addition, the plan included a provision which resulted in accelerated
vesting of all shares in the event of a change in control of Kroll.
Kroll-O'Gara has accounted for this plan as a fixed plan and,
accordingly, compensation expense was based on the fair market value as
determined by independent appraisal at the date of grant.
Kroll also entered into other agreements with certain of its senior
executives which provided additional grants. As a result of the Kroll
merger in December 1997, all remaining shares associated with the
restricted stock plan vested and all restrictions lapsed on the merger
date. In connection with this accelerated vesting Kroll-O'Gara
recognized compensation expense of approximately $800,000 in 1997,
which is included with merger related costs in the accompanying
consolidated statement of operations. In addition to the regular tax
benefits based on compensation expense recognized, Kroll-O'Gara also
realized a tax benefit for the fair market value of all restricted
shares which became fully vested in 1997. This benefit of approximately
$2.2 million has been recognized as an increase to additional paid in
capital in
F-32
<PAGE> 106
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the accompanying consolidated statement of shareholders' equity. This
balance represents the spread between cumulative compensation expense
recognized by Kroll-O'Gara for accounting purposes and the cumulative
compensation expense recognized for tax purposes based on the fair
market value of the shares. No shares were outstanding under the plan
as of December 31, 1997 and effective January 2, 1998, further
issuances under the plan were ceased by a board resolution.
Effective August 12, 1998, Kroll-O'Gara adopted a stock incentive plan
(the 1998 Stock Incentive Plan) for employees. Kroll-O'Gara may grant
up to 500,000 shares under the 1998 Stock Incentive Plan. There were no
shares granted under the plan during 1998; however, during fiscal 1999,
47,500 shares were granted under the plan. In connection with the
shares granted under the Stock Incentive Plan in 1999, Kroll-O'Gara
recorded deferred compensation of $1,571,661, representing the
difference between the fair market value of Kroll-O'Gara common stock
on the date of grant and the purchase price of the shares. This amount
is presented as a reduction of shareholders' equity, to be expensed
ratably over the vesting periods of the applicable grants.
Approximately $758,000 was expensed in 1999 and the balance will be
expensed ratably over the next two years as the grants vest.
(c) PURCHASE AND RETIREMENT OF COMMON STOCK -- In accordance with Kroll's
historical bylaws, restricted stock and stock option agreements, Kroll
acquired 259,036 shares (representing shares and shares under options)
of a former director for approximately $2.7 million upon his leaving
the employment of Kroll in January 1997.
(d) COMMON STOCK WARRANTS -- In connection with LSAI's initial public
offering on October 11, 1994, LSAI issued 660,000 warrants. No warrants
had been exercised at December 31, 1996. Until April 15, 1997, each
warrant could be exercised to purchase .4204 shares of common stock for
$16.65 per share. After April 15, 1997, each warrant could be exercised
to purchase .4204 shares of common stock for $9.51 per share. On
September 3, 1997, LSAI gave notice to the holders of these warrants of
LSAI's election to redeem the outstanding warrants at $0.01 each on
October 14, 1997, unless extended, at the sole discretion of LSAI, to a
date not later than November 7, 1997 (the "Warrant Redemption"). As a
result, 658,290 of the warrants were exercised in September and October
1997, and the remaining 1,710 warrants were redeemed.
As a portion of the public offering underwriting compensation, LSAI
also issued warrants to purchase 66,000 units at $7.32 per unit,
consisting of .4204 shares of common stock of Kroll-O'Gara and one
warrant for .4204 additional shares of common stock of Kroll-O'Gara,
exercisable during a four-year period commencing on October 11, 1995
(the "Underwriter Warrants"). The warrants included within each unit
were exercisable under the same terms as the warrants issued in
connection with the public offering as described above. As a result of
the Warrant Redemption, 62,000 of these warrants were exercised for
$0.12 per warrant plus $9.51 per share in September and October 1997,
and the remaining 4,000 warrants were redeemed. After the Warrant
Redemption, the holders of the Underwriter Warrants continue to have
the right to exercise the Underwriter Warrants with respect to the
.4204 shares of common stock of Kroll-O'Gara comprising the unit for
$7.20. In November 1997, 30,000 of the Underwriter Warrants were
exercised with respect to the .4204 shares of common stock of
Kroll-O'Gara comprising the unit for $7.20. The remaining 36,000 of the
Underwriter Warrants with respect to the .4204 shares of common stock
had not been exercised and were outstanding at
F-33
<PAGE> 107
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 1997. The proceeds from the exercise of all warrants
during 1997 are included in net proceeds from exercise of stock options
and warrants in the accompanying consolidated statement of cash flows
and approximated $2.7 million, net of commissions and other offering
expenses.
In connection with the Warrant Redemption, LSAI issued warrants to
purchase 30,281 shares of common stock of Kroll-O'Gara to various
investment bankers as a portion of their compensation for serving as
managers of the Warrant Redemption and certain other services. These
warrants have an exercise price per share of $10.47 and expire on
October 14, 2000. Both the number of shares and the exercise price per
share are subject to adjustment under certain circumstances. The value
of these warrants, recognized as compensation paid to the investment
bankers for services provided, was treated as a reduction in the
recognized net proceeds to LSAI from the Warrant Redemption. The value
of the outstanding warrants is included in paid in capital in excess of
par and entirely offsets the recognized compensatory value of the
warrants, resulting in no net effect on shareholders' equity.
As of December 31, 1999, 8,775 warrants granted by LSAI were still
outstanding.
As of December 31, 1999, BAI had outstanding warrants to purchase 135
shares of Kroll-O'Gara's common stock at $13.01 per share and 1,076
shares of Kroll-O'Gara's common stock at $4.65 per share. These
warrants were issued in June and July of 1996 to certain consultants
and other non-employees of BAI with exercise prices equal to or greater
than the then fair value of BAI's common stock on those dates.
Additionally, as of December 31, 1999, BAI also had outstanding
warrants to purchase 807 shares of Kroll-O'Gara's common stock at
$19.52 per share which were issued in January 1998.
As of December 31, 1999, Kroll-O'Gara had a total of 10,793 warrants
still outstanding.
(e) STOCK BASED COMPENSATION DISCLOSURE -- SFAS 123 requires, at a minimum,
pro forma disclosures of expense for stock-based awards based on their
fair values. Had compensation cost for these plans been determined
consistent with SFAS 123, Kroll-O'Gara's net income (loss) and diluted
earnings (loss) per share for the years ended December 31, 1997, 1998
and 1999 would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----------- -----------
<S> <C> <C> <C>
Net income (loss):
As reported..................... $ 709,999 $11,786,065 $(1,921,819)
Pro forma....................... $(403,461) $ 9,315,427 $(4,844,407)
Diluted earnings (loss) per share:
As reported..................... $ .05 $ .59 $ (.09)
Pro forma....................... $ (.03) $ .47 $ (.22)
</TABLE>
F-34
<PAGE> 108
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following weighted
average assumptions used for grants in 1997, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1998 1999
----------------- --------------- ------------------
<S> <C> <C> <C>
Dividend yield....... -- -- --
Expected
volatility......... 0% - 40.5% 40% - 41.4% 41.4%
Risk-free interest
rate............... 5.8% - 6.76% 4.2% - 5.7% 5.29% - 5.44%
Expected lives....... 5 - 7.5 years 1.5 - 7.5 years 7.5 years
</TABLE>
Option grants by Kroll-O'Gara during 1997 have a weighted-average
exercise price of $14.56, a weighted-average fair value of $7.28 and
contractual lives, on a weighted-average basis, of 9.4 years. The
608,497 options granted by Kroll-O'Gara during 1998 have a
weighted-average exercise price of $12.78, a weighted-average fair value
of $9.35 and contractual lives, on a weighted-average basis, of 9.4
years. The 647,195 options granted by Kroll-O'Gara during 1999 have a
weighted-average exercise price of $27.31, a weighted-average fair value
of $15.49 and contractual lives, on a weighted-average basis, of 9.2
years.
A summary of the status of Kroll-O'Gara's stock option plans at December
31, 1997, 1998 and 1999, and the change during the years then ended is
presented in the table below:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning
of year............. 812,749 $ 6.68 1,371,808 $10.11 1,459,990 $11.54
Granted............. 656,937 14.56 608,497 12.78 647,195 27.31
Exercised........... (6,745) 8.50 (477,894) 8.52 (194,371) 9.11
Forfeited/Expired/
Cancelled........ (91,133) 11.74 (42,421) 17.05 (82,775) 23.06
--------- ------ --------- ------ --------- ------
Outstanding, end of
year................ 1,371,808 $10.11 1,459,990 $11.54 1,830,039 $17.06
========= ====== ========= ====== ========= ======
Exercisable, end of
year................ 761,825 $ 6.52 855,122 $ 8.31 983,510 $10.53
========= ====== ========= ====== ========= ======
</TABLE>
Of the options outstanding at December 31, 1999, 274,173 options are
exercisable at prices per share ranging from $0.52 to $2.79 per share,
673,898 options are exercisable at prices per share ranging from $4.65
to $18.59 per share and 881,968 options are exercisable at prices per
share ranging from $20.22 to $34.88 per share.
(12) COMMITMENTS AND CONTINGENCIES --
(a) LETTERS OF CREDIT -- Under the terms of the Economic Development
Revenue Bonds Agreement, Kroll-O'Gara is required to maintain a letter
of credit supporting the debt. As of December 31, 1999, Kroll-O'Gara's
lender was committed to providing this letter of credit through May 31,
2001. As of December 31, 1999, Kroll-O'Gara had an outstanding letter
of credit in the amount of $1,437,625.
F-35
<PAGE> 109
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1999, Kroll-O'Gara had standby and purchase letters of
credit, issued by Kroll-O'Gara's lender, in the aggregate amount of
$1,678,241.
(b) EMPLOYMENT AGREEMENTS -- Kroll-O'Gara has employment agreements with
its executive officers and management level personnel with annual
compensation ranging in value from $55,000 to $486,000, over varying
periods extending to April 2005. The agreements generally provide for
salary continuation in the event of termination without cause for the
greater of the remainder of the agreement or one year. The agreements
also contain certain non-competition clauses and generally provide for
one year's salary if the agreement is not renewed.
As of December 31, 1999, the remaining aggregate commitment under these
employment agreements if all individuals were terminated without cause
was approximately $22.9 million.
(c) LEGAL MATTERS -- 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.
(Blackstone). 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, 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 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 Kroll-O'Gara and also seek class
certification. On behalf of Kroll-O'Gara and putative plaintiff classes
of shareholders, they seek a declaration that the individual defendants
breached their fiduciary duty and seek 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.
Kroll-O'Gara has learned that an individual has filed a qui tam suit,
which is under seal, against Kroll-O'Gara under the Civil False Claims
Act, 31 U.S.C. sec. 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. Though Kroll-O'Gara
strongly disputes the Government's contention and will vigorously
contest the Government's claims, in September 2000, the Company began
settlement negotiations with the U.S. Department of Justice. Management
currently believes a settlement of this matter is possible for
approximately $1.1 million and the Company will accrue this expense in
the third quarter of fiscal 2000.
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
F-36
<PAGE> 110
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
any currently pending or threatened litigation, individually or in the
aggregate, that is likely to have a material adverse effect on its
financial position, results of operations or its cash flows.
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS --
The fair values of significant current assets, current liabilities and
long-term debt approximate their respective historical carrying amounts.
Kroll-O'Gara has entered into nine foreign currency exchange contracts to
effectively hedge its exposure to certain foreign currency rate
fluctuations on demand loans to two subsidiaries which are denominated in
foreign currencies. By virtue of these contracts, Kroll-O'Gara has fixed
the total dollar amount which it will receive under the aforementioned
subsidiary loans through the maturity dates of the contracts regardless of
the fluctuations in the exchange rate. As of December 31, 1999, the total
notional amount of the contracts, which mature between January 2000 and
July 2001, was $18.1 million. Kroll-O'Gara's cumulative foreign currency
translation adjustment component of shareholders' equity was decreased by
$0.7 million in 1998 and increased by $1.9 million in 1999 as a result of
these agreements.
Kroll-O'Gara has estimated the fair value of their foreign exchange
contracts based on information obtained from the counterparty of the amount
Kroll-O'Gara would receive at December 31, 1999 in order to terminate the
agreements. As of December 31, 1999, Kroll-O'Gara would have received
approximately $1.1 million upon cancellation of all contracts.
(14) CUSTOMER AND SEGMENT DATA --
(a) SEGMENT DATA -- During 1997, Kroll-O'Gara operated in three business
segments, the Security Products and Services Group, the Investigations
and Intelligence Group, and the Voice and Data Communications Group. In
1998, Kroll-O'Gara created the Information Security Group in connection
with the merger with Securify.
The following summarizes information about Kroll-O'Gara's business
segments:
<TABLE>
<CAPTION>
SECURITY VOICE AND
PRODUCTS INVESTIGATIONS DATA
AND AND INFORMATION COMMUNI-
SERVICES INTELLIGENCE SECURITY CATIONS
GROUP GROUP GROUP GROUP OTHER CONSOLIDATED
-------- -------------- ----------- --------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1997
Net sales to
unaffiliated
customers............. $105,557 $ 87,329 $ -- $17,438 $ -- $210,324
======== ======== ======= ======= ======== ========
Gross profit............ $ 30,006 $ 33,979 $ -- $ 3,125 $ -- $ 67,110
======== ======== ======= ======= ======== ========
Operating income........ $ 8,238 $ 1,775 $ -- $ 68 $ -- $ 10,081
======== ======== ======= ======= ======== ========
Identifiable assets at
year-end.............. $ 74,283 $ 58,670 $ -- $13,449 $ -- $146,402
======== ======== ======= ======= ========
Corporate assets........ 9,284
--------
Total assets at
year-end.............. $155,686
========
</TABLE>
F-37
<PAGE> 111
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SECURITY VOICE AND
PRODUCTS INVESTIGATIONS DATA
AND AND INFORMATION COMMUNI-
SERVICES INTELLIGENCE SECURITY CATIONS
GROUP GROUP GROUP GROUP OTHER CONSOLIDATED
-------- -------------- ----------- --------- -------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1998
Net sales to
unaffiliated
customers............. $136,844 $117,583 $ 116 $17,653 $ -- $272,196
======== ======== ======= ======= ======== ========
Gross profit (loss)..... $ 39,345 $ 51,627 $ (395) $ 3,522 $ (325) $ 93,774
======== ======== ======= ======= ======== ========
Operating income
(loss)................ $ 22,822 $ 11,748 $(2,194) $ (351) $ (9,145) $ 22,880
======== ======== ======= ======= ======== ========
Identifiable assets at
year-end.............. $102,294 $108,303 $ 4,288 $16,488 $ -- $231,373
======== ======== ======= ======= ========
Corporate assets........ 22,371
--------
Total assets at
year-end.............. $253,744
========
1999
Net sales to
unaffiliated
customers............. $120,824 $176,837 $ 4,345 $19,932 $ -- $321,938
======== ======== ======= ======= ======== ========
Gross profit............ $ 35,004 $ 78,762 $ 2,300 $ 2,415 $ -- $118,481
======== ======== ======= ======= ======== ========
Operating income
(loss)................ $ 12,786 $ 13,167 $(1,764) $(1,534) $(16,502) $ 6,153
======== ======== ======= ======= ======== ========
Identifiable assets at
year-end.............. $107,786 $155,534 $ 3,359 $17,791 $ -- $284,470
======== ======== ======= ======= ========
Corporate assets........ 14,923
--------
Total assets at
year-end.............. $299,393
========
</TABLE>
Total net sales by segment includes sales to unaffiliated customers.
Intersegment sales are nominal. Operating income (loss) is total net
sales less operating expenses. Operating income (loss) does not include
the following items: interest expense, other expenses and income taxes.
The Other column includes Kroll-O'Gara's corporate headquarters costs.
Depreciation expense and capital expenditures for each of
Kroll-O'Gara's business segments for the years ended December 31, 1997,
1998 and 1999 are as follows:
<TABLE>
<CAPTION>
SECURITY VOICE AND
PRODUCTS DATA
AND INVESTIGATIONS AND INFORMATION COMMUNI-
SERVICES INTELLIGENCE SECURITY CATIONS
GROUP GROUP GROUP GROUP OTHER CONSOLIDATED
-------- ------------------ ----------- --------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
1997
Depreciation expense... $1,427 $1,373 $ -- $ 16 $ -- $ 2,816
====== ====== ====== ==== ====== =======
Capital expenditures... $3,149 $3,263 $ -- $ 43 $ -- $ 6,455
====== ====== ====== ==== ====== =======
</TABLE>
F-38
<PAGE> 112
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SECURITY VOICE AND
PRODUCTS DATA
AND INVESTIGATIONS AND INFORMATION COMMUNI-
SERVICES INTELLIGENCE SECURITY CATIONS
GROUP GROUP GROUP GROUP OTHER CONSOLIDATED
-------- ------------------ ----------- --------- ------ ------------
<S> <C> <C> <C> <C> <C> <C>
1998
Depreciation expense... $1,282 $1,760 $ 24 $ 24 $ 13 $ 3,103
====== ====== ====== ==== ====== =======
Capital expenditures... $3,427 $3,001 $ 186 $ 68 $ 647 $ 7,329
====== ====== ====== ==== ====== =======
1999
Depreciation expense... $2,188 $3,400 $ 93 $ 36 $ 400 $ 6,117
====== ====== ====== ==== ====== =======
Capital expenditures... $5,969 $9,687 $1,673 $117 $1,752 $19,198
====== ====== ====== ==== ====== =======
</TABLE>
Identifiable assets by segment are those assets that are used in
Kroll-O'Gara's operations in each segment. Corporate assets are
principally cash, marketable securities, computer software, certain
intangible assets and certain prepaid expenses.
The following summarizes information about Kroll-O'Gara's different
geographic areas:
<TABLE>
<CAPTION>
UNITED OTHER
STATES FRANCE FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1997
Net sales to unaffiliated
customers........................ $139,023 $24,004 $ 47,297 $ -- $210,324
Intercompany....................... 7,413 208 5,624 (13,245) --
-------- ------- -------- -------- --------
Total net sales.......... $146,436 $24,212 $ 52,921 $(13,245) $210,324
======== ======= ======== ======== ========
Operating income................... $ 4,920 $ 1,382 $ 3,779 $ -- $ 10,081
======== ======= ======== ======== ========
Identifiable assets................ $ 91,325 $23,706 $ 31,371 $ -- $146,402
======== ======= ======== ========
Corporate assets................... 9,284
--------
Total assets at
year-end............... $155,686
========
1998
Net sales to unaffiliated
customers........................ $165,062 $28,458 $ 78,676 $ -- $272,196
Intercompany....................... 2,960 199 4,548 (7,707) --
-------- ------- -------- -------- --------
Total net sales.......... $168,022 $28,657 $ 83,224 $ (7,707) $272,196
======== ======= ======== ======== ========
Operating income................... $ 10,825 $ 2,251 $ 9,804 $ -- $ 22,880
======== ======= ======== ======== ========
Identifiable assets................ $139,759 $29,047 $ 62,567 $ -- $231,373
======== ======= ======== ========
Corporate assets................... 22,371
--------
Total assets at
year-end............... $253,744
========
</TABLE>
F-39
<PAGE> 113
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
UNITED OTHER
STATES FRANCE FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- -------- ------------ ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1999
Net sales to unaffiliated
customers........................ $183,904 $27,483 $110,551 $ -- $321,938
Intercompany....................... 6,683 1,858 5,746 (14,287) --
-------- ------- -------- -------- --------
Total net sales.......... $190,587 $29,341 $116,297 $(14,287) $321,938
======== ======= ======== ======== ========
Operating income (loss)............ $ (4,654) $ 2,245 $ 8,562 $ -- $ 6,153
======== ======= ======== ======== ========
Identifiable assets................ $160,952 $26,784 $ 96,734 $ -- $284,470
======== ======= ======== ========
Corporate assets................... 14,923
--------
Total assets at
year-end............... $299,393
========
</TABLE>
Kroll-O'Gara accounts for transfers between geographic areas at cost
plus a proportionate share of operating profit.
The following summarizes Kroll-O'Gara's sales in the United States and
foreign locations:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
1997 1998 1999
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Sales to unaffiliated customers:
U.S. Government...................... $ 43,719 $ 62,149 $ 54,953
Other United States.................. 78,068 97,204 126,212
Middle East.......................... 5,887 5,958 4,917
Europe............................... 44,022 52,927 66,057
Asia................................. 10,697 15,467 22,763
Central & South America.............. 20,123 25,850 33,428
Other Foreign........................ 7,808 12,641 13,608
-------- -------- --------
$210,324 $272,196 $321,938
======== ======== ========
</TABLE>
Export sales by Kroll-O'Gara's domestic operations were approximately
15%, 17% and 3% of net sales for the years ended December 31, 1997,
1998 and 1999, respectively.
Kroll-O'Gara is subject to audit and investigation by various agencies
which oversee contract performance in connection with Kroll-O'Gara's
contracts with the U.S. Government. Additionally, Kroll-O'Gara's
laboratory testing operations are certified and subject to frequent
inspections and proficiency tests by certain federal, state or local
jurisdictions. Management believes that potential claims from such
audits and investigations will not have a material adverse effect on
the consolidated financial statements. In addition, contracts with the
U.S. Government may contain cost or performance incentives or both
based on stated targets or other criteria. Cost or performance
incentives are recorded at the time there is sufficient information to
relate actual performance to targets or other criteria.
Kroll-O'Gara has foreign operations and assets in Argentina, Australia,
Brazil, Canada, Chile, China, Colombia, France, Germany, India, Italy,
Japan, Mexico, Russia, Singapore, South Africa, Switzerland, the
Philippines and the United Kingdom. In addition, Kroll-O'Gara sells its
products and services in other foreign countries and has continued to
increase its level of international activity. Accordingly, Kroll-O'Gara
is subject to various risks including, among
F-40
<PAGE> 114
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
others, foreign currency restrictions, exchange rate fluctuations,
government instability and complexities of local laws and regulations.
(b) MAJOR CUSTOMERS -- During the years ended December 31, 1997, 1998 and
1999 sales in the Security Products and Services Group to the U.S.
Government approximated 21%, 23% and 17% of Kroll-O'Gara's net sales,
respectively.
(15) SUPPLEMENTAL CASH FLOWS DISCLOSURES --
The following is a summary of cash paid related to certain items:
<TABLE>
<CAPTION>
1997 1998 1999
---------- ----------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest................. $4,960,504 $ 4,593,326 $4,581,720
========== =========== ==========
Cash paid for taxes.................... $3,468,474 $ 4,095,349 $6,055,244
========== =========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:
Issuance of restricted stock........... $1,356,280 $ -- $ --
========== =========== ==========
Deferred compensation related to
options and restricted stock......... $ -- $ 1,192,096 $1,571,661
========== =========== ==========
Accrued contingent consideration
incurred in connection with
acquisition of business.............. $ -- $ -- $1,071,688
========== =========== ==========
Fair value of stock issued in
connection with acquisition of
businesses........................... $8,459,769 $17,610,504 $8,011,929
========== =========== ==========
Fair value of stock issued in
connection with acquisition of
minority interest.................... $1,243,474 $ -- $ --
========== =========== ==========
Notes issued in connection with
acquisition of businesses............ $2,906,513 $ -- $ --
========== =========== ==========
Tax benefit of restricted stock
vesting.............................. $2,160,341 $ -- $ --
========== =========== ==========
Cancellation of shareholder's note
payable obligation and issuance of
stock................................ $1,053,735 $ -- $ --
========== =========== ==========
Note issued in connection with
consulting agreement entered into
with former shareholder of an
acquired business.................... $ -- $ 147,914 $ --
========== =========== ==========
</TABLE>
F-41
<PAGE> 115
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) QUARTERLY FINANCIAL DATA (UNAUDITED) --
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
1999
Net sales............................. $ 71,499 $ 80,542 $ 87,547 $ 82,350
Gross profit.......................... 26,253 32,235 31,994 27,999
Net income (loss)..................... 2,528 265 3,654 (8,369)
Earnings (loss) per share:
Basic.............................. $ 0.12 $ 0.01 $ 0.16 $ (0.38)
Diluted............................ $ 0.11 $ 0.01 $ 0.16 $ (0.38)
1998
Net sales............................. $ 58,476 $ 66,319 $ 74,794 $ 72,607
Gross profit.......................... 19,547 22,503 26,027 25,697
Net income (loss)..................... 2,792 3,955 5,293 (254)
Earnings (loss) per share:
Basic.............................. $ 0.18 $ 0.21 $ 0.25 $ (0.01)
Diluted............................ $ 0.17 $ 0.21 $ 0.24 $ (0.01)
</TABLE>
(17) SUBSEQUENT EVENTS --
(a) FAILED MERGER WITH BLACKSTONE -- On November, 15, 1999, Kroll-O'Gara
announced that it had entered into a definitive agreement with
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 merger
through December 31, 1999 were approximately $1.6 million ($0.9 million
after taxes, or $0.04 per diluted share) and consisted primarily of
fees for attorneys, accountants, travel and other related charges.
Kroll-O'Gara anticipates additional expenses will be incurred in fiscal
2000.
(b) PROPOSED PLAN OF REORGANIZATION AND DISSOLUTION -- In April 2000,
subsequent to the terminated Blackstone transaction, Kroll-O'Gara
decided to explore the split-up of its principal businesses into two
independent public companies. On August 30, 2000, Kroll-O'Gara's Board
of Directors approved an agreement and plan of reorganization and
dissolution of Kroll-O'Gara (which was executed effective September 8,
2000), the completion of which is subject to a number of conditions
including the receipt of a favorable tax ruling and the approval by
Kroll-O'Gara's shareholders. Under this agreement, The O'Gara Company
(O'Gara), a newly incorporated company, will receive substantially all
of the assets and liabilities of Kroll-O'Gara's Security Products and
Services Group, and 60% of Kroll-O'Gara's ownership interest in the
common stock of the entity comprising its Information Security Group,
as well as a portion of Kroll-O'Gara's assets and liabilities that are
not attributable to a particular business group. The remaining business
of Kroll-O'Gara, primarily the Investigations and Intelligence Group,
the Voice and Data Communications Group and 40% of Kroll-O'Gara's
ownership interest in the common stock of the entity comprising the
Information Security Group, as well as the other assets and liabilities
that are not attributable to a particular business group, will be
transferred to and assumed by another newly incorporated company, Kroll
Risk Consulting Services, Inc. (KRCS). After these transfers, certain
management shareholders of Kroll-O'Gara will exchange all of their
shares of Kroll-O'Gara common stock for shares of O'Gara common
F-42
<PAGE> 116
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
stock and other management shareholders of Kroll-O'Gara will exchange
all their shares of Kroll-O'Gara common stock for shares of KRCS common
stock. Kroll-O'Gara then will distribute, on a pro rata basis, all
remaining shares of O'Gara common stock and KRCS common stock held by
it to the remaining holders of Kroll-O'Gara common stock. The
exchanging management shareholders will not participate in this
distribution. Concurrent with the completion of these transactions,
O'Gara and KRCS will become separate publicly-traded companies.
Subsequent to the reorganization and split-up, Kroll-O'Gara will be
dissolved.
As part of the reorganization and split-up, Kroll-O'Gara will incur
approximately $2.8 million (net of tax benefit of $1.9 million) of
charges for the write-off of certain intangibles and unamortized
financing fees, debt prepayment fees and compensation costs related to
accelerated vesting of stock option plans. KRCS and O'Gara have agreed
to split these charges on an agreed-upon basis. Also, as soon as
possible following completion of this transaction, KRCS plans to sell
the Voice and Data Communications Group.
(c) FINANCING ARRANGEMENTS
As described above, Kroll-O'Gara has entered into an agreement for the
separation of its principal business groups into two public companies.
Management of each of O'Gara and KRCS is currently in discussions with
banks to provide financing for each company subsequent to the
separation. Pending the separation, Kroll-O'Gara will require
additional sources of capital to supplement operating cash flow, either
through amending and increasing its credit facilities, through an
equity offering of one of its subsidiaries or both. In the absence of
the separation of the businesses, management is of the opinion that
there will be sufficient liquidity available from existing operations
and credit facilities, which can be supplemented, if necessary, with
additional secured or unsecured financing, to finance the continuing
operations of Kroll-O'Gara.
(d) 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.
(e) ACQUISITIONS -- During fiscal 2000, Kroll-O'Gara has completed two
acquisitions in the Investigations and Intelligence Group. The
aggregate purchase price of these acquisitions amounted to $1.2 million
and consisted of $0.7 million of cash and $0.5 million in seller
provided financing. These acquisitions have been accounted for as
purchase business acquisitions and the related goodwill from these
acquisitions (approximately $1.0 million) is being amortized over
twenty-five years.
F-43
<PAGE> 117
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1999 AND JUNE 30, 2000
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents (Note 7)............................. $ 13,835 $ 6,260
Trade accounts receivable, net of allowance for doubtful
accounts of $4,779 and $4,370 at December 31, 1999 and
June 30, 2000, respectively............................ 68,017 68,683
Unbilled revenues......................................... 18,034 22,548
Related party receivables................................. 2,096 2,792
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 24,160 15,241
Inventories (Note 8)...................................... 26,264 30,587
Prepaid expenses and other................................ 11,579 10,201
Deferred tax asset........................................ 824 824
-------- --------
Total current assets.............................. 164,809 157,136
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost
Land...................................................... 2,164 2,140
Buildings and improvements................................ 8,587 8,379
Leasehold improvements.................................... 7,452 8,081
Furniture and fixtures.................................... 10,131 11,258
Machinery and equipment................................... 36,769 39,699
-------- --------
65,103 69,557
Less: accumulated depreciation............................ (26,195) (29,735)
-------- --------
38,908 39,822
-------- --------
DATABASES, net of accumulated amortization of $26,187 and
$27,853 at December 31, 1999 and June 30, 2000,
respectively.............................................. 9,696 10,083
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS, net of accumulated amortization of $9,028 and
$10,798 at December 31, 1999 and June 30, 2000,
respectively.............................................. 81,676 79,077
OTHER ASSETS:
Other assets.............................................. 4,304 4,553
-------- --------
95,676 93,713
-------- --------
$299,393 $290,671
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-44
<PAGE> 118
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 1999 AND JUNE 30, 2000
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 2000
------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank lines of credit (Note 5)............................. $ 26,583 $ 37,422
Current portion of long-term debt......................... 3,737 1,806
Trade accounts payable.................................... 38,823 34,099
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 361 486
Accrued liabilities....................................... 28,299 23,137
Customer deposits......................................... 4,196 4,586
Income taxes currently payable............................ 768 1,606
-------- --------
Total current liabilities......................... 102,767 103,142
-------- --------
OTHER LONG-TERM LIABILITIES................................. 2,673 1,894
DEFERRED INCOME TAXES....................................... 1,821 1,821
LONG-TERM DEBT, net of current portion...................... 36,264 36,580
-------- --------
Total liabilities................................. 143,525 143,437
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 22,309,610 shares issued and
outstanding at December 31, 1999 and June 30, 2000,
respectively........................................... 223 223
Additional paid-in capital................................ 170,102 170,026
Retained deficit.......................................... (12,640) (17,300)
Deferred compensation..................................... (1,630) (1,218)
Accumulated other comprehensive loss...................... (187) (4,497)
-------- --------
Total shareholders' equity........................ 155,868 147,234
-------- --------
$299,393 $290,671
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-45
<PAGE> 119
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1999 2000
----------- -----------
(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
NET SALES................................................... $ 152,041 $ 163,049
COST OF SALES............................................... 93,553 104,711
----------- -----------
Gross profit......................................... 58,488 58,338
OPERATING EXPENSES:
Selling and marketing expenses............................ 13,302 14,624
General and administrative expenses....................... 29,579 40,917
Separation expenses (Note 12)............................. -- 676
Failed merger expenses (Note 12).......................... -- 2,000
Merger expenses (Note 3).................................. 3,094 438
Restructuring expense (Note 2)............................ 4,364 --
----------- -----------
Operating income (loss).............................. 8,149 (317)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (1,875) (2,872)
Other, net................................................ 70 (91)
----------- -----------
Income (loss) before provision for income taxes and
cumulative effect of change in accounting
principle........................................... 6,344 (3,280)
Provision for income taxes................................ 2,773 1,380
----------- -----------
Income (loss) before cumulative effect of change in
accounting principle................................ 3,571 (4,660)
Cumulative effect of change in accounting principle, net
of applicable tax benefit of $408 (Note 6)............. (778) --
----------- -----------
Net income (loss)......................................... $ 2,793 $ (4,660)
----------- -----------
PER SHARE DATA:
BASIC EARNINGS (LOSS) PER SHARE (Note 4)
Earnings (loss) per share................................. $ 0.13 $ (0.21)
=========== ===========
Weighted Average Shares Outstanding....................... 21,815,388 22,267,065
=========== ===========
DILUTED EARNINGS (LOSS) PER SHARE (Note 4)
Earnings (loss) per share................................. $ 0.12 $ (0.21)
=========== ===========
Weighted Average Shares Outstanding....................... 22,547,934 22,267,065
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-46
<PAGE> 120
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2000
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE COMMON ADDITIONAL RETAINED DEFERRED COMPREHENSIVE
SHARES INCOME (LOSS) STOCK PAID-IN CAPITAL DEFICIT COMPENSATION INCOME (LOSS) TOTAL
------ ------------- ------ --------------- -------- ------------ ------------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1999.................... 22,256 $223 $170,102 $(12,640) $(1,630) $ (187) $155,868
Net issuances of stock
under employee benefit
plans, including related
tax benefit............. 10 -- 21 -- -- -- 21
Issuance of restricted
stock................... 44 -- 43 -- -- -- 43
Deferred compensation
related to restricted
stock and stock
options................. -- -- (140) -- 412 -- 272
Comprehensive income
(loss):
Net loss................ -- $(4,660) -- -- (4,660) -- -- (4,660)
-------
Other comprehensive
income (loss), net of
tax:
Foreign currency
translation
adjustment, net of
$2,873 tax
benefit............. -- (4,310) -- -- -- -- -- --
-------
Other comprehensive
income.............. -- (4,310) -- -- -- -- (4,310) (4,310)
-------
Comprehensive income
(loss)............ -- $(8,970) -- -- -- -- -- --
------ ======= ---- -------- -------- ------- ------- --------
BALANCE, June 30, 2000.... 22,310 $223 $170,026 $(17,300) $(1,218) $(4,497) $147,234
====== ==== ======== ======== ======= ======= ========
</TABLE>
The accompanying notes to consolidated financial statements are an integral part
of these consolidated statements.
F-47
<PAGE> 121
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 7) (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND 2000
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 2000
---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 2,793 $(4,660)
Adjustments to reconcile net income (loss) to net cash
used in operating activities--
Depreciation and amortization........................ 6,034 8,142
Bad debt expense..................................... 806 2,222
Noncash compensation expense......................... 514 273
Change in assets and liabilities, net of effects of
acquisitions--
Receivables -- trade and unbilled...................... (12,098) (7,266)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 2,976 8,919
Income tax receivable.................................. (327) --
Inventories, prepaid expenses and other assets......... 217 (2,528)
Accounts payable and income taxes currently payable.... (10,608) (3,886)
Billings in excess of costs and estimated earnings on
uncompleted contracts................................. (94) 125
Amounts due to/from related parties.................... (1,027) (696)
Customer deposits...................................... (1,024) 390
Accrued liabilities.................................... 6,374 (5,177)
Long-term liabilities.................................. 1,862 (779)
-------- -------
Net cash used in operating activities................ (3,602) (4,921)
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net........... (9,325) (4,892)
Additions to databases.................................... (1,843) (2,249)
Acquisitions, net of cash acquired........................ (12,015) (263)
Sale of marketable securities............................. 12,007 --
-------- -------
Net cash used in investing activities................ (11,176) (7,404)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under bank lines of credit................. 20,808 10,839
Payments of long-term debt................................ (881) (1,840)
Proceeds from exercise of stock options................... 964 61
Foreign currency translation.............................. (2,719) (4,068)
-------- -------
Net cash provided by financing activities............ 18,172 4,992
-------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............. 3,394 (7,333)
Effects of foreign currency exchange rates on cash.......... (450) (242)
-------- -------
CASH AND EQUIVALENTS, BEGINNING OF PERIOD................... 14,041 13,835
-------- -------
CASH AND EQUIVALENTS, END OF PERIOD......................... $ 16,985 $ 6,260
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
<PAGE> 122
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS
(1) GENERAL
The Kroll-O'Gara Company, an Ohio corporation, together with its
subsidiaries (collectively "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 six month periods ended June 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.
(2) RESTRUCTURING OF OPERATIONS
In the first quarter of 1999, Kroll-O'Gara began implementation of a
restructuring plan (the "Plan") to reduce costs and improve operating
efficiencies. The Plan was substantially completed by the end of the second
quarter of 1999. Including the first quarter 1999 charge of $0.5 million,
the total non-recurring, pre-tax restructuring charge associated with the
Plan was $4.4 million. Total payments or write-offs made pursuant to the
Plan through June 30, 2000 were $3.5 million. Kroll-O'Gara does not expect
to incur any other significant restructuring charges in future periods
related to this Plan. The principal elements of the restructuring plan are
the closure of two Investigations and Intelligence Group offices and the
elimination of approximately 82 employees. The primary
F-49
<PAGE> 123
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
components of the restructuring charge, including accrued balances, as of
June 30, 2000 are as follows:
<TABLE>
<CAPTION>
DESCRIPTION EXPENSE ACCRUAL
----------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Severance and related costs.......................... $3,116 $369
Writedown of property, plant and equipment........... 150 --
Lease termination costs.............................. 1,064 498
Other................................................ 34 --
------ ----
$4,364 867
====== ====
Less -- Current portion.............................. 560
----
$307
====
</TABLE>
(3) ACQUISITIONS AND MERGERS
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 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.
In 2000, Kroll-O'Gara recorded a charge to operating expenses of
approximately $0.4 million ($0.02 per diluted share) for integration
related costs. These costs relate primarily to mergers and acquisitions
completed in 1999.
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.
F-50
<PAGE> 124
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
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 $20.7 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 six months ended June 30, 1999 (in
thousands, except per share data):
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------
INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
<S> <C> <C> <C>
Basic EPS.................................. $2,793 21,815 $0.13
=====
Effect of dilutive securities:
Options.................................. -- 708
Warrants................................. -- 3
Restricted Stock......................... -- 22
------ ------
Diluted EPS................................ $2,793 22,548 $0.12
====== ====== =====
</TABLE>
As a result of the net loss recorded for the six months ended June 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 $0.16 for the six months
ended June 30, 1999. The basic and diluted per share impact of the change
in accounting principle was $0.03 and $0.04, respectively.
(5) DEBT --
(a)AMENDMENT OF CREDIT FACILITY -- On September 14, 2000, Kroll-O'Gara
amended its credit agreement to extend its 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
F-51
<PAGE> 125
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
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 bear
interest at prime to prime plus 0.75%, or, at Kroll-O'Gara's option,
LIBOR plus 1.50% to LIBOR plus 2.50%, dependent upon a defined financial
ratio. Borrowings under this line of credit were approximately $22.8
million and $34.3 million at December 31, 1999 and June 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 certain of these
covenants at June 30, 2000. All such events of non-compliance were
subsequently waived or amended by the lender.
(b)SENIOR UNSECURED NOTES PAYABLE -- Kroll-O'Gara's $35.0 million of senior
unsecured notes payable also contains 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 not in
compliance with the fixed charge coverage ratio at June 30, 2000. This
event of non-compliance was subsequently waived by the lenders.
(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 and
has not determined the timing of or method of adoption of SFAS 133.
However, SFAS 133 could increase volatility in earnings and other
comprehensive income.
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 is effective July 1, 2000.
Interpretation
F-52
<PAGE> 126
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
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. Management does not anticipate that the adoption of
Interpretation No. 44 will have a material impact on financial position or
the results of operations.
(7) SUPPLEMENTAL CASH FLOW DISCLOSURE --
Cash equivalents consist of all highly liquid debt instruments with an
initial maturity of three months or less at the date of purchase.
Kroll-O'Gara invests excess cash in overnight repurchase agreements, which
are government collateralized securities. The carrying amount of cash and
cash equivalents approximates fair value of those instruments due to their
short maturity.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------------
1999 2000
--------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash paid for taxes......................................... $3,680 $ 991
Cash paid for interest...................................... $1,949 $2,708
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 $ --
</TABLE>
(8) INVENTORIES --
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method and include the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
INVENTORY CATEGORY 1999 2000
------------------ ------------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Raw materials............................................... $14,495 $19,437
Vehicle costs and work-in-process........................... 11,769 11,150
------- -------
Total inventory........................................ $26,264 $30,587
======= =======
</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 entered into 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
F-53
<PAGE> 127
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
of the contracts regardless of the fluctuations in the exchange rate. At
June 30, 2000, the total notional amount of the contracts, which mature
between July 2000 and January 2002, is $17.9 million. Kroll-O'Gara's
foreign currency translation adjustment component of shareholder's equity
was increased by $0.9 million in the six months ended June 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 June 30, 2000 in order to terminate the
agreements. As of June 30, 2000, Kroll-O'Gara would have received
approximately $1.8 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.
The following summarizes information about the Company's business segments:
<TABLE>
<CAPTION>
SECURITY INVESTIGATIONS
PRODUCTS AND AND VOICE AND DATA INFORMATION
SERVICES INTELLIGENCE COMMUNICATIONS SECURITY
GROUP GROUP GROUP GROUP OTHER CONSOLIDATED
------------ -------------- -------------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30,
1999
Net sales to unaffiliated
customers.............. $57,475 $ 84,623 $ 7,463 $ 2,480 $ -- $152,041
======= ======== ======= ======= ======= ========
Gross profit............. $18,576 $ 37,822 $ 823 $ 1,267 $ -- $ 58,488
======= ======== ======= ======= ======= ========
Operating income
(loss)................. $ 9,544 $ 5,818 $ (633) $ 123 $(6,703) $ 8,149
======= ======== ======= ======= ======= ========
SIX MONTHS ENDED JUNE 30,
2000
Net sales to unaffiliated
customers.............. $54,650 $ 98,001 $ 8,588 $ 1,810 $ -- $163,049
======= ======== ======= ======= ======= ========
Gross profit............. $14,184 $ 43,023 $ 1,372 $ (241) $ -- $ 58,338
======= ======== ======= ======= ======= ========
Operating income
(loss)................. $ 5,191 $ 8,925 $ (122) $(4,704) $(9,607) $ (317)
======= ======== ======= ======= ======= ========
Identifiable assets at
June 30, 2000.......... $99,783 $159,300 $10,762 $ 4,907 $ -- $274,752
======= ======== ======= ======= ======= ========
Corporate assets......... 15,919
--------
Total assets at June
30, 2000.......... $290,671
========
</TABLE>
(11) 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,
F-54
<PAGE> 128
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
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 June 30, 2000.
(12) SUBSEQUENT EVENTS --
(a)FAILED MERGER WITH BLACKSTONE -- 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 six months
ended June 30, 2000 were approximately $2.0 million ($0.09 per diluted
share) and consisted primarily of fees for attorneys, accountants,
travel and other related charges.
(b)PROPOSED PLAN OF REORGANIZATION AND DISSOLUTION -- In April 2000,
subsequent to the terminated Blackstone transaction, Kroll-O'Gara
decided to explore the split-up of its principal businesses into two
independent public companies. On August 30, 2000, Kroll-O'Gara's Board
of Directors approved an agreement and plan of reorganization and
dissolution of Kroll-O'Gara (which was executed effective September 8,
2000), the completion of which is subject to a number of conditions
including the receipt of a favorable tax ruling and the approval by
Kroll-O'Gara's shareholders. Under this agreement, The O'Gara Company
(O'Gara), a newly incorporated company, will receive substantially all
of the assets and liabilities of Kroll-O'Gara's Security Products and
Services Group, and 60% of Kroll-O'Gara's ownership interest in the
common stock of the entity comprising its Information Security Group, as
well as a portion of Kroll-O'Gara's assets and liabilities that are not
attributable to a particular business group. The remaining business of
Kroll-O'Gara, primarily the Investigations and Intelligence Group, the
Voice and Data Communications Group and 40% of Kroll-O'Gara's ownership
interest in the common stock of the entity comprising the Information
Security Group, as well as the other assets and liabilities that are not
attributable to a particular business group, will be transferred to and
assumed by another newly incorporated company, Kroll Risk Consulting
Services, Inc. (KRCS). After these transfers, certain management
shareholders of Kroll-O'Gara will exchange all of their shares of
Kroll-O'Gara common stock for shares of O'Gara common stock and other
management shareholders of Kroll-O'Gara will exchange all their shares
of Kroll-O'Gara common stock for shares of KRCS common stock.
Kroll-O'Gara then will distribute, on a pro rata basis, all remaining
shares of O'Gara common stock and KRCS common stock held by it to the
remaining holders of Kroll-O'Gara common stock. The exchanging
management shareholders will not participate in this distribution.
Concurrent with the completion of these transactions, O'Gara and KRCS
will become separate publicly-traded companies. Subsequent to the
reorganization and split-up, Kroll-O'Gara will be dissolved.
F-55
<PAGE> 129
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
As part of the reorganization and split-up, Kroll-O'Gara will incur
approximately $2.8 million (net of tax benefit of $1.9 million) of
charges for the write-off of certain intangibles and unamortized
financing fees, debt prepayment fees and compensation costs related to
accelerated vesting of stock option plans. KRCS and O'Gara have agreed
to split these charges on an agreed-upon basis. Also, as soon as
possible following completion of this transaction, KRCS plans to sell
the Voice and Data Communications Group.
(c)FINANCING ARRANGEMENTS
On September 14, 2000, Kroll-O'Gara amended its existing credit
agreement, extending its $15.0 million temporary increase in the
revolving line of credit until January 1, 2001 (see Note 5). Interest
rates on the components of the revolving line of credit were increased
0.75%. Pursuant to this most recent amendment, certain of the financial
covenants and ratios in the credit agreement were waived or amended as
Kroll-O'Gara had not been in compliance with certain of these prior
covenants at June 30, 2000.
As described above, Kroll-O'Gara has entered into an agreement for the
separation of its principal business groups into two public companies.
Management of each of O'Gara and KRCS is currently in discussions with
banks to provide financing for each company subsequent to the
separation. Pending the separation, Kroll-O'Gara will require additional
sources of capital to supplement operating cash flow, either through
amending and increasing its credit facilities, through an equity
offering of one of its subsidiaries or both. In the absence of the
separation of the businesses, management is of the opinion that there
will be sufficient liquidity available from existing operations and
credit facilities, which can be supplemented, if necessary, with
additional secured or unsecured financing, to finance the continuing
operations of Kroll-O'Gara.
F-56
<PAGE> 130
8,500,000 SHARES
[LOGO]
KROLL RISK CONSULTING SERVICES, INC.
COMMON STOCK
-------------------
PROSPECTUS
-------------------
, 2000
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS OR
OTHER DOCUMENTS TO WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANY OTHER
PERSON TO PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH
DIFFERENT OR INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT
MAKING AN OFFER TO SELL THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR
SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT THE INFORMATION APPEARING IN THIS
PROSPECTUS IS ACCURATE AS OF THE DATE ON THE FRONT COVER OF THIS PROSPECTUS
ONLY. OUR BUSINESS, FINANCIAL CONDITION, RESULTS OF OPERATIONS AND PROSPECTS,
AMONG OTHER THINGS, MAY HAVE CHANGED SINCE THAT DATE.
<PAGE> 131
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND SPLIT-UP.
The following table sets forth the various expenses in connection with the
issuance and split-up of the securities registered hereby. There are no
underwriting commissions or fees in connection with the split-up. All of such
amounts (except the SEC registration fee and the Nasdaq National Market listing
fee) are estimated.
<TABLE>
<S> <C>
SEC registration fee........................................ $ 26,725
Accounting fees and expenses................................
Nasdaq National Market listing fee..........................
Legal fees and expenses.....................................
Printing and engraving expenses.............................
Blue Sky fees and expenses..................................
Directors and officers' insurance...........................
Transfer agent and registrar fees and expenses..............
Miscellaneous...............................................
----------
Total.................................................. $
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Our certificate of incorporation and bylaws provide that we shall, to the
fullest extent permitted by Section 145 of the General Corporation Law of the
State of Delaware, as amended from time to time (the "DGCL"), indemnify all
directors and officers whom we may indemnify pursuant thereto.
Section 145 of the DGCL permits a corporation, under specified
circumstances, to indemnify its directors, officers, employees or agents against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlements actually and reasonably incurred by them in connection with any
action, suit or proceeding brought by third parties by reason of the fact that
they were or are directors, officers, employees or agents of the corporation, if
such directors, officers, employees or agents acted in good faith and in a
manner they reasonably believed to be in or not opposed to the best interests of
the corporation and, with respect to any criminal action or proceeding, had no
reason to believe their conduct was unlawful. In a derivative action, i.e., one
by or in the right of the corporation, indemnification may be made only for
expenses actually and reasonably incurred by directors, officers, employees or
agents in connection with the defense or settlement of an action or suit, and
only with respect to a matter as to which they shall have acted in good faith
and in a manner they reasonably believed to be in or not opposed to the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged liable to the corporation, unless and only
to the extent that the court in which the action or suit was brought shall
determine upon application that the defendant directors, officers, employees or
agents are fairly and reasonably entitled to indemnity for such expenses despite
such adjudication of liability.
Our certificate of incorporation provides that our directors will not be
personally liable to us or our stockholders for monetary damages resulting from
breaches of their fiduciary duty as directors except (a) for any breach of the
duty of loyalty to us or our stockholders, (b) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, (c)
under Section 174 of the DGCL, which makes directors liable for unlawful
dividends or unlawful stock repurchases or redemptions, or (d) for transactions
from which directors derive improper personal benefit.
II-1
<PAGE> 132
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The registrant issued ten shares of its common stock to the Kroll-O'Gara
Company on July 20, 2000. The securities were issued without registration under
the Securities Act of 1933, as amended, in reliance upon the exemption provided
by Section 4(2) of the Act. No underwriting commission was paid in connection
with the issuance.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization and Dissolution among
The Kroll-O'Gara Company, the Registrant, The O'Gara
Company, Jules B. Kroll and Thomas M. O'Gara(1)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant
3.2 Bylaws of the Registrant
4.1 Form of Stock Certificate for the common stock of the
Registrant*
5.1 Opinion of Kramer Levin Naftalis & Frankel LLP regarding the
legality of the securities being registered*
10.1 Form of Employment Agreement between the Registrant and
Jules B. Kroll*
10.2 Employment Agreement dated May 1999 between Kroll
Associates, Inc., The Kroll-O'Gara Company and Michael G.
Cherkasky(2)
10.3 Form of Employment Agreement between the Registrant and
Michael D. Shmerling*
10.4 Form of Employment Agreement between the Registrant and
Nazzareno E. Paciotti*
10.5 Employment Agreement dated July 1, 1999 between Kroll
Associates, Inc. and Michael Slattery, Jr.*
10.6 Employment Agreement dated June 1, 1998 between Kroll
Lindquist Avey Co. and Michael A. Beber*
10.7 KRCS 2000 Employee Stock Purchase Plan*
10.8 KRCS 2000 Non-Employee Director Plan*
10.9 KRCS 2000 Stock Incentive Plan*
10.10 Form of Cross-Indemnification Agreement among Kroll-O'Gara,
the Registrant, and The O'Gara Company(1)
10.11 Form of Tax Sharing Agreement among the Registrant, The
O'Gara Company and Securify, Inc.(1)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Kramer Levin Naftalis & Frankel LLP (included in
its opinion filed as Exhibit 5)*
24.1 Powers of Attorney (included as part of the signature page
hereto)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
99.1 Consent of Director Nominee - Marshall S. Cogan*
99.2 Consent of Director Nominee - Thomas E. Constance*
99.3 Consent of Director Nominee - Raymond E. Mabus*
99.4 Consent of Director Nominee - Michael D. Shmerling*
99.5 Consent of Director Nominee - J. Arthur Urciuoli*
</TABLE>
II-2
<PAGE> 133
---------------
* To be filed by amendment
(1) Filed as Appendix A to The Kroll-O'Gara Company's Preliminary Proxy
Statement on Schedule 14A and incorporated herein by reference
(2) Filed as an exhibit to The Kroll-O'Gara Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1999 and incorporated herein by
reference
(B) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because they are either not applicable or not
required or the information has been furnished in the consolidated financial
statements.
ITEM 17. UNDERTAKINGS.
The registrant hereby undertakes to provide to the Distribution Agent, at
the time of the split-up, certificates in such denominations and registered in
such names as required to permit prompt delivery to each recipient.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted as to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE> 134
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Kroll Risk
Consulting Services, Inc. has duly caused this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of New York, the State of New York, on the 20th day of September, 2000.
Kroll Risk Consulting Services, Inc.
By: /s/ MICHAEL G. CHERKASKY
---------------------------------------
Name: Michael G. Cherkasky
Title: President and Chief Executive
Officer
POWERS OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jules B. Kroll and Michael G. Cherkasky, and each
of them, with full power to act without the other, such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign this Registration Statement, any and all amendments thereto
(including post-effective amendments), any subsequent Registration Statements
pursuant to Rule 462 of the Securities Act of 1933, as amended, and any
amendments thereto and to file the same, with exhibits and schedules thereto,
and other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary or desirable to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
or his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JULES B. KROLL Chairman of the Board September 20, 2000
--------------------------------
Jules B. Kroll
/s/ MICHAEL G. CHERKASKY President, Chief Executive Officer and September 20, 2000
-------------------------------- Director (principal executive officer)
Michael G. Cherkasky
/s/ NAZZARENO E. PACIOTTI Chief Financial Officer, Treasurer September 20, 2000
-------------------------------- (principal financial and accounting
Nazzareno E. Paciotti officer)
</TABLE>
II-4
<PAGE> 135
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 Agreement and Plan of Reorganization and Dissolution among
The Kroll-O'Gara Company, the Registrant, The O'Gara
Company, Jules B. Kroll and Thomas M. O'Gara(1)
3.1 Amended and Restated Certificate of Incorporation of the
Registrant
3.2 Bylaws of the Registrant
4.1 Form of Stock Certificate for the common stock of the
Registrant*
5.1 Opinion of Kramer Levin Naftalis & Frankel LLP regarding the
legality of the securities being registered*
10.1 Form of Employment Agreement between the Registrant and
Jules B. Kroll*
10.2 Employment Agreement dated May 1999 between Kroll
Associates, Inc., The Kroll-O'Gara Company and Michael G.
Cherkasky(2)
10.3 Form of Employment Agreement between the Registrant and
Michael D. Shmerling*
10.4 Form of Employment Agreement between the Registrant and
Nazzareno E. Paciotti*
10.5 Employment Agreement dated July 1, 1999 between Kroll
Associates, Inc. and Michael Slattery, Jr.*
10.6 Employment Agreement dated June 1, 1998 between Kroll
Lindquist Avey Co. and Michael A. Beber*
10.7 KRCS 2000 Employee Stock Purchase Plan*
10.8 KRCS 2000 Non-Employee Director Plan*
10.9 KRCS 2000 Stock Incentive Plan*
10.10 Form of Cross-Indemnification Agreement among Kroll-O'Gara,
the Registrant, and The O'Gara Company(1)
10.11 Form of Tax Sharing Agreement among the Registrant, The
O'Gara Company and Securify, Inc.(1)
21.1 Subsidiaries of the Registrant
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Deloitte & Touche LLP
23.3 Consent of Kramer Levin Naftalis & Frankel LLP (included in
its opinion filed as Exhibit 5)*
24.1 Powers of Attorney (included as part of the signature page
hereto)
27.1 Financial Data Schedule
27.2 Financial Data Schedule
99.1 Consent of Director Nominee - Marshall S. Cogan*
99.2 Consent of Director Nominee - Thomas E. Constance*
99.3 Consent of Director Nominee - Raymond E. Mabus*
99.4 Consent of Director Nominee - Michael D. Shmerling*
99.5 Consent of Director Nominee - J. Arthur Urciuoli*
</TABLE>
---------------
* To be filed by amendment
(1) Filed as Appendix A to The Kroll-O'Gara Company's Preliminary Proxy
Statement on Schedule 14A and incorporated herein by reference
(2) Filed as an exhibit to The Kroll-O'Gara Company's Quarterly Reported on Form
10-Q for the quarter ended June 30, 1999 and incorporated herein by
reference
II-5
