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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT of 1934
For the transition period from --------------- to ---------------
COMMISSION FILE NUMBER 000-21629
THE KROLL-O'GARA COMPANY
(Exact name of registrant as specified in its charter)
OHIO 31-1470817
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
9113 LESAINT DRIVE
FAIRFIELD, OHIO 45014
(513) 874-2112
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock,
$.01 par value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment of this
Form 10-K [ ]
The aggregate market value of the Common Stock of the registrant held by
non-affiliates of the registrant was approximately $82,676,406 as of March 31,
2001. As of March 31, 2001, 22,414,697 shares of Common Stock were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE -- NONE
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PART I
ITEM 1. BUSINESS
GENERAL
The Kroll-O'Gara Company is a leading global provider of a broad range of
specialized products and services that are designed to provide solutions to a
variety of security needs. Worldwide, governments, businesses and individuals
increasingly are recognizing the need for products and services that mitigate
the growing risks associated with fraud, electronic threats, physical threats
and uninformed decisions based upon incomplete or inaccurate information.
Through its network of over 59 offices located in 23 countries, Kroll-O'Gara is
meeting these needs by providing information, analysis, training, advice and
products to its customers.
Kroll-O'Gara's operations currently are effectively divided between two
business segments (however, see "Recent Developments" below for information
concerning the planned sale of the Security Products and Services Group):
INVESTIGATIONS AND INTELLIGENCE. Kroll-O'Gara's Investigations and Intelligence
Group provides:
- 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;
- corporate security services, including security architecture and
planning; and
- technology services, including computer forensics, data recovery and
litigation and systems support services.
SECURITY PRODUCTS AND SERVICES. Kroll-O'Gara's Security Products and Services
Group provides:
- ballistic and blast protected armoring systems for commercial and
military vehicles, aircraft and missile components; and
- security services, including advanced driver training, threat recognition
and avoidance training, training in firearms safety and use and risk and
crisis management.
Additionally, Kroll-O'Gara owns approximately 25% of the stock of Securify,
Inc., which operates as a private company under separate management. Securify
provides objective information security services, including network and system
security assessment, product evaluation and assessment, security policy creation
and implementation, security architecture and design and public key
infrastructure (PKI) consulting services.
Kroll-O'Gara has pursued a strategy of aggressive growth and has completed
numerous acquisitions. Some of these acquisitions have been accounted for as
poolings of interest. Kroll-O'Gara's consolidated financial statements and the
other financial information presented in this annual report have been restated
to include these businesses as if they always had been a part of Kroll-O'Gara.
As a result, period-to-period comparability is not affected by these
acquisitions. Other acquisitions have been accounted for as purchases. The
financial results of these businesses are included in Kroll-O'Gara's results
from the effective date of each acquisition forward. Therefore, period-to-period
comparability is affected by these acquisitions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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RECENT DEVELOPMENTS
On November 15, 1999, Kroll-O'Gara announced that it had entered into a
definitive agreement with Blackstone Capital Partners III Merchant Banking Fund
L. P. (Blackstone) pursuant to which shares held by all Kroll-O'Gara
shareholders, other than certain members of management, would be acquired by
Blackstone for $18.00 per share in cash. On April 12, 2000, Kroll-O'Gara
announced that Blackstone had withdrawn its offer to acquire Kroll-O'Gara
shares.
On April 18, 2000, Kroll-O'Gara announced it would explore structuring a
transaction that would result in the separation of its two principal operating
segments, the Security Products and Services Group and the Investigations and
Intelligence Group, as well as seek an equity investment for its Information
Security Group. In September 2000, the Board of Directors approved an agreement
and plan of reorganization and dissolution of Kroll-O'Gara, that would have
resulted in the spinoff of net assets into two new public companies. When the
split-up was completed, Kroll-O'Gara shareholders, other than members of
management of the separated companies, would own shares in both companies. On
April 20, 2001, the Board decided not to pursue this separation alternative.
On April 20, 2001, in lieu of the proposed separation, the Board approved a
definitive agreement, subject to a limited number of closing conditions, to sell
the common stock of the active companies that comprise the Security Products and
Services Group, other than the Group's subsidiaries that provide kidnap and
ransom and risk information services and its Russian subsidiaries, to Armor
Holdings, Inc. (Armor) for up to $56.5 million. A portion of the sales price
($53.0 million) is to be paid at closing, currently expected to occur late in
the second quarter or in the third quarter of 2001. An escrow of $1.5 million
will be maintained and a deferred payment of up to $2.0 million will be made
based on the achievement of a gross profit target for the year ended December
31, 2001. Up to $15.0 million of the purchase price can be paid in registered
common stock of Armor. The purchase price will be reduced dollar-for-dollar to
the extent tangible net assets, as defined, do not equal approximately $37.4
million. See Note 20 to the Notes to Consolidated Financial Statements.
In October 2000, Kroll-O'Gara's then wholly owned subsidiary, Securify,
completed the sale of preferred stock shares through a private equity offering
to certain unrelated third parties. Under the terms of the stock purchase
agreement, Securify issued approximately 49.2 million shares of Series A
Convertible Preferred Stock, valued at $0.68 per share for total gross proceeds
of approximately $33.5 million. These preferred shares are convertible into an
equivalent number of shares of Securify's common stock. As a result of this
transaction, as of December 31, 2000, Kroll-O'Gara's voting control in Securify
approximated 27 percent. The investment in Securify, previously consolidated, is
now accounted for using the equity method. See Note 6 to the Notes to
Consolidated Financial Statements.
On April 16, 2001, the Board of Directors approved a formal plan to
discontinue operations of the Voice and Data Communications Group (VDCG), which
offered secure satellite communication equipment and satellite navigation
systems. Kroll-O'Gara has decided to divest itself of the operations of this
segment by no later than December 31, 2001. The discontinuance plan includes an
overall shutdown through an orderly runoff of operations. However, Kroll-O'Gara
will continue to consider proposals from parties that may be interested in
acquiring these operations prior to their shutdown. The results of operations of
VDCG have been classified as discontinued operations and all prior periods have
been restated accordingly. See Note 5 to the Notes to Consolidated Financial
Statements.
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PRODUCTS AND SERVICES
The following table presents the net sales of Kroll-O'Gara's products and
services by Group for the periods indicated.
YEAR ENDED DECEMBER 31,
------------------------------
1998 1999 2000
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(IN THOUSANDS)
Security Products and Services Group........................ $143,006 $123,987 $111,011
Investigations and Intelligence Group....................... 117,583 176,837 195,558
Information Security Group.................................. 116 4,345 4,033
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$260,705 $305,169 $310,602
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In addition to the information presented above, see the Notes to
Kroll-O'Gara's Consolidated Financial Statements, included elsewhere in this
annual report, for business segment data and for information concerning foreign
and domestic operations and export sales.
SECURITY PRODUCTS AND SERVICES GROUP
The following table presents the aggregate net sales for each of the three
product categories in Kroll-O'Gara's Security Products and Services Group for
the periods indicated.
YEAR ENDED DECEMBER 31,
-------------------------------
1998 1999 2000
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(IN THOUSANDS)
Commercial products........................ $ 73,756 $ 70,890 $ 64,462
Military products.......................... 59,839 39,602 31,912
Security services.......................... 9,411 13,495 14,637
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$143,006 $123,987 $111,011
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COMMERCIAL PRODUCTS
Kroll-O'Gara armors a variety of vehicles, including limousines, sedans,
sport utility vehicles, commercial trucks and money transport vehicles, to
protect against varying degrees of ballistic and blast threats. The armoring
process begins with the disassembly of a new base vehicle. This disassembly
normally involves the removal of the interior trim, seats, doors and windows.
The passenger compartment then is armored with both opaque and transparent
armor. Other features, such as run flat tires and non-exploding gas tanks, also
may be added. Finally, the vehicle is reassembled as close to its original
appearance as possible. The types of commercial products produced are described
below. During 2000, Kroll-O'Gara shipped approximately 1,132 commercial armored
vehicles.
ARMORED VEHICLES. Kroll-O'Gara produces fully armored vehicles and light
armored vehicles. Fully armored vehicles, such as limousines, large sedans or
sport utility vehicles, typically are armored to protect against attacks from
military assault rifles such as AK-47s and M16s. These vehicles also can be
blast protected by enhancing the ballistic and underbody protection with
proprietary materials and installation methods that protect the occupants
against a defined blast threat. Blast protected vehicles defend against threats
such as pipe bombs attached to the exterior of the vehicle and nondirectional
charges of 20 kg of TNT detonated approximately five meters from the vehicle.
Fully armored vehicles typically sell for $70,000 to $200,000 exclusive of the
cost of the base vehicle.
Fully armored vehicles also include Parade Cars, which are formal
limousines used predominantly for official functions by a president or other
head of state. These vehicles are usually customized based upon a commercially
available chassis which Kroll-O'Gara essentially rebuilds from the ground up.
Because the threat of organized assassination attempts is greater for heads of
state, these vehicles normally incorporate more advanced armor and sophisticated
protection features. These features can include supplemental air and
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oxygen systems, air purification systems to protect against chemical or
biological contamination, underbody fire suppressant systems, tear gas
launchers, anti-explosive self-sealing fuel tanks, electric deadbolt door locks,
gun ports and bomb scanners. Parade Cars normally sell for $300,000 to in excess
of $1.0 million inclusive of the cost of the base vehicle.
Light armored vehicles are similar in all respects to fully armored
vehicles except that substantially less total weight of armoring is added.
Therefore, it is possible to armor smaller vehicles such as the Volkswagen Jetta
and the General Motors Omega, as well as larger vehicles such as the Mercedes
Benz S600 and the Jeep Cherokee. Light armored vehicles are designed to protect
against attacks from handguns, such as a 9 mm or .357 Magnum. The price of a
light armored vehicle ranges from $5,000 to $60,000 exclusive of the cost of the
base vehicle.
OTHER VEHICLES. Kroll-O'Gara also produces specialty vehicles,
cash-in-transit money transport vehicles and commercial truck bodies. Specialty
vehicles are custom built for a specific mission. Examples of specialty vehicles
are Escort Cars, usually convertibles, and Chase Cars, usually closed-top
vehicles, in which security personnel ride while in a head of state motorcade.
Cash-in-transit vehicles are used by banks or other businesses to transport
currency and other valuables. After starting with a van or small truck, the
company modifies the base vehicle to provide protection for the cargo and
passengers from ballistic and blast threats. Kroll-O'Gara also builds commercial
truck bodies. The truck bodies are manufactured primarily for 3.5 ton trucks and
are installed on chassis produced by a variety of manufacturers.
MILITARY PRODUCTS
UP-ARMORED HMMWVS. Kroll-O'Gara is the prime contractor to the U.S.
Military for the supply of armoring and blast protection for High Mobility
Multi-Purpose Wheeled Vehicles. The HMMWV chassis are produced by AM General
Corporation and shipped directly to Kroll-O'Gara's facility in Fairfield, Ohio
where armor and blast protection components are added. A number of these
components are purchased from single source suppliers. The Up-Armored HMMWVs
provide exterior protection against various levels of armor-piercing ammunition,
overhead airburst protection and underbody blast protection against anti-tank
and anti-personnel mines. In addition, Kroll-O'Gara installs other features
designed to enhance crew safety, comfort and performance, such as air
conditioning, weapon turrets and mounts, door locks and shock-absorbing seats.
The company charges $70,000 to $110,000 for these ballistic and blast protective
systems. During 2000, Kroll-O'Gara shipped 377 Up-Armored HMMWVs. The company
also supplies engineering design and prototype services in support of the
Up-Armored HMMWV Program, and supplies spare parts and logistic support.
HIMARS. Kroll-O'Gara is serving as a subcontractor to develop a
ballistically armored and sealed truck cab for the High Mobility Artillery
Rocket System ("HIMARS"), which will be used by the U.S. Army. The truck is used
to fire missiles which are a part of either the Multiple Launch Rocket System
(MLRS) or the Army Tactical Missile System (ATACM).
OTHER ARMOR SYSTEMS. Kroll-O'Gara markets armor sub-systems for other
tactical wheeled vehicles, such as 2.5 ton and 5.0 ton trucks. The company also
produces various armor systems as a subcontractor to larger defense contractors,
such as Lockheed Martin Corporation. These products include armor for containers
for fuels and missile launchers and for pilot protection, and typically involve
the use of materials or methods which are unique to Kroll-O'Gara.
SECURITY SERVICES
Kroll-O'Gara provides a variety of services designed to protect and help
its clients manage risks and respond to crisis situations. These services
include training and risk and crisis management.
TRAINING. Kroll-O'Gara offers comprehensive security training programs in
advanced driving, ballistics, counterintelligence and surveillance both at its
facilities near Washington, D.C., San Antonio, Texas and Mexico City, Mexico and
at customer designated locations. Kroll-O'Gara offers ballistics training in a
progressive and realistic shooting house, encompassing 6,800 square feet of
training space, at its facility near
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Washington, DC. Ballistics training consists of a wide spectrum of combat
marksmanship skills which focuses on realistic situations, exposing students to
stress while under difficult firing situations. Kroll-O'Gara also offers
security and counterintelligence training courses for both U.S. Government
agencies and clients in the private sector. The training includes instruction on
methods of recognizing and deterring security risks. Students learn
methodologies utilized by terrorists, what information is needed by terrorists
in order to plan an attack and how to block or manipulate this flow of
intelligence.
RISK AND CRISIS MANAGEMENT. Kroll-O'Gara provides consulting services to
assist businesses in managing risks to their personnel and assets and in meeting
and managing unexpected crises. Kroll-O'Gara's crisis management services are
provided in a variety of contexts, 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. Kroll-O'Gara
maintains a crisis management center in Vienna, Virginia where personnel are on
duty 24 hours a day, 365 days a year, to handle requests for information and
provide initial advice and immediate contact with members of Kroll-O'Gara's
professional staff specializing in the particular crisis presented.
As part of its risk and crisis management service, Kroll-O'Gara furnishes
periodic information 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 kidnappings or specific regions or countries,
that are relevant to business travelers.
Although they have been a part of the Security Products and Services Group,
Kroll-O'Gara's subsidiaries that provide risk and crisis management services are
not included in the companies being sold to Armor.
INVESTIGATIONS AND INTELLIGENCE GROUP
Kroll-O'Gara's investigations and intelligence services are divided into
five major categories. The following table presents the aggregate net sales for
each of its five service categories for the periods indicated.
YEAR ENDED DECEMBER 31
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1998 1999 2000
-------- -------- --------
(IN THOUSANDS)
Business investigations and intelligence................. $ 29,044 $ 50,537 $ 78,283
Corporate services....................................... 46,442 58,304 46,588
Financial services....................................... 31,566 44,925 45,273
Corporate security services.............................. 10,531 22,446 22,823
Technology services...................................... -- 625 2,621
-------- -------- --------
Total............................................... $117,583 $176,837 $195,558
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BUSINESS INVESTIGATIONS AND INTELLIGENCE SERVICES
Kroll-O'Gara's 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. Kroll-O'Gara helps its 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
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reputations. Kroll-O'Gara provides 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 judgments, environmental liabilities and other actual or potential
problems.
LITIGATION SUPPORT. Kroll-O'Gara provides litigation support services to a
client's outside counsel and in-house lawyers in preparation for litigation or
arbitration proceedings and 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.
Kroll-O'Gara's wide-ranging information gathering can help businesses and legal
strategists decide whether to sue, go to trial or employ alternative dispute
resolution and whether, and at what level, to negotiate a settlement. In complex
litigation, Kroll-O'Gara uses 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 its forensic accounting professionals and
corporate investigators, Kroll-O'Gara has the financial expertise and
investigative capability to respond to suspected wrongdoing wherever it may
occur. Kroll-O'Gara's 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. Kroll-O'Gara has
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. Kroll-O'Gara provides 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. Kroll-O'Gara 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. Kroll-O'Gara serves 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. Kroll-O'Gara's 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. Kroll-O'Gara's
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. Kroll-O'Gara
attempts to determine the source and extent of the problem, develop information
about the parties responsible, minimize damage to the client and propose
effective measures to prevent further losses.
CORPORATE SERVICES
Kroll-O'Gara's corporate services include pre-employment background
checking, drug testing, surveillance and vendor integrity programs.
PRE-EMPLOYMENT BACKGROUND CHECKING. Kroll-O'Gara verifies 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. Kroll-O'Gara owns and operates 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. Kroll-O'Gara's 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 its
laboratory,
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identifying trends in local and national drug use, interpreting test results and
providing expert testimony concerning test results.
SURVEILLANCE. Kroll-O'Gara provides video surveillance services to its
clients in connection with investigating exaggerated disability claims and other
frauds. In performing surveillance, Kroll-O'Gara utilizes its 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.
VENDOR INTEGRITY PROGRAMS. Kroll-O'Gara provides profiles of a client's
vendors, using information provided by the vendors and obtained from independent
sources. A client utilizes these profiles to insure that its vendors adhere to
the client's standards for ethical business practices. The fees for this service
may be paid either through nominal fees charged to each participating vendor or
billed directly to the client.
FINANCIAL SERVICES
Kroll-O'Gara's financial services include forensic accounting, recovery and
restructuring, asset tracing and analysis services and pre-acquisition due
diligence.
FORENSIC ACCOUNTING. Kroll-O'Gara's 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. Kroll-O'Gara's
services include commercial litigation support, corporate investigations,
statutory and regulatory compliance, insurance claims, business valuations,
financial due diligence and visual strategies.
RECOVERY AND RESTRUCTURING. Kroll-O'Gara's clients include creditors,
lenders and investors as well as companies in difficult financial situations.
The services Kroll-O'Gara provides relate to turnarounds, liquidations,
corporate recovery and pre-lending and refinancing reviews. Kroll-O'Gara has
helped hundreds of troubled companies recover and restructure their operations
by investigating and reviewing their management accounts, financial systems and
operations. Kroll-O'Gara also helps them implement turnaround strategies and
design innovative solutions that can increase sales and profits, lower costs and
improve efficiency. Kroll-O'Gara's bank clients also turn to it for financial
forecasts, advice and intelligence prior to taking on new loans or advancing
additional funds to current customers.
ASSET TRACING AND ANALYSIS. Kroll-O'Gara's 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, Kroll-O'Gara has 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. Kroll-O'Gara believes
that its asset searching and analysis techniques are effective both in
uncovering assets and in bringing debtors to the negotiating table. In
identifying assets, Kroll-O'Gara relies 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 Kroll-O'Gara 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.
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CORPORATE SECURITY SERVICES
Kroll-O'Gara's corporate security services include security architecture
and design, corporate security planning and executive protection and electronic
countermeasures.
SECURITY ARCHITECTURE AND DESIGN. Kroll-O'Gara offers 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. Kroll-O'Gara designs
corporate security programs that help to safeguard clients' operations and
premises. Security programs and systems are designed to protect the safety of
key executives, preserve assets and protect the integrity of computer and
telecommunications systems. Additionally, in several areas of the world,
Kroll-O'Gara provides special escort and general protective services to
executives and VIPS.
ELECTRONIC COUNTERMEASURES. Kroll-O'Gara protects its clients by ensuring
that they are able to operate their businesses and communicate confidential
matters freely without electronic intrusion from outsiders. Kroll-O'Gara 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 Kroll-O'Gara's clients. Through sophisticated
inspections and equipment Kroll-O'Gara is able to detect listening devices and
disable or remove them before its clients are compromised.
TECHNOLOGY SERVICES
Kroll-O'Gara's 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. Kroll-O'Gara provides 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 of cyberterrorism.
By using sophisticated forensic software, Kroll-O'Gara also helps clients access
information recovered from hard drives and reconstruct computer data that may be
introduced as evidence in legal proceedings.
LITIGATION AND SYSTEMS SUPPORT. Kroll-O'Gara provides litigation support
through assistance in designing strategy and tactics and also analyses data
provided in the discovery stage of litigation. Kroll-O'Gara also helps clients
track down web-based intellectual property thefts, counterfeit goods and
criminals that use the Internet to steal information or property and commit
fraud. Kroll-O'Gara provides network security testing in which it helps clients
gauge objectively the level of network protection so that security flaws can be
identified and cured.
CUSTOMERS
SECURITY PRODUCTS AND SERVICES GROUP
COMMERCIAL PRODUCTS. Kroll-O'Gara's armored commercial vehicle customers
include governmental and private buyers. U.S. and foreign governmental buyers
purchase both fully and light-armored vehicles. Governmental buyers also
comprise the market for Parade Cars. Typically, governmental buyers consist of
ministries of foreign affairs, defense and internal affairs and offices of
presidential security. These customers are not constrained in their purchasing
decisions by considerations such as import duties and taxes and are free to
search globally for the best product available. The procurement cycles of
governmental buyers can
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range from relatively rapid, when the vehicles are for the use of the head of
state or in response to a particular crisis, to prolonged bureaucratic bids and
evaluations for normally budgeted items. Kroll-O'Gara's private customers for
armored commercial vehicles include corporations and individuals. Private buyers
are much more sensitive to cost, of which import duties and taxes may be a
substantial part, and, therefore, often will buy a locally produced product, if
one exists that meets their needs. Local servicing of the vehicle is also a
critical concern to private buyers. Kroll-O'Gara's customers for cash-in-transit
vehicles are generally financial institutions. Purchasing decisions for
cash-in-transit vehicles depend on many criteria including whether the financial
institution is private or governmental, insurance and regulatory requirements
and cost. The geographic distribution of 2000 sales of Kroll-O'Gara's commercial
armored vehicles, as a percentage of total 2000 sales for those products, was as
follows:
PERCENTAGE OF 2000 COMMERCIAL SALES BY GEOGRAPHIC AREA
Europe...................................................... 34.0%
Central and South America................................... 30.8%
North America............................................... 27.5%
Middle East................................................. 3.3%
Far East.................................................... 2.2%
Other....................................................... 2.2%
MILITARY PRODUCTS. Kroll-O'Gara's market for military hardware products is
worldwide in scope, including the U.S. Military and foreign defense forces.
Kroll-O'Gara's major contracts for delivery of Up-Armored HMMWVs are with the
U.S. Military. The Company also is serving as a subcontractor to develop a
ballistically armored and sealed truck cab for the HIMARS, to be used by the
U.S. Army. Additionally, Kroll-O'Gara provides protected container systems,
typically used to protect missile systems from small arms fire, to the U.S.
Military under a subcontract with Lockheed Martin. The Company is seeking to
expand its sales of armored tactical wheeled vehicles to foreign defense forces.
TRAINING. Kroll-O'Gara offers advanced driver training, firearms training
and surveillance detection training courses. Many private sector clients are
drawn to Kroll-O'Gara's training courses due to Kroll-O'Gara's reputation of
providing these services to various governmental agencies. Because the
protection afforded by armored vehicles is greatly enhanced by their proper
operation, Kroll-O'Gara markets its various courses to its armored commercial
vehicle customers and vice versa.
RISK AND CRISIS MANAGEMENT. A significant portion of Kroll-O'Gara's
business of investigating and negotiating ransom demands in connection with
kidnappings 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 Kroll-O'Gara investigates claims by
AIG's insureds. Although Kroll-O'Gara is paid by AIG after claims are made,
Kroll-O'Gara's customer is the affected person or entity. Kroll-O'Gara's
customers for its information services relating to travel safety are
multinational corporations and individuals. Kroll-O'Gara markets its information
services to many of its customers for other products and services.
INVESTIGATIONS AND INTELLIGENCE GROUP
Kroll-O'Gara's 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 Kroll-O'Gara provides services include many of
the largest international investment banks, numerous commercial banks, insurance
companies and other significant credit institutions.
Kroll-O'Gara classifies its investigative and intelligence sales by where
the services are delivered; international sales are services delivered outside
the United States. For the years ended December 31, 1998,
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1999 and 2000, 71%, 58%, and 59%, respectively, of this Group's net sales were
attributable to services delivered in the United States; the balance were
attributable to services delivered outside the United States.
Although many of Kroll-O'Gara's clients utilize these services on a
periodic basis, comparatively few clients utilize Kroll-O'Gara's investigative
and intelligence services on a continuing basis and the clients that account for
a material percentage of net sales in any year may vary widely.
In the United States, Kroll-O'Gara generally charges for its investigative
and intelligence services on an hourly basis at varying rates, depending upon
the type of service being provided and the competition that exists in providing
the service. Kroll-O'Gara also provides these services, particularly outside the
United States, on a negotiated project, or fixed fee, basis. Providing services
on a fixed fee basis enhances the potential for higher profit margins. However,
these arrangements also can result in unexpected losses on a particular project.
Kroll-O'Gara believes that this risk is reduced by being spread over a large
number of fixed fee arrangements and through its contracting process that
specifies the actual steps that are required to be performed for the fixed fees.
MARKETING AND SALES
COMMERCIAL. On a worldwide basis, Kroll-O'Gara employs 115 full-time sales
professionals in its Security Products and Services Group. These employees
operate out of Washington, D.C.; Miami, Florida; Fairfield, Ohio; Sao Paulo,
Brazil; Lamballe, France; Paris, France; Mexico City, Mexico; Manila, the
Philippines; Moscow, Russia; Bogota, Colombia; and Geneva, Switzerland. All
personnel have a geographic and/or product- specific responsibility. In most
cases, the sales personnel also recruit and maintain sales agents or
distributors. The agents or distributors have geographic and product-specific
agreements, and compensation in most cases is based upon a commission
arrangement. The sales personnel use a consultative approach when offering
solutions to customers' security problems. Sales cycles for commercial physical
security products can range from several months to a matter of days, depending
upon the product and the urgency associated with the security problem being
addressed. Physical security products which are readily available, such as the
fully armored Chevrolet Suburban, allow Kroll-O'Gara to assist customers who
have, or believe they have, developed an immediate threat.
Kroll-O'Gara is working with various cash transportation companies to
create joint ventures in order to supply all of these companies' armored
cash-in-transit vehicles in specific countries or regions.
Kroll-O'Gara's investigations and intelligence services are marketed and
sold by three different types of sales personnel. As of December 31, 2000
Kroll-O'Gara had four global key account managers who market and sell all its
varied services, both domestically and internationally, to its most significant
multinational corporate clients, 95 professional service providers who are also
expected to provide marketing services and 58 full time sales and marketing
employees who work in regional markets.
Kroll-O'Gara's global key account managers are expected to work with
targeted clients with which it has done significant business in the past to
expand their relationships with Kroll-O'Gara by selling them a broader range of
services. In addition, Kroll-O'Gara relies on its professional service providers
not only to service existing clients, but also for new business development and
marketing. Kroll-O'Gara obtains engagements from a client's board of directors,
executive officers and management and a variety of other corporate officials.
Kroll-O'Gara's senior professionals act as relationship managers for its major
clients. A significant part of its marketing efforts consist of maintaining and
developing these personal relationships. Kroll-O'Gara's 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. Kroll-O'Gara's services and marketing events are promoted through its
Internet website and publications mailed periodically to approximately 20,000
clients and prospective clients.
Kroll-O'Gara's marketing efforts attempt to increase business with existing
clients by expanding clients' awareness of the range of services it offers and
by increasing the number of decision makers within a client's organization that
are aware of the range of services it offers. Kroll-O'Gara's business
development staff
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periodically conducts surveys of clients to assess their perception of the range
and quality of its services and, after the completion of an assignment, clients
are often asked to complete a quality control questionnaire.
MILITARY. Kroll-O'Gara has positioned itself in the marketplace as a
commercial company with a military production capability. As such, Kroll-O'Gara
emphasizes its ability to develop new products, or product adaptations, quickly
and more cost-effectively than traditional defense contractors. In marketing its
products to the military, Kroll-O'Gara also places strong emphasis on its
superior antitank and antipersonnel mine protection for the occupants of
tactical wheeled vehicles. Kroll-O'Gara markets its military products through a
combination of trade show exhibitions, print advertising in military-related
periodicals and direct customer visits. Kroll-O'Gara emphasizes the
cross-marketing of military and commercial products, which it believes
strengthens the image of each product group. Kroll-O'Gara also has entered into
exclusive teaming and joint marketing agreements with AM General, the
manufacturer of the basic HMMWV, for sales in the military and commercial
arenas. These agreements designate Kroll-O'Gara as the exclusive armorer to AM
General for HMMWVs and allow Kroll-O'Gara to benefit from the AM General
distribution network and save on certain costs, such as exhibitions where AM
General and Kroll-O'Gara otherwise would both show products. Additionally,
Kroll-O'Gara currently is working with other military vehicle manufacturers
whose products are more popular in other areas of the world to develop armored
configurations for their vehicles.
Kroll-O'Gara's military sales activities are directed toward identifying
contract bid opportunities with various U.S. Government agencies and private
enterprises acting as prime contractors on government contracts and to making
sales through the Foreign Military Sales Program and directly to foreign
military organizations. Kroll-O'Gara has two full-time business development
managers who are responsible for this activity and also has contractual
arrangements with several outside consultants who assist the business
development managers in their activities. Proposal preparation and presentation
for government projects is done by a team which normally consists of program
managers, a contracting officer, a cost accountant and various manufacturing and
engineering personnel.
ENGINEERING AND DEVELOPMENT
Kroll-O'Gara's Security Products and Services Group emphasizes engineering
excellence and has an extensive engineering staff. Design engineers use
state-of-the-art two-dimensional and three-dimensional computer aided design and
engineering (CAD/CAE) systems in conjunction with coordinate measuring machines
to develop electronic models which generally are converted to solid models or
prototypes. Manufacturing engineers concentrate on improvements in the
production process and on overall cost reductions from better methods, fewer
components and less expensive materials with equal or superior quality. Applying
these techniques, over the years Kroll-O'Gara has been able to reduce both the
time and cost necessary to produce its armored vehicles. Kroll-O'Gara's
ballistic engineer, in conjunction with its design and manufacturing engineers,
develops and tests new ballistic and blast protection systems that meet
ever-changing threats. Advanced engineering is responsible for new product
development in conjunction with design engineering, manufacturing engineering
and ballistic engineering.
Kroll-O'Gara estimates that it expended approximately $3.7 million, $3.5
million and $2.8 million in 1998, 1999 and 2000, respectively, on its
engineering and development efforts. These amounts include expensed amounts
reimbursed under a Systems Technical Support Contract described under "U.S.
Government Contracts."
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U.S. GOVERNMENT CONTRACTS
Kroll-O'Gara serves as the U.S. Military's sole source contractor for
armoring the HMMWV fleet. Since its initial contract in August 1993 to armor 59
HMMWVs, Kroll-O'Gara has been awarded contracts to armor a total of 2,892
HMMWVs. Of these, 2,432 Up-Armored HMMWVs have been shipped, as follows:
NUMBER OF
YEAR SHIPPED HMMWVS
- ------------ ---------
1993........................................................ 0
1994........................................................ 139
1995........................................................ 26
1996........................................................ 507
1997........................................................ 366
1998........................................................ 460
1999........................................................ 557
2000........................................................ 377
-----
Total............................................. 2,432
=====
Prior to March 2000, Kroll-O'Gara's most recent HMMWV contract with the
U.S. Military was entered into in 1998 and included an option for additional
vehicles which was exercised on April 30, 1999. The 245 Up-Armored HMMWVs for
the U.S. Army and the U.S. Navy covered by the option were delivered through
August 2000. On March 30, 2000 Kroll-O'Gara was awarded a new contract by the
U.S. Military. The contract, with options, has a five-year duration with a
baseline quantity of 360 Up-Armored HMMWVs per year and a potential to reach
3,060 vehicles over the life of the contract. The range of the contract's total
value is between $125.0 million and $215.0 million. The initial order is for 360
Up-Armored HMMWVs with a value of approximately $25.0 million. On December 1,
2000, while in production of the initial order of 360, the U.S. Military
exercised an option for 487 additional vehicles in the first option year of the
new contract.
As the Up-Armored HMMWV fleet grows, Kroll-O'Gara is experiencing continued
growth in fleet management activity and spare parts. The U.S. Military signed a
five year spare parts corporate contract with Kroll-O'Gara in March 1999. This
contract designates Kroll-O'Gara to provide HMMWV armor parts to all U.S.
Military end users. The most recent fleet management contract option with the
U.S. Military was exercised in March 2001.
Kroll-O'Gara is in the last year of a System Technical Support contract
with the U.S. Military to support continued research and development on the
Up-Armored HMMWV program. This contract, signed in 1997, has required
Kroll-O'Gara to provide up to 25,000 hours per year of engineering and
development time to enhance and study the Up-Armored HMMWV. The last option to
the contract was exercised in August 1999 for year 2000, work on which is
continuing in the year 2001. The U.S. Military has requested a proposal from
Kroll-O'Gara to provide system technical support for the period from July 2001
through June 2002 plus three one-year options.
As a subcontractor to Lockheed Martin Corporation, Kroll-O'Gara has
provided armoring for certain missile weapons systems. Kroll-O'Gara was first
engaged in September 1993 by Lockheed Martin to armor launch systems of
missiles. Kroll-O'Gara was most recently engaged by Lockheed Martin to provide
this armoring for 2001 and 2002 and believes that it is well positioned for
future engagements.
Stewart & Stevenson Services, Incorporated has subcontracted with
Kroll-O'Gara to develop a ballistically armored and sealed High Mobility
Artillery Rocket System (HIMARS) truck cab. Two initial phases of this contract
were completed by Kroll-O'Gara, totaling $1.5 million. The Phase III contract
for $3.6 million will carry prototype development of nine cabs through 2001. It
is anticipated that this will eventually result in a multi-year production
contract.
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COMPETITION
The markets for Kroll-O'Gara's products and services are highly
competitive. Kroll-O'Gara competes in a variety of fields, with competitors
ranging from small businesses to multinational corporations.
SECURITY PRODUCTS AND SERVICES GROUP
Kroll-O'Gara believes that its design, engineering and production expertise
in providing fully integrated ballistic and blast protected vehicles gives it a
competitive advantage over those competitors who provide protection against only
selected ballistic threats. The largest competitors on a world-wide basis in the
production of armored commercial vehicles are DaimlerChrysler AG, which sells
its armored Mercedes Benz products on a special order basis as well as through
its world-wide distribution system, and BMW AG, which sells its products through
its world-wide dealer distribution system. In addition, there are a number of
other vehicle armorers in Europe, the Middle East and Latin America which armor
primarily locally manufactured automobiles. U.S.-based protected passenger
automobile armorers include the Pittston Company (owner of Brinks armored
vehicles), Moloney Coachbuilders, Inc., Armor Holdings, Inc., and Armet Armored
Vehicles, Inc. The principal competitive factors are price, quality of
engineering and design, production capability and capacity, ability to meet
delivery schedules and reputation in the industry. There are a large number of
companies that provide specific armoring packages for tactical wheeled vehicles,
helicopters and selected other military applications. Kroll-O'Gara believes
that, as the size of the Up-Armored HMMWV requirement continues to grow,
competition from major defense contractors may develop.
With regard to the security services provided by this Group, Kroll-O'Gara
competes with numerous local integrators and small consultant-type businesses,
such as Control Risks Group Ltd., and also with large suppliers of
security-related equipment such as Western Resources, Inc., Securitas AB, The
Wackenhut Corporation, Borg-Warner Security Corporation, Pittway Corporation,
Armor Holdings, Inc., ICTS International, N.V. and Tyco International Ltd. The
principal competitive factors are the best approach to solving the problems,
expertise, price, trust, availability and the company or individual reputation.
INVESTIGATIONS AND INTELLIGENCE GROUP
In this area, Kroll-O'Gara competes with local, regional, national and
international firms, including investigative and security firms, guard companies
and consultants in specialized areas such as kidnapping. Kroll-O'Gara believes
that it is one of the largest companies in the world providing a broad array of
corporate investigation, risk and crisis management and business intelligence
services on a global basis, and that it enjoys strong name recognition in its
industry.
Nevertheless, the markets in which it does business are highly competitive.
In most individual service areas in which Kroll-O'Gara operates, there is at
least one competitor that is significantly larger or more established than
Kroll-O'Gara 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 Kroll-O'Gara. Some of these firms have indicated an interest in
providing corporate investigation and business intelligence services similar to
the services provided by Kroll-O'Gara 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 Kroll-O'Gara and have long-established relationships
with their clients, which also are likely to be clients or prospective clients
of Kroll-O'Gara. In addition, large multinational security 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
Kroll-O'Gara. Competitive conditions could have a material adverse effect on
Kroll-O'Gara financial condition, results of operations and cash flows.
SEASONALITY, BACKLOG AND RELATED MATTERS
Approximately 11% of Kroll-O'Gara's net sales during 2000 were derived from
U.S. Military contracts and an additional 7% were derived from commercial
contracts with U.S. governmental agencies or foreign
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governments. For 1999, these percentages were 13% and 5%, respectively. Military
and governmental contracts generally are awarded on a periodic or sporadic
basis. Kroll-O'Gara frequently receives substantial orders in one quarter, the
revenues from which are not recognized until one or more subsequent quarters. As
a result, Kroll-O'Gara has significant fluctuations from time to time in its
business. Historically, these fluctuations have not been seasonal. Kroll-O'Gara
does not believe that its business is seasonal overall, although historically
the first quarter has been weaker than the other three. Period-to-period
comparisons within a given year or between years may not be meaningful or
indicative of operating results over a full fiscal year.
Kroll-O'Gara's backlog at December 31, 1999 and 2000 was approximately
$35.9 million and $91.1 million, respectively. Backlog consists of net sales
value for firm orders not included in net sales on the basis of
percentage-of-completion accounting. Because many timing and cost factors affect
the production and delivery of Kroll-O'Gara's products, there is no certainty as
to when net sales will be recognized from Kroll-O'Gara's backlog. However,
Kroll-O'Gara expects to ship all of its 2000 backlog in 2001. Year-to-year
comparisons of backlog are not necessarily indicative of future operating
results.
Kroll-O'Gara's net sales from government contracts and most commercial
contracts for its armoring products are recognized using the
percentage-of-completion method. Under this method, contract revenues are
reported based on the percentage that costs to date bear to total estimated
costs. Estimated contract losses are recognized in full in the period in which
it becomes likely that a loss will occur. Accordingly, contract revenues and
total cost estimates are reviewed and revised periodically as the work
progresses and as change orders are approved, and adjustments based upon the
percentage-of-completion are reflected in contract revenues in the period when
such estimates are revised. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
EMPLOYEES
As of March 31, 2001, Kroll-O'Gara had 2,506 employees, comprised of 115 in
marketing and sales, 639 in operations, 1,037 in professional services, 25 in
engineering, 544 in general and administrative, and 146 part-time employees.
Kroll-O'Gara's U.S. employees are not represented by any union and are not
covered by any collective bargaining agreements. Approximately 20 employees of
Kroll-O'Gara's French subsidiary are employed under agreements with the
Confederation Francaise Democratique du Travail. Wage increase parameters are
set twice a year by Kroll-O'Gara's local management in consultation with the
union. Kroll-O'Gara has not experienced any work stoppages or employee related
slowdowns and believes that its relationship with its employees is good.
GOVERNMENT REGULATION
Kroll-O'Gara's services are subject to various federal, state, local and
foreign laws, including laws designed to protect the privacy of persons.
Subsidiaries of Kroll-O'Gara hold private investigative licenses from, and their
investigative activities are subject to regulation by, the state and local
licensing authorities in the locations where such subsidiaries do business.
Kroll-O'Gara also utilizes data from outside sources, including data from third
party vendors and various government and public record services, in performing
its services. Use of this data is subject to compliance with applicable law.
Additionally, Kroll-O'Gara's 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 Kroll-O'Gara's business.
As a contractor with agencies of the U.S. Government, Kroll-O'Gara is
obligated to comply with a variety of regulations governing its operations and
the workplace. Additionally, Kroll-O'Gara's contracts give the contracting
agency the right to conduct audits of Kroll-O'Gara's facilities and operations,
and these audits occur routinely. An audit involves a governmental agency's
review of Kroll-O'Gara's compliance with the prescribed procedures established
in connection with the government contract.
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Regulations promulgated by the U.S. Commerce Department require
Kroll-O'Gara to obtain a general destination license in connection with the sale
of certain commercial products in foreign countries, and U.S. State Department
regulations require Kroll-O'Gara to file an export license in connection with
sales of military equipment in foreign countries. Furthermore, the U.S. State
Department prohibits all sales of military equipment to certain countries, and
the U.S. complies with United Nations trade embargos. Additionally, foreign
countries in which Kroll-O'Gara does business have laws and regulations which
may restrict Kroll-O'Gara's business. Kroll-O'Gara believes that it currently
conducts its activities and operations in substantial compliance with applicable
governmental laws and regulations.
ENVIRONMENTAL MATTERS
Kroll-O'Gara and its operations are subject to a number of environmental
laws, regulations and ordinances, both in the U.S. and various foreign
countries, 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. Environmental laws continue to change rapidly, and it is
likely that Kroll-O'Gara will be subject to increasingly stringent environmental
standards in the future. Kroll-O'Gara believes that it currently conducts its
activities and operations in substantial compliance with applicable
environmental laws.
PATENTS, TRADEMARKS AND COPYRIGHTS
Kroll-O'Gara currently has four issued U.S. patents relating to its
armoring business. Kroll-O'Gara has numerous federally registered trademarks and
copyrights and has registered its trademarks in numerous foreign countries.
Although Kroll-O'Gara does not believe that its ability to compete in any of its
product markets is dependent on its intellectual property, Kroll-O'Gara does
believe that the protection afforded by its "Armoring Assembly" and "Vehicle
Mine Protection Structure" patents, both of which relate to vehicle underbody
blast protection, provides Kroll-O'Gara with important technological advantages
over its competitors. Although Kroll-O'Gara has protected its technologies to
the extent that it believes appropriate, there can be no assurance that
Kroll-O'Gara's measures to protect its proprietary rights will deter or prevent
unauthorized use of Kroll-O'Gara's technologies. In other countries,
Kroll-O'Gara's proprietary rights may not be protected to the same extent as in
the United States.
ITEM 2. PROPERTIES
Kroll-O'Gara maintains executive offices and regional headquarters in New
York, New York, and Fairfield, Ohio, and other regional headquarters in London,
England; Hong Kong; Miami, Florida; Lamballe, France; and Sao Paulo, Brazil. In
addition, Kroll-O'Gara maintains 26 domestic offices or facilities in 17 states
and 33 foreign offices or facilities in 22 foreign countries around the world.
Kroll-O'Gara's principal properties and facilities as of December 31, 2000 were
as follows:
BUILDING
LOCATION SQUARE FOOTAGE STATUS
-------- -------------- ------
Fairfield, Ohio................................. 130,000 owned
Lamballe, France................................ 178,000 owned
Sao Paulo, Brazil............................... 56,000 leased
New York, New York.............................. 47,500 leased
Gretna, Louisiana............................... 20,000 owned
Mexico City, Mexico............................. 20,000 owned
Washington, D.C. area........................... n/a leased
San Antonio, Texas.............................. n/a owned
FAIRFIELD, OHIO. This facility contains full production and assembly
facilities for Kroll-O'Gara's armored commercial vehicles and the manufacturing
and distribution of Up-Armored HMMWVs. The facility is
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financed through tax-exempt debt and is pledged to secure the repayment of the
debt. The facility includes a complete fabrication and machine shop equipped
with a computer controlled plasma cutter, a computer controlled press break,
mills, automated grinders, a robotic welder and two coordinate measuring
machines, paint booths and ancillary equipment for both military and commercial
painting.
LAMBALLE, FRANCE. The site contains facilities for production of armored
commercial and cash-in-transit vehicles, design studios for development of
prototypes, integrated computer systems, and areas for parts, fabrication,
painting and quality control. This facility also contains a ballistics range.
The main portion of the facility is financed under a capital lease.
SAO PAULO, BRAZIL. This facility is used for manufacturing and sales of a
full product line of armored commercial vehicles. It currently is leased for a
term expiring in October 2004; however, either party can terminate the lease on
90 days written notice. For accounting purposes, this lease is treated as an
operating lease.
NEW YORK, NEW YORK. This facility contains executive offices and serves as
the headquarters for Kroll-O'Gara's Investigations and Intelligence Group. The
space is leased for a term expiring in December 2007. For accounting purposes,
this lease is treated as an operating lease.
GRETNA, LOUISIANA. This facility houses Kroll-O'Gara's drug testing
laboratory as well as serving as offices for Kroll-O'Gara's drug testing
subsidiary.
MEXICO CITY, MEXICO. This facility is used for manufacturing and sales of a
full product line of armored commercial vehicles. This facility was purchased in
1996.
WASHINGTON D.C. AREA. This facility is used for advanced security training
and includes a portion of an abandoned airport runway that is used for advanced
driver training. The facility is leased for a term expiring in May 2009. For
accounting purposes, this lease is treated as an operating lease.
SAN ANTONIO, TEXAS. This facility, which was acquired in 1997, consists of
165 acres of land used for advanced driver and force protection training.
Kroll-O'Gara's manufacturing capabilities include fully integrated
manufacturing programs which link production control, materials control, quality
control and accounting. Kroll-O'Gara's non-executive offices range from
approximately 320 square feet to approximately 8,800 square feet and are subject
to leases expiring through 2012. Kroll-O'Gara believes that its facilities are
adequate for its current needs and that its properties, including machinery and
equipment, are generally in good condition, well maintained and suitable for
intended current and foreseeable uses.
ITEM 3. LEGAL PROCEEDINGS
Kroll-O'Gara has been named as a defendant in eight lawsuits alleging that
its officers and directors breached their fiduciary duties in connection with
the now terminated proposed acquisition of a majority of Kroll-O'Gara's shares
by a company formed by Blackstone Capital Partners III Merchant Banking Fund
L.P. Five of the lawsuits were filed in the Court of Common Pleas, Butler
County, Ohio, and were consolidated on November 29, 1999. The remaining three
lawsuits were filed in the United States District Court for the Southern
District of New York and were consolidated on November 30, 1999. The plaintiffs
allege that Kroll-O'Gara's officers and directors breached their fiduciary
duties by deferring acquisitions, by negotiating an inadequate acquisition
price, by failing to engage in arms-length negotiations and by failing to seek
redress from Blackstone after Blackstone terminated the proposed transaction.
The plaintiffs also allege that Blackstone 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
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amount. The defendants believe that the allegations in the complaint are
meritless and will defend the suits vigorously
In addition to the matters discussed above, Kroll-O'Gara is involved in
litigation from time to time in the ordinary course of its business; however,
Kroll-O'Gara does not believe that there is any such additional currently
pending litigation, individually or in the aggregate, that is likely to have a
material adverse effect on its business, financial condition, results of
operations or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Kroll-O'Gara's common stock trades on the Nasdaq National Market under the
symbol "KROG." On March 31, 2001, there were approximately 202 record owners of
Kroll-O'Gara common stock.
The table below sets forth the high and low sale prices for Kroll-O'Gara
common stock as reported by The Nasdaq Stock Market for the periods indicated.
HIGH LOW
-------- --------
1999
First Quarter.............................................. $40.88 $26.31
Second Quarter............................................. 29.00 20.00
Third Quarter.............................................. 26.31 14.31
Fourth Quarter............................................. 17.19 11.94
2000
First Quarter.............................................. $16.94 $10.94
Second Quarter............................................. 10.94 4.56
Third Quarter.............................................. 6.63 4.88
Fourth Quarter............................................. 6.88 4.94
DIVIDENDS
Kroll-O'Gara expects that any future earnings will be retained to finance
its operations and for the growth and development of its business. Accordingly,
Kroll-O'Gara currently does not expect to pay cash dividends on its common stock
in the foreseeable future. Additionally, the terms of Kroll-O'Gara's credit
agreement with its bank do not permit the declaration or payment of any
dividends other than stock dividends.
SALE OF UNREGISTERED SECURITIES
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected financial data reflects mergers during 1997, 1998
and 1999 which were accounted for as poolings of interest. The prior period
consolidated financial information has been restated as though the entities had
always been part of Kroll-O'Gara. The selected financial data also includes the
completion of other acquisitions in 1997, 1998, 1999 and 2000 that utilized the
purchase method of accounting, which requires including the reported results of
each acquired business from the effective date of its acquisition. The selected
historical financial data presented as of December 31, 1999 and 2000 and for
each of the three years ended December 31, 2000, have been derived from the
audited Consolidated Financial Statements of Kroll-O'Gara presented elsewhere in
this document. The selected historical financial data presented as of
17
19
December 31, 1997 and 1998 and for the years ended December 31, 1996 and 1997,
have been derived from the audited Consolidated Financial Statements of
Kroll-O'Gara not included in this document. The consolidated financial data as
of December 31, 1996 is derived from Kroll-O'Gara's unaudited consolidated
financial statements not included in this document. The selected financial data
should be read in conjunction with the Consolidated Financial Statements and
Notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $158,924 $192,886 $260,705 $305,169 $310,602
Cost of sales..................................... 113,264 128,901 168,587 188,392 209,918
-------- -------- -------- -------- --------
Gross profit.................................... 45,660 63,985 92,118 116,777 100,684
Selling, general and administrative expenses,
including amortization.......................... 37,375 46,768 63,160 99,095 109,379
Asset impairment.................................. 125 -- -- -- --
Restructuring charge.............................. -- -- -- 4,364 686
Separation costs.................................. -- -- -- -- 4,194
Failed merger costs............................... -- -- -- 1,562 2,491
Merger related expenses........................... -- 7,205 5,727 4,069 357
-------- -------- -------- -------- --------
Operating income (loss)......................... 8,161 10,013 23,231 7,687 (16,424)
Interest expense.................................. (3,049) (4,877) (4,382) (4,747) (6,687)
Other income (expense), net....................... 335 (105) 1,615 107 55
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
minority interest, provision for income taxes,
extraordinary item and cumulative effect of
change in accounting principle................ 5,447 5,030 20,464 3,047 (23,056)
Minority interest................................. -- (156) -- -- --
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
provision for income taxes, extraordinary item
and cumulative effect of change in accounting
principle..................................... 5,447 4,874 20,464 3,047 (23,056)
Provision for income taxes........................ 366 3,305 7,353 2,429 2,651
-------- -------- -------- -------- --------
Income (loss) from continuing operations before
extraordinary item and cumulative effect of
change in accounting principle................ 5,081 1,569 13,112 617 (25,707)
Income (loss) from operations and estimated loss
on disposal of discontinued Voice and Data
Communications Group, net of tax................ 333 (305) (1,326) (1,761) (8,237)
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..................................... 4,139 1,264 11,786 (1,144) (33,944)
Extraordinary item, net of tax benefit............ -- (194) -- -- --
-------- -------- -------- -------- --------
Income (loss) before cumulative effect of change
in accounting principle....................... 4,139 1,070 11,786 (1,144) (33,944)
Cumulative effect of change in accounting
principle, net of tax benefit................... -- (360) -- (778) --
-------- -------- -------- -------- --------
Net income (loss)................................. $ 4,139 $ 710 $ 11,786 $ (1,921) $(33,944)
======== ======== ======== ======== ========
Basic earnings (loss) per share from continuing
operations...................................... $ 0.42 $ 0.11 $ 0.68 $ 0.03 $ (1.15)
======== ======== ======== ======== ========
Basic weighted average shares outstanding......... 12,112 14,751 19,337 22,006 22,295
======== ======== ======== ======== ========
Diluted earnings (loss) per share from continuing
operations...................................... $ 0.39 $ 0.10 $ 0.66 $ 0.03 $ (1.15)
======== ======== ======== ======== ========
Diluted weighted average shares outstanding....... 12,670 15,560 19,908 22,596 22,295
======== ======== ======== ======== ========
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YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital................................... $ 10,626 $ 38,329 $ 84,890 $ 62,042 $ 25,714
Net property, plant, and equipment................ 11,106 18,064 24,572 38,753 37,349
Total assets...................................... 91,673 149,071 248,368 291,698 261,749
Total debt, including current portion............. 31,249 54,239 41,347 66,584 78,465
Shareholders' equity.............................. 22,874 42,861 144,496 155,868 116,421
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of results of operations and financial condition
is based upon and should be read in conjunction with Kroll-O'Gara's Consolidated
Financial Statements and Notes. As a result of the acquisitions made by
Kroll-O'Gara in 1998, 1999 and 2000 (see below), financial results from
period-to-period may lack comparability. Additionally, on April 16, 2001, the
Board of Directors approved a plan to discontinue operations of the Voice and
Data Communications Group. Historical amounts have been reclassified to conform
to the current categories.
RECENT DEVELOPMENTS
Corporate Initiatives. Kroll-O'Gara has considered a variety of corporate
initiatives within the periods presented in the accompanying consolidated
financial statements.
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 merger were approximately $1.6 million
and $2.5 million for the years ended December 31, 1999 and 2000, respectively,
and consisted primarily of fees for attorneys, accountants, investment bankers,
travel and other related charges.
On April 18, 2000, Kroll-O'Gara announced it would explore structuring a
transaction that would result in the separation of its two principal operating
segments, the Security Products and Services Group and the Investigations and
Intelligence Group, and it would seek an equity investment for its Information
Security Group. In September 2000, the Board of Directors approved an agreement
and plan of reorganization and dissolution of Kroll-O'Gara, that would have
resulted in the spinoff of net assets into two new public companies. When the
split-up was completed, Kroll-O'Gara shareholders, other than members of
management of the separated companies, would own shares in both companies. On
April 20, 2001, the Board decided not to pursue this separation alternative.
Costs associated with this proposed separation were approximately $4.2 million
for the year ended December 31, 2000 and consisted primarily of fees for
attorneys, accountants, investment bankers and other related charges.
Kroll-O'Gara does not anticipate any additional expenses related to this now
terminated separation alternative.
On April 20, 2001, in lieu of the proposed separation, the Board approved a
definitive agreement, subject to a limited number of closing conditions, to sell
the common stock of the active companies that comprise the Security Products and
Services Group, other than the Group's subsidiaries that provide kidnap and
ransom and risk information services and its Russian subsidiaries, to Armor
Holdings, Inc. (Armor) for up to $56.5 million. A portion of the sales price
($53.0 million) is to be paid at closing, currently expected to occur late in
the second quarter or in the third quarter of 2001. An escrow of $1.5 million
will be maintained and a deferred payment of up to $2.0 million will be made
based on the achievement of a gross profit target for the year ended December
31, 2001. Up to $15.0 million of the purchase price can be paid in registered
common stock of Armor. The purchase price will be reduced dollar-for-dollar to
the extent tangible net assets, as defined, do not equal approximately $37.4
million. Kroll-O'Gara currently believes the sale of the Security Products and
Services Group will approximate book value. In the event the sale to Armor is
not consummated, Kroll-O'Gara will continue to evaluate all options available to
it, including to seek other buyers or other alternatives. See Note 20 to the
Notes to Consolidated Financial Statements.
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21
Other. In August 2000, due to continuing difficulties in utilizing all of
the functionality of the newly installed enterprise system in the Security
Products and Services Group's Fairfield, Ohio, facility, Kroll-O'Gara engaged an
outside consulting group to assist with the reimplementation of the enterprise
system. The reimplementation involved building on what had been previously
accomplished and did not involve a writeoff of any previously capitalized
amounts related to the initial implementation. The reimplementation was
initiated primarily to improve the facility's ability to utilize the full
functionality of the existing system. Kroll-O'Gara capitalized approximately
$1.8 million related to the reimplementation during the year ended December 31,
2000.
In 1999, Kroll-O'Gara learned that an individual had filed a qui tam suit
against Kroll-O'Gara under the Civil False Claims Act alleging that Kroll-O'Gara
and three of its vendors knowingly violated their contractual requirements with
the Army due to the vendors' alleged failure to have certified welders. In
October 2000, Kroll-O'Gara settled this litigation with the Department of
Justice for approximately $1.1 million, plus legal costs. Kroll-O'Gara admitted
no wrongdoing as part of the settlement. Kroll-O'Gara paid $0.55 million of the
settlement amount in November 2000; the remainder is due on December 30, 2001.
In October 2000, Kroll-O'Gara's then wholly owned subsidiary, Securify,
completed the sale of preferred stock shares through a private equity offering
to certain unrelated third parties. Under the terms of the stock purchase
agreement, Securify issued approximately 49.2 million shares of Series A
Convertible Preferred Stock, valued at $0.68 per share for total gross proceeds
of approximately $33.5 million. These preferred shares are convertible into an
equivalent number of shares of Securify's common stock. Kroll-O'Gara recognized
a pre-tax gain on this transaction of approximately $1.6 million. As a result of
this transaction, as of December 31, 2000, Kroll-O'Gara's voting control in
Securify approximated 27 percent. The investment in Securify, previously
consolidated, is now accounted for using the equity method. Kroll-O'Gara does
not have any carrying value for its investment as of December 31, 2000. Securify
has realized continuing losses since October 2000. Since Kroll-O'Gara has not
provided any guarantees and is not committed to provide any future funding to
Securify, it has not recorded its equity share of Securify losses. See Note 6 to
the Notes to Consolidated Financial Statements.
On April 16, 2001, the Board of Directors approved a formal plan to
discontinue operations of the Voice and Data Communications Group (VDCG), which
offered secure satellite communication equipment and satellite navigation
systems. Kroll-O'Gara has decided to divest itself of the operations of this
segment by no later than December 31, 2001. The discontinuance plan includes an
overall shutdown through an orderly runoff of operations. However, Kroll-O'Gara
will continue to consider proposals from parties that may be interested in
acquiring these operations prior to their shutdown. The results of operations of
VDCG have been classified as discontinued operations and all prior periods have
been restated accordingly. See Note 5 to the Notes to Consolidated Financial
Statements.
GENERAL
Kroll-O'Gara is a leading global provider of a broad range of specialized
products and services that are designed to provide solutions to a variety of
security needs. Through October 17, 2000, Kroll-O'Gara reported its revenue from
continuing operations through three groups. The Security Products and Services
Group markets ballistic and blast protected vehicles and security services. The
Investigations and Intelligence Group offers business intelligence,
investigation services and risk mitigation consulting services. The Information
Security Group offered information and computer security services. As a result
of the October 2000 sale of Securify stock, the Information Security Group
ceased to be part of Kroll-O'Gara's consolidated results. On April 16, 2001,
Kroll-O'Gara's Board of Directors approved a formal plan to discontinue
operations of a fourth group, the Voice and Data Communications Group.
Accordingly, these operations have been reclassified and reported as
discontinued operations.
1998 Offering. On May 5, 1998, Kroll-O'Gara completed a public offering of
3,200,000 shares of its common stock at $20.50 per share (the "Offering"),
resulting in net proceeds to Kroll-O'Gara of $60.4 million. A portion of the net
proceeds was used to repay $14.8 million of indebtedness, with the balance being
used through the first quarter of 1999 to fund acquisitions, working capital and
other general
20
22
corporate purposes. In addition to the shares sold by Kroll-O'Gara, certain
shareholders sold 1,860,000 shares of Kroll-O'Gara common stock in conjunction
with the Offering.
Acquisitions. Kroll-O'Gara has pursued a strategy of aggressive growth and
completed numerous acquisitions in 1998, 1999 and 2000, some of which have been
accounted for as poolings of interest and others of which have been accounted
for as purchases. These acquisitions are listed in the chart which follows.
POOLINGS(1)
COMPANY BUSINESS GROUP DATE ACQUIRED PRICE
- ------- ---------------------- -------------------- ------------------ ----------------
Laboratory Drug testing Investigations and December 7, 1998 1,209,053 shares
Specialists of Intelligence
America, Inc.
Securify Inc. Information security Information Security December 31, 1998 1,430,936 shares
services
Schiff & Associates, Security architectural Investigations and December 31, 1998 169,521 shares
Inc. services Intelligence
Financial Research, Business valuation and Investigations and March 1, 1999 102,555 shares
Inc. economic damage Intelligence
analysis services
Background America, Background Investigations and June 16, 1999 899,243 shares
Inc. investigation services Intelligence
PURCHASES(2)
COMPANY BUSINESS GROUP DATE ACQUIRED PRICE
- ------- ---------------------- -------------------- ------------------ ----------------
Corplex, Inc. Investigative and Investigations and March 1, 1998 29,207 shares
executive protection Intelligence
services
Lindquist Avey Forensic and Investigations and June 1, 1998 $4.7 million in
MacDonald investigative Intelligence cash and 278,340
Baskerville, Inc. accounting services; shares
headquartered in
Canada
Kizorek, Inc. (renamed Video surveillance Investigations and July 1, 1998 $0.8 million in
Inphoto services Intelligence cash and 352,381
Surveillance) shares
Protec S.A. Armors cars in Security Products September 30, 1998 $3.2 million in
Colombia and Services cash and 38,788
shares
Holder Associates, Security services in Investigations and October 1, 1998 $4.5 million in
S.A. Argentina Intelligence cash and 46,287
shares
Fact Finders Ltd. Investigates Investigations and November 1, 1998 $3.2 million in
intellectual property Intelligence cash, plus a
infringement cases in 3-year earn-out
Hong Kong and the based on profits
Peoples Republic of
China
The Buchler Corporate advisory Investigations and June 3, 1999 $12.0 million in
Phillips Group practices Intelligence cash and 366,469
shares
The Search Is On, Inc. Background Investigations and May 16, 2000 $0.4 million in
investigation services Intelligence cash, plus note
payable of $0.2
million
Decision Resources, Market research and Investigations and July 11, 2000 $0.3 million in
Inc. business intelligence Intelligence cash, plus note
services payable of $0.4
million
21
23
- ---------------
(1) Pooling of interest accounting requires the restating of all prior period
consolidated financial information as though the acquired entity had always
been a part of Kroll-O'Gara.
(2) Kroll-O'Gara's consolidated financial statements include the reported
results of each entity from its effective date of acquisition forward.
Revenue recognition. Revenue from intelligence and investigation services
is recognized as the services are performed pursuant to the applicable
contractual arrangements. Revenue related to time and materials arrangements is
recognized in the period in which the services are performed. Revenue from
standard hourly rate engagements is recognized as hours are incurred and revenue
from standard daily rate arrangements is recognized at amounts represented by
the agreed-upon billing amounts 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 impact of any
revisions in estimated total revenues and direct contract costs is recognized in
the period in which they become known. Kroll-O'Gara records either billed or
unbilled accounts receivable based on case-by-case invoicing determinations.
Kroll-O'Gara recognizes net sales from certain military and commercial
armoring contracts using the percentage-of-completion method calculated
utilizing the cost-to-cost approach. Under this method, Kroll-O'Gara accrues
estimated contract revenues based generally on the percentage that costs to date
bear to total estimated costs and recognizes estimated contract losses in full
when it becomes likely that a loss will occur. Accordingly, Kroll-O'Gara
periodically reviews and revises contract revenues and total cost estimates as
the work progresses and as change orders are approved. It reflects adjustments
in contract revenues, based upon the percentage of completion, in the period
when the estimates are revised. To the extent that these adjustments result in
an increase, a reduction or an elimination of previously reported contract
revenues, Kroll-O'Gara recognizes a credit or a charge against current earnings,
which could be material. Revenue related to other contracts for security
products (both government and commercial) that results principally from
short-term fixed price contracts is recognized on the completed contract method.
Contract costs include all direct material and labor costs, along with certain
direct overhead costs related to contract production. Kroll-O'Gara records
provisions for any estimated total contract losses on uncompleted contracts in
the period in which it concludes that the losses will occur.
Kroll-O'Gara recognized information security service revenues, which
consisted of consulting fees on information security projects, ratably over the
period of the agreement as services were performed or according to the completed
contract method of accounting for contract revenues, depending on the nature of
the agreement.
RESTRUCTURING OF OPERATIONS
Due to the large number of acquisitions Kroll-O'Gara completed in 1997 and
1998, integration of the operations of the acquired companies with existing
operations became a strategic initiative for Kroll-O'Gara's management. As part
of this initiative, management evaluated its business segments to ensure that
its core businesses within the segments were operating efficiently. In 1998,
most of the businesses were acquired as part of the Investigations and
Intelligence Group. As a result of management's evaluation of this Group, the
decision was made to close several less profitable operating facilities so that
the Group could focus on integration of existing facilities with the newly
acquired businesses.
In the first quarter of 1999, Kroll-O'Gara began implementation of a plan
to reduce costs and improve operating efficiencies and recorded a non-recurring
pre-tax restructuring charge of approximately $0.5 million. In the second
quarter of 1999, Kroll-O'Gara completed the restructuring plan with an
additional non-recurring pre-tax restructuring charge of $3.9 million. The
principal elements of the restructuring plan were the closure of two
Investigations and Intelligence Group offices and the elimination of
approximately 82 employees. The primary components of the restructuring charge
were severance costs and lease termination costs. See Note 7 to the Notes to
Consolidated Financial Statements.
In the third quarter of 2000, Kroll-O'Gara's Security Products and Services
Group implemented and completed a plan to reduce costs and improve operating
efficiencies with a total non-recurring pre-tax
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24
restructuring charge of approximately $0.7 million. The principal element of the
restructuring plan was the elimination of approximately 25 employees. The only
component of the restructuring charge was severance related to the termination
of employees. See Note 7 to the Notes to Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, the items noted
as a percentage of net sales:
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999 2000
----- ----- -----
Security products and services
Commercial................................................ 30.3% 26.9% 25.5%
Military.................................................. 23.5 13.1 10.3
Investigations and intelligence............................. 46.2 58.6 63.0
Information security........................................ -- 1.4 1.3
----- ----- -----
Total net sales........................................ 100.0% 100.0% 100.0%
Cost of sales............................................... 64.7 61.7 67.6
----- ----- -----
Gross profit.............................................. 35.3 38.3 32.4
Operating expenses:
Selling and marketing..................................... 8.2 8.5 9.1
General and administrative................................ 16.0 24.0 26.1
Restructuring charge...................................... -- 1.4 0.2
Separation costs.......................................... -- -- 1.4
Failed merger costs....................................... -- 0.5 0.8
Merger related costs...................................... 2.2 1.3 0.1
----- ----- -----
Operating income (loss)..................................... 8.9 2.5 (5.3)
Other income (expense):
Interest expense.......................................... (1.7) (1.6) (2.2)
Interest income........................................... 0.5 0.1 0.1
Other, net................................................ 0.1 (0.1) (0.1)
----- ----- -----
Income (loss) from continuing operations before provision
for income taxes and cumulative effect of accounting
change.................................................... 7.8 1.0 (7.4)
Provision for income taxes.................................. 2.8 0.8 0.9
----- ----- -----
Income (loss) from continuing operations before cumulative
effect of accounting change............................... 5.0 0.2 (8.3)
Loss from operations and estimated loss on disposal of
discontinued Voice and Data Communications Group, net..... (0.5) (0.6) (2.6)
----- ----- -----
Income (loss) before cumulative effect of accounting
change.................................................... 4.5 (0.4) (10.9)
Cumulative effect of accounting change...................... -- (0.3) --
----- ----- -----
Net income (loss)........................................... 4.5% (0.6)% (10.9)%
===== ===== =====
2000 COMPARED TO 1999
NET SALES. Net sales for the year ended December 31, 2000 increased $5.4
million, or 2%, from $305.2 million in 1999 to $310.6 million in 2000.
Security Products and Services Group. Net sales for the Security Products
and Services Group decreased $13.0 million, or 10%, from $124.0 million in 1999
to $111.0 million in 2000. The decrease primarily related to a decrease in net
sales of military products and services of $7.7 million, or 19%, from
23
25
$39.6 million in 1999 to $31.9 million in 2000 as a result of the completion in
the fourth quarter of 1999 of a contract with the U.S. Military to supply 738
armored High Mobility Multi-Purpose Wheeled Vehicles ("HMMWVs") to the U.S. Army
and U.S. Air Force (the "738 Contract"). The 738 Contract, which began in 1998,
resulted in higher levels of production and net sales due to an aggressive
delivery schedule required by the U.S. Air Force. In 2000, Kroll-O'Gara's
military product sales were based on two new contracts for 245 and 360
Up-Armored HMMWVs, which did not provide for an aggressive delivery schedule.
Also included in net sales for the Security Products and Services Group are
sales of commercial armoring products and security services, which decreased
$5.3 million, or 6%, from $84.4 million in 1999 to $79.1 million in 2000. The
decrease primarily resulted from a decrease in net sales for commercial armoring
products of $6.4 million, or 9%, from $70.9 million in 1999 to $64.5 million in
2000 due to a lag between completing a large U.S. government contract in the
first quarter of 2000 and beginning a new contract during the third quarter of
2000. In 1999, net sales of commercial armoring products were driven by
production under this contract to produce 300 armored vehicles. Partially
offsetting the decrease in net sales of commercial armoring products was an
increase in net sales for security services of $1.1 million, or 8%, from $13.5
million in 1999 to $14.6 million in 2000. The increase in net sales for security
services was primarily the result of continued growth of the Group's driver
training operations in 2000.
Investigations and Intelligence Group. Net sales for the Investigations and
Intelligence Group increased $18.7 million, or 11%, from $176.8 million in 1999
to $195.6 million in 2000. A portion of this increase was a result of the
Buchler Phillips acquisition completed for the Group in the second quarter of
1999. Excluding purchase acquisitions, sales increased $11.9 million. This
increase primarily stemmed from internal growth in the Group's Business
Investigations and Intelligence and Corporate Services practices. Net sales from
the domestic Business Investigations and Intelligence practice increased $5.0
million, or 10%, from $51.0 million in 1999 to $56.0 million in 2000, excluding
acquisitions. Net sales related to Corporate Services increased $2.3 million, or
5%, from $42.6 million in 1999 to $ 44.9 million in 2000, excluding
acquisitions. The Group experienced slower net sales in the fourth quarter of
2000 due to a general softening in investment banking transactions.
Information Security Group. Net sales for the Information Security Group
decreased $0.3 million, or 7%, from $4.3 million in 1999 to $4.0 million in
2000. The decrease in net sales was primarily the result of Kroll-O'Gara's sale
of preferred stock related to this entity in October 2000. Net sales subsequent
to the private equity offering are excluded from Kroll-O'Gara's results of
operations. See Note 6 to the Notes to Financial Statements for more information
on the sale of preferred stock by the Information Security Group.
COST OF SALES AND GROSS PROFIT. Cost of sales increased $21.5 million, or
11%, from $188.4 million in 1999 to $209.9 million in 2000. The increase in cost
of sales was partially due to the Buchler Phillips acquisition completed in the
second quarter of 1999. Excluding this acquisition, cost of sales increased
$17.6 million. Gross profit as a percentage of net sales was 38.3% and 32.4% for
1999 and 2000, respectively.
Gross margins for the Security Products and Services Group decreased
approximately 10.2 percentage points from 28.8% in 1999 to 18.6% in 2000. In the
second quarter of 2000, new vehicle models caused additional costs as prototypes
for the new models had to be completed before full production could begin. All
prototype costs were expensed as incurred. In 1999, there were minimal prototype
expenses. In addition, in the third quarter of 2000, the Security Products and
Services Group elected to take a physical inventory at the end of the period in
anticipation of the separation of Kroll-O'Gara and also took steps to ensure the
integrity of data for the reimplementation of its enterprise system. These
efforts, as well as the recognition of higher overhead costs due to lower
production in the period, resulted in total additional costs of approximately
$2.6 million. These costs negatively affected cost of goods sold and
consequently the gross profit margin. The decrease in production was primarily
due to a lag between completing one U.S. government contract at the end of the
first quarter of 2000 and beginning a new contract during the third quarter of
2000. Production under the new contract was lower than anticipated in the fourth
quarter due to delays in obtaining key components and raw materials, which
negatively affected the gross profit margins in the fourth quarter.
24
26
Gross margin decreased approximately 3.4 percentage points from 44.5% in
1999 to 41.1% in 2000 for the Investigations and Intelligence Group. The
decrease in gross margin was due to increased fixed costs associated with
increased employee compensation and benefits as well as increased subcontractor
fees associated with generating professional fee revenue.
Gross margin for the Information Security Group decreased from 52.9% in
1999 to a negative 10% in 2000. Gross margin was negatively impacted in 2000 by
a continuing focus on development of this Group's service capabilities and an
increase in professional personnel to support the establishment of a firm
customer base.
OPERATING EXPENSES. Operating expenses increased $8.0 million, or 7%, to
$117.1 million in 2000 from $109.1 million in 1999. This increase was despite a
decrease in non-recurring expenses of $2.3 million, from $10.0 million in 1999
to $7.7 million in 2000. Non-recurring charges in 2000 consisted of
approximately $2.5 million of costs associated with the failed recapitalization
merger with Blackstone as well as $4.2 million of costs associated with the
separation of Kroll-O'Gara's Security Products and Services Group and
Investigations and Intelligence Group. In addition, $0.4 million of costs
related to additional merger integration costs associated with the acquisitions
completed in 1999 and $0.7 million of costs related to a restructuring charge
incurred by the Security Products and Services Group in order to reduce costs in
future periods. In 1999, non-recurring expenses included $4.1 million of
merger-related expenses primarily for the Background America merger as well as a
restructuring charge of $4.4 million.
Excluding non-recurring expenses, operating expenses increased $10.3
million in 2000. Approximately $1.6 million of this increase was due to
operating expenses incurred by Buchler Phillips in the first quarter of 2000.
The Buchler Phillips acquisition was not completed until the second quarter of
1999 and its operating expenses are not included in Kroll-O'Gara's historical
financial information until the effective date of the acquisition, April 1,
1999. Also included in the operating expense increase were increases of $2.5
million for depreciation and amortization of fixed and intangible assets,
including goodwill, and $2.4 million for bad debt expense. In the third quarter
of 1999, the Investigations and Intelligence Group recovered approximately $1.6
million of a previously written off bad debt which offset a portion of the
Group's bad debt expense recognized in 1999. In 2000, slow customer payments
prompted Kroll-O'Gara's Investigations and Intelligence Group to increase its
reserve for uncollectible accounts receivable. In addition, operating expenses
in the Information Security Group increased $5.1 million as a result of the
continuing focus on development of this Group's software products capabilities,
including an increase in professional and support personnel to support the
increased development.
As a percent of net sales, operating expenses, before non-recurring
charges, increased from 32.5% in 1999 to 35.2% in 2000. As mentioned previously,
the increase in operating expenses as a percentage of net sales primarily was
attributable to increased fixed costs to develop the Information Security
Group's software products capabilities and to the increases related to
depreciation, amortization and bad debt expenses.
INTEREST EXPENSE. Interest expense increased $2.0 million, or 41%, to $6.7
million in 2000, compared to $4.7 million in 1999. This increase was the result
of increased borrowings on Kroll-O'Gara's revolving credit facility. For most of
the first six months of 1999, Kroll-O'Gara had excess funds as a result of a
public offering of stock completed in May 1998 and no borrowings were required
on the revolving credit facility until the purchase of Buchler Phillips on June
3, 1999. In 2000, increased borrowings on Kroll-O'Gara's revolving credit
facility primarily related to the continuing funding of the working capital
needs of the Information Security Group, costs of approximately $4.2 million
related to the separation of Kroll-O'Gara's two principal operating groups and
failed merger costs of $2.5 million.
PROVISION FOR INCOME TAXES. The provision for income taxes was $2.7 million
in 2000 in comparison with $2.4 million in 1999. The effective tax rates for the
periods were 80% in 1999 and 12% in 2000. In 2000, Kroll-O'Gara recorded tax
expense despite the pre-tax loss incurred from operations. The tax provision
resulted from the non-deductibility of certain expenses, including the failed
separation costs and the litigation settlement with the U.S. Department of
Justice, and from income in certain domestic and foreign jurisdictions.
Additionally, certain domestic and foreign entities realized losses in 2000 from
which Kroll-
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O'Gara was not able to benefit for tax purposes. A valuation allowance related
to all of these net operating loss carryforwards was provided for in 2000.
DISCONTINUED OPERATIONS. The loss from operations of the discontinued Voice
and Data Communications Group increased from $1.8 million in 1999 to $3.2
million in 2000. This increase was due to an increase in the Group's inventory
reserve resulting from excess stock of technologically outdated
telecommunications equipment as well as an increase in the allowance for
doubtful accounts due to slow paying customers. Due to the uncertainty
surrounding the future realizability of the tax benefit associated with the
Voice and Data Communication Group's losses, management concluded that a
valuation allowance for the entire tax benefit was required in both 1999 and
2000. In addition, management estimated a loss on disposal of $5.0 million which
includes the estimated future results of operations through the estimated date
of the shutdown. Major components of the estimated loss on disposal include a
writedown of related goodwill and other asset balances of $4.2 million and
estimated severance, operating and shutdown costs of $0.8 million.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Kroll-O'Gara had
previously capitalized costs associated with the start-up of activities,
including pre-operating costs, organization costs and other start-up costs.
These capitalized costs were amortized over periods ranging from one to five
years. The capitalized amount, $1.2 million before tax, was expensed in 1999 in
accordance with the American Institute of Certified Public Accountants Statement
of Position 98-5, "Reporting on the Cost of Start-Up Activities." The amount
expensed is shown net of applicable tax benefit of $0.4 million.
NET INCOME (LOSS). Net loss increased $32.0 million from a loss of $1.9
million in 1999 to a loss of $33.9 million in 2000. The increase in net loss was
due primarily to a decrease in gross profit of $16.1 million, increases in
operating expenses of $8.0 million and increases in losses associated with the
discontinued Voice and Data Communications Group of $6.5 million.
1999 COMPARED TO 1998
NET SALES. Net sales for the year ended December 31, 1999 increased $44.5
million, or 17%, from $260.7 million in 1998 to $305.2 million in 1999.
Security Products and Services Group. Net sales for the Security Products
and Services Group decreased $19.0 million, or 13%, from $143.0 million in 1998
to $124.0 million in 1999. The decrease related to a decrease in net sales of
military products and services of $20.2 million, or 34%, from $59.8 million in
1998 to $39.6 million in 1999. In April 1998, Kroll-O'Gara began work on the 738
Contract. In addition, Kroll-O'Gara continued work on a previous contract with
the U.S. Military for 360 Up-Armored HMMWVs through July of 1998. The
combination of production on the two contracts as well as an aggressive delivery
schedule required by the U.S. Air Force relating to the 738 Contract resulted in
unusually high levels of production and net sales in 1998.
Also included in net sales for the Security Products and Services Group are
sales of commercial armoring products and services, which increased $1.2
million, or 1%, from $83.2 million in 1998 to $84.4 million in 1999. Increases
in net sales for security services accounted for the increase in commercial net
sales as these services increased $4.1 million, or 43%, for the year ended
December 31, 1999 in comparison with 1998. The increase in net sales of security
services was primarily the result of increased sales associated with the
introduction of driver training operations in Texas and Mexico in 1999.
Investigations and Intelligence Group. Net sales for the Investigations and
Intelligence Group increased $59.3 million, or 50%, from $117.6 million in 1998
to $176.8 million in 1999. A substantial portion of this increase was a result
of the acquisitions of Lindquist Avey, InPhoto, Corplex, Fact Finders, Holder
and Buchler Phillips. These acquisitions increased Kroll-O'Gara's presence in
Asia, Europe and Latin America and strengthened the Business Investigations and
Analysis and Financial Services practices on a global scale. Excluding net sales
reported by these acquired entities, net sales increased $14.3 million, or 14%,
from $100.7 million 1998 to $115.0 million in 1999. This increase primarily
stemmed from internal growth in the Group's Corporate Services practices.
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Information Security Group. Net sales for the Information Security Group
increased $4.2 million from $0.1 million in 1998 to $4.3 million in 1999. The
Information Security Group initiated operations in February 1998 but had minimal
sales as it was involved in start-up activities for most of the year.
COST OF SALES AND GROSS PROFIT. Cost of sales increased $19.8 million, or
12%, from $168.6 million in 1998 to $188.4 million in 1999. The increase in cost
of sales was due to the acquisitions completed in 1998 and 1999. Excluding these
acquisitions, cost of sales decreased $5.3 million. Gross profit as a percentage
of net sales was 35.3% and 38.3% for 1998 and 1999, respectively. The overall
increase in gross profit as a percent of net sales was primarily the result of a
shift in sales mix in which higher margin Investigations and Intelligence Group
and Information Security Group net sales increased as a percentage of total net
sales.
Gross margins for the Security Products and Services Group were 28.9% and
28.8% in 1998 and 1999, respectively. Gross margin increased as a result of a
planned shift in sales mix in the Security Products and Services Group's
domestic operations to increased commercial armoring sales and military spare
parts sales, both of which have higher margins. However, this gross margin
increase was almost completely offset by poor gross margin performance
experienced in all foreign operations as a result of competitive pricing
pressures and pricing concessions necessitated by foreign economic conditions. A
transition to higher levels of armoring in Latin and South America also slowed
sales and required some inventory writeoffs. Additionally, currency devaluations
in South America hurt margins and slowed sales.
Gross margins for the Investigations and Intelligence Group were 43.9% and
44.5% in 1998 and 1999, respectively. The increase in gross margin was primarily
a result of the acquisition of Buchler Phillips which historically has had
higher margins than the rest of the other Investigations and Intelligence
businesses.
Gross margin at the Information Security Group reflected a full year of
operations and was 52.9% in 1999.
OPERATING EXPENSES. Operating expenses increased $40.2 million, or 58%, to
$109.1 million in 1999 from $68.9 million in 1998. The increase was partially
due to the acquisitions completed in 1998 and 1999. Operating expenses of
acquired companies represented $24.7 million of total operating expenses in 1999
and $6.4 million of total operating expenses in 1998. Excluding operating
expenses of these acquisitions, operating expenses increased $21.9 million net
of a $1.5 million recovery of a previously written off bad debt. Included in
this increase was a restructuring charge of $4.4 million and $5.0 million for
depreciation and amortization of intangible assets including goodwill. In
addition, approximately $5.0 of the increase in expenses related to the
additional legal, accounting, insurance and information systems costs required
to administer the growth experienced by Kroll-O'Gara since the beginning of
1998. A key component of these costs was the implementation of new enterprise
systems at one of the Security Products and Services Group's subsidiaries and at
one of the Investigation and Intelligence Group's subsidiaries as well as new
corporate financial reporting software. The remaining increase, $9.0 million,
related to overall compensation and benefits increases, an increase in the level
of personnel and other administrative, marketing and facility costs.
In 1998, Kroll-O'Gara recorded approximately $5.7 million in expenses
related to the mergers with Laboratory Specialists, Schiff, Securify and
Background America. In 1999, Kroll-O'Gara recorded approximately $4.1 million in
merger and integration related expenses associated with those acquisitions. In
addition, Kroll-O'Gara recorded approximately $1.6 million in failed merger
expenses associated with the failed recapitalization merger with Blackstone. See
Note 2 to the Notes to Consolidated Financial Statements for more information on
the Blackstone transaction.
As a percent of net sales, operating expenses, before merger related,
restructuring and failed merger costs, were 24.2% in 1998 and 32.5% in 1999. As
mentioned previously, the increase in operating expenses as a percentage of net
sales was primarily a result of increased fixed costs to administer the growth
experienced by Kroll-O'Gara since the beginning of 1998.
INTEREST EXPENSE. Interest expense increased $0.4 million, or 8%, to $4.7
million in 1999, compared to $4.4 million in 1998. With the completion of the
Offering, a significant portion of Kroll-O'Gara's indebtedness was repaid
(approximately $14.8 million). As a result, Kroll-O'Gara experienced lower
interest expense starting in the third quarter of 1998 and continuing through
the first quarter of 1999. However, due
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to the significant number of acquisitions completed in the second half of 1998
and first half of 1999, remaining cash from the Offering was utilized.
Kroll-O'Gara began to draw on its $25.0 million credit facility in 1999,
primarily to fund the $12.0 million cash portion of the Buchler Phillips
purchase price and to fund overall growth and working capital, particularly the
additional cash needs of the Information Security Group.
INTEREST INCOME. Interest income decreased $0.9 million, or 68%, to $0.4
million in 1999, compared to $1.3 million in 1998. Net proceeds of the Offering
that were not used to repay debt were invested in short-term instruments with
maturities of three months or less. The return on these investments was
responsible for the increased interest income in 1998. In 1999, the remaining
investments were liquidated to fund acquisitions and increases in working
capital needs as a result of acquisitions and growth.
PROVISION FOR INCOME TAXES. The provision for income taxes was $2.4 million
in 1999 in comparison with $7.4 million in 1998. The effective tax rates for the
periods were 36% in 1998 and 80% in 1999. In 1999, Kroll-O'Gara recorded taxes
at an effective rate significantly higher than it had previously experienced
largely due to the non-deductibility of some of the merger related expenses
incurred in the period as well as increases in nondeductible goodwill and
intangible amortization. The 1999 tax provision also reflected the favorable
impact of the reversal of the valuation allowance related to certain foreign
jurisdiction net operating loss carryforwards, net of other foreign losses that
did not have a current benefit. In 1998, Kroll-O'Gara determined that certain of
the Kroll Holdings merger expenses qualified for future deductibility which
favorably impacted the 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 certain foreign net operating
loss carryforwards. Certain foreign jurisdictions realized losses in 1999 from
which Kroll-O'Gara was not able to benefit for tax purposes.
DISCONTINUED OPERATIONS. The loss from operations of the discontinued Voice
and Data Communications Group increased $0.5 million from $1.3 million in 1998
to $1.8 million in 1999. This increase was due to an increase in the Group's
inventory reserve which resulted from technology changes in the
telecommunications market effectively reducing demand and lowering sales prices
for certain items included in the Group's inventory. Due to the uncertainty
surrounding the future realizability of the tax benefit associated with the
Voice and Data Communication Group's losses, management concluded that a
valuation allowance for the entire tax benefit was required in both 1998 and
1999.
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE. Kroll-O'Gara had
previously capitalized costs associated with the start-up of activities,
including pre-operating costs, organization costs and other start-up costs.
These capitalized costs were amortized over periods ranging from one to five
years. The capitalized amount, $1.2 million before tax, was expensed in 1999 in
accordance with the American Institute of Certified Public Accountants Statement
of Position 98-5, "Reporting on the Cost of Start-Up Activities". The amount
expensed is shown net of applicable tax benefit of $0.4 million.
NET INCOME (LOSS). Net income decreased $13.7 million from $11.8 million in
1998 to a loss of $1.9 million in 1999. The decrease was due primarily to a
$40.2 million increase in operating expenses, partially offset by $24.7 million
in increased gross profit and a decreased provision for income taxes, as
discussed above.
LIQUIDITY AND CAPITAL RESOURCES
General. Kroll-O'Gara historically has met its operating cash needs by
utilizing borrowings under its credit arrangements and net proceeds from public
offerings to supplement cash provided by operations, excluding non-cash charges
such as depreciation and amortization.
Credit facilities and senior notes. On March 30, 2001, Kroll-O'Gara entered
into an amended and restated loan agreement, which expires on May 31, 2002 if
not terminated earlier as described below, to provide for a revolving credit
facility that initially amounts to $40.0 million. The agreement also provides
for a letter of credit facility of approximately $1.4 million supporting the
Company's Economic Development Revenue Bonds and up to $6.0 million of
transactional letters of credit. Letters of credit cannot be issued or
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renewed with a maturity date beyond May 31, 2002. The agreement is secured by
substantially all assets of Kroll-O'Gara and its subsidiaries and a pledge of
the stock of essentially all the subsidiaries, all of which jointly and
severally guarantee obligations under the agreement. The revolving credit
facility includes required quarterly reductions of approximately $1.1 million on
each of June 30 and September 30, 2001 and approximately $1.7 million on each of
December 31, 2001 and March 31, 2002 in the amount that may be borrowed under
the facility and, if necessary, corresponding principal repayments to the
adjusted levels. In addition, the net proceeds from any lender-approved sale of
assets in excess of $1.0 million per transaction or $2.0 million per fiscal year
must be paid proportionately to the revolving credit facility lender and to the
holders of Kroll-O'Gara's outstanding $35.0 million principal amount of senior
notes (discussed below), with a corresponding reduction in the total permitted
borrowings under the revolving credit facility. This includes the net proceeds
from the sale to Armor and any proceeds from additional sales of Kroll-O'Gara's
stock ownership in Securify or other assets in excess of the threshold amounts.
Borrowings under Kroll-O'Gara's line of credit were approximately $22.8 million
and $36.5 million at December 31, 1999 and 2000, respectively, and $36.4 million
at March 31, 2001.
In connection with the amended credit facility, Kroll-O'Gara entered into
amended and restated agreements with the holders of its senior notes. These
agreements also are secured by substantially all assets of Kroll-O'Gara and its
subsidiaries and a pledge of the stock of essentially all the subsidiaries and
are jointly and severally guaranteed by essentially all the subsidiaries. The
amended and restated senior note agreements require total principal payments of
$864,200 on each of June 30 and September 30, 2001 and of $1,296,300 on each of
December 31, 2001 and March 31, 2002. The balance is payable at maturity in May
2003, but maturity will be accelerated to May 31, 2002 if Kroll-O'Gara's
revolving credit agreement is not renewed and, as described below, further
accelerated upon closing of the transaction with Armor.
The amended bank loan and senior note agreements contain substantially
identical financial covenants which, among other restrictions, require the
maintenance of certain financial ratios and other financial requirements,
including an interest coverage ratio, net worth minimums and minimum quarterly
EBITDA that requires Kroll-O'Gara to effectively break even before taxes and to
generate EBITDA of $6.0 million per quarter. The agreements also impose
limitations on mergers, acquisitions, stock redemptions, additional indebtedness
and capital expenditures. The loan agreement does not permit the declaration or
payment of any dividend, other than stock dividends. Kroll-O'Gara was not in
compliance with certain of the covenants under the prior bank loan agreement as
of December 31, 2000. Had the lender not amended and restated the agreement, all
amounts outstanding under the credit agreement would have been immediately
payable.
The bank loan agreement and senior loan agreements were further amended as
of April 20, 2001 in connection with Kroll-O'Gara's agreement to sell the
Security Products and Services Group to Armor. The March 30, 2001 agreements
required interest on advances under the revolving credit facility and on the
senior notes at the greater of 8.56% or the prime rate plus 1.5% (9.5% at March
31, 2001). Effective April 20, 2001 the interest rate under all of the
agreements was changed to the greater of (a) 8.56% or (b) prime plus 1.5%, plus
0.5% times the number of 30-day periods which have expired since April 20, 2001
(or, if less, the highest rate allowed by law).
Kroll-O'Gara's agreement with Armor provides that it will receive $53.0
million at closing, $15.0 million of which is expected to be paid in Armor
stock. Of the $38.0 million cash, $3.0 million will be used for transaction
costs and certain other payables. The remaining cash must be paid immediately
56.79% to the revolving credit facility lender and 43.21% to the senior note
holders. During the 60 days following closing of the transaction with Armor, any
proceeds from the sale of the Armor stock also must be paid immediately to the
revolving credit facility lender and senior note holders in the same
percentages. All remaining outstanding amounts under the revolving credit
facility and the senior notes are due 60 days after closing.
Kroll-O'Gara has been in discussions with another lender to provide
financing subsequent to the sale of the Security Products and Services Group to
Armor. After payment of the net proceeds from the sale of the Security Products
and Services Group to the revolving credit facility lender and the senior note
holders, Kroll-O'Gara expects there to be approximately $22 million remaining
outstanding to these parties which
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must be repaid no later than 60 days after closing. Kroll-O'Gara believes that
it can obtain a credit facility of approximately $35 million at interest rates
comparable to the rate under the March 30, 2001 amendment to its existing credit
facilities. Therefore, the anticipated financing under discussion should be
adequate to meet the ongoing needs of Kroll-O'Gara. If the sale of the Security
Products and Services Group to Armor is not consummated, Kroll-O'Gara believes
it can continue to remain in compliance with all the terms and conditions of the
bank loan agreement and senior note agreements for the remainder of their terms.
However, based on the increasing interest rates included in the amended bank
loan agreement and senior note agreements, Kroll-O'Gara would endeavor to obtain
new financing if the sale to Armor is not consummated.
Effective June 3, 1999, with the acquisition of Buchler Phillips,
Kroll-O'Gara acquired a demand note with maximum borrowings of pound 2.5
million. The demand note bears interest at the Bank of England's base rate plus
1.0%. Maximum borrowings permitted pursuant to this demand note are $4.0
million. Borrowings outstanding pursuant to this demand note were approximately
$3.4 million and $2.8 million, respectively, as translated at December 31, 1999
and December 31, 2000.
Cash flows from operating activities. Operating activities provided $1.1
million in net cash in 2000 in comparison with net cash used of $5.3 million in
1999. In 1999, cash was used primarily to fund working capital investments
offset by net income. In 2000, cash was provided primarily by reductions in
working capital investments.
Cash flows from investing activities. In 2000, Kroll-O'Gara incurred
capital expenditures of $12.6 million, primarily for upgrades of general
information systems as well as additional leasehold improvements and office
furniture and fixtures related to new office space in the Investigations and
Intelligence Group. In 1999, Kroll-O'Gara incurred capital expenditures of $19.1
million primarily related to the acquisition and implementation of two
enterprise systems, one at its Security Products and Services Group and one at
its Investigations and Intelligence Group. In 1999, Kroll-O'Gara sold $13.3
million of its marketable securities in order to fund its increased capital
expenditure requirements. Additions to databases totaled $3.9 million and $4.4
million for the years ended December 31, 1999 and 2000, respectively. In
addition to capital expenditures, 1999 investing activities included the
acquisition of Buchler Phillips which required cash of approximately $12.0
million, net of cash acquired.
The levels of Kroll-O'Gara's capital expenditures were in excess of the
amounts that were permitted under its credit agreement in 1999 and 2000. Had the
lender not amended and restated the loan agreement as previously discussed, all
amounts outstanding under the credit agreement would have been immediately
payable. Capital expenditures, excluding databases, are limited to $8.0 million
in 2001 under Kroll-O'Gara's credit and loan agreements.
Cash flows from financing activities. Net cash provided by financing
activities was $27.3 million and $12.2 million for the years ended December 31,
1999 and 2000, respectively. In both periods, cash was provided by borrowings
under bank lines of credit, net of repayments of long term debt. In 1999 cash
was also provided from proceeds from the exercise of stock options and warrants.
Net cash used in discontinued operations was less than $0.1 million in 2000
compared with $0.7 million in 1999. Cash used in 1999 reflects increases in net
cash provided by working capital items offset by the Voice and Data
Communications Group's net loss.
Foreign operations. Kroll-O'Gara attempts to mitigate the risks of doing
business in foreign countries by separately incorporating its operations in
those countries, maintaining reserves for credit losses, maintaining insurance
on equipment to protect against losses related to political risks and terrorism,
and using financial instruments to hedge Kroll-O'Gara's risk from translation
gains and losses.
Kroll-O'Gara utilizes derivative financial instruments, in the form of
forward contracts, to effectively hedge a specific portion of its exposure to
certain foreign currency rate fluctuations on its net investment in two foreign
subsidiaries. At December 31, 2000 ten such contracts, maturing between January
2001 and December 2002 were outstanding. The notional amount, together with
amortized premium, and the fair market value associated with these forward
contracts were $14.7 million and $0.8 million, respectively. If Statement of
Financial Accounting Standards No. 133 had been applied to all net investment
hedge contracts in place at December 31, 2000, the effect would have been to
decrease assets by approximately $0.2 million
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with an offsetting amount recorded in the accumulated other comprehensive income
(loss) component of shareholders' equity. Kroll-O'Gara does not hold or issue
derivative financial instruments for trading purposes.
Quarterly fluctuations. Kroll-O'Gara's operations may fluctuate on a
quarterly basis as a result of the timing of contract costs and revenues of its
Security Products and Services Group, particularly from its military and
governmental contracts which are generally awarded on a periodic and/or sporadic
basis. Kroll-O'Gara generally does not have long-term contracts with its clients
in its Investigations and Intelligence Group and its ability to generate net
sales is dependant upon obtaining many new projects each year, most of which are
of a relatively short duration. Period-to-period comparisons within a given year
or between years may not be meaningful or indicative of operating results over a
full fiscal year.
New accounting pronouncements. In June 1998, the Financial Accounting
Standards Board (FASB) 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 net investment
hedge contracts in place. These instruments have historically qualified for
hedge accounting throughout the periods presented in the accompanying
consolidated financial statements. Kroll-O'Gara has adopted the provisions of
SFAS 133 beginning on January 1, 2001. Kroll-O'Gara has designated these
contracts as net investment hedges under SFAS 133 and, as such, the accounting
under this new statement will approximate its previous accounting. Based on
current hedge instruments and designations, Kroll-O'Gara will account for
changes in the fair value of its net investment hedge contracts (that is, based
on the forward exchange rate) with the related changes in fair value reported in
other comprehensive income (loss). Kroll-O'Gara does not expect that it will
realize any material charges to earnings pursuant to SFAS 133. See Note 16 to
the Notes to Consolidated Financial Statements. However, in the event of a
future change in facts or in the underlying net investment hedge relationships,
Kroll-O'Gara could experience future volatility in earnings.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 (Interpretation No. 44), "Accounting for Certain
Transactions involving Stock Compensation - an interpretation of APB Opinion
25." Interpretation No. 44 became effective July 1, 2000. Interpretation No. 44
clarifies the application of APB Opinion 25 for certain matters, specifically
(a) the definition of an employee for purposes of applying APB Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. See Note 6 to the Notes
to Consolidated Financial Statements.
The Emerging Issues Task Force (EITF) Issue No. 00-20, "Accounting for
Costs Incurred to Acquire or Originate Information for Database Content and
Other Collections of Information," states that the EITF is considering different
views for the accounting for database costs. One of the views would require
Kroll-O'Gara to expense some or all of the database costs that Kroll-O'Gara
currently capitalizes and amortizes, which is currently an acceptable
alternative. Adoption of a different method of accounting for database costs
could have a material impact on Kroll-O'Gara's financial position and results of
operations. To date, the EITF has not made any official determinations on this
issue.
Forward-Looking Statements. This quarterly report contains statements which
Kroll-O'Gara believes are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. These statements are made
particularly in this Management's Discussion and Analysis of Financial Condition
and Results of Operations, but also appear elsewhere in this document.
Forward-looking statements can be identified by the use of language such as
"may," "will," "expect," "anticipate," "estimate," "continue" or other similar
words. Such statements are based upon management's estimates, assumptions and
projections and are subject to substantial risks and uncertainties that could
cause actual results to differ materially from those set forth in the
forward-looking statements. Factors that could cause actual results to differ
materially
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from those in the forward-looking statements include, among other things:
contract delays, reductions or cancellations; cost overruns with regard to fixed
price contracts; problems and costs associated with integrating past and future
business combinations; various political and economic risks of conducting
business outside the United States, including foreign economic conditions and
currency rate fluctuations; changes in laws and regulations; adjustments
associated with percentage-of-completion accounting; inability of subcontractors
to perform on schedule and meet demand; unexpected competitive pressures
resulting in lower margins and volumes; uncertainties in connection with
start-up operations and opening new offices; higher-than-anticipated costs of
financing the business; loss of senior personnel; and changes in the general
level of business activity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Foreign Operations." In addition, the information set
forth in Note 16 "Fair Value of Financial Instruments" to Kroll-O'Gara's 2000
Consolidated Financial Statements is incorporated herein by reference.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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 (Note 1) and subsidiaries as of December 31, 1999 and 2000
and the related consolidated statements of operations, shareholders' equity and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with 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 provide a reasonable basis
for our opinion.
In our opinion, based on our audits, 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, 1999
and 2000 and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States.
As explained in Note 3(q) to the consolidated financial statements,
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
April 20, 2001
33
35
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 2000
1999 2000
------------ ------------
ASSETS (NOTES 10 AND 11)
CURRENT ASSETS:
Cash and cash equivalents................................. $ 13,030,534 $ 8,438,124
Trade accounts receivable, net of allowance for doubtful
accounts of $3,663,786 and $5,701,429 in 1999 and 2000,
respectively (Notes 3 and 7)........................... 59,261,184 65,266,388
Unbilled revenues (Note 3)................................ 18,033,811 19,994,597
Related party receivables (Note 9)........................ 2,095,810 2,475,006
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 7)......................... 24,159,724 8,634,134
Inventories (Note 7)...................................... 21,287,658 18,641,172
Prepaid expenses and other................................ 11,284,003 9,819,306
Deferred tax asset (Note 8)............................... 823,831 --
Net current assets of discontinued operation (Note 5)..... 7,137,550 1,879,237
------------ ------------
Total current assets........................................ 157,114,105 135,147,964
------------ ------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 3 and 11):
Land...................................................... 2,164,197 2,544,465
Buildings and improvements................................ 8,586,985 8,406,949
Leasehold improvements.................................... 7,446,487 8,037,866
Furniture and fixtures.................................... 9,947,051 10,707,204
Machinery and equipment................................... 36,717,974 39,064,853
Construction-in-progress.................................. -- 1,326,425
------------ ------------
64,862,694 70,087,762
Less -- accumulated depreciation.......................... (26,110,142) (32,738,578)
------------ ------------
38,752,552 37,349,184
------------ ------------
DATABASES, net of accumulated amortization of $26,187,348
and $29,759,496 in 1999 and 2000, respectively (Note 3)... 9,696,162 10,204,294
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE
ASSETS, net of accumulated amortization of $8,336,265 and
$12,118,945 in 1999 and 2000, respectively (Notes 3 and
4)........................................................ 78,907,738 75,485,901
OTHER ASSETS:
Other assets (Note 7)..................................... 4,269,355 3,561,271
Net non-current assets of discontinued operation (Note
5)..................................................... 2,958,084 --
------------ ------------
95,831,339 89,251,466
------------ ------------
$291,697,996 $261,748,614
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
34
36
THE KROLL-O'GARA COMPANY
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 2000
1999 2000
------------ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving lines of credit (Note 10)....................... $ 26,582,688 $ 39,613,300
Current portion of long-term debt (Note 11)............... 3,737,227 5,138,176
Trade accounts payable.................................... 33,240,883 30,664,595
Related party payables (Note 9)........................... -- 239,145
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 360,725 --
Accrued liabilities (Note 7).............................. 26,190,992 21,156,019
Income taxes currently payable............................ 768,105 1,526,120
Deferred income taxes (Note 8)............................ -- 1,553,038
Customer deposits and deferred revenue.................... 4,191,267 9,543,874
------------ ------------
Total current liabilities......................... 95,071,887 109,434,267
OTHER LONG-TERM LIABILITIES................................. 2,673,092 1,663,626
DEFERRED INCOME TAXES (Note 8).............................. 1,820,815 515,400
LONG-TERM DEBT, net of current portion (Note 11)............ 36,264,163 33,713,848
------------ ------------
Total liabilities................................. 135,829,957 145,327,141
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 12, 15, 17 and 20)
SHAREHOLDERS' EQUITY (Notes 1 and 14):
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 22,414,697 shares issued and
outstanding in 1999 and 2000, respectively............. 222,555 224,147
Additional paid-in-capital................................ 170,101,929 169,467,255
Retained deficit.......................................... (12,639,574) (46,583,887)
Deferred compensation..................................... (1,629,893) (337,043)
Accumulated other comprehensive loss...................... (186,978) (6,348,999)
------------ ------------
Total shareholders' equity........................ 155,868,039 116,421,473
------------ ------------
$291,697,996 $261,748,614
============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated balance sheets.
35
37
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000
------------ ------------ ------------
NET SALES................................................. $260,704,672 $305,168,951 $310,602,195
COST OF SALES............................................. 168,586,556 188,392,159 209,918,021
------------ ------------ ------------
Gross profit..................................... 92,118,116 116,776,792 100,684,174
OPERATING EXPENSES:
Selling and marketing................................... 21,338,962 25,840,027 28,272,472
General and administrative.............................. 41,821,029 73,254,967 81,107,429
Failed separation costs (Note 2)........................ -- -- 4,194,188
Failed merger related costs (Note 2).................... -- 1,562,331 2,490,923
Merger related costs (Note 4)........................... 5,727,358 4,069,089 357,279
Restructuring charges (Note 7).......................... -- 4,363,566 685,620
------------ ------------ ------------
Operating expenses............................... 68,887,349 109,089,980 117,107,911
------------ ------------ ------------
Operating income (loss).......................... 23,230,767 7,686,812 (16,423,737)
OTHER INCOME (EXPENSE):
Interest expense........................................ (4,382,010) (4,747,207) (6,686,969)
Interest income......................................... 1,273,218 409,892 349,318
Litigation settlement (Note 15)......................... -- -- (1,254,457)
Gain from issuance of subsidiary stock (Note 6)......... -- -- 1,616,658
Foreign currency gains (losses) and other, net.......... 342,492 (302,830) (656,340)
------------ ------------ ------------
Income (loss) from continuing operations before
provision for income taxes and cumulative effect of
change in accounting principle...................... 20,464,467 3,046,667 (23,055,527)
Provision for income taxes (Note 8)..................... 7,352,931 2,429,410 2,651,521
------------ ------------ ------------
Income (loss) from continuing operations before
cumulative effect of change in accounting
principle........................................... 13,111,536 617,257 (25,707,048)
Discontinued operations (Note 5):
Net loss from operations of discontinued voice and
data communications group........................... (1,325,471) (1,761,035) (3,199,618)
Estimated net loss on disposal of discontinued voice
and data communications group....................... -- -- (5,037,647)
------------ ------------ ------------
Income (loss) before cumulative effect of change in
accounting principle............................. 11,786,065 (1,143,778) (33,944,313)
Cumulative effect of change in accounting principle, net
of applicable tax benefit of $408,000 in 1999 (Note
3(q))................................................. -- (778,041) --
------------ ------------ ------------
Net income (loss)..................................... $ 11,786,065 $ (1,921,819) $(33,944,313)
============ ============ ============
Income (loss) per share from continuing operations (Note
3(n)):
Basic................................................... $ 0.68 $ 0.03 $ (1.15)
============ ============ ============
Diluted................................................. $ 0.66 $ 0.03 $ (1.15)
============ ============ ============
Net income (loss) per share (Note 3(n)):
Basic................................................... $ 0.61 $ (0.09) $ (1.52)
============ ============ ============
Diluted................................................. $ 0.59 $ (0.09) $ (1.52)
============ ============ ============
Weighted average shares outstanding (Note 3(n)):
Basic................................................... 19,336,580 22,005,632 22,295,391
============ ============ ============
Diluted................................................. 19,908,206 22,005,632 22,295,391
============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
36
38
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
ADDITIONAL
COMPREHENSIVE COMMON PAID-IN- RETAINED DEFERRED
SHARES INCOME (LOSS) STOCK CAPITAL DEFICIT COMPENSATION
---------- ------------- -------- ------------ ------------ ------------
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 14)..... 428,625 4,286 4,473,859 -- --
Issuance of stock in conjunction
with the acquisition of businesses
(Note 4).......................... 767,416 7,674 17,602,830 -- --
Exercise of stock put option (Note
4)................................ (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, including $169,000
of tax provision.............. -- (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 -- -- -- --
---------- ============ -------- ------------ ------------ -----------
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 14)..... 202,614 2,026 3,293,084 -- --
Issuance of stock in conjunction
with acquisition of businesses
(Note 4).......................... 468,024 4,681 8,007,248 246,494 --
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
----------------- ------------
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 14)..... -- 4,478,145
Issuance of stock in conjunction
with the acquisition of businesses
(Note 4).......................... -- 17,610,504
Exercise of stock put option (Note
4)................................ -- (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, including $169,000
of tax provision.............. -- --
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.......... -- --
----------- ------------
BALANCE, December 31, 1998.......... (871,335) 144,496,264
Net issuances of stock under
employee benefit plans, including
related tax benefit (Note 14)..... -- 3,295,110
Issuance of stock in conjunction
with acquisition of businesses
(Note 4).......................... -- 8,258,423
37
39
ADDITIONAL
COMPREHENSIVE COMMON PAID-IN- RETAINED DEFERRED
SHARES INCOME (LOSS) STOCK CAPITAL DEFICIT COMPENSATION
---------- ------------- -------- ------------ ------------ ------------
Deferred compensation related to
restricted stock and stock options
(Note 14)......................... -- -- 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, including $191,000
of tax provision.............. -- 684,357 -- -- -- --
------------
Other comprehensive income...... -- 684,357 -- -- -- --
------------
Comprehensive loss............ -- $ (1,237,462) -- -- -- --
---------- ============ -------- ------------ ------------ -----------
BALANCE, December 31, 1999.......... 22,255,510 222,555 170,101,929 (12,639,574) (1,629,893)
Net issuances of stock under
employee benefit plans, including
related tax benefit (Note 14)..... 115,197 1,152 15,381 -- --
Issuance of restricted stock (Note
14)............................... 43,990 440 43,128 -- --
Deferred compensation related to
restricted stock and stock options
(Note 14)......................... -- -- (693,183) -- 1,292,850
Comprehensive income (loss):
Net loss.......................... -- $(33,944,313) -- -- (33,944,313) --
------------
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment, including $335,000
of tax provision.............. -- (6,162,021) -- -- -- --
------------
Other comprehensive loss........ -- (6,162,021) -- -- -- --
------------
Comprehensive loss............ -- $(40,106,334) -- -- -- --
---------- ============ -------- ------------ ------------ -----------
BALANCE, December 31, 2000.......... 22,414,697 $224,147 $169,467,255 $(46,583,887) $ (337,043)
========== ======== ============ ============ ===========
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS) TOTAL
----------------- ------------
Deferred compensation related to
restricted stock and stock options
(Note 14)......................... -- 1,055,704
Comprehensive income (loss):
Net loss.......................... -- (1,921,819)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment, including $191,000
of tax provision.............. -- --
Other comprehensive income...... 684,357 684,357
Comprehensive loss............ -- --
----------- ------------
BALANCE, December 31, 1999.......... (186,978) 155,868,039
Net issuances of stock under
employee benefit plans, including
related tax benefit (Note 14)..... -- 16,533
Issuance of restricted stock (Note
14)............................... -- 43,568
Deferred compensation related to
restricted stock and stock options
(Note 14)......................... -- 599,667
Comprehensive income (loss):
Net loss.......................... -- (33,944,313)
Other comprehensive income (loss),
net of tax:
Foreign currency translation
adjustment, including $335,000
of tax provision.............. -- --
Other comprehensive loss........ (6,162,021) (6,162,021)
Comprehensive loss............ -- --
----------- ------------
BALANCE, December 31, 2000.......... $(6,348,999) $116,421,473
=========== ============
The accompanying notes to consolidated financial statements are an integral
part of these consolidated statements.
38
40
THE KROLL-O'GARA COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS (NOTE 18)
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
1998 1999 2000
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ 11,786,065 $ (1,921,819) $(33,944,313)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) continuing operations --
Loss from discontinued operations...................... 1,325,471 1,761,035 8,237,265
Depreciation and amortization.......................... 8,859,778 13,828,783 16,350,003
Bad debt expense....................................... 1,242,355 3,298,634 5,735,274
Gain from issuance of subsidiary stock................. -- -- (1,616,658)
Gain on sale of marketable securities.................. (10,469) -- --
Noncash compensation expense........................... 226,074 1,055,704 599,667
Change in assets and liabilities, net of effects of
acquisitions and dispositions --
Receivables -- trade and unbilled...................... (12,083,029) (17,300,323) (17,537,681)
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ (14,510,296) 2,248,373 15,494,298
Inventories, prepaid expenses and other assets......... (4,713,109) (5,135,872) 829,852
Accounts payable and income taxes currently payable.... 2,324,655 (1,182,953) 7,363,868
Billings in excess of costs and estimated earnings on
uncompleted contracts................................ (68,214) 178,069 (360,725)
Amounts due to/from related parties.................... (2,457,191) 731,612 (140,051)
Deferred taxes......................................... (838,668) (1,409,954) 1,071,454
Accrued liabilities, long-term liabilities, customer
deposits and deferred revenue........................ (2,493,890) (1,500,935) (966,473)
------------ ------------ ------------
Net cash provided by (used in) continuing
operations...................................... (11,410,468) (5,349,646) 1,115,780
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment............... (7,362,975) (19,080,914) (12,640,829)
Additions to databases................................... (4,186,924) (3,855,750) (4,397,602)
Acquisitions, net of cash acquired (Note 4).............. (18,595,996) (12,014,287) (470,000)
Sales (purchases) of marketable securities, net.......... (13,262,353) 13,285,322 --
------------ ------------ ------------
Net cash used in investing activities of
continuing operations........................... (43,408,248) (21,665,629) (17,508,431)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under revolving lines of
credit................................................. (559,112) 24,262,221 13,396,419
Proceeds from debt....................................... 284,877 -- --
Payments of long-term debt............................... (13,662,425) (1,345,464) (1,574,366)
Repayment of notes payable -- shareholder................ (176,057) -- --
Net proceeds from issuance of common stock............... 68,336,923 -- --
Purchase and retirement of stock......................... (166,668) -- --
Other.................................................... (548,602) 1,096,137 283,051
Proceeds from exercise of stock options and warrants..... 4,478,145 3,295,110 60,101
------------ ------------ ------------
Net cash provided by financing activities of
continuing operations........................... 57,987,081 27,308,004 12,165,205
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS....... 3,168,365 292,729 (4,227,446)
Effects of foreign currency exchange rates on cash and cash
equivalents.............................................. 106,049 (411,780) (344,096)
Net cash used in discontinued operations................... (1,750,396) (744,896) (20,868)
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, beginning of year............... 12,370,463 13,894,481 13,030,534
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of year..................... $ 13,894,481 $ 13,030,534 $ 8,438,124
============ ============ ============
The accompanying notes to consolidated financial statements
are an integral part of these consolidated statements.
39
41
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1999 AND 2000
(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 Investigations and
Intelligence Group offers business intelligence, investigation and risk
mitigation consulting services. The Security Products and Services Group markets
ballistic and blast protected vehicles and security services. The Information
Security Group offers information and computer security services, including
network and system security review and repair. See Note 6 for a discussion of
the preferred stock sale completed during fiscal 2000 by the Information
Security Group subsidiary. See Note 5 for a discussion of the discontinuance of
the Voice and Data Communications Group.
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 4).
(2) CORPORATE INITIATIVES
Kroll-O'Gara has considered a variety of corporate initiatives within the
periods presented in the accompanying consolidated financial statements. Mergers
and acquisitions are discussed in Note 4.
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 merger were approximately $1.6 million
and $2.5 million for the years ended December 31, 1999 and 2000, respectively,
and consisted primarily of fees for attorneys, accountants, investment bankers,
travel and other related charges.
On April 18, 2000, Kroll-O'Gara announced it would explore structuring a
transaction that would result in the separation of its two principal operating
segments, the Security Products and Services Group and the Investigations and
Intelligence Group, and it would seek an equity investment for its Information
Security Group. In September 2000, the Board of Directors (Board) approved an
agreement and plan of reorganization and dissolution of Kroll-O'Gara, that would
have resulted in the spinoff of net assets into two new public companies. Had
the spinoff been completed, Kroll-O'Gara shareholders, other than members of
management of the separated companies, would have owned shares in both
companies. On April 20, 2001, the Board decided not to pursue this separation
alternative. Costs associated with this proposed separation were approximately
$4.2 million for the year ended December 31, 2000 and consisted primarily of
fees for attorneys, accountants, investment bankers and other related charges.
Kroll-O'Gara does not anticipate any additional expenses related to this now
terminated separation alternative.
On April 20, 2001, in lieu of the proposed separation, the Board approved a
definitive agreement, subject to a limited number of closing conditions, to sell
most of the active companies that comprise the Security Products and Services
Group to Armor Holdings, Inc. (Armor) for up to $56.5 million (see Note 20).
In April 2001, Kroll-O'Gara entered into amended and restated agreements
for its revolving credit facility, letters of credit facility and its senior
notes (see Notes 10 and 11).
40
42
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(3) 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.
Kroll-O'Gara has adopted income statement recognition as its accounting
policy for recognizing any gains and losses on issuances of stock by its
subsidiaries.
(b) Revenue Recognition -- Revenue from intelligence and investigation
services is recognized as the services are performed pursuant to the applicable
contractual arrangements. Revenue related to time and materials arrangements is
recognized in the period in which the services are performed. Revenue from
standard hourly rate engagements is recognized as hours are incurred and revenue
from standard daily rate arrangements is recognized at amounts represented by
the agreed-upon billing amounts 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 impact of any
revisions in estimated total revenues and direct contract costs is recognized in
the period in which they become known. Kroll-O'Gara records either billed or
unbilled accounts receivable based on case-by-case invoicing determinations.
Revenue related to certain contracts for security products (both government
and commercial) that results principally from long-term fixed price contracts 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.
Changes in estimated total contract costs will result in revisions to the
percentage of contract revenue recognized. These revisions are recognized when
determined.
Revenue related to other contracts for security products (both government
and commercial) that results principally from short-term fixed price contracts
is recognized on the completed contract method. Provisions for estimated total
contract losses on any uncompleted contracts are recorded in the period in which
it becomes known that such losses will occur.
Revenue from information security services, which consist of consulting
fees on information security projects, is recognized ratably over the period of
the agreement as services are performed or according to the completed contract
method of accounting for contract revenues, depending on the nature of the
agreement.
(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) 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
41
43
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
doubtful accounts based upon facts surrounding the credit risk of specific
clients and past history. Management does not anticipate incurring losses on its
trade receivables in excess of established allowances.
(e) Property, Plant and Equipment -- Property, plant and equipment are
stated at cost. Depreciation is computed on both straight-line and accelerated
methods over the estimated useful lives of the related assets as follows:
Buildings and improvements.................................. 5-40 years
Furniture and fixtures...................................... 3-10 years
Machinery and equipment..................................... 3-12 years
Leasehold improvements...................................... Life of lease
(f) 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
and amortized over a five year period. Amortization of databases for the years
ended December 31, 1998, 1999 and 2000 was $3,283,232, $3,520,624 and
$3,572,148, respectively.
(g) Impairment of Long-Lived Assets -- Pursuant to the provisions of
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of",
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 impairments exist at December 31, 2000,
except for impairments recognized in connection with the discontinued operation
discussed in Note 5. However, it is possible, due to a change in circumstances,
that carrying values could become impaired in the future. Such impairments could
have a material effect on the results of operations in a particular reporting
period.
(h) 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 purchase business combinations. Costs in excess of assets
acquired, net of accumulated amortization, as of December 31, 1999 and 2000 were
$69,469,509 and $66,674,348, 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, 1998, 1999
and 2000 were $1,471,975, $3,497,242 and $3,266,968, respectively.
(i) 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 six months to five years. Other intangible assets,
net of accumulated amortization, as of December 31, 1999 and 2000 were
$9,438,229 and $8,811,553, respectively. Amortization of other intangible assets
for the years ended December 31, 1998, 1999 and 2000 was $945,202, $817,454 and
$936,962, respectively.
(j) 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,
42
44
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(k) 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.
(l) Research and Development -- Research and development costs are expensed
as incurred. Kroll-O'Gara incurred approximately $537,000, $297,000 and $630,000
for the years ended December 31, 1998, 1999 and 2000, respectively, for research
and development. These costs are included in general and administrative expenses
in the accompanying consolidated statements of operations.
(m) Advertising -- Kroll-O'Gara expenses the cost of advertising as
incurred. Advertising expenses for the years ended December 31, 1998, 1999 and
2000 were approximately $1,805,233, $2,160,893 and $2,753,180, respectively.
(n) Earnings Per Share -- Pursuant to the provisions of SFAS No. 128
"Earnings Per Share" basic earnings per share are computed by dividing net
income by the weighted average number of shares of common stock outstanding
during the year. Diluted earnings per share are computed by dividing net income
by the weighted average number of shares of common stock and common stock
equivalents outstanding during the year. Dilutive common stock equivalents
represent shares issuable upon assumed exercise of stock options and warrants
and assumed issuance of restricted stock.
The following is a reconciliation of the numerator and denominator for
basic and diluted earnings per share for the years ended December 31, 1998, 1999
and 2000:
YEAR ENDED DECEMBER 31, 1998
-----------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
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
=========== ========== =====
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------
NET LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
----------- ------------- ---------
Basic and diluted loss per share..................... $(1,921,819) 22,005,632 $(0.09)
=========== ======
Effect of dilutive securities:
Options........................................... 546,614
Restricted stock.................................. 42,974
Warrants.......................................... 1,188
----------
Diluted shares....................................... 22,596,408
==========
43
45
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEAR ENDED DECEMBER 31, 2000
------------------------------------------
NET LOSS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------ ------------- ---------
Basic and diluted loss per share.................... $(33,944,313) 22,295,391 $(1.52)
============ ======
Effect of dilutive securities:
Options.......................................... 287,355
Restricted stock................................. 15,095
Warrants......................................... 291
----------
Diluted shares...................................... 22,598,132
==========
As a result of the net loss recorded in 1999 and 2000, basic and diluted
loss per share are identical as all options and warrants are anti-dilutive.
Basic and diluted earnings per share based on income from continuing
operations were $0.68 and $0.66, respectively, for the year ended December 31,
1998. The basic and diluted per share impact of the discontinued operation was
$(0.07).
Basic and diluted earnings per share based on loss from continuing
operations were $0.03 for the year ended December 31, 1999. The basic and
diluted per share impact of the discontinued operation was $(0.08) and the
change in accounting principle was $(0.04).
Basic and diluted loss per share based on income from continuing operations
were $(1.15) for the year ended December 31, 2000. The basic and diluted per
share impact of the discontinued operation was $(0.37).
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 shares
in the above tables because the warrants' and options' exercise price were
greater than the average market price of the common shares.
During 2000, 9,661 warrants and 1,304,866 options to purchase an equivalent
amount of shares of common stock of Kroll-O'Gara at $13.01 to $25.69 per warrant
and from $9.00 to $28.54 per option were outstanding but were not included in
the shares in the above tables because the warrants' and options' exercise price
were greater than the average market price of the common shares.
(o) New Accounting Pronouncements -- In 1998, Kroll-O'Gara adopted SFAS 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. The accumulated other comprehensive loss
balance of ($0.2) million and ($6.3) million at December 31, 1999 and 2000,
respectively, consisted entirely of foreign currency translation adjustments.
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
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.
44
46
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 net investment hedge contracts in place. These
instruments have historically qualified for hedge accounting throughout the
periods presented in the accompanying consolidated financial statements.
Kroll-O'Gara has adopted the provisions of SFAS 133 beginning on January 1,
2001. Kroll-O'Gara has designated these contracts as net investment hedges under
SFAS 133 and, as such, the accounting under this new statement will approximate
its previous accounting. Based on current hedge instruments and designations,
Kroll-O'Gara will account for changes in the fair value of its net investment
hedge contracts (that is, based on the forward exchange rate) with the related
changes in fair value reported in other comprehensive income (loss).
Kroll-O'Gara does not expect that it will realize any material charges to
earnings pursuant to SFAS 133. See Note 16 for further discussion. However, in
the event of a future change in facts or in the underlying net investment hedge
relationships, Kroll-O'Gara could experience future volatility in earnings. A
sale of net assets, portions of the business or a segment that does not include
the corresponding hedge instrument, such as the currently contemplated sale of
the Security Products and Services Group described in Note 20, could also result
in future volatility in earnings.
In March 2000, the FASB issued Financial Accounting Standards Board
Interpretation No. 44 (Interpretation No. 44), "Accounting for Certain
Transactions involving Stock Compensation - an interpretation of APB Opinion
25." Interpretation No. 44 became effective July 1, 2000. Interpretation No. 44
clarifies the application of APB Opinion 25 for certain matters, specifically
(a) the definition of an employee for purposes of applying APB Opinion 25, (b)
the criteria for determining whether a plan qualifies as a noncompensatory plan,
(c) the accounting consequence of various modifications to the terms of a
previously fixed stock option or award, and (d) the accounting for an exchange
of stock compensation awards in a business combination. See Note 6 for a
discussion of the impact of Interpretation No. 44 related to certain stock
option awards held by the employees of a former subsidiary.
The Emerging Issues Task Force (EITF) Issue No. 00-20, "Accounting for
Costs Incurred to Acquire or Originate Information for Database Content and
Other Collections of Information," states that the EITF is considering different
views for the accounting for database costs. One of the views would require
Kroll-O'Gara to expense some or all of the database costs that Kroll-O'Gara
currently capitalizes and amortizes, which is currently an acceptable
alternative. Adoption of a different method of accounting for database costs
could have a material impact on Kroll-O'Gara's financial position and results of
operations. To date, the EITF has not made any official determinations on this
issue.
(p) 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 Opinion 25) as allowed by SFAS No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123). APB Opinion 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 Opinion 25 if certain
pro forma disclosures are made. The pro forma disclosures required by SFAS 123
are presented in Note 14(d).
(q) Change in Accounting Principle -- 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. Kroll-O'Gara adopted the provisions of this
45
47
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
(r) 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 carrying value of foreign currency exchange contracts is not equal to the
fair value. See Note 16 for further discussion.
(s) Reclassifications -- Certain reclassifications have been reflected in
1998 and 1999 to conform with the current period presentation. Specifically, in
accordance with EITF Issue No. 99-19 "Reporting Revenue Gross as a Principal
versus Net as an Agent" and EITF Issue No. 00-14 "Accounting for Certain Sales
Incentives," Kroll-O'Gara has made reclassifications in the 1998 and 1999
consolidated statements of operations to include certain types of costs that are
billed to its customers in net sales instead of offsetting the revenues against
cost of sales and selling and marketing expenses.
(4) 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 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 14). 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 for Series A Preferred, .118273
for Series B Preferred and .0955252 for Securify common stock. In total,
Kroll-O'Gara issued 1,430,936 shares of common stock. In addition, outstanding
employee stock options of Securify were converted at the same exchange factor as
Securify common stock into options to purchase 179,877 shares of Kroll-O'Gara's
common stock. Effective with the consummation of the merger, Kroll-O'Gara
created the Information Security Group and Securify's results of operations and
financial position are reported in this group.
The mergers with 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,
financial position and cash flows of LSAI, Schiff and Securify as though they
had always been a part of Kroll-O'Gara.
46
48
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
KROLL-
O'GARA
HISTORICAL LSAI SCHIFF SECURIFY COMBINED
------------ ----------- ---------- --------- ------------
Nine months ended September
30, 1998 (unaudited)
Revenue.................... $164,146,336 $12,039,154 $3,531,062 $ 48,000 $179,764,552
Income from discontinued
operation............... 287,000 -- -- -- 287,000
Net income (loss).......... 11,559,576 1,440,725 582,254 (944,196) 12,638,359
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 include $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 relate primarily to the merger with Kroll Holdings, Inc. (Kroll)
consummated in December 1997 and were approximately $0.4 million.
In March 1999, a wholly owned subsidiary of Kroll-O'Gara acquired each then
issued and outstanding share of common stock of Financial Research, Inc. (FRI).
Effective upon the consummation of the transaction a total of 101,555 shares of
Kroll-O'Gara's common stock were issued. The transaction constituted a tax-free
reorganization and has been accounted for as a pooling of interests. The prior
period consolidated financial statements would not be 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-O'Gara's common stock
(see Note 14). 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 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. The results of operations
47
49
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for the separate companies and the combined amounts presented in the
consolidated financial statements follow:
KROLL-O'GARA
HISTORICAL BAI ADJUSTMENTS COMBINED
------------ ---------- ----------- ------------
Three months ended March 31, 1999
(unaudited)
Revenue............................... $ 65,573,000 $2,492,000 $ -- $ 68,065,000
Loss from discontinued operation...... (170,000) -- -- (170,000)
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............................... $247,192,113 $7,350,666 $ -- $254,542,779
Loss from discontinued operation...... (1,325,471) -- -- (1,325,471)
Net income (loss)..................... 13,088,906 (1,416,374) 113,533 11,786,065
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 include $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 relate primarily to the mergers and acquisitions completed in
the fourth quarter of 1998 and were approximately $1.0 million.
In 2000, Kroll-O'Gara recorded a charge to operating expenses of
approximately $0.4 million ($0.02 per diluted share) for merger integration
related costs. These costs relate primarily to mergers and acquisitions
completed in 1999.
(b) Purchase Transactions -- 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 $1.9 million was earned through December 31, 2000 and
approximately $0.8 million remains accrued at December 31, 2000 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 12 to 25 years.
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
48
50
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
In addition to the mergers during 1999 with BAI and FRI, 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.
During 2000, Kroll-O'Gara completed two acquisitions which were accounted
for as purchase business combinations. Both of these acquisitions have been
included in Kroll-O'Gara's Investigations and Intelligence Group. The aggregate
purchase price of these acquisitions amounted to approximately $1.3 million and
consisted of $0.7 million in cash and notes payable of $0.6 million to the
former owners of the businesses. 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 25 years.
In connection with the 1998, 1999 and 2000 purchase acquisitions, assets
were acquired and liabilities were assumed as follows (dollars in thousands):
OTHER 1998 1999 2000
INPHOTO ACQUISITIONS ACQUISITION ACQUISITIONS
------- ------------ ----------- ------------
FAIR VALUE OF ASSETS
ACQUIRED INCLUDING:
Cash.............................................. $ 192 $ 701 $ 4 $ 262
Accounts receivable............................... 1,743 5,300 1,174 326
Unbilled revenue.................................. 269 1,561 5,441 26
Other current assets.............................. 450 551 852 -
Property, plant and equipment..................... 955 1,243 1,233 28
Other non-current assets.......................... -- 271 319 --
Costs in excess of assets acquired and other
intangible assets.............................. 9,790 28,874 20,835 1,076
------- -------- -------- ------
13,399 38,501 29,858 1,718
Less: Cash paid for net assets.................... (854) (18,689) (12,018) (732)
Fair value of debt issued......................... -- -- -- (625)
Fair value of stock issued........................ (8,228) (9,381) (8,012) --
------- -------- -------- ------
$ 4,317 $ 10,431 $ 9,828 $ 361
======= ======== ======== ======
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition costs......... $ 4,117 $ 9,583 $ 7,508 $ 361
Debt.............................................. 200 848 2,320 --
------- -------- -------- ------
$ 4,317 $ 10,431 $ 9,828 $ 361
======= ======== ======== ======
49
51
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) DISCONTINUED OPERATION -- VOICE AND DATA COMMUNICATIONS GROUP
On April 16, 2001, the Board of Directors approved a formal plan to
discontinue operations of the Voice and Data Communications Group (VDCG), which
offered secure satellite communication equipment and satellite navigation
systems. Kroll-O'Gara has decided to divest itself of the operations of this
segment by no later than December 31, 2001. The discontinuance plan includes an
overall shutdown through an orderly runoff of operations. However, Kroll-O'Gara
will continue to consider proposals from parties that may be interested in
acquiring these operations prior to their shutdown. The results of operations of
VDCG have been classified as discontinued operations and all prior periods have
been restated accordingly. The results of the discontinued Voice and Data
Communications Group reflect an allocation of interest expense based on VDCG's
average net assets. The tax effects of the results of operations of VDCG were
not significant for the periods presented.
The fiscal 2000 estimated loss on disposal of $5.0 million ($0.23 per
diluted share) includes the estimated future results of operations through the
estimated date of the shutdown. Major components of the estimated loss on
disposal include a writedown of related goodwill and other asset balances of
$4.2 million and estimated severance, operating and shutdown costs of $0.8
million. The loss on disposal calculation includes $0.2 million of allocated
interest expense. The estimated loss on disposal is based upon management's best
estimates of the net realizable value of the net assets of this segment and of
the estimated direct costs of disposing of these operations. The amounts the
Company will ultimately realize may differ materially from the amounts utilized
in arriving at the estimated loss on disposal of the discontinued operations.
Net sales, results of operations and net assets from this discontinued
operation are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-----------------------------
1998 1999 2000
------- ------- -------
Net sales............................................. $17,653 $19,931 $16,852
Interest expense allocation........................... $ 288 $ 218 $ 239
Net loss from discontinued operations................. $(1,325) $(1,761) $(3,200)
Estimated net loss on disposal........................ $ -- $ -- $(5,038)
AS OF DECEMBER 31,
-------------------
1999 2000
-------- -------
Current assets.............................................. $14,698 $8,104
Property, plant and equipment, net.......................... 155 --
Other assets................................................ 2,803 --
Current liabilities......................................... (7,560) (6,225)
------- ------
Net assets of discontinued operations............. $10,096 $1,879
======= ======
A valuation allowance for VDCG's net operating loss carryforwards has been
provided as it is not certain that the tax benefit will be realized in the
foreseeable future.
One VDCG executive has an employment agreement subject to similar terms as
discussed in Note 15(b). If terminated without cause, this commitment would
approximate $0.1 million as of December 31, 2000.
(6) SALE OF STOCK BY INFORMATION SECURITY GROUP
In October 2000, Kroll-O'Gara's then wholly owned subsidiary, Securify,
completed the sale of preferred stock shares through a private equity offering
to certain unrelated third parties. Under the terms of the stock
50
52
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
purchase agreement, Securify issued approximately 49.2 million shares of Series
A Convertible Preferred Stock, valued at $0.68 per share for total gross
proceeds of approximately $33.5 million. These preferred shares are convertible
into an equivalent number of shares of Securify's common stock. Kroll-O'Gara
recognized a pre-tax gain on this transaction of approximately $1.6 million. The
tax effects of this transaction approximate $2.1 million, resulting in a total,
net of tax, loss of $0.5 million. The tax effects of this transaction include
net operating loss carryforwards and other deferred tax assets that will not
remain with Kroll-O'Gara. As of December 31, 2000, Kroll-O'Gara had an amount
receivable from Securify, totaling approximately $5.4 million, that is subject
to an unsecured promissory note agreement with repayment terms scheduled over a
five-year period. Kroll-O'Gara will recognize income in the period that
repayments are received pursuant to the promissory note agreement.
As a result of this transaction, as of December 31, 2000, Kroll-O'Gara's
voting control in Securify approximated 27 percent. The investment in Securify,
previously consolidated, is now accounted for using the equity method.
Kroll-O'Gara does not have any carrying value for its investment as of December
31, 2000. Securify has realized continuing losses since October 2000. Since
Kroll-O'Gara has not provided any guarantees and is not committed to provide any
future funding to Securify, it has not recorded its equity share of Securify
losses.
Kroll-O'Gara has also recognized an approximate $41,000 loss in the other
income (expense) caption in the consolidated statement of operations for the
period ended December 31, 2000 related to specific stock options to acquire
Kroll-O'Gara common stock that continue to be held by certain Securify
employees. Kroll-O'Gara will recognize an additional $0.3 million of expense
related to these stock options over the remaining vesting periods ranging from
16 to 22 months. Consistent with the provisions of Interpretation No. 44, Kroll-
O'Gara is required to recognize compensation expense for any stock options to
acquire Kroll-O'Gara common stock that are maintained by non-employees.
(7) 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:
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
United States Military:
Billed receivables...................................... $ 4,877,570 $ 6,826,533
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 13,827,929 7,265,288
----------- -----------
Total United States Military.................... $18,705,499 $14,091,821
=========== ===========
51
53
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
Other contracts and receivables:
Billed receivables...................................... $54,383,614 $58,439,855
Costs and estimated earnings in excess of billings on
uncompleted contracts................................ 10,331,795 1,368,846
----------- -----------
Total other contracts and receivables........... $64,715,409 $59,808,701
=========== ===========
Total trade accounts receivable, net...................... $59,261,184 $65,266,388
=========== ===========
Total costs and estimated earnings in excess of billings
on uncompleted contracts................................ $24,159,724 $ 8,634,134
=========== ===========
Costs and estimated earnings in excess of billings on uncompleted contracts
are net of $131,582,751 and $139,118,840 of progress billings to the United
States Military at December 31, 1999 and 2000, respectively.
Costs and estimated earnings in excess of billings on uncompleted contracts
represent revenue recognized on long-term contracts in excess of billings
because amounts were not billable at the balance sheet date. It is anticipated
such unbilled amounts attributable to the United States Military will generally
be billed over the next 180 days as the contract is substantially completed.
Amounts receivable on other contracts are generally billed as shipments are
made. It is estimated that substantially all of such amounts will be billed
within one year, although contract extensions may delay certain collections
beyond one year.
The following summarizes activity in the allowance for doubtful accounts on
trade accounts receivable:
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ----------- ----------
Year ended December 31, 1998..... $2,993,471 $1,242,355 $(1,809,002) $2,426,824
Year ended December 31, 1999..... $2,426,824 $3,298,634 $(2,061,672) $3,663,786
Year ended December 31, 2000..... $3,663,786 $5,735,274 $(3,697,631) $5,701,429
(b) Inventories -- Inventories are stated at the lower of cost or market
using the first-in, first-out (FIFO) method and include the following:
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
Raw materials............................................. $14,494,953 $11,650,878
Vehicle costs and work-in-process......................... 6,792,705 6,990,294
----------- -----------
$21,287,658 $18,641,172
=========== ===========
The following summarizes activity in valuation reserves for inventory
obsolescence:
ADDITIONS
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
OF PERIOD EXPENSES DEDUCTIONS PERIOD
---------- ---------- ---------- ----------
Year ended December 31, 1998.......... $340,332 $ 9,668 $-- $ 350,000
Year ended December 31, 1999.......... $350,000 $116,752 $-- $ 466,752
Year ended December 31, 2000.......... $466,752 $857,648 $-- $1,324,400
52
54
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(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:
USEFUL DECEMBER 31,
LIFE ------------------------
DESCRIPTION (YEARS) 1999 2000
- ----------- ------- ---------- ----------
Security deposits.................................. -- $ 971,045 $ 941,858
Long-term receivable............................... -- 1,112,681 659,391
Non-refundable deposit on an equipment lease with a
related party.................................... 5 537,784 537,784
Deferred financing fees............................ 2-30 920,492 1,070,492
Investment in unconsolidated subsidiary............ -- 520,695 674,564
Other long-term assets............................. -- 619,650 528,917
---------- ----------
4,682,347 4,413,006
Less -- accumulated amortization................... (412,992) (851,735)
---------- ----------
$4,269,355 $3,561,271
========== ==========
(d) Accrued Liabilities -- Accrued liabilities consist of the following at
December 31, 1999 and 2000:
DECEMBER 31,
--------------------------
DESCRIPTION 1999 2000
- ----------- ----------- -----------
Payroll and related benefits.............................. $11,019,288 $ 8,053,549
Accrued professional fees................................. 2,113,264 561,613
Property, sales and other taxes payable................... 2,636,732 2,677,758
Accrued medical costs..................................... 645,132 571,664
Accrued interest.......................................... 497,576 610,377
Accrued warranty reserve.................................. 442,597 464,933
Accrued payments to former owners of acquired
businesses.............................................. 2,868,569 2,193,652
Accrued restructuring costs............................... 664,900 727,967
Other accruals............................................ 5,302,934 5,294,506
----------- -----------
$26,190,992 $21,156,019
=========== ===========
(e) Restructuring of Operations -- In the first quarter of 1999,
Kroll-O'Gara began implementation of a restructuring plan (the 1999 Plan) to
reduce costs and improve operating efficiencies. The 1999 Plan was substantially
completed by the end of the second quarter of 1999. The total pre-tax
restructuring charge recorded pursuant to the 1999 Plan was approximately $4.4
million. Total payments or writeoffs made pursuant to the 1999 Plan through
December 31, 2000 were $3.8 million. Kroll-O'Gara does not expect to incur any
other significant restructuring charges in future periods related to the 1999
Plan. The principal elements of the restructuring plan were the closure of two
Investigations and Intelligence Group offices and
53
55
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the elimination of approximately 82 employees. The components of the
restructuring charge including accrued balances as of December 31, 2000 are as
follows:
DESCRIPTION EXPENSE ACCRUAL
- ----------- ---------- --------
Severance and related costs................................. $3,116,303 $210,833
Writedown of property, plant and equipment.................. 150,166 --
Lease termination costs..................................... 1,064,270 366,314
Other....................................................... 32,827 --
---------- --------
$4,363,566 577,147
==========
Less -- Current portion..................................... 412,821
--------
$164,326
========
In the third quarter of 2000, Kroll-O'Gara's Security Products and Services
Group implemented and completed a plan to reduce costs and improve operating
efficiencies (the 2000 Plan) with a total pre-tax restructuring charge of
approximately $0.7 million. Total payments pursuant to the 2000 Plan through
December 31, 2000 were $0.4 million. Kroll-O'Gara does not expect to incur any
other significant restructuring charges in future periods related to the 2000
Plan. The principal element of the restructuring plan was the elimination of
approximately 25 employees. The only component of the restructuring charge was
severance related to the termination of employees. At December 31, 2000,
approximately $0.3 million remained as an accrual relating to the 2000 Plan.
(8) INCOME TAXES
Kroll-O'Gara accounts for income taxes under the liability method pursuant
to SFAS No. 109, "Accounting for Income Taxes." Under the liability method,
deferred tax liabilities and assets are determined based on the differences
between the financial reporting and tax bases of assets and liabilities using
enacted tax rates.
Kroll-O'Gara's provision for income taxes on income (loss) from continuing
operations for all periods is summarized as follows:
1998 1999 2000
---------- ----------- -----------
Currently payable:
Federal........................................ $5,530,085 $ 1,887,333 $(2,065,160)
State and local................................ 965,158 333,059 1,216,733
Foreign........................................ 1,834,143 2,235,172 2,385,078
---------- ----------- -----------
8,329,386 4,455,564 1,536,651
---------- ----------- -----------
Deferred:
Federal........................................ (847,018) (1,352,885) 736,391
State and local................................ (129,437) (238,745) 130,299
Foreign........................................ -- (434,524) 248,180
---------- ----------- -----------
(976,455) (2,026,154) 1,114,870
---------- ----------- -----------
$7,352,931 $ 2,429,410 $ 2,651,521
========== =========== ===========
54
56
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A reconciliation between the statutory federal income tax rate and the
effective tax rate is summarized as follows:
1998 1999 2000
----------------- ------------------ -------------------
AMOUNT RATE AMOUNT RATE AMOUNT RATE
---------- ---- ---------- ----- ----------- -----
Provision (benefit) for income
taxes at the federal statutory
rate........................... $7,039,777 34.4% $1,035,866 34.0% $(7,838,879) 34.0%
State and local income taxes, net
of federal benefit............. 637,004 3.1 47,750 1.6 1,045,000 (4.5)
Nondeductible expenses........... 197,446 1.0 1,747,864 57.4 3,463,375 (15.0)
Change in valuation allowance.... (194,744) (1.0) (928,095) (30.5) 2,556,084 (11.1)
Tax attributes associated with
Securify....................... -- -- -- -- 2,068,000 (9.0)
Effect of foreign (income)
loss........................... (47,924) (0.2) 737,777 24.2 1,176,529 (5.1)
Other............................ (278,628) (1.4) (211,752) (7.0) 181,412 (0.8)
---------- ---- ---------- ----- ----------- -----
Provision for income
taxes..................... $7,352,931 35.9% $2,429,410 79.7% $ 2,651,521 (11.5)%
========== ==== ========== ===== =========== =====
The components of Kroll-O'Gara's consolidated deferred income tax assets
and liabilities as of December 31 are summarized below:
1999 2000
----------- ------------
Deferred tax assets:
Allowance for doubtful accounts......................... $ 1,051,436 $ 1,740,702
Depreciation and amortization........................... 320,653 580,979
Net operating loss carryforwards........................ 3,312,439 5,174,685
Payroll and other benefits.............................. 1,452,718 1,525,684
Restructuring........................................... 658,246 230,859
Other accruals.......................................... 961,809 587,303
Acquisition costs....................................... 1,694,866 1,050,124
Other................................................... 779,765 431,844
----------- ------------
10,231,932 11,322,180
Valuation allowance..................................... (2,649,047) (5,205,131)
----------- ------------
Net deferred tax assets......................... 7,582,885 6,117,049
----------- ------------
Deferred tax liabilities:
Nonaccrual service fee receivable....................... (181,579) (215,667)
Deferred revenue........................................ (4,220,953) (3,547,434)
Database capitalization................................. (3,107,610) (3,342,575)
Customer lists, net of amortization..................... (121,399) --
Percentage of completion on foreign subsidiaries........ (201,148) --
Foreign leasing transactions............................ (147,146) (145,332)
Other................................................... (600,034) (934,479)
----------- ------------
(8,579,869) (8,185,487)
----------- ------------
Net deferred tax liability...................... $ (996,984) $ (2,068,438)
=========== ============
Kroll-O'Gara has certain foreign and domestic net operating loss
carryforwards, which approximated $3.3 million and $5.2 million at December 31,
1999 and 2000, respectively. The foreign net operating loss carryforwards relate
primarily to Mexico and the Philippines. The carryforwards expire beginning in
2001. A valuation allowance for all existing domestic and foreign loss
carryforwards has been provided as it is not
55
57
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain that the tax benefit will be realized in the foreseeable future.
Adjustments to the valuation allowance, if any, will be recorded in the periods
in which it is determined the asset is realizable.
(9) RELATED PARTY TRANSACTIONS
(a) Summary of Related Party Transactions -- The following summarizes
transactions with related parties:
YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1999 2000
---------- ---------- ----------
Sales
to Shareholder............................... $4,877,478 $4,779,449 $5,776,344
to affiliated entities....................... 821,400 70,595 26,248
Purchases
from Shareholder............................. 474,800 361,320 286,589
from affiliated entities..................... 1,406,210 296,100 1,045,222
Lease expense to affiliated entities........... 916,600 792,979 786,756
Legal services expense provided by former
Director..................................... 190,000 -- --
Legal services expense to law firm of a Board
member....................................... -- -- 1,719,862
Non-interest bearing advances to
shareholders................................. 568,213 581,779 651,052
Air charter fees included in costs of the
offering or merger costs..................... 566,000 -- --
Non-interest bearing advances to affiliates.... 615,851 282,346 358,480
Trade accounts receivable due from
shareholder.................................. 1,290,558 1,231,685 1,465,474
Trade accounts payable due to affiliate........ -- -- 239,145
(b) Sales-Shareholder -- During 1998, 1999 and 2000, 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, 1998, 1999 and 2000 was $4,877,478, $4,779,449 and
$5,776,344, 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 $474,800, $361,320 and $286,589 for the years ended December 31,
1998, 1999 and 2000, respectively. The yearend accounts receivable balance from
AIG was approximately $1,231,685 and $1,465,474 at December 31, 1999 and 2000,
respectively.
(c) 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 amortize the remaining
portion of existing lease deposits from the original aircraft lease. Rental
expense, including amortization recognized, approximated $292,000, $82,000 and
$90,000 for the years ended December 31, 1998, 1999 and 2000, respectively.
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 that the hourly rate was favorably comparable
to rates charged by another unrelated charter service for similar aircraft. As
of December 31, 1999 and 2000, Kroll-O'Gara had approximately $402,801 and
$312,929, respectively in unamortized lease deposits with this affiliated
entity.
56
58
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Kroll-O'Gara is also currently leasing various equipment and office space
from several affiliated entities under various five year and month-to-month
lease agreements. Rental expense, net of sub-lease income, approximated
$625,000, $711,000 and $696,885 for the years ended December 31, 1998, 1999 and
2000, respectively.
(10) REVOLVING LINES OF CREDIT
On March 30, 2001, Kroll-O'Gara entered into an amended and restated loan
agreement to provide for a revolving credit facility that initially amounts to
$40.0 million. The agreement was further amended on April 20, 2001.
Additionally, the agreement provides for a letter of credit facility of
$1,356,250 supporting the Company's Economic Development Revenue Bonds and up to
$6.0 million of transactional letters of credit (see Notes 11 and 15). Letters
of credit can not be issued or renewed with a maturity date beyond May 31, 2002.
The agreement is secured by substantially all assets of Kroll-O'Gara and its
subsidiaries and a pledge of the stock of essentially all the subsidiaries, all
of which jointly and severally guarantee obligations under the agreement. The
security, pledge and joint and several guarantee also extend to the $35.0
million senior notes (see Note 11). Advances under the revolving credit facility
bear interest at prime plus 1.5% at December 31, 2000 and, based on the
amendments on March 30, 2001 and April 20, 2001, bear interest at the greater of
(a) 8.56% or (b) the prime rate plus 1.5%, plus 0.5% times the number of 30-day
periods which have expired since April 20, 2001 (or, if less, the highest rate
allowed by law).
Average borrowings under the revolving credit facility and its predecessors
were $1,659,131, $10,838,273 and $29,885,224 during 1998, 1999 and 2000,
respectively, at approximate weighted average interest rates of 7.96%, 7.02% and
8.50%, respectively. The maximum borrowings outstanding during 1998, 1999 and
2000 were $7,735,029, $22,822,706 and $38,442,798, respectively. Borrowings
under the revolving credit facility were approximately $22.8 million and $36.5
million at December 31, 1999 and 2000, respectively.
The $40.0 million revolving credit facility includes quarterly reductions
in the amount that may be borrowed or outstanding in total as follows:
TOTAL PERMITTED
DATE BORROWINGS
- ---- ---------------
March 31, 2001.............................................. $40,000,000
June 30, 2001............................................... 38,864,200
September 30, 2001.......................................... 37,728,400
December 31, 2001........................................... 36,024,700
March 31, 2002.............................................. 34,321,000
The net proceeds from any lender approved asset sales in excess of $1.0
million per transaction or $2.0 million per fiscal year must be paid
proportionately to the lender and the holders of the senior notes, with a
corresponding reduction in the total permitted borrowings under the revolving
credit facility. A material adverse change in the business of Kroll-O'Gara,
including a significant sale of net assets, would result in the acceleration of
all amounts due to the lender and the holders of the senior notes.
Kroll-O'Gara's agreement to sell the entities that comprise the Security
Products and Services Group discussed in Note 20 would result in an acceleration
of all amounts due to 60 days after the closing of the sale. The agreement
expires on May 31, 2002.
This loan agreement includes financial covenants which, among other
restrictions, require the maintenance of certain financial ratios and other
financial requirements, including an interest coverage ratio, net worth minimums
and minimum quarterly EBITDA, that requires Kroll-O'Gara to effectively break
even before taxes and to generate EBITDA of $6.0 million per quarter. The
agreement also imposes limitations on mergers, acquisitions, stock redemptions,
additional indebtedness and capital expenditures. The agreement
57
59
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
does not permit the declaration or payment of any dividends, other than stock
dividends. Kroll-O'Gara was not in compliance with certain of these covenants as
of December 31, 2000. Had the lender not amended and restated the credit
agreement, all amounts outstanding under this credit agreement would have been
immediately payable.
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 base rate plus 1.0%. Average borrowings during
1999 and 2000 under the demand note were $2,836,905 and $2,178,761, as
translated, at an approximate weighted average interest rate of 6.71% and 7.13%.
The maximum borrowings outstanding during 1999 and 2000 were $3,675,097 and
$3,547,638, respectively, as translated. Maximum borrowings permitted pursuant
to this demand note are $4.0 million based on an exchange rate of 0.67 British
pound sterling to the U.S. dollar. Borrowings outstanding pursuant to this
demand note were approximately $3.4 million and $2.8 million, respectively, as
translated at December 31, 1999 and 2000.
58
60
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(11) LONG-TERM DEBT
The components of long-term debt are as follows at:
DECEMBER 31,
--------------------------
1999 2000
----------- -----------
Senior notes payable to various institutions, interest at
8.56% at December 31, 1999 and 2000 payable
semi-annually, principal payable in four quarterly
payments beginning June 30, 2001 through March 31, 2002
of $4,321,000 in total with the balance payable at
maturity in May 2003, subject to accelerated maturity to
May 31, 2002 if the Company's revolving credit facility
is not renewed.......................................... $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 5.84% at December 31, 2000, payable in
scheduled installments through September 2016, subject
to optional tender by the bondholders and a
corresponding remarketing agreement, secured by the
property, plant and equipment and a bank letter of
credit (Note 15)........................................ 1,275,974 1,207,224
Notes payable to former shareholders of acquired
companies, interest at fixed rates ranging from 5.5% to
7.0%, payable in scheduled installments through January
2003, certain notes secured by acquired assets.......... 1,994,414 875,320
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................................................ 452,806 765,669
Other notes payable, interest at 6.0% to 10.9%, payable in
scheduled installments through September 2007, certain
notes secured by various equipment...................... 1,278,196 1,003,811
----------- -----------
40,001,390 38,852,024
Less -- current portion................................... (3,737,227) (5,138,176)
----------- -----------
$36,264,163 $33,713,848
=========== ===========
Kroll-O'Gara's $35.0 million of senior notes payable were amended on March
30, 2001 and April 20, 2001. Based on the amendments, the senior notes bear
interest at the greater of (a) 8.56% or (b) the prime rate plus 1.5%, plus 0.5%
times the number of 30-day periods which have expired since April 20, 2001 (or,
if less, the highest rate allowed by law). The senior notes also contain
financial covenants, which among other restrictions, require the maintenance of
a minimum level of net worth and a fixed charge coverage ratio. The senior notes
are cross-collateralized, pledged and guaranteed with the Company's revolving
credit facility and contain similar acceleration features (see Note 10). In
addition, the net proceeds from asset sales must be paid proportionately to the
revolving credit facility lender and the holders of the senior notes.
Kroll-O'Gara's agreement to sell the entities that comprise the Security
Products and Services Group discussed in Note 20 would result in an acceleration
of all amounts due to 60 days after the closing of the sale.
59
61
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Scheduled maturities of long-term debt at December 31, 2000 are as follows:
2001.................................................... $ 5,138,176
2002 (includes $30,679,000 subject to acceleration)..... 32,571,815
2003.................................................... 248,930
2004.................................................... 178,356
2005.................................................... 192,083
Thereafter.............................................. 522,664
-----------
$38,852,024
===========
(12) 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, 2000:
TOTAL
-----------
2001.................................................... $ 9,572,454
2002.................................................... 7,328,732
2003.................................................... 5,961,799
2004.................................................... 4,865,954
2005.................................................... 4,109,104
Thereafter.............................................. 9,240,110
-----------
$41,078,153
===========
Rental expense charged against current operations amounted to approximately
$6,640,000, $10,182,000 and $12,265,000, for the years ended December 31, 1998,
1999 and 2000, respectively.
(13) DEFINED CONTRIBUTION AND BONUS PLANS
As of December 31, 2000, Kroll-O'Gara had the following employee benefit
plans in place:
(a) Defined Contribution Plans -- Kroll-O'Gara and its subsidiaries have
established various non-contributory 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 $797,003, $1,189,841 and
$1,123,323, for the years ended December 31, 1998, 1999 and 2000, 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.
Kroll-O'Gara expensed approximately $476,000, $1,235,000 and $1,092,000
associated with the profit and revenue sharing plans in 1998, 1999 and 2000,
respectively.
60
62
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(14) 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 360,000, 647,195 and 262,374 shares were granted during 1998, 1999
and 2000, respectively. Options granted under the plan are generally granted at
fair market value at the date of grant and are exercisable over periods not
exceeding ten years. Additionally, effective with the mergers with LSAI,
Securify and BAI each company's then outstanding stock options were 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 LSAI, Securify and BAI stock option plans in 1998 were 248,497. No
options were granted under previously existing stock option plans in 1999 and
2000.
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 and will
be amortized ratably over the vesting periods of the applicable options.
Approximately $298,000 and $236,000 was expensed in 1999 and 2000, respectively.
In 2000, Kroll-O'Gara adopted a stock option plan (the 2000 Option Plan)
for non-officer employees. Kroll-O'Gara may grant options for up to 750,000
shares under the 2000 Option Plan. Options for 742,400 shares were granted
during 2000. Options granted under the plan are generally granted at fair market
value at the date of grant and are exercisable over periods not exceeding ten
years.
(b) Restricted Stock Plan -- Effective August 12, 1998, Kroll-O'Gara
adopted a stock incentive plan (the Stock Incentive Plan) for employees.
Kroll-O'Gara may grant up to 500,000 shares under the Stock Incentive Plan.
There were no shares granted under the plan during 1998 or 2000, 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 and will be amortized ratably over the vesting periods of
the applicable grants. Approximately $758,000 and $364,000 were expensed in 1999
and 2000, respectively, and the balance will be expensed ratably over the next
fifteen months as the grants vest.
(c) Common Stock Warrants -- As of December 31, 2000, warrants originally
granted by LSAI to purchase 8,719 shares of common stock at $25.69 per share
were outstanding. These warrants were issued by LSAI in June 1998 to certain
consultants and underwriters in connection with the completion of a private
offering of common stock in 1998 and were recognized as compensation paid for
services rendered and treated as a reduction in the recognized net proceeds from
the offering.
As of December 31, 2000, warrants originally granted by BAI to purchase 135
shares of common stock at $13.01 per share, 807 shares of common stock at $19.52
per share and 1,076 shares of common stock at $4.65 per share were outstanding.
These warrants were issued in June and July of 1996 and January of 1998 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.
As of December 31, 2000, Kroll-O'Gara had a total of 10,737 warrants still
outstanding.
(d) 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
61
63
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
determined consistent with SFAS 123, Kroll-O'Gara's net income (loss) and
diluted earnings (loss) per share for the years ended December 31, 1998, 1999
and 2000 would have been as follows:
1998 1999 2000
----------- ----------- ------------
Net income (loss):
As reported.............................. $11,786,065 $(1,921,819) $(33,944,313)
Pro forma................................ $ 9,315,427 $(4,844,407) $(37,332,945)
Diluted earnings (loss) per share:
As reported.............................. $ 0.59 $ (0.09) $ (1.52)
Pro forma................................ $ 0.47 $ (0.22) $ (1.67)
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 1998, 1999 and 2000:
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1998 1999 2000
---------------- ---------------- ----------------
Dividend yield...................... -- -- --
Expected volatility................. 40% - 41.4% 41.4% 43.7%
Risk-free interest rate............. 4.2% - 5.7% 5.29% - 5.44% 6.14% - 6.7%
Expected lives...................... 1.5 - 7.5 years 7.5 years 7.5 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 remaining contractual lives, on a weighted-average basis, of 7.4
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 remaining contractual lives, on a weighted-average basis, of 8.2
years. The 1,004,774 options granted by Kroll-O'Gara during 2000 have a
weighted-average exercise price of $6.37, a weighted-average fair value of $3.73
and remaining contractual lives, on a weighted-average basis, of 9.4 years.
A summary of the status of Kroll-O'Gara's stock option plans at December
31, 1998, 1999 and 2000, and the changes during the years then ended is
presented in the table below:
1998 1999 2000
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding, beginning of
year......................... 1,371,808 $10.11 1,459,990 $11.54 1,830,039 $17.06
Granted...................... 608,497 12.78 647,195 27.31 1,004,774 6.37
Exercised.................... (477,894) 8.52 (194,371) 9.11 (115,197) 0.73
Forfeited/Expired/Cancelled... (42,421) 17.05 (82,775) 23.06 (321,318) 18.39
--------- ------ --------- ------ --------- ------
Outstanding, end of year....... 1,459,990 $11.54 1,830,039 $17.06 2,398,298 $13.19
========= ====== ========= ====== ========= ======
Exercisable, end of year..... 855,122 $ 8.31 983,510 $10.53 1,111,084 $14.61
========= ====== ========= ====== ========= ======
Of the options outstanding at December 31, 2000, 160,348 options are
exercisable at prices per share ranging from $0.52 to $2.79 per share, 586,814
options are exercisable at prices per share ranging from $4.65 to $18.59 per
share and 363,922 options are exercisable at prices per share ranging from
$20.22 to $30.75 per share.
62
64
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) 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, 2000, Kroll-O'Gara's lender was
committed to providing this letter of credit through May 31, 2001. As of
December 31, 2000, Kroll-O'Gara had an outstanding letter of credit in the
amount of $1,356,250.
At December 31, 2000, Kroll-O'Gara had standby and purchase letters of
credit, issued by Kroll-O'Gara's lender, in the aggregate amount of $2,223,094.
(b) Employment Agreements -- Kroll-O'Gara has employment agreements with
its executive officers and management level personnel with annual compensation
ranging in value from $8,000 to $450,000, 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, 2000, the remaining aggregate commitment under these
employment agreements if all individuals were terminated without cause was
approximately $15.2 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. The plaintiffs
allege that Kroll-O'Gara's officers and directors breached their fiduciary
duties by deferring acquisitions, by negotiating an inadequate acquisition
price, by failing to engage in arms-length negotiations and by failing to seek
redress from Blackstone after Blackstone terminated the proposed transaction.
The plaintiffs also allege that Blackstone 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. The plaintiffs seek a declaration that the individual
defendants breached their fiduciary duty and seek damages and attorneys' fees in
an unspecified amount. Kroll-O'Gara believes that the allegations in the
complaint are meritless and will defend the suits vigorously.
In 1999, Kroll-O'Gara learned that an individual had filed a qui tam suit
against Kroll-O'Gara under the Civil False Claims Act alleging that Kroll-O'Gara
and three of its vendors knowingly violated their contractual requirements with
the Army due to the vendors' alleged failure to have certified welders. In
October 2000, Kroll-O'Gara settled this litigation with the Department of
Justice for approximately $1.1 million, plus legal costs. Kroll-O'Gara admitted
no wrongdoing as part of the settlement. Kroll-O'Gara paid $0.55 million of the
settlement amount in November 2000; the remainder is due on December 30, 2001.
In addition to the matters discussed above, Kroll-O'Gara is involved in
litigation from time to time in the ordinary course of its business; however,
Kroll-O'Gara does not believe that there is any currently pending 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.
(16) 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 ten foreign currency exchange contracts to
effectively hedge a specific portion of its exposure to certain foreign currency
rate fluctuations on its net investment in two foreign subsidiaries. As of
December 31, 2000, the total notional amount of the contracts, which mature
between January 2001 and December 2002, was $14.7 million. Kroll-O'Gara's
accumulated other comprehensive loss
63
65
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
translation adjustment component of shareholders' equity was decreased by $1.9
million in 1999 and increased by $0.2 million in 2000 as a result of these
contracts.
Kroll-O'Gara has estimated the fair value of its foreign exchange contracts
based on current applicable forward rates as well as on information obtained
from the counterparty of the amount Kroll-O'Gara would receive at December 31,
2000 in order to terminate the agreements. As of December 31, 2000, Kroll-O'Gara
would have received approximately $0.8 million upon cancellation of all
contracts. If SFAS 133 had been applied to all net investment hedge contracts in
place at December 31, 2000, the effect would have been to decrease assets by
approximately $0.2 million with an offsetting amount recorded in the accumulated
other comprehensive income (loss) component of shareholders' equity.
(17) CUSTOMER AND SEGMENT DATA
(a) Segment Data -- Through October 17, 2000, Kroll-O'Gara operated in
three business segments, the Security Products and Services Group, the
Investigations and Intelligence Group and the Information Security Group. As a
result of the preferred stock sale completed by the Information Security Group
on October 17, 2000, the Group ceased to be a part of the consolidated results
of the Kroll-O'Gara Company from that date forward. See Note 6 for more
information on this transaction.
The following summarizes information about Kroll-O'Gara's business
segments:
SECURITY INVESTIGATIONS
PRODUCTS AND INFORMATION
AND SERVICES INTELLIGENCE SECURITY
GROUP GROUP GROUP OTHER CONSOLIDATED
------------ -------------- ----------- -------- ------------
(DOLLARS IN THOUSANDS)
1998
Net sales to unaffiliated
customers......................... $143,006 $117,583 $ 116 $ -- $260,705
======== ======== ======= ======== ========
Gross profit (loss)................. $ 41,211 $ 51,627 $ (395) $ (325) $ 92,118
======== ======== ======= ======== ========
Operating income (loss)............. $ 22,822 $ 11,748 $(2,194) $ (9,145) $ 23,231
======== ======== ======= ======== ========
Identifiable assets at year-end..... $102,294 $108,303 $ 4,288 $ -- $214,885
======== ======== ======= ========
Corporate assets.................... 22,371
Net assets of discontinued
operation......................... 11,112
--------
Total assets at year-end............ $248,368
========
1999
Net sales to unaffiliated
customers......................... $123,987 $176,837 $ 4,345 $ -- $305,169
======== ======== ======= ======== ========
Gross profit........................ $ 35,715 $ 78,762 $ 2,300 $ -- $116,777
======== ======== ======= ======== ========
Operating income (loss)............. $ 12,786 $ 13,167 $(1,764) $(16,502) $ 7,687
======== ======== ======= ======== ========
Identifiable assets at year-end..... $107,786 $155,534 $ 3,359 $ -- $266,679
======== ======== ======= ========
Corporate assets.................... 14,923
Net assets of discontinued
operation......................... 10,096
--------
Total assets at year-end............ $291,698
========
64
66
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SECURITY INVESTIGATIONS
PRODUCTS AND INFORMATION
AND SERVICES INTELLIGENCE SECURITY
GROUP GROUP GROUP OTHER CONSOLIDATED
------------ -------------- ----------- -------- ------------
(DOLLARS IN THOUSANDS)
2000
Net sales to unaffiliated
customers......................... $111,011 $195,558 $ 4,033 $ -- $310,602
======== ======== ======= ======== ========
Gross profit (loss)................. $ 20,680 $ 80,408 $ (404) $ -- $100,684
======== ======== ======= ======== ========
Operating income (loss)............. $ 650 $ 12,677 $(9,554) $(20,197) $(16,424)
======== ======== ======= ======== ========
Identifiable assets at year-end..... $ 86,722 $161,235 $ -- $ -- $247,957
======== ======== ======= ========
Corporate assets.................... 11,913
Net assets of discontinued
operation......................... 1,879
--------
Total assets at year-end............ $261,749
========
Total net sales by segment include 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, 1998, 1999 and 2000 are as follows:
SECURITY INVESTIGATIONS
PRODUCTS AND INFORMATION
AND SERVICES INTELLIGENCE SECURITY
GROUP GROUP GROUP OTHER CONSOLIDATED
------------ -------------- ----------- ------ ------------
(DOLLARS IN THOUSANDS)
1998
Depreciation expense............. $1,282 $1,760 $ 24 $ 13 $ 3,079
====== ====== ====== ====== =======
Capital expenditures............. $3,427 $3,001 $ 186 $ 749 $ 7,363
====== ====== ====== ====== =======
1999
Depreciation expense............. $2,188 $3,400 $ 93 $ 400 $ 6,081
====== ====== ====== ====== =======
Capital expenditures............. $5,969 $9,687 $1,673 $1,752 $19,081
====== ====== ====== ====== =======
2000
Depreciation expense............. $2,550 $4,394 $ 254 $ 764 $ 7,962
====== ====== ====== ====== =======
Capital expenditures............. $4,945 $6,040 $1,551 $ 105 $12,641
====== ====== ====== ====== =======
Identifiable assets by segment are those assets that are used in
Kroll-O'Gara's operations in each segment. Corporate assets are principally
cash, computer software, certain intangible assets and certain prepaid expenses.
65
67
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes information about Kroll-O'Gara's different
geographic areas:
UNITED OTHER
STATES FRANCE FOREIGN ELIMINATIONS CONSOLIDATED
-------- ------- -------- ------------ ------------
(DOLLARS IN THOUSANDS)
1998
Net sales to unaffiliated
customers........................ $171,224 $28,458 $ 61,023 $ -- $260,705
Intercompany....................... 2,960 199 3,318 (6,477) --
-------- ------- -------- -------- --------
Total net sales.......... $174,184 $28,657 $ 64,341 $ (6,477) $260,705
======== ======= ======== ======== ========
Operating income................... $ 11,054 $ 2,251 $ 9,926 $ -- $ 23,231
======== ======= ======== ======== ========
Identifiable assets................ $139,759 $29,047 $ 46,079 $ -- $214,885
======== ======= ======== ========
Corporate assets................... 22,371
Net assets of discontinued
operation........................ 11,112
--------
Total assets at
year-end............... $248,368
========
1999
Net sales to unaffiliated
customers........................ $180,073 $27,483 $ 97,613 $ -- $305,169
Intercompany....................... 5,137 1,858 5,746 (12,741) --
-------- ------- -------- -------- --------
Total net sales.......... $185,210 $29,341 $103,359 $(12,741) $305,169
======== ======= ======== ======== ========
Operating income (loss)............ $ (4,331) $ 2,245 $ 9,773 $ -- $ 7,687
======== ======= ======== ======== ========
Identifiable assets................ $156,919 $26,784 $ 82,976 $ -- $266,679
======== ======= ======== ========
Corporate assets................... 14,923
Net assets of discontinued
operation........................ 10,096
--------
Total assets at
year-end............... $291,698
========
2000
Net sales to unaffiliated
customers........................ $181,320 $27,322 $101,960 $ -- $310,602
Intercompany....................... 9,368 1,538 3,254 (14,160) --
-------- ------- -------- -------- --------
Total net sales.......... $190,688 $28,860 $105,214 $(14,160) $310,602
======== ======= ======== ======== ========
Operating income (loss)............ $(23,285) $ 1,106 $ 5,755 $ -- $(16,424)
======== ======= ======== ======== ========
Identifiable assets................ $163,775 $26,655 $ 57,527 $ -- $247,957
======== ======= ======== ========
Corporate assets................... 11,913
Net assets of discontinued
operation........................ 1,879
--------
Total assets at
year-end............... $261,749
========
Kroll-O'Gara accounts for transfers between geographic areas at cost plus a
proportionate share of operating profit.
66
68
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following summarizes Kroll-O'Gara's sales in the United States and
foreign locations:
YEARS ENDED DECEMBER 31,
--------------------------------
1998 1999 2000
-------- -------- --------
(DOLLARS IN THOUSANDS)
Sales to unaffiliated customers:
U.S. Government.......................... $ 62,149 $ 54,953 $ 50,515
Other United States...................... 103,366 122,182 133,940
Middle East.............................. 5,958 1,640 2,475
Europe................................... 35,274 58,018 58,847
Asia..................................... 15,467 22,763 16,343
Central & South America.................. 25,850 33,428 32,721
Other Foreign............................ 12,641 12,185 15,761
-------- -------- --------
$260,705 $305,169 $310,602
======== ======== ========
Export sales by Kroll-O'Gara's domestic operations were approximately 18%,
3% and 2% of net sales for the years ended December 31, 1998, 1999 and 2000,
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 continues to increase its level of international
activity. Accordingly, Kroll-O'Gara is subject to various risks including, among
others, foreign currency restrictions, exchange rate fluctuations, government
instability and complexities of local laws and regulations.
(b) Major Customers -- During the years ended December 31, 1998, 1999 and
2000 sales in the Security Products and Services Group to the U.S. Government
approximated 24%, 18% and 16% of Kroll-O'Gara's net sales, respectively.
67
69
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(18) SUPPLEMENTAL CASH FLOWS DISCLOSURES
The following is a summary of cash paid related to certain items:
1998 1999 2000
----------- ---------- ----------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest...................... $ 4,593,326 $4,581,720 $5,957,847
=========== ========== ==========
Cash paid for taxes of continuing
operations, net of refunds............... $ 3,952,951 $6,055,244 $ 631,172
=========== ========== ==========
Cash paid for taxes of discontinued
operation................................ $ 142,398 $ -- $ --
=========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF NON-CASH
ACTIVITIES:
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 $ 812,033
=========== ========== ==========
Fair value of stock issued in connection
with acquisition of businesses........... $17,610,504 $8,011,929 $ --
=========== ========== ==========
Notes issued in connection with acquisition
of businesses............................ $ -- $ -- $ 625,320
=========== ========== ==========
Note issued in connection with consulting
agreement entered into with former
shareholder of an acquired business...... $ 147,914 $ -- $ --
=========== ========== ==========
(19) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
1999
Net sales................................ $68,778 $77,314 $81,828 $ 77,249
Gross profit............................. 25,855 32,163 31,656 27,103
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)
2000
Net sales................................ $80,226 $74,235 $83,291 $ 72,850
Gross profit............................. 30,042 26,923 26,718 17,001
Net loss................................. (380) (4,281) (7,187) (22,096)
Loss per share:
Basic................................. $ (0.02) $ (0.19) $ (0.32) $ (0.99)
Diluted............................... $ (0.02) $ (0.19) $ (0.32) $ (0.99)
68
70
THE KROLL-O'GARA COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(20) SUBSEQUENT EVENTS
(a) Disposition of Security Products and Services Group -- On April 20,
2001, the Board approved a definitive agreement, subject to a limited number of
closing conditions, to sell the common stock of the active companies that
comprise the Security Products and Services Group, other than the Group's
subsidiaries that provide kidnap and ransom and risk information services and
its Russian subsidiaries, to Armor for up to $56.5 million. A portion of the
sales price ($53.0 million) is to be paid at closing, currently expected to
occur late in the second quarter or in the third quarter of 2001. An escrow of
$1.5 million will be maintained and a deferred payment of up to $2.0 million
will be made based on the achievement of a gross profit target for the year
ended December 31, 2001. Up to $15.0 million of the purchase price can be paid
in registered common stock of Armor. The purchase price will be reduced
dollar-for-dollar to the extent tangible net assets, as defined, do not equal
approximately $37.4 million. Kroll-O'Gara currently believes the sale of the
Security Products and Services Group will approximate book value. In the event
the sale to Armor is not consummated, Kroll-O'Gara will continue to evaluate all
options available to it, including to seek other buyers or other alternatives.
69
71
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information as of March 31, 2001
concerning each of Kroll-O'Gara's executive officers and directors:
NAME AGE POSITION
- ---- --- --------
Jules B. Kroll............................ 59 Chairman of the Board, Co-Chief Executive
Officer and Director; Chief Executive
Officer -- Investigations and Intelligence
Group
Thomas M. O'Gara.......................... 50 Vice Chairman of the Board and Director
Wilfred T. O'Gara......................... 43 Co-Chief Executive Officer and Director;
Chief Executive Officer -- Securities
Products and Services Group
Michael G. Cherkasky...................... 51 President and Chief Operating Officer --
Investigations and Intelligence Group and
Director
Marshall S. Cogan......................... 63 Director
Thomas E. Constance....................... Director
Abram S. Gordon........................... 37 Vice President, General Counsel and
Secretary
Raymond E. Mabus.......................... 51 Director
Nazzareno E. Paciotti..................... 55 Chief Financial Officer
Hugh E. Price............................. 64 Director
William S. Sessions....................... 69 Director
JULES B. KROLL has been Chairman of the Board since December 1997. Mr.
Kroll was named Co-Chief Executive Officer of Kroll-O'Gara and Chief Executive
Officer of the Investigations and Intelligence Group in April 2000. Previously
he had served as Kroll-O'Gara's Chief Executive Officer since December 1997. He
founded Kroll-O'Gara's Kroll Associates, Inc. subsidiary in 1972 and has been
the Chairman of the Board and Chief Executive Officer of Kroll Associates and
Kroll Holdings since their foundings. Mr. Kroll also is a director of
Presidential Life Insurance Company. He has been a director of Kroll-O'Gara
since December 1997.
THOMAS M. O'GARA has been Vice Chairman of the Board of Kroll-O'Gara since
December 1997. He served as Chairman of the Board of Kroll-O'Gara from August
1996 until December 1997. Mr. O'Gara has also been Chairman of the Board of
Kroll-O'Gara's O'Gara-Hess & Eisenhardt Armoring Company ("OHE") subsidiary
since 1990 and was OHE's Chief Executive Officer from 1990 until 1995. He has
been a director of Kroll-O'Gara since August 1996 and a director of OHE since
1988. Mr. O'Gara has held numerous executive officer and director positions with
Kroll-O'Gara, its subsidiaries and its predecessors since 1975. From 1984 until
1986, Mr. O'Gara also was Honorary Consul General for the Sultanate of Oman.
Thomas M. O'Gara and Wilfred T. O'Gara are brothers.
WILFRED T. O'GARA was named Co-Chief Executive Officer of Kroll-O'Gara and
Chief Executive Officer of the Security Products and Services Group in April
2000. Previously he had served as Kroll-O'Gara's President and Chief Operating
Officer since December 1997 and as its Chief Executive Officer from August 1996
until December 1997. Mr. O'Gara has been associated with Kroll-O'Gara, its
subsidiaries and its predecessors since 1983 and has held numerous executive
officer and director positions, including serving as Chief Executive Officer of
OHE since January 1996, President and Chief Operating Officer of OHE from 1991
through 1995 and Vice President -- Sales and Marketing of OHE from 1988 until
1991. Mr. O'Gara
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has been a director of Kroll-O'Gara since August 1996 and a director of OHE
since 1991. Mr. O'Gara also is a director of LSI Industries, Inc.
MICHAEL G. CHERKASKY has been President and Chief Operating Officer of
Kroll-O'Gara's Investigations and Intelligence Group since December 1997. Prior
to December 1997 he had been an Executive Managing Director of Kroll Holdings
since April 1997 and Chief Operating Officer of Kroll Holdings since January
1997. From November 1995 to January 1997, he was the head of Kroll Holdings'
North American Region and from February 1994 to November 1995 he was the head of
Kroll Holdings' Monitoring Group. From June 1993 to November 1993, Mr. Cherkasky
was a candidate for public office. From 1978 to June 1993, Mr. Cherkasky was
with the District Attorney's office for New York County, his last position being
Chief of the Investigation Division. He became a director of Kroll-O'Gara in
December 1997.
MARSHALL S. COGAN has been 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.
THOMAS E. CONSTANCE has been a partner in the law firm of Kramer, Levin,
Naftalis & Frankel LLP since 1994. From 1973 to 1994, Mr. Constance was with the
law firm of Shea & Gould. Mr. Constance is a director of Uniroyal Technology
Group. He has been a director of Kroll-O'Gara since December 2000.
ABRAM S. GORDON is Vice President, General Counsel and Secretary of
Kroll-O'Gara. Prior to joining Kroll-O'Gara in January 1997, he was with the law
firm of Taft, Stettinius & Hollister LLP, Cincinnati, Ohio, from October 1987
until December 1996.
RAYMOND E. MABUS 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 is a director of Friede Goldman Halter. He has been a director of
Kroll-O'Gara since November 1996.
NAZZARENO E. PACIOTTI has been Chief Financial Officer of Kroll-O'Gara
since December 1997. Prior to December 1997 he had been the Chief Financial
Officer of Kroll Holdings since 1992. From 1990 to 1992, he was a Managing
Director and the Controller of the Henley Group (the parent of PneumoAbex Inc.
and Fisher Scientific, a laboratory supply company) and from 1988 to 1990, he
was a Vice President and the Controller of PneumoAbex Inc., an aerospace
contractor specializing in the manufacture of landing gear and flight actuating
systems.
HUGH E. PRICE is head of Kroll-O'Gara's Crisis Management Group and its
Kroll Information Services Group, both of which are part of the Security
Products and Services Group. During 1995 and 1996, prior to joining
Kroll-O'Gara, he was a consultant to various businesses and organizations. Until
his retirement in 1995, Mr. Price had been employed by the Central Intelligence
Agency since 1964. His positions with the Agency included Deputy and Associate
Deputy Director for Operations (1991-1995), Chief and Deputy Chief for
Counterintelligence (1988-1990) and Director of Personnel (1986-1988). Mr. Price
became a director of Kroll-O'Gara in October 1996.
WILLIAM S. SESSIONS is a partner in the law firm of Holland & Knight LLP
and is a consultant to various public and private businesses. From 1987 until
1993, Mr. Sessions was Director of the Federal Bureau of Investigation. He
served as a United States District Judge for the Western District of Texas from
1974 until
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1987. Mr. Sessions is a director of Zenith National Insurance Company. He has
been a director of Kroll-O'Gara since November 1996.
Directors of Kroll-O'Gara are elected annually. Officers of Kroll-O'Gara
are elected annually and serve at the discretion of the Board of Directors.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE. Section 16(a) of
the Securities Exchange Act of 1934 requires Kroll-O'Gara's executive officers
and directors, and persons who beneficially own more than ten percent of
Kroll-O'Gara's equity securities, to file reports of security ownership and
changes in that ownership with the Securities and Exchange Commission. These
persons also are required by SEC regulations to furnish Kroll-O'Gara with copies
of all Section 16(a) forms they file. Based upon a review of copies of these
forms and written representations from its executive officers and directors,
Kroll-O'Gara believes that all Section 16(a) forms were filed on a timely basis
during and for 2000 except that the Form 5s of Messrs. Cherkasky, Cogan, Mabus
and Sessions, reporting stock option grants for each, were filed 13 days after
their due date.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY INFORMATION. The following table sets forth, for the fiscal years
indicated, amounts of cash and certain other compensation paid by Kroll-O'Gara
and its subsidiaries, for services in all capacities, to Jules B. Kroll and
Wilfred T. O'Gara, Kroll-O'Gara's Co-Chief Executive Officers during 2000, and
each of the four other most highly compensated executive officers during 2000.
These persons are sometimes referred to as the "named executive officers."
SUMMARY COMPENSATION TABLE
LONG TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
--------------------------- -------------------------
OTHER SECURITIES
ANNUAL RESTRICTED UNDERLYING
COMPEN- STOCK STOCK OPTION ALL OTHER
NAME AND SALARY BONUS SATION AWARDS GRANTS COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($)(1) (#) ($)(2)
- ---------------------- ---- ------- ------- ------- ---------- ------------ ------------
Jules B. Kroll 2000 375,000 -- -- -- -- 16,556
Chairman and Co-Chief 1999 375,000 -- -- -- -- 14,661
Executive Officer 1998 375,000 -- -- -- -- 31,915
Thomas M. O'Gara 2000 275,000 -- -- -- -- 7,233
Vice Chairman 1999 275,000 -- -- -- -- 7,030
1998 275,000 -- -- -- -- 7,651
Wilfred T. O'Gara 2000 350,000 -- -- -- 25,000 12,294
Co-Chief 1999 350,000 -- -- -- 17,000 8,675
Operating Officer 1998 350,000 -- -- -- -- 6,816
Michael G. Cherkasky 2000 416,000 116,667 -- -- 20,000 11,768
Chief Operating 1999 400,000 100,000 -- 155,628 50,000 25,930
Officer -- 1998 400,000 40,000 -- -- -- 28,914
Investigations and
Intelligence Group
Nazzareno E. Paciotti 2000 275,520 -- -- -- 10,000 10,847
Chief Financial
Officer 1999 275,520 66,667 -- -- 10,000 8,777
1998 275,520 66,667 -- -- -- 19,813
Abram S. Gordon 2000 175,000 30,000 -- -- 18,000 5,911
Vice President 1999 150,000 35,000 -- -- 5,000 5,753
1998 135,000 25,000 -- -- -- 4,160
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- ---------------
(1) Represents 6,000 shares of restricted stock for Mr. Cherkasky, awarded on
March 25, 1999 under Kroll-O'Gara's 1998 Stock Incentive Plan and having an
aggregate value at December 31, 2000 of $30,000. No other shares of
restricted stock are held by Mr. Cherkasky. 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.
(2) Represents profit-sharing contributions in 2000 of $1,172 for Mr. Kroll and
$2,625 for each other named executive officer; supplemental disability plan
benefits of $12,174 for Mr. Kroll, $7,341 for Mr. Cherkasky, $6,332 for Mr.
Paciotti, $3,667 for Mr. Thomas M. O'Gara, $5,708 for Mr. Wilfred T. O'Gara
and $2,933 for Mr. Gordon; group term life insurance benefits of $3,210 for
Mr. Kroll, $1,802 for Mr. Cherkasky, $1,890 for Mr. Paciotti, $966 for Mr.
Thomas M. O'Gara, $420 for Mr. Wilfred T. O'Gara and $378 for Mr. Gordon.
EMPLOYMENT AGREEMENTS. Kroll-O'Gara had employment agreements which expired
on November 30, 2000 with each of the following executive officers providing for
annual base salaries in the listed amounts: Jules B. Kroll, $375,000; Thomas M.
O'Gara, $275,000; Wilfred T. O'Gara, $350,000; Nazzareno E. Paciotti, $275,000;
Abram S. Gordon, $175,000. These agreements are being continued on a
month-to-month basis. Each of these executive officers also is entitled to
participate in an annual bonus plan established by the Compensation Committee of
the Board of Directors and to receive up to 50% of the bonus in shares of Kroll-
O'Gara's common stock. Pursuant to these employment agreements, employment may
be terminated by Kroll-O'Gara 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 also provide that if Kroll-O'Gara does not renew the
agreement for one year or more at the end of the term, the employee will receive
an amount equal to one year's base salary. Each employment agreement restricts
the executive officer from competing with Kroll-O'Gara during the term of the
agreement, and for two years thereafter if termination of employment is for
cause or at the volition of the employee. Each of Messrs. Thomas M. and Wilfred
T. O'Gara has further agreed that during his employment and for a period of 10
years thereafter he will not directly or indirectly own any interest in or
perform any services for any entity which uses the word "O'Gara" as a business
or trade name and competes with Kroll-O'Gara. Additionally, Mr. Kroll has agreed
that during his employment and for a period of 10 years thereafter he will not
directly or indirectly own any interest in or perform any services for any
entity which uses the word "Kroll" as a business or trade name and competes with
Kroll-O'Gara.
In May 1999 Mr. Cherkasky entered into an employment agreement with
Kroll-O'Gara for an "evergreen" two year term. The agreement provided 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 Kroll-O'Gara's
annual bonus, stock option, stock incentive and other benefit plans. In
connection with 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 $350,000. In the event the
agreement is terminated due to Mr. Cherkasky's death or disability or by
Kroll-O'Gara for other than cause or by Mr. Cherkasky for good reason, he is
entitled to receive a lump sum payment equal to the value of his salary, annual
bonus, the three-year anniversary payment, stock options and incentive stock for
the remainder of the term. During his employment and for two years after his
employment terminates, if the termination occurs during the first two years of
the agreement and is by Kroll-O'Gara for cause or by him for other than good
reason, Mr. Cherkasky is restricted from directly or indirectly engaging in the
investigations and intelligence business. For purpose of the agreement, "cause"
means conviction of a felony and "good reason" includes a change in duties or
responsibilities, a reduction in compensation or any person or group other than
Jules Kroll becoming the beneficial owner of 35% or more of the voting power of
Kroll-O'Gara's securities.
STOCK OPTIONS. The following table presents information on option grants to
the named executive officers during 2000 pursuant to the Company's 1996 Stock
Option Plan. The Plan does not provide for the grant of stock appreciation
rights ("SARs").
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OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS(1)
--------------------------------------------------- POTENTIAL REALIZABLE
NUMBER OF VALUE AT ASSUMED
SECURITIES % OF TOTAL ANNUAL RATES OF STOCK
UNDERLYING OPTIONS EXERCISE PRICE APPRECIATION FOR
OPTIONS GRANTED TO OR OPTION TERM
GRANTED EMPLOYEES IN BASE PRICE EXPIRATION -----------------------
NAME (#) FISCAL YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ---------- ---------- ---------- ----------
Jules B. Kroll................ -- -- -- -- -- --
Thomas M. O'Gara.............. -- -- -- -- -- --
Wilfred T. O'Gara............. 25,000 2.5 6.375 5/12/10 100,230 254,003
Michael G. Cherkasky.......... 20,000 2.0 6.375 5/12/10 80,184 203,202
Nazzareno E. Paciotti......... 10,000 1.0 6.375 5/12/10 40,092 101,601
Abram S. Gordon............... 18,000 1.8 6.375 5/12/10 72,166 182,882
- ---------------
(1) All options vest 25% one year from date of grant, with the remaining 75%
vesting in 25% increments based upon Kroll-O'Gara's stock price achieving
specified levels for a minimum of 20 consecutive days. The exercise price of
all options may be paid in cash or by the transfer of shares of
Kroll-O'Gara's common stock valued at their fair market value on the date of
exercise. Each option becomes exercisable in full in the event of the
execution of an agreement of merger, consolidation or reorganization
pursuant to which Kroll-O'Gara is not to be the surviving corporation or the
execution of an agreement of sale or transfer of all or substantially all of
the assets of Kroll-O'Gara.
With respect to each named executive officer, the following table sets
forth information concerning unexercised stock options held at December 31,
2000. No options were exercised by the named executive officers during 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES
NUMBER OF
SECURITIES VALUE OF
UNDERLYING UNEXERCISED
VALUE UNEXERCISED IN-THE-MONEY
REALIZED ($) OPTIONS AT OPTIONS AT
---------------- FY-END (#) FY-END ($)
(MARKET PRICE ON -------------- -------------
SHARES ACQUIRED EXERCISE LESS EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE (#) EXERCISE PRICE) UNEXERCISABLE UNEXERCISABLE
---- --------------- ---------------- -------------- -------------
Jules B. Kroll................... -- -- -- --
Thomas M. O'Gara................. -- -- 23,150/ -- -- / --
Wilfred T. O'Gara................ -- -- 101,113/36,334 -- / --
Michael G. Cherkasky............. -- -- 136,320/55,209 267,754/9,375
Nazzareno E. Paciotti............ -- -- 119,695/5,834 247,129/--
Abram S. Gordon.................. -- -- 18,333/19,667 -- / --
DIRECTORS' COMPENSATION
Directors who are not employees of Kroll-O'Gara receive annually a $15,000
fee, plus options to purchase 2,000 shares of common stock, for serving as
directors. These directors also are paid $1,000 for each Board of Directors
meeting attended in person and $750 for Board meetings held by telephone. Each
committee Chairman receives an annual fee of $1,600 and committee members,
including the Chairman, receive $750 per meeting attended, whether in person or
by telephone, unless the meeting occurs on the same day as a Board meeting, in
which case no separate fee is paid. Employee directors are not separately
compensated for their services as directors.
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Under Kroll-O'Gara's Outside Directors' Deferred Compensation Plan, each
nonemployee director is entitled to defer all or a portion of his director's
fees into a bookkeeping account. The account is credited with "phantom"
Kroll-O'Gara common stock units equivalent in value to the amount of each fee
deferred, at the time earned. Unless a later time is selected by a director, the
value of the units in the director's account will be paid in cash when the
director's service on Kroll-O'Gara's Board terminates or at the time of a
"change in control" of Kroll-O'Gara as defined in the Plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Kroll-O'Gara's common stock on March 31, 2001 by each beneficial
owner of more than five percent of the common stock, each director and each
named executive officer individually and all directors and executive officers as
a group. Unless otherwise indicated, all shares are owned directly and the
indicated owner has sole voting and dispositive power with respect to such
shares.
BENEFICIAL
OWNERSHIP(1)
-------------------
NAME NUMBER PERCENT
---- --------- -------
Jules B. Kroll(2)(3)........................................ 2,879,991 12.9
Thomas M. O'Gara(2)......................................... 2,441,369 10.9
Wilfred T. O'Gara........................................... 356,072 1.6
Michael G. Cherkasky........................................ 187,022 *
Marshall S. Cogan........................................... 2,000 *
Thomas E. Constance......................................... -- --
Abram S. Gordon............................................. 22,933 *
Raymond E. Mabus............................................ 4,000 *
Nazzareno E. Paciotti....................................... 128,011 *
Hugh E. Price............................................... 19,889 *
William S. Sessions......................................... 4,000 *
All directors and executive officers as a group
(11 persons)................................................ 6,049,287 26.4
American International Group, Inc.(2)....................... 1,444,212 6.5
Lord, Abbett & Co.(2)....................................... 1,865,950 8.4
- ---------------
* Less than 1%.
(1) Includes the following numbers of shares of common stock which may be
acquired through the exercise of currently exercisable stock options or
stock options which become exercisable within 60 days after March 31, 2001;
Mr. Kroll, none; Mr. Thomas M. O'Gara, 23,150 shares; Mr. Wilfred T. O'Gara,
113,030 shares; Mr. Cherkasky, 153,862 shares; Mr. Cogan, 2,000 shares; Mr.
Gordon, 22,833 shares; Mr. Mabus, 4,000 shares; Mr. Paciotti, 114,695
shares; Mr. Price, 19,889 shares; Mr. Sessions, 4,000 shares; and all
directors and executive officers as a group, 460,459 shares. Also includes
for Mr. Cherkasky, 250 shares of restricted stock that vest within 60 days
after March 31, 2001.
(2) Mr. Kroll's address is 900 Third Avenue, New York, New York 10022. Mr.
O'Gara's address is 9113 LeSaint Drive, Fairfield, Ohio 45014. AIG's address
is 70 Pine Street, New York, New York 10270. Lord, Abbett & Co.'s address is
767 Fifth Avenue, New York, New York 10153.
(3) Does not include 192,560 shares held by trusts for the benefit of Mr.
Kroll's adult children, in which Mr. Kroll disclaims any beneficial
interest.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Constance, who became a director of Kroll-O'Gara in December 2000, is a
partner in the law firm of Kramer, Levin, Naftalis & Frankel LLP, which provides
legal counsel to Kroll-O'Gara.
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In connection with Kroll-O'Gara's initial public offering, the Board of
Directors adopted a policy requiring that any future transactions, including
loans, between Kroll-O'Gara and its officers, directors, principal shareholders
and their affiliates be on terms no less favorable to Kroll-O'Gara than could be
obtained from unrelated third parties and that any such transactions be approved
by a majority of the disinterested members of the Board of Directors.
Described below are certain transactions and relationships between
Kroll-O'Gara and its officers, directors and shareholders which have occurred
during the last fiscal year. Except with respect to interest rates charged on
certain of the intercompany notes and accounts payable/receivable, Kroll-O'Gara
believes that the material terms of the various transactions were as favorable
as could have been obtained from unrelated third parties.
VICTORY AVIATION
Victory Aviation Services, Inc. is a Delaware corporation of which Messrs.
Thomas M. O'Gara and Wilfred T. O'Gara own approximately 92% and 1%,
respectively, of the outstanding capital stock.
LEASE AGREEMENTS. Kroll-O'Gara has a Master Equipment Lease with Victory
Aviation, entered into in July 1995, under which Kroll-O'Gara leases various
items of equipment from Victory Aviation. As of December 31, 2000, Kroll-O'Gara
had approximately $1,250,000 of equipment under various month-to-month lease
arrangements. Rental expenses were $451,000 for the year ended December 31,
2000.
SUPPLIER ARRANGEMENTS. During 1995 and 1996, Kroll-O'Gara purchased the
dual-hard steel required for its vehicle armoring from Victory Aviation, which
distributed the steel for an unrelated third party. At December 31, 2000,
Kroll-O'Gara had receivables of $285,000 from Victory Aviation in connection
with the prior arrangement, which sum is guaranteed by the shareholders of
Victory Aviation. All other aspects of the arrangement have been terminated.
CORPORATE AIRCRAFT. In February 1995, Kroll-O'Gara entered into a lease for
a Gulfstream G-II aircraft owned by Victory Aviation. Effective June 1, 1998,
Kroll-O'Gara reached an agreement to amend the corporate aircraft lease. The
terms of the aircraft lease addendum provide Kroll-O'Gara with a hourly discount
from the normal commercial hourly rate on future charters of corporate aircrafts
from Victory Aviation in order to amortize the remaining portion of existing
lease deposits from the original aircraft lease. Kroll-O'Gara had approximately
$313,000 in unamortized lease deposits with Victory Aviation as of December 31,
2000. Rental expense related to the Gulfstream lease, including amortization of
the deposit, was $90,000 in 2000.
INTERCOMPANY NOTES AND ACCOUNTS PAYABLE/RECEIVABLE AND CERTAIN LOANS
During 2000, 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, 2000 pursuant to this agreement were $651,000.
During 2000, Kroll-O'Gara rendered risk management services, including
marketing support, and claims investigations services to AIG and its
subsidiaries. Kroll-O'Gara billed AIG and its subsidiaries $5,776,000 in 2000
for these services. The year-end accounts receivable balance for AIG was
$1,465,000 at December 31, 2000. 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 $287,000 for this insurance during 2000.
Kroll-O'Gara obtains the coverage through an independent insurance broker and
where possible obtains competitive proposals from unrelated third parties.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS OF FORM 8-K
(a)(1) The following consolidated financial statements of Kroll-O'Gara and its
subsidiaries are included in
Item 8:
Report of Independent Public Accountants
Consolidated Balance Sheets
- As of December 31, 1999 and 2000
Consolidated Statements of Operations
- For the Years Ended December 31, 1998, 1999 and 2000
Consolidated Statements of Shareholders' Equity
- For the Years Ended December 31, 1998, 1999 and 2000
Consolidated Statements of Cash Flows
- For the Years Ended December 31, 1998, 1999 and 2000
Notes to Consolidated Financial Statements
(a)(2) 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.
(b) Reports on Form 8-K
During the quarter ended December 31, 2000, Kroll-O'Gara filed the
following current reports on
Form 8-K.
Date of Report: October 20, 2000 (filed October 24, 2000); Item 5.
Date of Report: October 4, 2000 (filed October 4, 2000); Item 5.
(c) Exhibits: See the List of Exhibits beginning on page E-1.
(d) Financial Statements: Not applicable
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 23rd day of
April, 2001.
THE KROLL-O'GARA COMPANY
By /s/ NAZZARENO E. PACIOTTI
------------------------------------
Nazzareno E. Paciotti
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated as of the 23rd day of April, 2001.
SIGNATURE TITLE
--------- ----------------------------------------------------
/s/ JULES B. KROLL Chairman of the Board and Co-Chief Executive Officer
- --------------------------------------------- (co-principal executive officer)
Jules B. Kroll
Vice Chairman of the Board
- ---------------------------------------------
Thomas M. O'Gara
/s/ WILFRED T. O'GARA Co-Chief Executive Officer and Director
- --------------------------------------------- (co-principal executive officer)
Wilfred T. O'Gara
/s/ NAZZARENO E. PACIOTTI Chief Financial Officer (principal financial and
- --------------------------------------------- accounting officer)
Nazzareno E. Paciotti
/s/ MICHAEL G. CHERKASKY* Director
- ---------------------------------------------
Michael G. Cherkasky
/s/ MARSHALL S. COGAN* Director
- ---------------------------------------------
Marshall S. Cogan
/s/ THOMAS E. CONSTANCE* Director
- ---------------------------------------------
Thomas E. Constance
/s/ RAYMOND E. MABUS* Director
- ---------------------------------------------
Raymond E. Mabus
/s/ HUGH E. PRICE* Director
- ---------------------------------------------
Hugh E. Price
/s/ WILLIAM S. SESSIONS* Director
- ---------------------------------------------
William S. Sessions
* Pursuant to Power of Attorney
By: /s/ ABRAM S. GORDON
- --------------------------------------------
Abram S. Gordon
Attorney-in-Fact
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LIST OF EXHIBITS
EXHIBIT
NO. DESCRIPTION
- ------- -----------
3.1 Amended and Restated Articles of Incorporation of the
Company (1)
3.2 Code of Regulations of the Company (2)
4.1 Form of Amended and Restated Note Purchase Agreement, dated
as of March 30, 2001, between the Company and each of
Connecticut General Life Insurance Company, Life Insurance
Company of North America, Lincoln Life & Annuity Company of
New York, Massachusetts Mutual Life Insurance Company, The
Traveler's Insurance Company, and The Guardian Life
Insurance Company of America
4.2 Collateral Agency and Intercreditor Agreement, dated as of
March 30, 2001, among KeyBank National Association,
Connecticut General Life Insurance Company, Life Insurance
Company of North America, Lincoln Life & Annuity Company of
New York, Massachusetts Mutual Life Insurance Company, The
Traveler's Insurance Company, and The Guardian Life
Insurance Company of America
4.3 Guaranty Agreement, dated as of March 30, 2001 given by
certain subsidiaries of the Company
4.4 Waiver, Direction and Amendment Number One dated as of April
20, 2001 to Amended and Restated Note Purchase Agreements
dated as of March 30, 2001, among the Company and
Connecticut General Life Insurance Company, Life Insurance
Company of North America, Lincoln Life & Annuity Company of
New York, Massachusetts Mutual Life Insurance Company, The
Traveler's Insurance Company, and The Guardian Life
Insurance Company of America
10.1 Agreement to armor HMMWVs between the Company and the United
States Army Tank and Automotive Command, dated April 10,
2000
10.2 Systems Technical Support Agreement between the Company and
the United States Army, dated January 20, 1997 (3)
10.3 1996 Stock Option Plan, as amended (4)*
10.4 Employment Agreement between the Company and Thomas M.
O'Gara, dated August 23, 1996 (2)*
10.5 Employment Agreement between the Company and Wilfred T.
O'Gara, dated August 23, 1996 (2)*
10.6 Amended and restated lease of office space in New York, New
York between Progress Partners and Kroll Associates, Inc.
(5)
10.7 Registration Rights Agreement, dated August 8, 1997, among
Thomas M. O'Gara, Jules B. Kroll and the Company (5)
10.8 Employment Agreement, dated October 17, 1997, between the
Company and Jules B. Kroll (5)*
10.9 Employment Agreement, dated October 17, 1997, between the
Company and Nazzareno E. Paciotti (5)*
10.10 Employment Agreement, dated October 17, 1997, between the
Company and Abram S. Gordon (5)*
10.11 Amendment to Employment Agreement, dated October 17, 1997,
between the Company and Thomas M. O'Gara (5)*
10.12 Amendment to Employment Agreement, dated October 17, 1997,
between the Company and Wilfred T. O'Gara (5)*
10.13 Employment Agreement between Kroll Associates, Inc., The
Kroll-O'Gara Company and Michael G. Cherkesky, dated May 17,
1999 (6)*
10.14 Second Amended and Restated Loan Agreement, dated as of
March 30, 2001, among The Kroll-O'Gara Company, O'Gara-Hess
& Eisenhardt Armoring Company, Kroll Holdings, Inc., Kroll
Associates, Inc. and KeyBank National Association
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EXHIBIT
NO. DESCRIPTION
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10.15 Security Agreement, dated as of March 30, 2001, among
KeyBank National Association, The Kroll-O'Gara Company,
O'Gara-Hess & Eisenhardt Armoring Company, Kroll Holdings,
Inc. and Kroll Associates, Inc.
10.16 Security Agreement, dated as of March 30, 2001, among
KeyBank National Association and certain subsidiaries of the
Company
10.17 Guarantee, dated as of March 30, 2001, given by certain
subsidiaries of the Company in favor of KeyBank National
Association
10.18 Stock Pledge Agreement, dated as of March 30, 2001, between
the Company and KeyBank National Association
10.19 Waiver, Direction and Amendment Number One dated as of April
20, 2001 to the Second Amended and Restated Loan Agreement
dated as of March 30, 2001, between the Company and KeyBank
National Association
21.1 Subsidiaries of the Company
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney
- ---------------
* Executive compensation agreement
- ---------------
(1) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
No. 333-48099 and incorporated herein by reference.
(2) Filed as an Exhibit to the Company's Registration Statement on Form S-1,
No. 333-11093 and incorporated herein by reference.
(3) Filed as an Exhibit to the Company's Annual Report on Form 10-K for the
year ended December 31, 1996 and incorporated herein by reference.
(4) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
No. 333-74063 and incorporated herein by reference.
(5) Filed as an Exhibit to the Company's Registration Statement on Form S-4,
No. 333-35845 and incorporated herein by reference.
(6) Filed as an Exhibit to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1999 and incorporated herein by reference.
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