SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) August 21, 2001
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Armor Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware 0-18863 59-3392443
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(State or other jurisdiction (Commission File Number) (IRS Employer Identification No.)
of incorporation)
1400 Marsh Landing Parkway, Jacksonville, Florida 32250
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (904) 741-5400
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N/A
(Former name or former address, if changed since last report.)
Item 2. Acquisition or Disposition of Assets
FORWARD LOOKING AND CAUTIONARY STATEMENTS
Except for the historical information and discussions contained herein,
statements contained in this Form 8-K may constitute "forward looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Statements that are predictive in nature, that depend upon or refer to
future events or conditions, or that include words such as, "expects,"
"anticipates," "intends," "plans," "believes," "estimates," and similar
expressions are forward looking statements. These statements involve a number of
risks, uncertainties and other factors that could cause actual results to differ
materially, including, but not limited to, our failure to continue to develop
and market new and innovative products and services and to keep pace with
technological change; competitive pressures; failure to obtain or protect
intellectual property rights; the ultimate effect of various domestic and
foreign political and economic issues on our business, financial condition or
results of operations; quarterly fluctuations in revenues and volatility of
stock prices; contract delays; cost overruns; our ability to attract and retain
key personnel; currency and customer financing risks; dependence on certain
suppliers; changes in the financial or business condition of our distributors or
resellers; our ability to successfully manage acquisitions, alliances and
integrate past and future business combinations; regulatory, legal, political
and economic changes and other risks, uncertainties and factors inherent in our
business and otherwise discussed elsewhere in this Form 8-K and in our other
filings with the Securities and Exchange Commission or in materials incorporated
therein by reference.
PROPOSED ACQUISITION OF THE SECURITY PRODUCTS AND SERVICES GROUP FROM THE
KROLL-O'GARA COMPANY
DESCRIPTION OF THE TRANSACTION
On April 20, 2001 we, together with our wholly owned subsidiary, entered
into a Stock Purchase Agreement (the "Stock Purchase Agreement") with The
Kroll-O'Gara Company, an Ohio corporation ("Kroll-O'Gara"), O'Gara-Hess &
Eisenhardt Armoring Company, a Delaware corporation ("OHEAC"), The O'Gara
Company, an Ohio corporation ("O'Gara Company"), and O'Gara Security Associates,
Inc., an Ohio corporation ("OSA"). Pursuant to the Stock Purchase Agreement, we
agreed to acquire OHEAC, O'Gara Company, OSA, and certain of their direct and
indirect subsidiaries, which comprise the majority of the Security Products and
Services Group of Kroll-O'Gara. The business which we have agreed to acquire is
referred to in this report as "O'Gara." We expect to consummate this acquisition
on or about August 22, 2001.
A copy of the Stock Purchase Agreement is attached as Exhibit 2.1 to
this report. A copy of the amendment to the Stock Purchase Agreement dated
August 20, 2001 is attached as Exhibit 2.2 to this report.
Upon the consummation of the acquisition, we intend to continue the
primary business operations of O'Gara and to continue to use the physical assets
of those primary businesses for that purpose. We expect to operate O'Gara as a
stand alone division of Armor Holdings and currently do not intend to integrate
O'Gara into either the Armor Holdings Products Division or ArmorGroup Services
Division. However, we intend to undertake a review of O'Gara's operations to
determine whether any of its operations should be altered or integrated into our
other divisions. We expect to assume approximately 750 employees as a result of
this acquisition.
The following paragraphs provide more information about the companies
we have agreed to acquire and the nature of their business.
BUSINESS
O'Gara's security products and training services includes:
- ballistic and blast protected armoring systems for commercial vehicles,
military vehicles, aircraft, and missile components; and
- advanced driver training, threat recognition and avoidance training, and
training in firearms safety and use.
COMMERCIAL PRODUCTS
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, O'Gara shipped approximately 1,132 commercial armored vehicles.
ARMORED VEHICLES. 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 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 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. 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, O'Gara
modifies the base vehicle to provide protection for the cargo and passengers
from ballistic and blast threats. 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. 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"). The HMMWV chassis are produced by AM General
Corporation and shipped directly to 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, 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. O'Gara charges
$70,000 to $110,000 for these ballistic and blast protective systems. During
2000, O'Gara shipped 377 Up-Armored HMMWVs. O'Gara also supplies engineering
design and prototype services in support of the Up-Armored HMMWV Program, and
supplies spare parts and logistic support.
HIMARS. 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. O'Gara markets armor sub-systems for other tactical
wheeled vehicles, such as 2.5 ton and 5.0 ton trucks. O'Gara 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 O'Gara.
TRAINING.
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. O'Gara offers ballistics training in a
progressive and realistic shooting house, encompassing 6,800 square feet of
training space, at its facility near Washington, DC. Ballistics training
consists of a wide spectrum of combat marksmanship skills which focuses on
realistic situations, exposing students to stress while under difficult firing
situations. 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.
CUSTOMERS
COMMERCIAL PRODUCTS. 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 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. 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. 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 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......................................................... 32.7%
Central and South America...................................... 23.1%
North America.................................................. 36.0%
Middle East.................................................... 3.5%
Far East....................................................... 2.4%
Other.......................................................... 2.3%
MILITARY PRODUCTS. O'Gara's market for military hardware products is
worldwide in scope, including the U.S. Military and foreign defense forces.
O'Gara's major contracts for delivery of Up-Armored HMMWVs are with the U.S.
Military. O'Gara is also 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, 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. O'Gara is seeking to expand its sales of
armored tactical wheeled vehicles to foreign defense forces.
TRAINING. O'Gara offers advanced driver training, firearms training and
surveillance detection training courses. Many private sector clients are drawn
to O'Gara's training courses due to 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, O'Gara markets
its various courses to its armored commercial vehicle customers and vice versa.
MARKETING AND SALES
COMMERCIAL. On a worldwide basis, O'Gara employs approximately 44
full-time sales professionals. 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; 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 O'Gara to assist customers who
have, or believe they have, developed an immediate threat.
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.
MILITARY. O'Gara has positioned itself in the marketplace as a commercial
company with a military production capability. As such, 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, O'Gara also places strong emphasis on its superior
antitank and antipersonnel mine protection for the occupants of tactical
wheeled vehicles. O'Gara markets its military products through a combination of
trade show exhibitions, print advertising in military-related periodicals and
direct customer visits. O'Gara emphasizes the cross-marketing of military and
commercial products, which it believes strengthens the image of each product
group. 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 O'Gara as the
exclusive armorer to AM General for HMMWVs and allow O'Gara to benefit from the
AM General distribution network and save on certain costs, such as exhibitions
where AM General and O'Gara otherwise would both show products. Additionally,
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.
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. 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
O'Gara emphasizes engineering excellence and has an extensive engineering
staff. Design engineers use state-of-the-art two-dimensional and
three-dimensional computer aided design and engineering (CAD/CAE) systems in
conjunction with coordinate measuring machines to develop electronic models
which generally are converted to solid models or prototypes. Manufacturing
engineers concentrate on 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 O'Gara has been able to reduce both the time and cost necessary to
produce its armored vehicles. 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.
O'Gara estimates that it expended approximately $2.8 million in 2000 on
its engineering and development efforts. These amounts include expensed amounts
reimbursed under a Systems Technical Support Contract described under "U.S.
Government Contracts."
U.S. GOVERNMENT CONTRACTS
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,
O'Gara has been awarded contracts to armor a total of 2,892 HMMWVs. Of these,
2,682 Up-Armored HMMWVs have been shipped, as follows:
NUMBER OF
YEAR SHIPPED HMMWVS
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1993...................................... 0
1994...................................... 139
1995...................................... 26
1996...................................... 507
1997...................................... 366
1998...................................... 460
1999...................................... 557
2000...................................... 377
Through June 30, 2001..................... 250
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Total........................... 2,682
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Prior to March 2000, 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 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 estimated revenues
is between $125.0 million and $215.0 million. The initial order is for 360
Up-Armored HMMWVs with estimated revenues 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, O'Gara is experiencing continued
growth in fleet management activity and sale of spare parts. The U.S. Military
signed a five year spare parts corporate contract with O'Gara in March 1999.
This contract designates 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.
O'Gara is in the last year of a System Technical Support contract with the
U.S. Military to support continued research and development of the Up-Armored
HMMWV program. This contract, signed in 1997, has required 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 O'Gara to provide system technical
support for the period from July 2001 through June 2002 plus three one-year
renewal options.
As a subcontractor to Lockheed Martin Corporation, O'Gara has provided
armoring for certain missile weapons systems. O'Gara was first engaged in
September 1993 by Lockheed Martin to armor launch systems of missiles. 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 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 O'Gara, totaling $1.5 million. The Phase III contract for $3.6 million will
require prototype development of nine cabs through 2001. It is anticipated that
this will eventually result in a multi-year production contract.
COMPETITION
The markets for O'Gara's products and services are highly competitive.
O'Gara competes in a variety of fields, with competitors ranging from small
businesses to multinational corporations.
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., 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. 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 O'Gara, 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, ICTS
International, N.V. and Tyco International Ltd.
SEASONALITY, BACKLOG AND RELATED MATTERS
Approximately 32.1% of O'Gara's net sales during 2000 were derived from
U.S. Military contracts and an additional 15.5% were derived from commercial
contracts with U.S. governmental agencies or foreign governments. Military and
governmental contracts generally are awarded on a periodic or sporadic basis.
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,
O'Gara has significant fluctuations from time to time in its business.
Historically, these fluctuations have not been seasonal. 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.
O'Gara's backlog at December 31, 2000 was approximately $91.1 million.
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 O'Gara's products, there is
no certainty as to when net sales will be recognized from O'Gara's backlog.
However, 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.
O'Gara's net sales from government contracts and most commercial contracts
for its armoring products are recognized using the percentage-of-completion
method using a cost-to-cost methodology on long-term contracts. Under this
method, contract revenues are reported based on the percentage that costs to
date bear to total 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. Going forward the Company will use a
percentage of completion based on the units completed methodology.
PATENTS AND TRADEMARKS
O'Gara currently has four issued U.S. patents relating to its armoring
business. O'Gara has numerous federally registered trademarks and has
registered its trademarks in numerous foreign countries. Although O'Gara does
not believe that its ability to compete in any of its product markets is
dependent on its intellectual property, 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
O'Gara with important technological advantages over its competitors. Although
O'Gara has protected its technologies to the extent that it believes
appropriate, there can be no assurance that O'Gara's measures to protect its
proprietary rights will deter or prevent unauthorized use of O'Gara's
technologies. In other countries, O'Gara's proprietary rights may not be
protected to the same extent as in the United States.
PROPERTIES
O'Gara maintains executive offices and regional headquarters in Fairfield,
Ohio, and other regional headquarters in Lamballe, France and Sao Paulo,
Brazil. 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
Mexico City, Mexico 20,000 owned
Washington, D.C. area Not applicable leased
San Antonio, Texas Not applicable owned
FAIRFIELD, OHIO. This facility contains full production and assembly
facilities for O'Gara's armored commercial vehicles and the manufacturing and
distribution of Up-Armored HMMWVs. The facility is financed through tax-exempt
debt and is pledged to secure the repayment of 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.
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.
O'Gara's manufacturing capabilities include fully integrated manufacturing
programs which link production control, materials control, quality control and
accounting. 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 7. Financial Statements, Pro Forma Financial Information and Exhibits
(a) Financial Statements of the Business Acquired
Audited Combined Financial Statements of The Securities Products
and Service Group ("SPSG") as of December 31, 1999 and 2000 and for each of the
years ended December 31, 1998, 1999 and 2000 (the "O'Gara Audited Financial
Statements").
Unaudited Combined Financial Statements of SPSG as of December 31, 2000
and June 30, 2001 and for the six months ended June 30, 2000 and June 30, 2001
(the "O'Gara Unaudited Financial Statements" and collectively with the O'Gara
Audited Financial Statements, the "O'Gara Financial Statements.)"
(b) Pro Forma Financial Information
Unaudited pro forma condensed consolidated statements of operations for
the year ended December 31, 2000 and for the six months ended June 30, 2001 of
the Company which gives effect to the acquisition of O'Gara as if it had
occurred on January 1, 2000.
Unaudited pro forma condensed consolidated balance sheet as of June 30,
2001 of the Company which gives effect to the acquisition of O'Gara as if it had
occurred on June 30, 2001.
(c) Exhibits.
The following Exhibits are hereby filed as part of this Current Report
on Form 8-K:
Exhibit Description
- -------- -----------
2.1 Stock Purchase Agreement by and among Armor Holdings, Inc., Bengal
Acquisition Corp. and The Kroll-O'Gara Company incorporated by
reference to Exhibit 2.1 to our current report on Form 8-K filed on
April 27, 2001.
2.2 Amendment to the Stock Purchase Agreement dated as of August 20, 2001
23.1 Consent of Arthur Andersen LLP.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: August 21, 2001
ARMOR HOLDINGS, INC.
By: /s/ Robert R. Schiller
-----------------------------------------
Name: Robert R. Schiller
Title: Executive Vice President and Chief Financial Officer
INDEX TO FINANCIAL STATEMENTS
Page
Unaudited Pro Forma Financial Statements
Pro Forma Condensed Consolidated Statement of Operations for the Year ended
December 31, 2000 .........................................................F-3
Pro Forma Condensed Consolidated Statement of Operations for the Six
Months ended June 30, 2001................................................ F-5
Pro Forma Condensed Consolidated Balance Sheet as of June 30, 2001 ........ F-8
Audited Financial Statements of The Security Products and Services Group
("SPSG")
Report of Independent Public Accountants ................................ F-10
Combined Balance Sheet as of December 31, 1999 and 2000 ................... F-11
Combined Statements of Operations for the Years Ended December 31, 1998,
1999 and 2000. ........................................................... F-13
Combined Statements of Parent's Equity in Segment for the Years Ended
December 31, 1998, 1999 and 2000........................................... F-14
Combined Statements of Cash Flows for the Years Ended December 31, 1998,
1999 and 2000. . .......................................................... F-15
Notes to Combined Financial Statements. .................................. F-16
Unaudited Interim Financial Statements of The Security Products and
Services Group
Combined Balance Sheets as of December 31, 2000 and June 30, 2001 ......... F-35
Combined Statements of Operations for the Six Months Ended,
June 30, 2000 and 2001 F-37
Combined Statements of Cash Flows for the Six Months June 30, 2000
and 2001 ................................................................. F-38
Notes to Combined Unaudited Financial Statements ..........................F-39
F-1
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
The following unaudited pro forma condensed consolidated statements of
operations for the year ended December 31, 2000 and the six months ended June
30, 2001 are presented for informational purposes only and are not necessarily
indicative of actual results that would have been achieved had the transaction
been consummated at the beginning of, or for, the periods indicated. These pro
forma condensed consolidated statements of operations do not purport to indicate
results of operations as of any future period. The pro forma condensed
consolidated statement of operations for the year ended December 31, 2000 and
the six months ended June 30, 2001 reflect only anticipated cost savings
directly attributable to the acquisition of O'Gara which we believe would have
resulted had the acquisition occurred on January 1, 2000 and reflects the
implementation of Statement of Financial Accounting Standard No. 142, Goodwill
and Other Intangible Assets, as if it had been applied to the acquisition of
O'Gara. The unaudited pro forma condensed consolidated statements of operations
should be read in conjunction with our Consolidated Financial Statements and the
related notes thereto filed with our Form 10-K for the year ended December 31,
2000, and the Combined Financial Statements of SPSG included herein.
In preparing the unaudited pro forma condensed consolidated statement of
operations for the year ended December 31, 2000 and the six months ended June
30, 2001, we used a purchase price of $52.3 million (which excludes the $2
million contingent earnout) and a net tangible book value of $35.2 million.
F-2
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical Pro Forma
Armor SPSG (1) Adjustments Pro Forma
------------ ---------------- ----------------- ------------
Revenues $220,955 $104,992 $ 7,428 (2) (5) $333,375
Cost of sales 137,499 86,127 3,966 (2) (5) 227,592
Operating expenses 50,341 22,620 (849) (3) (5) 72,112
Amortization expense 3,429 1,077 (1,077) (4) (5) 3,429
Equity in earnings of
Unconsolidated subsidiary (87) - - (87)
Restructuring charges - 686 - 686
Integration and related charges 3,290 - - 3,290
------------ ---------------- ----------------- ------------
Operating income (loss) 26,483 (5,518) 5,388 26,353
Interest expense, net 1,896 2,266 333 (7) 4,495
Other (income) expense (1,803) 1,952 (109) (5) 40
Provision (benefit) for taxes 9,342 275 (2,124) (6) 7,493
------------ ---------------- ----------------- ------------
Net income (loss) $ 17,048 ($10,011) $7,288 $14,325
Earnings per common share:
Basic $0.75 $0.61
Diluted $0.73 $0.59
Weighted average common Shares outstanding:
Basic 22,630 1,009 (8) 23,639
Diluted 23,356 1,009 (8) 24,365
F-3
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(1) SPSG's combined results of operations are presented for the year ended
December 31, 2000.
(2) Reflects a change from O'Gara's revenue recognition policy on long-term
contracts from percentage of completion based on the cost incurred basis to
percentage of completion based on the units completed basis. For the year
ended December 31, 2000, this change in revenue recognition would have
resulted in an increase in revenues of approximately $9.3 million and an
increase in cost of sales of approximately $5.6 million.
(3) Represents an adjustment to operating expenses to reflect the reduction in
information technology consulting and data circuit costs of $262,000, and
reduced insurance fees of $100,000 pursuant to our existing contracts.
(4) Reflects the elimination of amortization expense for the SPSG companies
being acquired pursuant to this acquisition. According to Statement of
Financial Accounting Standard No. 141, Business Combinations, goodwill
arising from business combinations completed after July 1, 2001 will no
longer require annual amortization but rather be tested for impairment.
(5) Reflects the elimination of the Russian operations with revenues of $1.9
million, cost of sales of $1.6 million, operating expenses of $487,000,
amortization expense of $450,000 and other income of $109,000. These
operations are not being purchased as part of the O'Gara acquisition.
(6) Reflects the adjustment to the provision for taxes by applying our
estimated effective tax rate to the pretax pro forma income derived from
the pro forma adjustments described above.
(7) Reflects interest expense of $2.7 million related to the acquisition debt
incurred as a result of this transaction, net of the elimination of SPSG'a
allocated interest expense of $2.4 million.
(8) Reflects the issuance of 1,009,422 shares of our $0.01 par value per share
common stock valued at $15 million issued as part of the consideration for
the acquisition of O'Gara.
F-4
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
Historical Pro Forma
Armor SPSG (1) Adjustments Pro Forma
------------- -------------- ----------------- -------------
Revenues $ 112,930 $ 61,404 $ (2,668) (2) (5) $171,666
Cost of sales 69,707 50,250 (1,946) (2) (5) 118,011
Operating expenses 27,118 9,169 (313) (3) (5) 35,974
Amortization expense 1,778 448 (448) (4) (5) 1,778
Restructuring charges 9,959 - - 9,959
Integration and related charges 836 - - 836
------------- -------------- ----------------- -------------
Operating (loss) income 3,532 1,537 39 5,108
Interest expense, net 1,514 1,215 96 (7) 2,825
Other (income) expense (227) 292 13 (5) 78
Provision (benefit) for taxes 1,343 382 (691) (5) (6) 1,034
------------- -------------- ----------------- -------------
Net (loss) income $902 $(352) $621 $1,171
Earnings (loss) per common share:
Basic $0.04 $0.05
Diluted $0.04 $0.05
Weighted average common Shares outstanding:
Basic 22,934 1,009 (8) 23,943
Diluted 23,670 1,009 (8) 24,679
F-5
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(1) SPSG's combined results of operations are presented for the six months ended
June 30, 2001.
(2) Reflects a change from O'Gara's revenue recognition policy on long-term
contracts from percentage of completion based on the cost incurred basis to
percentage of completion based on the units completed basis. For the six
months ended June 30, 2001, this change in revenue recognition would have
resulted in an decrease in revenues of approximately $1.5 million and an
decrease in cost of sales of approximately $1.0 million.
(3) Represents an adjustment to operating expenses to reflect reduced
information technology consulting and data circuit costs of $52,000 and
reduced insurance fees of $75,000 pursuant to our existing contracts.
(4) Reflects the elimination of the historical amortization expense associated
with pre-existing goodwill on the SPSG companies being acquired pursuant to
this acquisition. In addition, no adjustment has been made to recognize
amortization of goodwill associated with this acquisition as the expected
acquisition will occur subsequent to June 30, 2001. According to Statement
of Financial Accounting Standard No. 142, Goodwill and Other Intangible
Assets, goodwill arising from business combinations completed after July 1,
2001 will no longer require annual amortization but rather be tested for
impairment.
(5) Reflects the elimination of the Russian operations with revenues of
$1.2 million, cost of sales of $917,000, operating expenses of $186,000,
amortization expense of $146,000 and other income of $13,000. These
operations are not being purchased as part of the O'Gara acquisition.
(6) Reflects an adjustment to the provision for taxes by applying our
estimated effective tax rate to the pretax pro forma income derived from
the pro forma adjustments described above.
(7) Reflects interest expense of $1.3 million related to the acquisition debt
incurred as a result of this transaction, net of the elimination of SPSG's
allocated interest expense of $1.2 million.
(8) Reflects the issuance of 1,009,422 shares of our $0.01 par value per share
common stock valued at $15 million issued as part of the consideration for
the acquisition of O'Gara.
F-6
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
The following unaudited pro forma condensed consolidated balance sheet as of
June 30, 2001 is presented for informational purposes only and is not
necessarily indicative of our financial position had the acquisition of O'Gara
been consummated on June 30, 2001. This pro forma condensed balance sheet does
not purport to indicate our financial position as of any future period. The pro
forma condensed consolidated balance sheet as of June 30, 2001 reflects those
adjustments directly attributable to the acquisition of O'Gara that we believe
would have resulted had the acquisition occurred on June 30, 2001. This
unaudited pro forma condensed balance sheet should be read in conjunction with
our Consolidated Financial Statements and the related notes thereto filed with
our Form 10-K for the year ended December 31, 2000, and the Combined Financial
Statements of SPSG included herein.
In preparing the unaudited pro forma condensed consolidated balance sheet as of
June 30, 2001, we used a purchase price of $52.3 million (which excludes the $2
million contingent earnout) of which $37.3 million would be paid in cash and
issuing 1,009,422 shares of our common stock valued at $15 million.
F-7
UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
AS OF JUNE 30, 2001
(AMOUNTS IN THOUSANDS)
Historical Pro Forma
Armor SPSG (1) Adjustments Pro Forma
------------ --------------- ---------------- ---------------
ASSETS
Current assets:
Cash and cash equivalents $ 4,981 $ 2,231 $ (125) (2) $ 7,087
Accounts receivable, net 51,591 14,777 (37) (2) 66,331
Related party receivable - 338 (338) (2) -
Costs and estimated earnings in excess
of billings on uncompleted contracts - 12,726 (12,726) (3) -
Inventories 30,474 18,512 9,130 (2) (3) 58,116
Prepaid expenses and other
current assets 19,612 3,795 (5,026) (2) (6) 18,381
------------ --------------- ---------------- ---------------
Total current assets 106,658 52,379 (9,122) 149,915
Property, plant and equipment, net 26,790 16,220 (638) (2) 42,372
Intangible assets, net 94,402 13,413 11,720 (4) (2) 119,535
Other assets 9,356 595 (352) (2) 9,599
------------ --------------- ---------------- ---------------
Total assets $237,206 $ 82,607 $ 1,608 $321,421
============ =============== ================ ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term debt $ 2,216 $ - $ - $ 2,216
Current portion of long-term debt and
capitalized lease obligations 514 2,070 - 2,584
Accounts payable, accrued expenses and
other current liabilities 16,994 26,451 960 (2) (6) 44,405
------------ --------------- ---------------- ---------------
Total current liabilities 19,724 28,521 960 49,205
Long-term debt and capitalized lease
obligations and other long term
liabilities 47,089 1,547 38,187 (2) (5) 86,823
------------ --------------- ---------------- ---------------
Total liabilities 66,813 30,068 39,147 136,028
Stockholders' equity:
Common stock 253 - 10 (7) 263
Additional paid in capital 153,851 - 14,990 (8) 168,841
Parent's equity in segment - 57,641 (57,641) (2) -
Deferred compensation (20) 20 (2)
Retained earnings 44,251 - 44,251
Accumulated other comprehensive income (2,593) (5,082) 5,082 (2) (2,593)
Treasury stock (25,369) - - (25,369)
------------ --------------- ---------------- ---------------
Total stockholders' equity 170,393 52,539 (37,539) 185,393
------------ --------------- ---------------- ---------------
Total liabilities and stockholders' equity $ 237,206 $ 82,607 $ 1,608 $321,421
============ =============== ================ ===============
F-8
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
(1) SPSG's combined balance sheet as of June 30, 2001.
(2) Reflects the elimination of the Russian operations as well as certain other
assets and liabilities of SPSG that will not be purchased by us. The
elimination of the Russian operations results in a reduction in cash of
$125,000, a reduction in accounts receivable of $37,000, a reduction of
inventory of $442,000, a reduction of other current assets of $20,000 a
reduction in land, buildings and equipment of $679,000, a reduction in
intangible assets of $1.4 million, a reduction in other assets of $352,000,
a reduction in accounts payable, accrued expenses and other current
liabilities of $483,000, a reduction in long-term debt, capitalized lease
obligations and other long-term liabilities of $132,000, and a reduction in
Parent's equity in segment of $2.4 million.
(3) Reflects the adjustment of SPSG's historical costs in excess of billings and
inventory resulting from a change in O'Gara's revenue recognition policy on
long-term contracts from percentage of completion based on the cost incurred
basis to percentage of completion on the units completed basis. This change
in revenue recognition results in a decrease in costs in excess of billings
of $12.7 million and an increase in inventory of $9.6 million.
(4) Reflects the excess of purchase price over the fair value of the net assets
acquired of approximately $25.1 million, net of O'Gara's existing goodwill
of $13.4 million.
(5) Reflects borrowings of approximately $37.3 million necessary to consummate
the O'Gara acquisition.
(6) The adjustment to prepaid expenses and other current assets, accounts
payable, accrued expenses and other current liabilities includes the accrual
of direct costs in the amount of $5.0 million, net of $4.0 million incurred
by us through June 30, 2001.
(7) Reflects the issuance of 1,009,422 shares of our common stock with $0.01 par
value per share for the acquisition of the O'Gara. The number of shares was
determined by using the average closing price of the ten trading days up to
and including August 8, 2001.
(8) Represents additional paid in capital associated with the issuance of
1,009,422 shares of our common stock at an assumed price of $14.86 per share
issued as consideration of the O'Gara acquisition.
F-9
Report of Independent Public Accountants
To The Kroll-O'Gara Company:
We have audited the accompanying combined balance sheets of THE SECURITY
PRODUCTS AND SERVICES GROUP (a wholly-owned segment of The Kroll-O'Gara Company
- - see Note 1) as of December 31, 1999 and 2000 and the related combined
statements of operations, parent's equity in segment 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, the combined financial statements referred to above present
fairly, in all material respects, the financial position of The Security
Products and Services Group 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 2(o) to the combined 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
F-10
THE SECURITY PRODUCTS AND SERVICES GROUP
Combined Balance Sheets
As of December 31, 1999 and 2000
- --------------------------------------------------------------------------------
1999 2000
---- ----
ASSETS (NOTE 7)
CURRENT ASSETS:
Cash and cash equivalents $ 3,238,003 $ 2,160,667
Trade accounts receivable, net of
allowance for doubtful accounts of $958,749 and
$1,220,454 in 1999 and 2000, respectively (Note 4) 23,070,754 22,700,811
Related party receivables (Note 6) 334,934 411,067
Costs and estimated earnings in excess of billings
on uncompleted contracts (Note 4) 24,159,724 8,634,134
Inventories (Note 4) 21,194,072 18,641,172
Prepaid expenses and other 4,245,948 3,712,065
Deferred tax asset (Note 5) 455,499 1,001,368
------------ -------------
Total current assets 76,698,934 57,261,284
------------ -------------
PROPERTY, PLANT AND EQUIPMENT, at cost (Notes 3, 4 and 7):
Land 1,970,094 2,350,362
Buildings and improvements 6,630,563 6,409,884
Leasehold improvements 1,109,421 734,420
Furniture and fixtures 4,989,378 5,520,345
Machinery and equipment 11,430,893 13,097,138
------------ -------------
26,130,349 28,112,149
Less-accumulated depreciation (9,155,674) (11,034,471)
------------ -------------
16,974,675 17,077,678
------------ -------------
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER
INTANGIBLE ASSETS, net of accumulated amortization
of $3,181,580 and $3,836,381 in 1999
and 2000, respectively (Note 3) 16,924,465 14,452,643
OTHER ASSETS (Note 4) 753,891 652,822
------------ -------------
17,678,356 15,105,465
------------ -------------
$111,351,965 $ 89,444,427
============ =============
The accompanying notes to combined financial statements are an integral part of
these combined balance sheets.
F-11
THE SECURITY PRODUCTS AND SERVICES GROUP
COMBINED BALANCE SHEETS
AS OF DECEMBER 31, 1999 AND 2000
- --------------------------------------------------------------------------------
1999 2000
---- ----
LIABILITIES AND PARENT'S EQUITY IN SEGMENT
CURRENT LIABILITIES:
Current portion of debt due to third-parties (Note 7) $ 2,245,927 $ 2,111,147
Trade accounts payable 21,889,237 18,041,155
Billings in excess of costs and estimated
earnings on uncompleted contracts 360,725 -
Accrued liabilities (Note 4) 6,665,966 8,304,120
Customer deposits and deferred revenue 1,381,456 5,498,582
------------ -----------
Total current liabilities 32,543,311 33,955,004
OTHER LONG-TERM LIABILITIES 521,787 174,352
DEFERRED INCOME TAXES (Note 5) 26,201 210,815
LONG-TERM DEBT DUE TO THIRD PARTIES, net of current portion (Note 7) 853,639 1,004,296
------------ -----------
Total liabilities 33,944,938 35,344,467
------------ -----------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 11)
PARENT'S EQUITY IN SEGMENT (Notes 1 and 10):
Advances from Kroll-O'Gara, net 77,360,861 58,138,979
Deferred compensation (214,171) (72,176)
Accumulated other comprehensive income (loss) 260,337 (3,966,843)
------------ -----------
Total parent's equity in segment 77,407,027 54,099,960
------------ -----------
$111,351,965 $89,444,427
============ ===========
The accompanying notes to combined financial statements are an integral part of
these combined balance sheets.
F-12
THE SECURITY PRODUCTS AND SERVICES GROUP
Combined Statements of Operations
For the Years Ended December 31, 1998, 1999 and 2000
- --------------------------------------------------------------------------------
1998 1999 2000
---- ---- ----
NET SALES $137,736,262 $117,323,965 $104,991,972
COST OF SALES 99,075,439 84,025,859 86,126,825
-------------- -------------- -------------
Gross profit 38,660,823 33,298,106 18,865,147
OPERATING EXPENSES:
Selling and marketing 9,423,372 9,135,057 6,782,321
General and administrative 11,385,896 16,348,053 16,915,286
Restructuring charge (Note 4(e)) - 291,757 685,620
-------------- -------------- -------------
Operating expenses 20,809,268 25,774,867 24,383,227
-------------- -------------- -------------
Operating income (loss) 17,851,555 7,523,239 (5,518,080)
OTHER INCOME (EXPENSE):
Interest expense (2,410,211) (1,994,705) (2,365,341)
Interest income 472,365 71,306 99,032
Litigation settlement (Note 11(c)) - - (1,254,457)
Other, net (547,593) (244,391) (697,298)
-------------- -------------- -------------
Other expense (2,485,439) (2,167,790) (4,218,064)
-------------- -------------- -------------
Income (loss) before provision for income taxes and
cumulative effect of change in accounting principle 15,366,116 5,355,449 (9,736,144)
Provision for income taxes (Note 5) (5,978,353) (3,534,299) (274,626)
-------------- -------------- -------------
Income (loss) before cumulative effect of change in
accounting principle 9,387,763 1,821,150 (10,010,770)
Cumulative effect of change in accounting principle, net of
applicable tax benefit of $408,000 in 1999 (Note 2(o)) - (778,041) -
-------------- -------------- -------------
Net income (loss) $ 9,387,763 $ 1,043,109 $ (10,010,770)
============== ============== =============
The accompanying notes to combined financial statements are an integral part of
these combined statements.
F-13
THE SECURITY PRODUCTS AND SERVICES GROUP
Combined Statements of Parent's Equity in Segment For the Years Ended December
31, 1998, 1999 and 2000
- --------------------------------------------------------------------------------
ACCUMULATED
OTHER
COMPREHENSIVE ADVANCES FROM DEFERRED COMPREHENSIVE
INCOME (LOSS) KROLL O'GARA COMPENSATION INCOME (LOSS) Total
------------- ------------ ------------ ------------- -----
BALANCE, December 31, 1997 $27,246,665 $ - $ (547,406) $ 26,699,259
Comprehensive income:
Net income $ 9,387,763 9,387,763 - - 9,387,763
--------------
Other comprehensive income (loss),
net of tax (Notes 2(m) and 12):
Foreign currency translation
adjustment, net of $330,000
tax benefit (494,432) - - - -
--------------
Other comprehensive loss (494,432) - - (494,432) (494,432)
--------------
Comprehensive income $ 8,893,331 - - - -
==============
Change in advances from Kroll-O'Gara 29,998,511 - - 29,998,511
---------- ------------- ------------ ----------
BALANCE, December 31, 1998 66,632,939 - (1,041,838) 65,591,101
Comprehensive income (loss):
Net income $ 1,043,109 1,043,109 - - 1,043,109
--------------
Other comprehensive income (loss),
net of tax (Notes 2(m) and 12):
Foreign currency translation
adjustment, net of $868,000
tax provision 1,302,175 - - - -
--------------
Other comprehensive income 1,302,175 - - 1,302,175 1,302,175
--------------
Comprehensive income $ 2,345,284 - - - -
==============
Change in advances from Kroll-O'Gara 9,271,218 - - 9,271,218
Deferred compensation related to
restricted stock of Kroll-O'Gara
(Note 10(b)) 413,595 (214,171) - 199,424
---------- ------------- ------------ ----------
BALANCE, December 31, 1999 77,360,861 (214,171) 260,337 77,407,027
Comprehensive income (loss):
Net loss $(10,010,770) (10,010,770) - - (10,010,770)
--------------
Other comprehensive income (loss),
net of tax (Notes 2(m) and 12):
Foreign currency translation
adjustment, net of $131,000 tax
provision (4,227,180) - - - -
--------------
Other comprehensive loss (4,227,180) - - (4,227,180) (4,227,180)
--------------
Comprehensive loss $(14,237,950) - - - -
==============
Change in advances from Kroll-O'Gara (9,211,112) - - (9,211,112)
Deferred compensation related to
restricted stock of Kroll-O'Gara
(Note 10(b)) - 141,995 - 141,995
---------- ------------- ------------ ----------
BALANCE, December 31, 2000 $58,138,979 $ (72,176) $(3,966,843) $ 54,099,960
=========== ============= ============ ============
The accompanying notes to combined financial statements are an integral part of
these combined statements.
F-14
THE SECURITY PRODUCTS AND SERVICES GROUP
Combined Statements of Cash Flows (Note 14) For the Years Ended December 31,
1998, 1999 and 2000
- ------------------------------------------------------------------------------
1998 1999 2000
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 9,387,763 $ 1,043,109 $(10,010,770)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operations--
Depreciation and amortization 2,413,473 3,688,942 3,720,053
Bad debt expense 337,203 1,132,518 1,186,307
Shareholder stock compensation - 199,424 91,136
Change in assets and liabilities, net of effects of acquisitions--
Trade receivables (6,794,252) (2,788,128) (1,392,352)
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 (4,094,132) (976,767) 1,925,246
Accounts payable and income taxes currently payable 1,198,949 1,899,901 (3,395,843)
Billings in excess of costs and estimated earnings on
uncompleted contracts (68,214) 178,069 (360,725)
Amounts due to/from related parties (158,862) (294,758) (76,133)
Deferred taxes 175,885 321,056 (361,255)
Accrued liabilities, long-term liabilities and customer
deposits 2,457,446 (3,472,586) 5,841,556
------------- --------- ---------
Net cash provided by (used in) operating activities (9,655,037) 3,179,153 12,661,518
------------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (3,868,200) (6,176,704) (5,013,508)
Acquisition, net of cash acquired (Note 3) (3,200,000) - -
------------- --------- ---------
Net cash used in investing activities (7,068,200) (6,176,704) (5,013,508)
------------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from third party debt, net 457,511 - 84,627
Payments of third party debt, net (559,112) (495,859) (68,750)
Increase (decrease) in advances from Kroll-O'Gara, net 16,748,478 2,823,565 (9,160,253)
Other (581,551) 1,608,717 599,417
------------- --------- ---------
Net cash provided by (used in) financing activities 16,065,326 3,936,423 (8,544,959)
------------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (657,911) 938,872 (896,949)
Effects of foreign currency exchange rates on cash and cash
equivalents 87,119 (179,387) (180,387)
CASH AND CASH EQUIVALENTS, beginning of year 3,049,310 2,478,518 3,238,003
------------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year $ 2,478,518 $ 3,238,003 $ 2,160,667
============= =========== =============
The accompanying notes to combined financial statements are an integral part of
these combined statements.
F-15
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(1) Basis of Presentation-
The Security Products and Services Group (SPSG or the Company) is a
wholly-owned segment of The Kroll-O'Gara Company (Kroll-O'Gara).
On April 20, 2001, the Board of Directors of Kroll-O'Gara approved a
definitive agreement, subject to a limited number of closing conditions,
to sell the common stock of the active companies that comprise
Kroll-O'Gara's SPSG segment, other than SPSG's subsidiaries that provide
kidnap and ransom and risk information services, SPSG's Russian
subsidiaries and certain other inactive companies, to Armor Holdings,
Inc. (Armor) for up to $56.5 million. The accompanying SPSG combined
financial statements and footnotes exclude the subsidiaries that provide
kidnap and ransom and risk information services as they will continue to
be operated by Kroll-O'Gara after the sale of SPSG. The Russian
subsidiaries and certain other inactive companies are included within
the accompanying combined financial statements as they have historically
been included within the SPSG segment and might not be operated by
Kroll-O'Gara after the sale. The Russian subsidiaries and certain other
inactive companies had combined total assets of approximately $3.0
million at December 31, 2000 and net revenues of approximately $1.9
million for the year ended December 31, 2000.
Of the $56.5 million sales price, a portion ($53.0 million subject to
adjustment) 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
may be made based on the Company's achievement of a gross profit target
for the year ending December 31, 2001. At Armor's option, 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, are less than approximately
$37.4 million. Kroll-O'Gara currently believes the sale of SPSG will
approximate the value of parent's equity in segment. In the event the
sale to Armor is not consummated, Kroll-O'Gara will continue to evaluate
all options available to it, including seeking other buyers or other
alternatives.
The accompanying combined financial statements are presented on a
carve-out basis and include the historical results of operations and
assets and liabilities of the SPSG entities as noted above. These
combined financial statements have been prepared from Kroll-O'Gara's
historical accounting records.
SPSG was allocated $2.5 million, $3.9 million and $4.5 million of
overhead costs related to Kroll-O'Gara's corporate administrative
functions in 1998, 1999 and 2000, respectively. The allocations were
based on a specific identification of Kroll-O'Gara's administrative costs
attributable to SPSG and, to the extent that such identification was not
practicable, on the basis of SPSG's sales as a percentage of
Kroll-O'Gara's sales. The expenses associated with various corporate
initiatives of Kroll-O'Gara were not allocated to SPSG. The allocated
costs are included in the various operating expense captions in the
accompanying combined statements of operations.
SPSG's operations have been financed through its operating cash flows and
advances from Kroll-O'Gara. SPSG's interest expense includes an
allocation of Kroll-O'Gara's interest expense based on Kroll-O'Gara's
weighted average interest rate applied to intercompany advances. Interest
expense allocated from Kroll-O'Gara was $2.0 million, $1.7 million and
$1.9 million for the years ended December 31, 1998, 1999 and 2000,
respectively, at weighted average interest rates of 6.2%, 5.4%, and 9.5%
for the years ended December 31, 1998, 1999, and 2000, respectively.
Income tax was calculated as if SPSG had filed separate income tax
returns. SPSG's current income taxes receivable or payable at any point
in time are included in the advances from Kroll-O'Gara balance in
parent's equity in segment. The advances from Kroll-O'Gara balance in
parent's equity in segment also includes the equity accounts
F-16
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
of specific legal entities included in SPSG, the net assets or liabilities of
divisions included in SPSG and the net intercompany receivable and payable
balances of all entities and divisions with Kroll-O'Gara.
Management believes that the allocation methodologies utilized are
reasonable.
(2) Summary of Significant Accounting Policies-
(a) Nature of Operations--SPSG markets ballistic and blast-protected
vehicles and security services. All material intercompany
accounts and transactions are eliminated. Investments in 20% to
50% owned entities are accounted for using the equity method and
investments in less than 20% owned entities are accounted for
using the cost method. Affiliated entities are not included in
the accompanying combined financial statements, and include
entities that are directly or indirectly owned by current
shareholders or former shareholders.
(b) Revenue Recognition--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.
(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. SPSG 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 SPSG 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 SPSG's client base, along with the different industries
and geographic regions in which SPSG's clients operate. SPSG
does not generally require collateral or other security to
support client receivables, although SPSG does require
retainers, up-front deposits or irrevocable letters-of-credit in
certain situations. SPSG has established an allowance for
doubtful accounts based upon facts surrounding the credit risk
of specific clients and past history. Management does not
anticipate incurring losses on its trade receivables in excess
of established allowances.
(e) Property, Plant and Equipment--Property, plant and equipment are
stated at cost. Depreciation is computed on 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 4-10 years
Machinery and equipment 3-12 years
Leasehold improvements Life of lease
F-17
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(f) Impairment of Long-Lived Assets--Pursuant to the provisions of
Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of" (SFAS 121), long-lived assets, certain
identifiable intangibles and goodwill related to those assets must
be reviewed for impairment by asset group for which the lowest
level of independent cash flows can be identified. In accordance
with this standard, SPSG 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, SPSG believes no
impairment existed at December 31, 2000. However, it is possible,
due to a change in circumstances, that carrying values could
become impaired in the future. Such impairment could have a
material effect on the results of operations in a particular
reporting period.
(g) Costs in Excess of Assets Acquired--Costs in excess of assets
acquired represents the excess of the purchase cost over the fair
value of net assets acquired in a purchase business combination.
Costs in excess of assets acquired, net of accumulated
amortization, as of December 31, 1999 and 2000 were approximately
$15,218,000 and $13,027,000, respectively. Amortization is
recorded on a straight-line basis over periods ranging from 15 to
40 years. Amortization of costs in excess of assets acquired for
the years ended December 31, 1998, 1999, and 2000 was
approximately $642,000, $973,000 and $673,000, respectively.
(h) 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 two and one-half years to five years. Other intangible
assets, net of accumulated amortization, as of December 31, 1999
and 2000 were approximately $1,707,000 and $1,426,000,
respectively. Amortization of other intangible assets for the
years ended December 31, 1998, 1999 and 2000 was approximately
$469,000, $489,000 and $404,000, respectively.
(i) Foreign Currency Translation--Assets and liabilities of foreign
operations are translated using yearend exchange rates and
revenues and expenses are translated using exchange rates
prevailing during the year, with gains or losses resulting from
translation included as a separate component of parent's equity
in segment.
Gains or losses resulting from foreign currency transactions are
translated to local currency at the rates of exchange prevailing
at the dates of the transactions. Amounts receivable or payable in
foreign currencies, other than the subsidiary's local currency,
are translated at the rates of exchange prevailing at the balance
sheet date. The effect of transactional gains or losses is
included in other income (expense) in the accompanying combined
statements of operations.
(j) Use of Estimates--The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States 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.
(k) Research and Development--Research and development costs are
expensed as incurred. SPSG 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 combined statements of operations.
(l) Advertising--SPSG expenses the cost of advertising as incurred.
Advertising expenses for the years ended December 31, 1998, 1999
and 2000 were approximately $1,340,000, $1,510,000 and $1,554,000,
respectively.
F-18
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(m) New Accounting Pronouncements--In 1998, SPSG adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" (SFAS 130), which established standards for reporting and
displaying comprehensive income and its components in a financial
statement that is displayed with the same prominence as other
financial statements. SPSG has chosen to disclose comprehensive
income, which encompasses net income and foreign currency
translation adjustments, in the combined statements of parent's
equity in segment. The accumulated other comprehensive income
(loss) balances of ($1.0) million, $0.3 million and ($4.0) million
at December 31, 1998, 1999 and 2000, respectively, consisted
entirely of foreign currency translation adjustments.
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 derivative instruments (including certain
derivative instruments embedded in other contracts) be recorded in
the balance sheet as assets and liabilities measured at 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. SPSG has several
forward contracts in place in association with its net investment
in one of its subsidiaries. These instruments have historically
qualified for hedge accounting throughout the periods presented in
the accompanying combined financial statements. SPSG has adopted
the provisions of SFAS 133 beginning on January 1, 2001. SPSG 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, SPSG will account for changes in the
fair value of its net investment hedge contracts with the related
changes in fair value reported in other comprehensive income
(loss). SPSG does not expect that it will realize any material
charges to earnings pursuant to SFAS 133. See Note 12 for further
discussion. However, in the event of a future change in facts or
in the underlying net investment hedge relationships, SPSG could
experience future volatility in earnings. A sale of net assets or
portions of the business that does not include the corresponding
hedge instrument could also result in future volatility in
earnings.
(n) Stock-Based Compensation--SPSG has elected to account for the cost
of its employee stock options and other forms of employee
stock-based compensation plans utilizing the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25
(APB 25) as allowed by Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). APB
25 requires compensation cost for stock-based compensation plans
to be recognized based on the difference, if any, between the fair
market value of the stock on the date of grant and the option
exercise price. SFAS 123 established a fair value-based method of
accounting for compensation cost related to stock options and
other forms of stock-based compensation. SFAS 123 allows an entity
to continue to measure compensation cost using the principles of
APB 25 if certain pro forma disclosures are made. The pro forma
disclosures required by SFAS 123 are presented in Note 10(c).
(o) 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. SPSG's former practice
was to capitalize certain of these expenses and amortize them over
periods ranging from one to five years. SPSG adopted the
provisions of this statement in the first quarter of 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.
F-19
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(p) Derivative Financial Instruments--Financial instruments in the
form of foreign currency exchange contracts are utilized by SPSG
to hedge its exposure to movements in foreign currency exchange
rates. SPSG 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 12 for further discussion.
(q) 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," SPSG has made reclassifications in the 1998 and
1999 combined 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.
(3) Mergers and Acquisitions-
Kroll-O'Gara completed one acquisition in SPSG in 1998 that was
accounted for as a purchase business combination. In September 1998,
Kroll-O'Gara, through its O'Gara-Hess & Eisenhardt de Columbia
(OHE-Columbia) subsidiary, completed the acquisition of the assets of
Protec, S.A. (Protec), headquartered in Bogota, Colombia, which
specializes in vehicle armoring systems and manufacturing bullet and
smash resistant glass for its own use and for sale to third parties.
OHE-Columbia has been included in SPSG. The purchase price of this
acquisition amounted to approximately $4.1 million and consisted of $3.2
million in cash and 38,788 shares of Kroll-O'Gara common stock (valued
at approximately $0.9 million or an average of $22.95 per share). For
accounting purposes, the acquisition was effective on October 1, 1998
and the results of operations of OHE-Columbia are included in the
combined financial statements from that date forward. The resulting
goodwill from this transaction is being amortized over a 20 year period.
F-20
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
In connection with the 1998 purchase acquisition of Protec, the original
assets acquired and liabilities assumed were as follows (dollars in
thousands):
FAIR VALUE OF ASSETS ACQUIRED INCLUDING:
Other current assets $ 75
Property, plant and equipment 311
Costs in excess of assets acquired
and other intangible assets 3,917
-----
4,303
Less: Cash paid for net assets (3,200)
Fair value of Kroll-O'Gara stock issued (890)
-----
$ 213
=========
LIABILITIES ASSUMED INCLUDING:
Liabilities assumed and acquisition costs $ 99
Debt 114
-----
$ 213
=========
(4) Balance Sheet Accounts-
(a) Trade Accounts Receivable and Costs and Estimated Earnings in
Excess of Billings on Uncompleted Contracts--The following
summarizes the components of trade accounts receivable and costs
and estimated earnings in excess of billings on uncompleted
contracts:
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
=========== ============
Other contracts and receivables:
Billed receivables $18,193,184 $15,874,278
Costs and estimated earnings in excess of billings on uncompleted
contracts 10,331,795 1,368,846
------------ ---------------
Total other contracts and receivables $28,524,979 $17,243,124
=========== ============
Total trade accounts receivable, net $23,070,754 $22,700,811
=========== ============
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 from the balance sheet date as
shipments are made. Amounts receivable on other contracts are also generally
billed as shipments are made. It is estimated that
F-21
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
substantially all 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 AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS END OF PERIOD
------ -------- ---------- -------------
Year ended December 31, 1998 $657,254 $ 337,203 $(484,947) $ 509,510
Year ended December 31, 1999 509,510 1,132,518 (683,279) 958,749
Year ended December 31, 2000 958,749 1,186,307 (924,602) 1,220,454
(b) Inventories--Inventories are stated at the lower 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 6,699,119 6,990,294
--------- ---------
$21,194,072 $18,641,172
=========== ===========
The following summarizes activity in valuation reserves for inventory
obsolescence:
ADDITIONS
BALANCE AT CHARGED TO
BEGINNING OF COSTS AND BALANCE AT
PERIOD EXPENSES DEDUCTIONS END OF 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
F-22
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(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 LIFE DECEMBER 31,
DESCRIPTION (YEARS) 1999 2000
----------- ------- ---- ----
Security deposits - $ 95,065 $ 63,691
Deferred financing fees 30 152,940 152,940
Investment in unconsolidated subsidiary and other 20 493,316 474,987
Advances to Kroll-O'Gara shareholder - 80,119 40,000
--------- --------
821,440 731,618
Less- accumulated amortization (67,549) (78,796)
--------- --------
$753,891 $652,822
======== ========
(d) Accrued Liabilities--Accrued liabilities consist of the following:
DECEMBER 31,
DESCRIPTION 1999 2000
----------- ---- ----
Payroll and related benefits $3,625,072 $2,538,146
Accrued professional fees - 124,199
Property, sales and other taxes payable 400,306 683,567
Accrued medical costs 332,394 295,845
Accrued interest - 5,052
Accrued warranty reserve 442,597 464,933
Accrued restructuring reserve - 315,146
Other accruals 1,865,597 3,877,232
--------- ---------
$6,665,966 $8,304,120
========== ==========
(e) Restructuring of Operations--In the first quarter of 1999, SPSG
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 non-recurring pre-tax restructuring charge
recorded pursuant to the 1999 Plan was approximately $0.3
million. Total payments or writeoffs made pursuant to the 1999
Plan through December 31, 1999 were $0.3 million. SPSG does not
expect to incur any other significant restructuring charges in
future periods related to the 1999 Plan. The principal element
of the restructuring plan was the elimination of approximately
55 employees. The components of the restructuring charge in 1999
were as follows:
DESCRIPTION EXPENSE
-----------------------------------------------------------------------------------------
Severance and related costs $195,095
Writedown of property, plant and equipment 96,662
--------
$291,757
========
In the third quarter of 2000, SPSG implemented and completed a plan to
reduce costs and improve operating efficiencies (the 2000 Plan) with a total
non-recurring pre-tax restructuring charge of approximately $0.7 million. Total
payments pursuant to the 2000 Plan through December 31, 2000 were $0.4 million.
SPSG does not expect to incur any other significant restructuring charges in
future periods
F-23
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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.
(5) Income Taxes-
SPSG accounts for income taxes under the liability method pursuant to
Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under the liability method, deferred tax liabilities and
assets are determined based on the differences between the financial
reporting and tax bases of assets and liabilities using enacted tax
rates.
SPSG is a wholly-owned subsidiary of Kroll-O'Gara and does not file an
individual tax return. Accordingly, for purposes of these separate
combined financial statements, SPSG has computed deferred income tax
assets and liabilities using the separate return method as allowed by
SFAS 109. Under this method, the allocation of tax expense or tax
benefit is based on what SPSG's current and deferred tax expense would
have been had SPSG filed separate tax returns. This method also assumes
that all net operating loss carryforwards are available to be utilized
by the respective subsidiaries in the segment.
SPSG's provision for income taxes, excluding the cumulative effect of
a change in accounting principle, is summarized as follows:
1998 1999 2000
---- ---- ----
Currently payable:
Federal $4,019,928 $2,813,258 $ -
State and local 709,399 496,457 -
Foreign 1,632,204 592,815 322,402
---------- ---------- --------
6,361,531 3,902,530 322,402
---------- ---------- --------
Deferred:
Federal (325,701) (128,546) 41,790
State and local (57,477) (22,684) 7,375
Foreign - (217,001) (96,941)
---------- ---------- --------
(383,178) (368,231) (47,776)
---------- ---------- --------
$5,978,353 $3,534,299 $274,626
========== ========== ========
F-24
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
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 $5,224,479 34.0% $1,820,853 34.0% $(3,310,289) (34.0)%
State and local income taxes,
net of federal benefit 433,063 2.8 285,680 5.3 62,979 0.7
Nondeductible expenses (106,743) (0.7) 314,421 5.9 770,133 7.9
Change in valuation allowance 107,206 0.7 661,620 12.4 2,418,132 24.8
Effect of foreign losses 156,041 1.0 31,262 0.6 284,507 2.9
Other 164,307 1.1 420,463 7.8 49,164 0.5
---------- ---- ---------- ---- ------------- ----
Provision for income taxes $5,978,353 38.9% $3,534,299 66.0% $ 274,626 2.8%
========== ==== ========== ==== ============= ====
The components of SPSG's combined deferred income tax assets and
liabilities as of December 31 are summarized below:
1999 2000
-------------- --------------
Deferred tax assets:
Allowance for doubtful accounts $ 213,396 $ 467,274
Depreciation and amortization 78,838 37,791
Net operating loss carryforwards 867,985 3,287,382
Payroll and other benefits 534,734 556,921
Other accruals 212,764 220,786
Other 89,300 327,482
----------- ------------
1,997,017 4,897,636
Valuation allowance (867,985) (3,287,382)
----------- ------------
Net deferred tax assets 1,129,032 1,610,254
----------- ------------
Deferred tax liabilities:
Percentage of completion on foreign subsidiaries (201,148) -
Foreign leasing transactions (147,146) (145,332)
Other (351,440) (674,369)
----------- ------------
(699,734) (819,701)
----------- ------------
Net deferred tax asset $ 429,298 $ 790,553
=========== ============
SPSG has certain domestic and foreign net operating loss
carryforwards. The domestic net operating loss carryforward approximated $5.9
million at December 31, 2000 and expires in 2015. There was no domestic net
operating loss carryforward at December 31, 1999. The foreign net operating
loss carryforwards approximated $2.6 million and $3.9 million at December 31,
1999 and 2000, respectively, and relate primarily to Mexico and the
Philippines. These carryforwards expire beginning in 2001. A valuation
allowance for all existing domestic and foreign net operating loss
carryforwards has been provided as it is not certain that the tax benefit will
be realized in the foreseeable future. Adjustments to the valuation allowance,
if any, will be recorded in the periods in which it is determined the asset is
realizable.
F-25
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(6) Related Party Transactions-
(a) Summary of Related Party Transactions--The following summarizes
transactions with related parties:
YEARS ENDED DECEMBER 31,
------------------------
1998 1999 2000
---- ---- ----
Purchases
from Kroll-O'Gara Shareholder $ 118,700 $ 90,350 $ -
from affiliated entities 1,325,410 - -
Lease expense to affiliated entities 838,597 566,213 450,764
Non-interest bearing advances to Kroll-O'Gara shareholders 562,541 132,707 92,587
Non-interest bearing advances to affiliated entities 282,346 282,346 358,480
(b) Equipment Leases with Affiliated Entities--SPSG is currently
leasing various equipment from an affiliated entity under
month-to-month lease agreements. Rental expense approximated
$547,000, $484,000 and $451,000 for the years ended December 31,
1998, 1999 and 2000, respectively.
(7) Long-Term Debt Due to Third Parties-
(a) Debt Specifically Allocated to SPSG--The components of long-term
debt due to third parties are as follows at:
DECEMBER 31,
------------
1999 2000
---- ----
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 certain property,
plant and equipment and a bank letter of credit (Note 11) $ 1,275,974 $ 1,207,224
Notes payable to former shareholders of acquired company, interest at
10%, payable in 2001 250,000 250,000
-----------------------------------------------------------------------
Other notes payable, interest at 6% to 10.9%, payable in scheduled
installments through November 2010, certain notes secured by
various equipment 1,573,592 1,658,219
-- ------------ -----------
3,099,566 3,115,443
Less -- current portion (2,245,927) (2,111,147)
-- ------------ -----------
$ 853,639 $ 1,004,296
-- ============ ===========
Scheduled maturities of long-term debt at December 31, 2000 are as
follows:
2001 $2,111,147
2002 179,503
2003 150,585
2004 155,616
2005 166,961
Thereafter 351,631
-------
$3,115,443
==========
F-26
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Included in other notes payable is a foreign revolving
line-of-credit not to exceed $500,000. Amounts outstanding were
$384,706 and $333,000 at December 31, 1999 and 2000, respectively.
(b) Parent's Debt Not Specifically Allocated to SPSG--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 and expires on May 31, 2002.
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 Note 11). Letters of credit cannot be
issued or renewed with a maturity date beyond May 31, 2002.
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). Kroll-O'Gara had
approximately $36.5 million borrowed under the line of credit at
December 31, 2000.
Kroll-O'Gara had $35.0 million of senior notes payable outstanding
at December 31, 2000. These agreements were also 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 loan agreement and the senior notes (together, the financing
agreements) are secured by substantially all assets of
Kroll-O'Gara and its subsidiaries and a pledge of the stock of
essentially all of the subsidiaries, all of which jointly and
severally guarantee obligations under the financing agreements.
These financing agreements include 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 financing agreements also impose limitations on mergers,
acquisitions, stock redemptions, additional indebtedness and
capital expenditures. The financing agreements do not permit the
declaration or payment of any dividends, other than stock
dividends. 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 revolving credit
facility 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 revolving credit facility lender and the holders of the
senior notes. In accordance with the April 20, 2001 amendment to
the loan agreement, Kroll-O'Gara's agreement to sell SPSG would
result in an acceleration of all amounts due under the loan
agreement 60 days after the closing of the sale. Kroll-O'Gara was
not in compliance with certain covenants of the financing
agreements as of December 31, 2000. Had the lender and the
holders of senior notes not amended and restated the financing
agreements, all amounts outstanding under the financing
agreements would have been immediately payable. Kroll-O'Gara
believes it has the capability to continue to finance its
operations and the operations of its segments through fiscal
2001.
(8) Operating Leases-
SPSG 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:
F-27
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
2001 $ 851,987
2002 627,435
2003 565,190
2004 517,763
2005 289,333
Thereafter 724,333
-------
$3,576,041
==========
Rental expense charged against current operations amounted to
approximately $1,169,888, $1,536,174 and $1,784,236 for the years ended
December 31, 1998, 1999 and 2000, respectively.
(9) Defined Contribution Plan-
SPSG participates in a Kroll-O'Gara sponsored profit sharing/401(k)
plan covering substantially all domestic employees. Contributions to the plan
are discretionary. The plan includes a matching contribution whereby SPSG will
contribute a percentage of the amount a participant contributes, limited to
certain maximum amounts. Plan contribution expense charged against current
operations amounted to approximately $236,000 and $146,000 for the years ended
December 31, 1999 and 2000, respectively. There was no contribution expense for
the year ended December 31, 1998.
F-28
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(10) Parent Equity Arrangements-
(a) Stock Option Plans--SPSG employees were granted stock options
under Kroll-O'Gara's 1996 stock option plan (the 1996 Plan).
Options for 60,500, 220,400 and 82,000 shares were granted
during 1998, 1999 and 2000, respectively. Options granted under
the 1996 Plan were generally granted at fair market value at the
date of grant and are exercisable over periods not exceeding ten
years.
In 2000, Kroll-O'Gara adopted a stock option plan (the 2000 Plan)
for non-executive employees. Options for 289,850 shares were
granted to SPSG employees during 2000. Options granted under the
2000 Plan were 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 1998 Stock Incentive Plan)
for employees. There were no shares granted under the plan
during 1998 or 2000, however, during fiscal 1999, 12,500 shares
were granted under the plan to SPSG employees. In connection
with the shares granted under the Stock Incentive Plan in 1999,
SPSG recorded deferred compensation of $413,595 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 parent's equity in
segment and is being amortized ratably over the vesting periods
of the applicable grants. Approximately $199,000 and $91,000 was
expensed in 1999 and 2000, respectively.
(c) Stock Based Compensation Disclosure--SFAS 123 requires, at a
minimum, pro forma disclosures of expense for stock-based awards
based on their fair values. The pro forma amounts below are not
necessarily representative of the effects of stock-based awards
on future pro forma net income because future plans that include
SPSG employees may differ from Kroll-O'Gara stock option plans
and accordingly (1) future grants of employee stock options may
not be comparable to awards made to employees while SPSG was a
part of Kroll-O'Gara, and (2) the assumptions used to compute
the fair value of any future stock option awards will be
specific to these future plans and therefore, may not be
comparable to the Kroll-O'Gara assumptions used. If SPSG had
measured compensation cost for the Kroll-O'Gara stock options
granted to its employees under the fair value method prescribed
by SFAS 123, SPSG's net income (loss) for the years ended
December 31, 1998, 1999 and 2000 would have been as follows:
1998 1999 2000
---------- ----------- ------------
Net income (loss):
As reported $9,387,763 $1,043,109 $(10,010,770)
Pro forma $8,817,376 $ 101,957 $(10,967,658)
F-29
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The fair value of each Kroll-O'Gara stock option granted to SPSG
employees is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted
average assumptions used by Kroll-O'Gara for grants in 1998, 1999
and 2000:
YEAR ENDED DECEMBER 31,
-------------------------------------------
1998 1999 2000
---- ---- ----
Dividend yield - - -
Expected volatility 41.4% 41.4% 43.7%
Risk-free interest rate 5.4% 5.4% 6.7%
Expected lives 2.5 - 7.5 years 7.5 years 7.5 years
The 60,500 options granted by Kroll-O'Gara to SPSG employees during 1998
have a weighted-average exercise price of $18.92, a weighted-average fair value
of $10.02 and remaining contractual lives, on a weighted-average basis, of 7.4
years. The 220,400 options granted by Kroll-O'Gara to SPSG employees during
1999 have a weighted-average exercise price of $27.66, a weighted-average fair
value of $17.01 and contractual lives, on a weighted-average basis, of 8.2
years. The 371,850 options granted by Kroll-O'Gara to SPSG employees during
2000 have a weighted-average exercise price of $6.38, a weighted-average fair
value of $3.74 and contractual lives, on a weighted-average basis, of 9.4
years.
A summary of the status of Kroll-O'Gara stock options granted to SPSG
employees at December 31, 1998, 1999 and 2000, and the change 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 381,449 $ 11.60 386,671 $ 13.01 569,895 $ 18.66
Granted 60,500 18.92 220,400 27.66 371,850 6.38
Exercised (52,778) 9.36 (24,209) 10.16 - -
Forfeited/Expired/ Cancelled (2,500) 17.50 (12,967) 19.19 (287,877) 15.05
------- -------- ------- ------- -------- -------
Outstanding, end of year 386,671 $ 13.13 569,895 $ 18.66 653,868 $ 13.26
------- -------- ------- ------- -------- -------
Exercisable, end of year 188,144 $ 11.47 218,557 $ 12.79 278,907 $ 15.90
======= ======== ======= ======= ======== =======
Of the options outstanding at December 31, 2000, 59,309 options
are exercisable at prices per share ranging from $1.00 to $9.00
per share, 57,751 options are exercisable at prices per share
ranging from $9.88 to $12.75 per share and 161,847 options are
exercisable at prices per share ranging from $17.25 to $26.94 per
share.
F-30
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
(11) Commitments and Contingencies-
(a) Letters of Credit--Under the terms of the Economic Development
Revenue Bonds Agreement, SPSG is required to maintain a letter
of credit supporting the debt. As of December 31, 2000, SPSG's
lender was committed to providing this letter of credit through
May 31, 2001. As of December 31, 2000, SPSG had an outstanding
letter of credit in the amount of $1,356,250.
At December 31, 2000, SPSG had standby and purchase letters of
credit, issued on its behalf by its primary lender, in the
aggregate amount of $1,875,562.
(b) Employment Agreements--Kroll-O'Gara and SPSG have month-to-month
employment agreements with SPSG executive officers and
management level personnel with annual compensation ranging in
value from $135,000 to $350,000. 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 $785,000.
(c) Legal Matters--Kroll-O'Gara has been named as a defendant in
eight lawsuits alleging that its officers and directors breached
their fiduciary duties in connection with the now terminated
proposed acquisition of a majority of Kroll-O'Gara's shares by a
company formed by Blackstone Capital Partners III Merchant
Banking Fund L.P. (Blackstone). 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 American
International Group, Inc. and its subsidiaries (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 an SPSG subsidiary under the Civil False Claims
Act alleging that the SPSG subsidiary 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, SPSG settled this litigation with the
Department of Justice for approximately $1.1 million, plus legal
costs. SPSG admitted no wrongdoing as part of the settlement.
SPSG paid $0.55 million of the settlement amount in November
2000; the remainder is due on December 30, 2001.
F-31
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
In addition to the matters discussed above, SPSG is involved in
litigation from time to time in the ordinary course of its
business; however, SPSG does not believe that there is any
currently pending or threatened litigation, individually or in
the aggregate, that is likely to have a material adverse effect
on its financial position, results of operations or its cash
flows.
(12) Fair Value of Financial Instruments-
The fair value of significant current assets, current liabilities and
long-term debt approximate their respective historical carrying amounts.
SPSG has entered into six foreign currency exchange contracts to
effectively hedge its exposure to certain foreign currency rate
fluctuations on intercompany demand loans to one subsidiary which are
denominated in a foreign currency. By virtue of these contracts, SPSG has
fixed the total dollar amount which it will receive under the
aforementioned subsidiary loan through the maturity dates of the
contracts regardless of the fluctuations in the exchange rate. As of
December 31, 2000, the total notional amount of the contracts, which
mature between January 2001 and July 2002, was $11.5 million. SPSG's
cumulative foreign currency translation adjustment component of parent's
equity in segment was increased by $2.0 million in 1999 and decreased by
$0.3 million in 2000 as a result of these contracts.
SPSG has estimated the fair value of its foreign exchange contracts
based on information obtained from the counterparty. Fair value
represents the amount SPSG would have received at December 31, 2000 if
the agreements had been terminated. As of December 31, 2000, SPSG would
have received approximately $0.9 million upon cancellation of all
contracts. If SFAS 133 had to be 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 parent's equity in segment.
(13) Customer Data-
(a) Geographic Data--The following summarizes information about SPSG's
different geographic areas:
UNITED STATES FRANCE OTHER FOREIGN ELIMINATIONS COMBINED
------------- ------ ------------- ------------- --------
1998 (DOLLARS IN THOUSANDS)
----
Net sales to unaffiliated customers $83,812 $26,164 $27,760 $ - $137,736
Intercompany 898 637 186 (1,721) -
------- ------- ------- ------- --------
Total net sales $84,710 $26,801 $27,946 $(1,721) $137,736
======= ======== ======== ==== =========
Operating income $11,851 $ 2,185 $ 3,816 $ - $ 17,852
======= ======== ======== ==== =========
1999
----
Net sales to unaffiliated customers $68,263 $25,315 $23,746 $ - $117,324
Intercompany 2,037 1,445 423 (3,905) -
------- -------- -------- ----- --------
Total net sales $70,300 $26,760 $24,169 $(3,905) $117,324
======= ======== ======== ==== =========
Operating income (loss) $ 7,318 $ 2,012 $ (1,807) $ - $ 7,523
======= ======== ======== ==== =========
F-32
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
UNITED STATES FRANCE OTHER FOREIGN ELIMINATIONS COMBINED
------------- ------ ------------- ------------- --------
(DOLLARS IN THOUSANDS)
2000
Net sales to unaffiliated customers $55,541 $25,159 $24,292 $ - $104,992
Intercompany 3,962 1,218 758 (5,938) -
----- ----- --- ------
Total net sales $59,503 $26,377 $25,050 $ (5,938) $104,992
======= ======= ======= ======== ========
Operating income (loss) $ (5,413) $ 927 $ (1,032) $ - $ (5,518)
======== ========= ======== ===== ==========
SPSG accounts for transfers between geographic areas at cost plus
a proportionate share of operating profit.
The following summarizes SPSG'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 $ 62,059 $ 54,953 $ 49,960
Other United States 11,859 7,989 8,716
Middle East 3,998 1,618 2,403
Europe 31,202 29,759 24,610
Central and South America 20,766 19,716 16,025
Other Foreign 7,852 3,289 3,278
-------- -------- ---------
$137,736 $117,324 $104,992
======== ======== =========
Export sales by SPSG's domestic operations were approximately
10%, 5% and 4% of net sales for the years ended December 31,
1998, 1999 and 2000, respectively.
SPSG is subject to audit and investigation by various agencies
which oversee contract performance in connection with SPSG's
contracts with the U.S. Government. Management believes that
potential claims from such audits and investigations will not
have a material adverse effect on the combined 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.
SPSG has foreign operations and assets in Brazil, Colombia,
France, Italy, Mexico, Russia and the Philippines. In addition,
SPSG sells its products and services in other foreign countries
and has continued to increase its level of international
activity. Accordingly, SPSG 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 to the U.S. Government approximated 45%, 47% and
48% of SPSG's net sales, respectively.
(14) Supplemental Cash Flows Disclosures-
The following is a summary of cash paid related to certain items:
F-33
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1998 1999 2000
---- ---- ----
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ 473,107 $ 212,277 $170,763
========== ========== ========
Cash paid for taxes $1,303,277 $2,455,459 $312,316
========== ========== ========
SUPPLEMENTAL DISCLOSURE OF
NON-CASH ACTIVITIES:
Deferred compensation related to restricted stock $ - $ 413,595 $ -
========== ========== ========
Fair value of Kroll-O'Gara stock issued in connection
with acquisition of businesses $ 890,185 $ - $ -
========== ========== ========
The supplemental cash flow disclosure information does not include
allocated interest and tax expense that was funded directly by Kroll-O'Gara.
F-34
THE SECURITY PRODUCTS AND SERVICES GROUP
COMBINED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 2000 AND JUNE 30, 2001 (DOLLARS IN 000'S)
- --------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
2000 2001
------------ ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 2,161 $ 2,231
Trade accounts receivable, net of allowance for doubtful accounts of approximately
$1,220 and $1,022 at December 31, 2000 and June 30, 2001, respectively 22,701 14,777
Related party receivables 411 338
Costs and estimated earnings in excess of billings on uncompleted contracts 8,634 12,726
Inventories (Note 4) 18,641 18,512
Prepaid expenses and other 3,712 2,794
Deferred tax asset 1,001 1,001
------- -------
Total current assets 57,261 52,379
------- -------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land 2,350 2,342
Buildings and improvements 6,410 6,188
Leasehold improvements 735 726
Furniture and fixtures 5,520 6,384
Machinery and equipment 13,097 12,504
------- -------
28,112 28,144
Less-accumulated depreciation (11,034) (11,924)
------- -------
17,078 16,220
------- -------
COSTS IN EXCESS OF ASSETS ACQUIRED AND OTHER INTANGIBLE ASSETS, net of
accumulated amortization of approximately $3,836 and $4,284 at December 31,
2000 and June 30, 2001, respectively 14,453 13,413
OTHER ASSETS 652 595
------- -------
15,105 14,008
------- -------
$89,444 $82,607
======= =======
The accompanying notes are an integral part of these combined balance sheets.
F-35
THE SECURITY PRODUCTS AND SERVICES GROUP
COMBINED BALANCE SHEETS (UNAUDITED)
AS OF DECEMBER 31, 2000 AND JUNE 30, 2001 (DOLLARS IN 000'S)
- --------------------------------------------------------------------------------
DECEMBER 31, JUNE 30,
2000 2001
------------ ----------
LIABILITIES AND PARENT'S EQUITY IN SEGMENT
CURRENT LIABILITIES:
Current portion of long-term debt due to third-parties $ 2,111 $ 2,070
Trade accounts payable 18,041 15,036
Accrued liabilities 8,304 7,392
Customer deposits and deferred revenue 5,499 4,023
------- -------
Total current liabilities 33,955 28,521
OTHER LONG-TERM LIABILITIES 174 391
DEFERRED INCOME TAXES 211 211
LONG-TERM DEBT DUE TO THIRD PARTIES, net of current portion 1,004 945
------- -------
Total liabilities 35,344 30,068
PARENT'S EQUITY IN SEGMENT (Note 1):
Advances from Kroll-O'Gara, net 58,139 57,641
Deferred compensation (72) (20)
Accumulated other comprehensive loss (3,967) (5,082)
------- -------
Total parent's equity in segment 54,100 52,539
------- -------
$89,444 $82,607
======= =======
The accompanying notes are an integral part of these combined balance sheets.
F-36
THE SECURITY PRODUCTS AND SERVICES GROUP
COMBINED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2000 AND 2001 (DOLLARS IN 000'S)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------- ----------------------
2000 2001 2000 2001
-------- ------- -------- --------
NET SALES $22,755 $32,928 $51,440 $61,404
COST OF SALES 17,598 28,202 38,211 50,250
------- ------- ------- -------
Gross profit 5,157 4,726 13,229 11,154
OPERATING EXPENSES:
Selling and marketing expenses 880 845 2,700 2,410
General and administrative expenses 3,816 3,914 7,978 7,207
------- ------- ------- -------
Operating income (loss) 461 (33) 2,551 1,537
OTHER INCOME (EXPENSE):
Interest expense (370) (638) (1,004) (1,215)
Other, net (84) (141) (118) (292)
------- ------- ------- -------
Income (loss) before provision for income
taxes 7 (812) 1,429 30
Provision for income taxes 117 290 209 382
------- ------- ------- -------
Net income (loss) $ (110) $(1,102) $ 1,220 $ (352)
======= ======= ------- -------
Other comprehensive loss, net of tax:
Foreign currency translation adjustment, net of
$1,010 and $424 tax provision, respectively (2,658) (1,115)
------- -------
Comprehensive loss $(1,438) $(1,467)
======= =======
The accompanying notes are an integral part of these combined financial
statements.
F-37
THE SECURITY PRODUCTS AND SERVICES GROUP
COMBINED STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2000 AND 2001 (DOLLARS IN 000'S)
- --------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
---------------------------
2000 2001
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 1,220 $ (352)
Adjustments to reconcile net income (loss) to net cash provided by operating
activities-
Depreciation and amortization 2,062 1,879
Bad debt expense 40 237
Noncash compensation expense 55 52
Change in assets and liabilities-
Trade accounts receivables 1,141 6,874
Costs and estimated earnings in excess of billings on uncompleted contracts 8,919 (4,092)
Inventories, prepaid expenses and other assets (6,113) 536
Trade accounts payable (2,645) (2,336)
Amounts due to/from related parties 25 67
Accrued liabilities, long-term liabilities and customer deposits and deferred
revenue 864 (1,477)
-------- -------
Net cash provided by operating activities 5,568 1,388
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment, net (1,764) (1,035)
-------- -------
Net cash used in investing activities (1,764) (1,035)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of third party debt, net (208) (100)
Decrease in advances from Kroll-O'Gara, net (4,480) (144)
Other (564) 36
-------- -------
Net cash used in financing activities (5,252) (208)
-------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (1,448) 145
Effects of foreign currency exchange rates on cash and cash equivalents (158) (75)
CASH AND CASH EQUIVALENTS, beginning of period 3,238 2,161
-------- -------
CASH AND CASH EQUIVALENTS, end of period $ 1,632 $ 2,231
======== =======
The accompanying notes are an integral part of these combined financial
statements.
F-38
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(1) General-
The Security Products and Services Group (SPSG or the Company) is a
wholly-owned segment of The Kroll-O'Gara Company (Kroll-O'Gara).
On April 20, 2001, the Board of Directors of Kroll-O'Gara approved a
definitive agreement, subject to a limited number of closing conditions,
to sell the common stock of the active companies that comprise
Kroll-O'Gara's SPSG segment, other than SPSG's subsidiaries that provide
kidnap and ransom and risk information services, SPSG's Russian
subsidiaries and certain other inactive companies, to Armor Holdings,
Inc. (Armor) for up to $56.5 million. The accompanying SPSG combined
financial statements and footnotes exclude the subsidiaries that provide
kidnap and ransom and risk information services as they will continue to
be operated by Kroll-O'Gara after the sale of SPSG. The Russian
subsidiaries and certain other inactive companies are included within the
accompanying combined financial statements as they have historically been
included within the SPSG segment and might not be operated by
Kroll-O'Gara after the sale.
Of the $56.5 million sales price, a portion ($53.0 million subject to
adjustment) is to be paid at closing, currently expected to occur 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 may be made based on SPSG's
achievement of a gross profit target for the year ending December 31,
2001. At Armor's option, 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,
are less than approximately $37.4 million. Kroll-O'Gara currently
believes the sale of SPSG will approximate the value of parent's equity
in segment. In the event the sale to Armor is not consummated,
Kroll-O'Gara will continue to evaluate all options available to it,
including seeking other buyers or other alternatives.
The accompanying combined financial statements are presented on a
carve-out basis and include the historical results of operations and
assets and liabilities of the SPSG entities as noted above. These
combined financial statements have been prepared from Kroll-O'Gara's
historical accounting records.
SPSG was allocated $0.9 million and $1.2 million of overhead costs
related to Kroll-O'Gara's corporate administrative functions for the
three months ended June 30, 2000 and 2001, respectively, and $2.0 million
and $2.2 million for the six months ended June 30, 2000 and 2001,
respectively. The allocations were based on a specific identification of
Kroll-O'Gara's administrative costs attributable to SPSG and, to the
extent that such identification was not practicable, on the basis of
SPSG's sales as a percentage of Kroll-O'Gara's sales. The expenses
associated with various corporate initiatives of Kroll-O'Gara were not
allocated to SPSG. The allocated costs are included in the various
operating expense captions in the accompanying combined statements of
operations.
SPSG's operations have been financed through its operating cash flows and
advances from Kroll-O'Gara. SPSG's interest expense includes an
allocation of Kroll-O'Gara's interest expense based on Kroll-O'Gara's
weighted average interest rate applied to intercompany advances. Interest
expense allocated from Kroll O'Gara was $0.9 million and $1.0 million at
weighted average interest rates of 3.8% and 6.0% for the six months ended
June 30, 2000 and 2001, respectively. Income tax was calculated as if
SPSG had filed separate income tax returns. SPSG's current income taxes
receivable or payable at any point in time are
F-39
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
included in the advances from Kroll-O'Gara in parent's equity in segment.
The advances from Kroll-O'Gara balance in parent's equity in segment also
includes the equity accounts of specific legal entities included in SPSG,
the net assets or liabilities of divisions included in SPSG and the net
intercompany balances of all entities and divisions with Kroll-O'Gara.
Management believes that its allocation methodologies are reasonable.
The accompanying unaudited combined financial statements have been
prepared in accordance with accounting principles generally accepted in
the United States for interim financial information. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the United States for complete financial
statements. In the opinion of management, all adjustments (consisting of
normal recurring adjustments) considered necessary for fair presentation
have been included. Operating results for the three months and six months
ended June 30, 2001 are not necessarily indicative of the results that
may be expected for the year ended December 31, 2001. The accompanying
combined financial statements should be read in conjunction with the
combined financial statements and notes thereto in SPSG's audited
financial statements for the year ended December 31, 2000.
(2) Parent's Debt Not Specifically Allocated to SPSG-
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 and expires on May 31, 2002. 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. Letters of credit cannot be issued or
renewed with a maturity date beyond May 31, 2002. Advances under the
revolving credit facility bear interest at prime plus 1.5% at June 30,
2001 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% (monthly interest factor which was negotiated with the
lender to receive advanced waiver to release pledged collateral for the
sale of SPSG to Armor) times the number of 30-day periods which have
expired since April 20, 2001 (or, if less, the highest rate allowed by
law). At June 30, 2001, the interest rate on the revolving credit
facility was 9.25%. Kroll-O'Gara had approximately $36.1 million borrowed
under the revolving credit facility at June 30, 2001.
Kroll-O'Gara had $35.0 million of senior notes payable outstanding at
June 30, 2001. These agreements were also 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%
(monthly interest factor which was negotiated with the lender to receive
advanced waiver to release pledged collateral for the sale of SPSG to
Armor) times the number of 30-day periods which have expired since April
20, 2001 (or, if less, the highest rate allowed by law). At June 30,
2001, the interest rate on the senior notes was 9.25%.
The loan agreement and the senior notes (together, the financing
agreements) are 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 financing agreements. These financing agreements include
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
F-40
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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 financing agreements also impose limitations on mergers,
acquisitions, stock redemptions, additional indebtedness and capital
expenditures. The financing agreements do not permit the declaration or
payment of any dividends, other than stock dividends. 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 revolving credit facility 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 revolving
credit facility lender and the holders of the senior notes. In accordance
with the April 20, 2001 amendment to the loan agreement, Kroll-O'Gara's
agreement to sell SPSG would result in an acceleration of all amounts due
under the loan agreement 60 days after the closing of the sale.
Kroll-O'Gara was not in compliance with certain covenants of the
financing agreements as of December 31, 2000 and June 30, 2001. Had the
revolving credit facility lender and the holders of the senior notes not
amended and restated the financing agreements on March 30, 2001 and April
20, 2001 or waived the events of non-compliance as of June 30, 2001, all
amounts outstanding under the financing agreements would have been
immediately payable. Kroll-O'Gara anticipates compliance with all
covenants and believes it has the capability to continue to finance its
operations and the operations of its segments throughout the remainder of
2001.
(3) Supplemental Cash Flow Disclosure-
The following is a summary of cash paid related to certain items:
SIX MONTHS ENDED
JUNE 30,
------------------
2000 2001
---- ----
(DOLLARS IN 000'S)
Cash paid for taxes $224 $ 63
Cash paid for interest (exclusive of
Kroll O'Gara interest allocation
discussed in Note 1) 63 141
F-41
THE SECURITY PRODUCTS AND SERVICES GROUP
NOTES TO COMBINED UNAUDITED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
(4) 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, JUNE 30,
2000 2001
------------ ----------
(DOLLARS IN 000'S)
Raw materials $11,651 $11,547
Vehicle costs and work-in-process 6,990 6,965
------- -------
Total inventory $18,641 $18,512
======= =======
(5) Restructuring of Operations-
In the third quarter of 2000, SPSG 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 June 30, 2001 were $0.6
million. SPSG 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 June 30,
2001, approximately $0.1 million remained as an accrual relating to the
2000 Plan.
(6) New Accounting Pronouncements-
In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 141, "Business
Combinations" (SFAS No. 141), which addresses financial accounting and
reporting for business combinations. SFAS No. 141 requires all business
combinations in the scope of the statement to be accounted for using one
method, the purchase method. The provisions of this statement apply to
all business combinations initiated after June 30, 2001. Due to the
recent issuance of the standard, the Company is still assessing the
potential impact to its combined financial statements.
In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142), which
establishes accounting and reporting standards for goodwill and other
intangible assets that are acquired individually or with a group of other
assets. The provisions of this statement are effective for fiscal years
beginning after December 15, 2001. For example, the Company had
amortization expense related to goodwill and other intangible assets of
approximately $0.5 million for the six months ended June 30, 2001. Due to
the recent issuance of the standard, the Company is still assessing the
potential impact to its combined financial statements.
F-42