Initial Public Offering (IPO): Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1 The O'Gara Group, Inc. S-1 HTML 2.68M
2: EX-2.1 Plan of Acquisition, Reorganization, Arrangement, HTML 197K
Liquidation or Succession
3: EX-2.2 Plan of Acquisition, Reorganization, Arrangement, HTML 144K
Liquidation or Succession
4: EX-2.3 Plan of Acquisition, Reorganization, Arrangement, HTML 235K
Liquidation or Succession
5: EX-3.1 Articles of Incorporation/Organization or By-Laws HTML 83K
6: EX-3.2 Articles of Incorporation/Organization or By-Laws HTML 28K
7: EX-10.1 Material Contract HTML 62K
8: EX-10.2 Material Contract HTML 70K
9: EX-10.3 Material Contract HTML 19K
10: EX-10.4 Material Contract HTML 14K
11: EX-10.6 Material Contract HTML 55K
12: EX-10.7 Material Contract HTML 36K
13: EX-10.8 Material Contract HTML 15K
14: EX-21.1 Subsidiaries of the Registrant HTML 12K
15: EX-23.1 Consent of Experts or Counsel HTML 9K
16: EX-23.2 Consent of Experts or Counsel HTML 9K
17: EX-23.3 Consent of Experts or Counsel HTML 9K
18: EX-23.4 Consent of Experts or Counsel HTML 9K
19: EX-23.5 Consent of Experts or Counsel HTML 9K
20: EX-99.1 Miscellaneous Exhibit HTML 10K
21: EX-99.2 Miscellaneous Exhibit HTML 9K
22: EX-99.3 Miscellaneous Exhibit HTML 9K
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
With copies to:
George D. Molinsky, Esq.
Patricia O. Lowry, Esq.
Taft Stettinius & Hollister LLP
425 Walnut Street
Suite 1800 Cincinnati, Ohio45202
(513) 381-2838
David A. Gibbons, Esq.
Miyun Sung, Esq.
Hogan & Hartson LLP
555 Thirteenth Street, N.W. Washington, D.C.20004
(202) 637-5600
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
registration statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box: o
If this form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same
offering: o
If this form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering: o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated
filer, or a smaller reporting company. See the definitions of
“large accelerated filer,”“accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
Large
accelerated
filer o
Accelerated
filer o
Non-accelerated
filer þ
Smaller reporting
company o
(Do not check if a smaller
reporting company)
CALCULATION
OF REGISTRATION FEE
Proposed Maximum
Title of Each Class
Aggregate Offering
Amount of
of Securities to be Registered
Price(1)
Registration Fee
Common Stock, no par value per share
$172,500,000
$6,780
(1)
Estimated solely for the purpose of
calculating the registration fee under Rule 457(o) of the
Securities Act of 1933, which includes shares that the
underwriters have the option to purchase to cover
over-allotments.
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, as amended, or until this
Registration Statement shall become effective on such date as
the Commission, acting pursuant to said Section 8(a), may
determine.
The
information in this preliminary prospectus is not complete and
may be changed. We may not sell these securities until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any state or jurisdiction where the
offer or sale is not permitted.
This is The O’Gara Group, Inc.’s initial public
offering. We are selling all of
the shares
of common stock offered in this offering.
Prior to this offering, there has been no public market for our
common stock. It is currently estimated that the initial public
offering price per share will be between
$ and
$ . We
intend to apply for listing of the common stock on The NASDAQ
Global Market under the symbol “OGAR.”
Investing in our common stock involves risks. See “Risk
Factors” beginning on page 11.
Per Share
Total
Initial public offering price
$
$
Underwriting discount
$
$
Proceeds, before expenses, to us
$
$
We have granted the underwriters an option to purchase a maximum
of additional
shares of our common stock to cover over-allotments of shares,
exercisable at any time until 30 days after the date of
this prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus is truthful or
complete. Any representation to the contrary is a criminal
offense.
Delivery of the shares of common stock is expected be made on or
about ,
2008.
Morgan
Keegan & Company, Inc. Sole
Book-running Manager
You should rely only on the information contained in this
prospectus and the registration statement of which this
prospectus is a part. We have not authorized anyone to provide
you with information different from that contained in this
prospectus. We are offering to sell, and seeking offers to buy,
shares of our common stock only in jurisdictions where offers
and sales are permitted. The information contained in this
prospectus is accurate only as of the date of this prospectus,
regardless of the time of delivery of this prospectus or of any
sale of our common stock.
This summary highlights information contained elsewhere in
this prospectus that we consider important to investors. You
should read the entire prospectus carefully, including the
“Risk Factors” section and the financial statements
and related notes included in this prospectus, before making an
investment decision.
Simultaneously with the closing of this offering, we will
acquire Finanziaria Industriale S.p.A., together with its
wholly- and partially-owned subsidiaries (Isoclima),
Transportadora de Protección y Seguridad, S.A. de C.V. (TPS
Armoring or TPS), and OmniTech Partners, Inc., Optical Systems
Technology, Inc. and Keystone Applied Technologies, Inc.
(collectively, OmniTech) using the proceeds from this offering,
borrowings under our new credit facility and issuances of our
common stock. The acquisitions of Isoclima, TPS and OmniTech are
referred to as the Pending Acquisitions. These Pending
Acquisitions will significantly increase our size, expand and
enhance our product portfolio, broaden and deepen our customer
base, expand our geographic presence and enhance our management
team. As a result, except in circumstances where the context
indicates otherwise, we have described our business below
assuming that our new credit facility is in place and the
Pending Acquisitions already have occurred. See “The
Pending Acquisitions” and “Risk Factors —
Risks Related to Our Pending and Future Acquisitions.”
Unless the context indicates otherwise, references in this
prospectus to “we,”“us,”“our,”
the “company” or “The O’Gara Group”
refer to The O’Gara Group, Inc. and its consolidated
subsidiaries and assume and give effect to the consummation of
the Pending Acquisitions.
Our
Company
We provide a diverse portfolio of security, safety and defense
products and services to commercial and government organizations
worldwide. Our business activities are focused on delivering
specialized products and services that improve the ability of
organizations and individuals to prepare for, respond to and
recover from acts of terrorism, violent crime and other hazards.
We have a varied and distinguished list of customers, including,
among others: Mercedes-Benz, BMW and Azimut-Benetti in the
commercial market; the U.S. Marine Corps, U.S. Special
Operations Command (SOCOM), U.K. Ministry of Defence and Italian
Ministry of Defense in the military market; the
U.S. Department of State, U.S. Intelligence Community
and various law enforcement agencies and state and local
governments in the government market; and high-profile
individuals. Including the Pending Acquisitions, our pro forma
combined revenues for the year ended December 31, 2007 and
the six months ended June 30, 2008 were $179.9 million
and $102.6 million, respectively. Our pro forma EBITDA for
the year ended December 31, 2007 and the six months ended
June 30, 2008 were $19.0 million and
$17.1 million, respectively. Our pro forma combined backlog
at June 30, 2008 was $126.7 million.
Our business activities are organized into three
divisions — Advanced Transparent and Mobile Systems,
Sensor Systems and Training and Services.
•
Advanced Transparent and Mobile Systems. Our
Advanced Transparent and Mobile Systems division designs,
manufactures and sells highly engineered transparent armor,
vehicle armoring systems and impact-resistant and other
specialized glass. The majority of our revenues in this division
are derived from sales to commercial market customers operating
in the automotive, rail, marine and aviation industries. In the
automotive industry, we supply transparent armor used in
commercial and military armored vehicles, and we are a
vertically integrated provider of armoring systems for cars,
trucks and SUVs. For the rail, marine and aviation industries,
our activities are focused on the production of impact-resistant
and other specialized glass used to protect a range of
high-value assets, such as high-speed trains, yachts and
aircraft. Our specialized glass products are also used in solar
panels for alternative energy applications and for architectural
purposes.
•
Sensor Systems. Our Sensor Systems division
designs, manufactures and sells optoelectronic equipment to the
government and military markets. Our principal products in this
division are specialized night vision equipment and tagging,
tracking and locating systems, all of which enable government
agencies and militaries to conduct covert intelligence,
surveillance and reconnaissance missions and
battlefield operations more effectively. We believe our
proprietary technologies for illumination and detection are
among the most advanced in the industry, in part as a result of
our use of certain infrared bands that are undetectable by
conventional night vision equipment. Our products also
incorporate other advanced technologies, including
heads-up
displays and thermal imaging sensors.
•
Training and Services. Our Training and
Services division provides technical services, such as threat
and vulnerability assessments and weapons of mass destruction
training; tactical services, such as urban warfare and tactical
driving training; and preparedness and response services, such
as emergency response and continuity of operations planning.
These offerings enhance our customers’ ability to prepare
for, operate during and recover from high-risk situations and
emergencies. We offer our training and services to government,
military and corporate customers, both at our tactical training
complex and at customer locations worldwide.
Our management team possesses a long history of building and
acquiring businesses focused on the security, safety and defense
markets. We believe their experience and relationships within
these markets have been instrumental in the acquisition,
integration and growth of the businesses we have acquired to
date and will be critical to the execution of our business
strategy. Our founders, Thomas M. O’Gara, Wilfred T.
O’Gara and Michael J. Lennon, previously managed
O’Gara-Hess & Eisenhardt Armoring Company, a
pioneer and leader in designing, engineering and manufacturing
armored vehicles. In addition to the companies acquired since
our inception, our founders completed 19 acquisitions during
their previous ventures.
Industry
Our products and services address a large and growing worldwide
market comprised of governments, militaries, corporations and
individuals seeking to more effectively protect and preserve
lives and assets. The current environment of worldwide
geopolitical and socioeconomic unrest, terrorism, violent crime
and natural disasters has precipitated a number of global trends
impacting the manner in which organizations, both commercial and
governmental, execute their security, safety and defense-related
initiatives. These trends, which are described below, are
driving the growth of our target markets by increasing the
demand for products and services that enhance situational
awareness, improve the ability to respond to, operate during and
recover from critical events and protect personnel and property
in hostile, high-risk environments.
Evolving asymmetrical nature of
threats. Governments and commercial organizations
worldwide are increasingly encountering asymmetrical threats,
such as highly organized and sophisticated terrorist groups and
the use of unconventional weapons, that are presenting
challenges to the operational efficacy of traditional security
and defense practices unaccustomed to assessing and defeating
those threats. In response, governments in particular are taking
decisive actions, such as realigning spending priorities, to
more effectively address the evolving nature of threats. In
recent years, the U.S. government has shifted spending
priorities away from large-scale weapons platforms used
primarily during periods of high-intensity conflict to tactical
products more suited to combating the dangers associated with
asymmetrical threats and to gathering intelligence to
prevent — or more effectively respond to —
such threats. This has resulted in the procurement of additional
advanced products and services to enhance the capabilities of
security and military personnel, particularly as part of the
Global War on Terror (GWOT), the Department of Defense (DoD)-led
initiative focused specifically on fighting against and
eliminating terrorist organizations worldwide. Since
September 11, 2001, the U.S. government has
appropriated $636 billion for the GWOT. In government
fiscal year (GFY) 2009, the budget request for the GWOT is
$66 billion.
Increased emphasis on emergency preparedness and
response. In response to manmade and natural
threats, U.S. federal, state and local governments, foreign
governments and commercial organizations have allocated
increased funding to prepare for, respond to and recover from
acts of terror and other catastrophic events. These
organizations are procuring services such as vulnerability
assessments, emergency response planning, business continuity
planning and recovery services. For example, in its GFY 2009
budget request, the U.S. government has allocated
approximately $5 billion to emergency preparedness and
response initiatives. In addition, since 2001, the
U.S. government has spent over $30 billion enhancing
state and local emergency preparedness and response.
Expanding criminal activities. As a result of
increased criminal activities in certain parts of the world,
such as Latin America, the Middle East and areas of Europe,
governmental and commercial organizations as well as individuals
have taken measures to increase protection against these
activities. Within the government market, law enforcement
agencies are working rigorously to equip officers with the
capabilities to combat escalating criminal threats, such as
narcoterrorism and organized crime. Within the commercial
market, both corporations and individuals are taking proactive
measures, such as using armored vehicles, to enhance security in
increasingly high-risk environments.
Increased reliance upon government
outsourcing. In order to maximize efficiency,
reduce costs and replace an aging government workforce,
governments have come to rely upon the products and services of
the private sector. Domestically, in the field of training,
organizations such as the DoD, the Department of Homeland
Security (DHS) and the Department of State all utilize the
services of third-party professionals to ensure proper education
and preparation of soldiers, first responders and government
employees. According to the U.S. Government Accountability
Office, the DoD’s obligations under third-party service
contracts grew from approximately $85 billion in GFY 1996
to more than $151 billion in GFY 2006, representing an
increase of approximately 78%.
Market
Opportunity
As threats to the security and safety of governments,
militaries, corporations and individuals continue to increase
and evolve, demand for technologies, products and services to
more effectively combat such threats is growing rapidly. As a
global provider of a diverse portfolio of advanced capability
products and services, we believe we are uniquely positioned to
capitalize upon the strong growth trends within the security,
safety and defense markets worldwide. Specifically, we are
acutely focused on — and able to provide —
complementary solutions in three distinct, high-priority
segments of these markets, namely specialty products used to
safeguard government and civilian constituents, proprietary
technologies used to enhance the operational effectiveness of
military and intelligence missions, and training services for
government and military personnel and private citizens in the
processes and procedures to mitigate the risks associated with
manmade and natural disasters. We have bases of operation in the
U.S., Europe and Mexico, which we believe will serve as strong
platforms for growth in the markets we currently serve as well
as enable us to penetrate new markets globally. We believe our
ability to develop and produce market-leading products and
services coupled with our deep knowledge of our customers and
end markets will enable us to expand our domestic and
international market share and continue to offer our customers
high-value solutions.
The
Pending Acquisitions
Simultaneously with the closing of this offering, we will
complete the acquisitions of the following companies:
•
Isoclima — Established in 1977 and based in
Este, Italy, Isoclima is a designer and manufacturer of
transparent armor and impact-resistant and other specialized
glass for the automotive, rail, marine, aviation and other
markets. Isoclima will join our Advanced Transparent and Mobile
Systems division. Subject to customary adjustments, we will
acquire Isoclima for aggregate consideration of approximately
$165.3 million consisting of cash, common stock and assumed
debt.
•
TPS Armoring — Established in 1994 and based in
Monterrey, Mexico, TPS Armoring is a manufacturer of vehicle
armoring systems used primarily by government officials and
private individuals. TPS Armoring also will join our Advanced
Transparent and Mobile Systems division. Subject to customary
adjustments, we will acquire TPS for aggregate consideration of
approximately $35.5 million consisting of cash, common
stock and assumed debt.
•
OmniTech — Established in 1995 and based in
Freeport, Pennsylvania, OmniTech is a designer and manufacturer
of optoelectronic systems serving the government and military
markets. OmniTech will join our Sensor Systems division. Subject
to customary adjustments, we will acquire OmniTech for aggregate
consideration of approximately $31.3 million consisting of
cash, common stock and assumed debt.
We believe that these companies will add significant value to
our organization as they will substantially increase our size,
extend and enhance our product portfolio, broaden and deepen our
customer base, expand our geographic presence and enhance our
management team.
Our
Competitive Strengths
Experienced and deep management team. Our
management team has an average of 23 years of experience
managing businesses that serve the security, safety and defense
markets. In addition, our founders previously formed and managed
a public company that served these markets. As we continue to
grow, we believe that the experience and depth of our management
team will serve as a significant competitive advantage and
enable us to effectively execute our strategy.
Diversified business model. Our broad
portfolio of products and services addresses the needs of both
commercial and government customers operating in domestic and
international markets. For the year ended December 31, 2007
and the six months ended June 30, 2008, sales to commercial
customers represented 62% and 60%, respectively, of our pro
forma combined revenues and sales to government customers
represented 38% and 40% of those revenues. For the year ended
December 31, 2007 and the six months ended June 30,2008, sales to domestic customers were 22% and 18%,
respectively, of our pro forma combined revenues and sales to
international customers were 78% and 82% of those revenues. As a
result of our highly diverse business activities, we believe
that our future success is not dependent upon a single
technology, product, service, customer, government program or
geographic market.
Attractive, global customer base. We have a
worldwide customer base that includes many highly discerning
commercial, government and military organizations that typically
are very difficult to penetrate without pre-existing business
relationships. We believe that we have built a high degree of
confidence with key customers, due in large part to our
consistent ability to meet their exacting quality standards and
field performance requirements. Our customer base provides us
with substantial organic growth opportunities and, because of
our customers’ reputations and stature, with strong
references as we pursue new opportunities worldwide.
Strong knowledge of customer requirements. In
each of our divisions, we interact directly and routinely with
our customers. As a result, we have continuous sources of
information regarding our customers’ requirements and
evolving needs that we can apply in creating innovative
solutions for them in our target markets. We believe our
customer contacts also provide us with advantageous positioning
for future projects and contracts.
Proprietary manufacturing methods, technologies and
processes. We have developed proprietary
manufacturing methods, technologies and processes that we
believe provide us with competitive advantages in producing
highly reliable and technologically advanced products. Our
Advanced Transparent and Mobile Systems businesses have invested
in state-of-the-art production and testing facilities that are
integral to our ability to exceed the stringent performance and
quality assurance standards mandated by our customers. Our
Sensor Systems businesses have developed proprietary sensor and
imaging technologies that we can incorporate into multiple
products, providing them with unique attributes relative to
those currently available in competing products.
Successful acquisition and integration track
record. Our executive officers have a successful
track record of identifying, consummating and integrating
acquisitions. Since our inception, we have acquired and
integrated five businesses, implementing initiatives at each to
enhance operational efficiencies and financial performance. As a
result, we have been able to pursue larger, more competitive
business opportunities from new customers and to capture
additional revenues from existing customers.
Our objective is to become the leading global provider of
security, safety and defense products and services used by
commercial, military and government customers to address risks
associated with terrorism, violent crime and other hazards. We
intend to realize this objective by implementing the following
strategies:
Integrate our Pending Acquisitions. We intend
to integrate Isoclima, TPS and OmniTech by, among other things,
coordinating our expanded sales and marketing resources to
increase the reach of our offerings; implementing our existing
lean manufacturing practices to enhance manufacturing
efficiencies; coordinating research and development activities
to accelerate the development of next-generation products;
leveraging our existing customer relationships, particularly
those within the U.S. government, to generate incremental
revenues; and realizing manufacturing and other efficiencies by
sourcing internally key components used in our finished goods,
such as Isoclima’s specialized glass used by TPS in its
armored vehicles.
Extend and enhance our product and service
portfolio. We expect to continue developing
innovative technologies that can be leveraged across multiple
product platforms within our divisions and to continue
introducing new products and services that expand our offerings
and help us maintain our competitive advantages within our
existing markets. Through ongoing customer contact and market
interaction, we monitor changing trends in all of our target
markets and intend to continually modify our portfolio of
products and services to address these changing demands.
Broaden and deepen our customer base. We
intend to further penetrate our existing customer base by
marketing additional products from our expanded portfolio to
existing customers; migrating products from early adopters and
validators to a broader group of customers; and using our
enhanced financial and operational resources to identify and
pursue larger-scale opportunities. We also intend to increase
the marketing of the products we currently produce
internationally to the U.S. domestic market and of those we
produce domestically to the international market.
Expand our geographical presence. We intend to
continue expanding our geographical presence, both domestically
and in attractive international markets across all of our
divisions. We will consider opening select additional domestic
and international facilities to compete more effectively for
business opportunities that arise. We believe the combination of
our management team’s prior experience with international
expansion and the resident knowledge of our international
managers will enable us to pursue this growth initiative
systematically and efficiently.
Grow through complementary acquisitions. We
plan to grow our business by acquiring select companies and
assets that enhance our technological capabilities, broaden our
product and services offerings and expand our customer
relationships or geographical presence. We look for companies
with proprietary products or services that fit our business
model and that have reached the point at which we believe we can
add value. We intend to maintain a highly disciplined approach
in our pursuit of acquisitions by performing assessments of a
target’s proprietary technologies and processes, growth
prospects, potential synergies and management aptitude.
We were formed in August 2003 to acquire Specialized Technical
Services, Inc., a manufacturer of night vision equipment
established in 1991 and the foundation of our Sensor Systems
division. In 2005, we acquired Diffraction, Ltd., a developer
and manufacturer of optoelectronic prototypes since 1993, and
integrated its operations into our Sensor Systems division. Our
Training and Services division was established in early 2006
when we hired the owners and employees of Tracor, Inc. to
develop their training concepts. The division was enhanced later
that year by the purchase of certain assets of Safety and
Security Institute (SSI), the security and safety training
division of VIR Rally, LLC, and by the acquisition of Homeland
Defense Solutions, Inc. (HDS). In 2007, we created the Mobile
Security division, which is being renamed the Advanced
Transparent and Mobile Systems division, with the acquisition of
Security Support Solutions Limited (3S), which has sold,
leased and serviced armored military and commercial vehicles
since 2003.
We are an Ohio corporation. Our principal executive offices are
located at 7870 East Kemper Road, Suite 460, Cincinnati,
Ohio45249 and our telephone number is
(513) 338-0660.
Our internet address is www.ogaragroup.com. The
information contained on or accessible from our website is not a
part of, and is not incorporated by reference in, this
prospectus.
Shares of common stock offered by The O’Gara Group,
Inc.
shares
Shares of common stock to be outstanding after this offering
shares
Over-allotment option
shares
Use of proceeds
We estimate that our net proceeds from the sale
of shares
of common stock being offered hereby, after deducting
underwriting discounts and commissions and estimated offering
expenses, will be approximately
$ million (or
$ if the underwriters
exercise the over-allotment option), based on an offering price
of $ per share, which is the
mid-point of the estimated offering price range set forth on the
cover page of this prospectus.
We intend to use all of the net proceeds from this offering and
approximately $54.8 million in borrowings under our new
credit facility to fund the approximately $149.9 million
aggregate cash portion of the purchase price required for the
Pending Acquisitions, to refinance all outstanding indebtedness
under our existing credit facility, which was approximately
$4.9 million as of June 30, 2008, to refinance
approximately $32.6 million of the debt assumed in the
Pending Acquisitions and to pay $2.0 million in bonuses to
two of our founders that become payable on completion of the
offering.
We intend to use the proceeds sold pursuant to the
underwriters’ over-allotment option to reduce amounts
outstanding under our new credit facility which will then be
available for working capital and general corporate purposes.
See “Use of Proceeds.”
Dividend policy
We currently do not anticipate paying any cash dividends on our
common stock. Our new credit facility will limit our ability to
pay cash dividends.
Proposed NASDAQ symbol
“OGAR”
Unless we specifically state otherwise, all information in this
prospectus:
•
assumes that the Pending Acquisitions already have occurred and
that shares of our common
stock, (based on a value of
$ per share, the mid-point of
the estimated offering price range set forth on the cover page
of this prospectus and an exchange rate of $1 = €
) have been issued as part of the
purchase price for the Pending Acquisitions;
•
assumes that our new credit facility is in place;
•
assumes the filing of our amended and restated Articles of
Incorporation, which will occur immediately before this offering;
•
reflects the conversion of all outstanding shares of our
preferred stock into shares
of common stock, and the issuance
of shares of common stock in
payment of all accrued dividends on our preferred stock (based
on a value of
$ per share, the
mid-point of the estimated offering price range set forth on the
cover page of this prospectus), to be effective immediately
before the offering;
reflects a -for-one split of our
common stock in the form of a stock dividend to be effective
immediately before the offering;
•
assumes no exercise by the underwriters of their over-allotment
option;
•
excludes an aggregate of 55,445 shares of our common stock
issuable upon exercise of outstanding stock options under our
2004 Stock Option Plan (2004 Option Plan) and 2005 Stock Option
Plan (2005 Option Plan) at a weighted average exercise
price of $51.32 per share, as well as 6,125 additional shares
reserved for issuance under the 2004 and 2005 Option Plans for
which options have not been granted; and
•
excludes shares of our common
stock reserved for issuance under our 2008 Stock Incentive Plan
(2008 Incentive Plan), none of which have been issued as of the
date of this prospectus.
Risk
Factors
Investing in our common stock involves substantial risks. You
should carefully consider all of the information set forth in
this prospectus and, in particular, should evaluate the specific
factors set forth under “Risk Factors” in deciding
whether to invest in our common stock.
Summary
Consolidated Historical and Pro Forma Financial And Other
Data
The following summary consolidated historical and pro forma
financial and other data should be read in conjunction with
“Unaudited Pro Forma Condensed Combined Financial
Data,”“Selected Consolidated Historical Financial
Data,”“Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and the
consolidated and combined financial statements and related notes
of The O’Gara Group, Inc., Isoclima, TPS and OmniTech
included elsewhere in this prospectus.
The basic and diluted net income
(loss) per share computation excludes common shares issuable
upon exercise of options to purchase shares of our common stock
as their effect would be anti-dilutive. See Note 3 to the
consolidated financial statements of The O’Gara Group, Inc.
included elsewhere in this prospectus for a detailed explanation
of the determination of shares used in computing basic and
diluted loss per share.
(2)
Pro forma basic and diluted net
income (loss) per share is presented for the year ended
December 31, 2007 and the six months ended June 30,2008 to reflect per share data assuming the conversion of all
our outstanding shares of preferred stock into
443,561 shares of common stock and the issuance
of shares of
common stock in payment of all accrued dividends on our
preferred stock (based on a value of
$ per share, the
mid-point of the estimated offering price range set forth on the
cover page of this prospectus) to be effective immediately
before the offering.
(3)
On a pro forma basis to reflect the
conversion of all of our outstanding shares of preferred stock
into 443,561 shares of common stock and the issuance
of shares of common stock in
payment of all accrued dividends on our preferred stock, based
on a value of $ per
share, the mid-point of the estimated offering price set forth
on the cover page of this prospectus, to be effective
immediately before the offering.
(4)
On a pro forma as adjusted basis to
reflect the conversion of all of our outstanding shares of
preferred stock into 443,561 shares of common stock and the
issuance of shares of common
stock in payment of all accrued dividends on our preferred stock
(based on a value of $
per share, the mid-point of the estimated offering price set
forth on the cover page of this prospectus) to be effective
immediately before the offering, the sale
of shares of our
common stock in this offering at the assumed initial offering
price of $ per share, after
deducting the underwriting discounts, commissions and estimated
offering expenses payable by us, and the new credit facility.
(5)
We define EBITDA as net income
before interest, income taxes, depreciation and amortization,
minority interest and equity investment income or loss. Minority
interest represents third-parties’ ownership interests in
certain
non-wholly-owned
consolidated subsidiaries of Isoclima, the effect of which we
eliminate because we believe this more accurately reflects our
less than 100% ownership in these entities. Our management uses
EBITDA:
•
as a measurement of operating performance because it assists us
in comparing our operating performance on a consistent basis as
it removes the impact of items not directly resulting from our
core operations;
•
for planning purposes, including the preparation of our internal
annual operating budget;
•
to allocate resources to enhance the financial performance of
our business;
•
to evaluate the effectiveness of our operational strategies; and
•
to evaluate our capacity to fund capital expenditures and expand
our business.
EBITDA is not a measure of financial performance under generally
accepted accounting principles. Items excluded from EBITDA are
significant components in understanding and assessing financial
performance. EBITDA should not be considered in isolation or as
an alternative to, or substitute for, net income, cash flows
generated by operations, investing or financing activities, or
other financial statement data presented in the consolidated
financial statements. Because EBITDA is not a measurement
determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations,
EBITDA as presented may not be comparable to similarly titled
measures of other companies.
The following table reconciles actual, historical net income
(loss) of The O’Gara Group, Inc. to historical EBITDA:
Minority interest income before taxes and interest
(354
)
(177
)
Income related to equity method investments
(297
)
—
Depreciation and amortization(a)
14,726
8,137
Pro forma combined EBITDA
$
19,021
$
17,057
(a)
Reflects pro forma amortization expense included above reduced
by depreciation expense related to assets of subsidiaries of
Isoclima not included in the purchase agreement.
You should carefully consider the risks described below
before deciding to invest in us. Investing in our common stock
involves a high degree of risk. Any of the following risks could
harm our business and future results of operations and could
result in a partial or complete loss of your investment. These
risks are not the only ones that we may face. Additional risks
not presently known to us or that we currently consider
immaterial also could impair our business operations and
financial condition.
Risks
Related to Our Pending and Future Acquisitions
We may
have difficulty integrating the Pending Acquisitions and
managing the growth associated with them. If our integration
efforts fail in one or more respects, the effect on our
business, financial condition, results of operations or cash
flows could be material.
The completion of the Pending Acquisitions may place a
significant strain on our financial, technical, operational and
administrative resources.
•
We will transform immediately from a company with
$38.3 million in 2007 revenues and operations or offices in
five U.S. and two United Kingdom cities to a company with
$179.9 million in 2007 pro forma combined revenues and
operations or offices in six U.S., five European and three
Mexican cities.
•
Our business mix will shift from one primarily involving sales
in the defense and security services markets, particularly to
the U.S. government and its agencies, to one with
substantial commercial and international sales.
•
We will enter the markets for architectural and solar glass, in
which our current management team has no prior experience.
•
We will have substantial operations in Croatia, a country in
which we previously have not done business and our current
management has no experience, and in Italy and Mexico, countries
in which our current management’s operating experience is
not recent.
While our founders and executive officers have a long history of
integrating acquisitions in our industry, the collective size
and breadth of the Pending Acquisitions is greater than that of
acquisitions previously undertaken by us. We may not be able to
integrate the operations of the acquired companies without
increases in costs, losses in revenues and other difficulties.
In addition, we may not be able to realize the operating
efficiencies, synergies, cost savings or other benefits expected
from the Pending Acquisitions. A substantial portion of the
acquired companies’ businesses is outside of the
U.S. The difficulty of integrating and realizing benefits
from the Pending Acquisitions may be exacerbated by the varied
geographic locations involved and by the need to comply with
multiple U.S. and foreign laws and regulatory requirements.
Any unexpected costs or delays incurred in connection with the
integration of the Pending Acquisitions could have a material
adverse effect on our business, results of operations or
financial condition.
The
integration and continued success of the businesses being
acquired in the Pending Acquisitions are dependent on key
employees at those companies. The loss of any of those key
employees could have a material adverse effect on our business,
financial condition, results of operations and cash
flows.
Our ability to successfully integrate and grow our business
after the closing of this offering and the Pending Acquisitions
depends to a significant extent on the continued services of the
key employees at Isoclima, TPS and OmniTech, some of whom will
be running significant portions of our business. If key
employees at any of these companies were to leave and it became
necessary to hire new employees to manage the business, we could
experience difficulties in finding qualified personnel.
Messrs. Herrera and Maxin, the principal shareholders of
TPS Armoring and OmniTech, respectively, each will have a
two-year employment agreement with us that contains customary
confidentiality, noncompetition and nonsolicitation provisions.
We cannot guarantee that any of these key employees will not
terminate his employment, which could have a materially adverse
effect on our business, financial condition, results of
operations and cash flows.
The
market price of our common stock may decline as a result of the
Pending Acquisitions.
The market price of our common stock may decline as a result of
the Pending Acquisitions if, among other things, the integration
of our business and any of the acquired businesses is
unsuccessful or if the liabilities, expenses or transaction
costs related to the Pending Acquisitions are greater than we
expect. The market price of our common stock also may decline if
the Pending Acquisitions do not result in the benefits to our
financial results anticipated by financial or industry analysts
or if those benefits are not achieved as rapidly as expected.
We may
not be successful in identifying and consummating suitable
future acquisitions on favorable terms, if at all, which may
impede our growth and negatively impact the price of our common
stock.
We intend to grow, in part, through the acquisition of
additional security, safety and defense-related businesses. Our
ability to expand through acquisitions is integral to our growth
strategy and requires us to identify suitable acquisition
candidates that complement our existing product and service
offerings
and/or
expand those lines into related products and services. We may
encounter difficulty identifying suitable acquisition
candidates. The market for acquisitions of such companies is
highly competitive, and many companies with which we compete
have substantially greater resources that they can deploy in
pursuing attractive acquisition candidates. If competition
intensifies, there may be fewer acquisition opportunities
available to us as well as higher prices for acquisitions. Even
if we identify an appropriate acquisition candidate, we may not
be able to negotiate satisfactory terms for the acquisition or
to finance the acquisition. Moreover, if we are unable to
negotiate satisfactory terms for an acquisition or we discover
issues during our due diligence review and terminate
negotiations, we may incur significant expenses related to the
terminated transaction. For example, during the fourth quarter
of 2007, we incurred approximately $0.8 million of expense
in connection with acquisition opportunities that ultimately did
not materialize. If we fail to complete acquisitions, we may not
grow as rapidly as we expect, which could adversely affect the
market price of our common stock. Further, any expenses incurred
could adversely affect our financial condition, results of
operations and cash flows.
Both
the Pending Acquisitions and future acquisitions could be
difficult to integrate, divert the attention of key personnel,
disrupt our business, dilute shareholder value and impair our
financial condition, results of operations and cash
flows.
In addition to the factors previously discussed, acquisitions
involve numerous risks, any of which could harm our business,
including the following:
•
that the acquired company is less compatible with our growth
strategy than originally anticipated because, for example, we do
not realize anticipated operational or other synergies;
•
difficulties in supporting, transitioning and retaining
customers of the acquired company;
•
diversion of financial and management resources from existing
operations in order to integrate the acquired company’s
operational and other systems with those we maintain, including
difficulties encountered in implementing internal controls and
timely preparation of financial statements; and
•
that the price we pay or other resources that we devote may
exceed the value we realize, or the value we could have realized
if we had allocated the purchase price or other resources to
another opportunity.
Acquisitions also frequently result in the recording of goodwill
and other intangible assets which are subject to potential
impairments in the future that could harm our financial results.
In addition, if we finance acquisitions by issuing equity, or
securities convertible into equity, our existing stockholders
could be diluted, which could lower the market price of our
common stock. If we finance acquisitions through debt, the debt
financing may contain covenants or other provisions that limit
our operational or financial flexibility. As a result, if we
fail to evaluate acquisitions or investments properly, we may
not achieve the anticipated benefits of any such acquisitions,
and we may incur costs in excess of what we anticipate. The
failure to evaluate and execute acquisitions or investments
successfully or otherwise adequately address these risks could
materially harm our business, financial condition, results of
operations and cash flows.
Acquisitions
may expose us to liabilities that could harm our growth and
future operations.
We may acquire companies subject to known and unknown
liabilities, such as liabilities to the government, third-party
creditors, vendors or other persons, liabilities for
clean-up of
undisclosed environmental contamination, liabilities incurred in
the ordinary course of business and claims for indemnification
by parties entitled to be indemnified by the acquired company.
Although our acquisition agreements, including the agreements
for the Pending Acquisitions, generally include indemnity
provisions from the sellers for known and unknown liabilities,
we could incur losses if a liability exceeds the dollar amount
of the indemnity available or if we could not collect all or
some portion of the indemnity from the seller. As a result, if a
liability were asserted against us based upon our ownership of a
recently-acquired company, we might have to pay substantial sums
to settle any such claim, which could harm our business,
financial condition, results of operations and cash flows.
If we
are unable to manage our growth, our business, financial
condition, results of operations and cash flows could be
adversely affected.
Our headcount and operations have grown rapidly both from
organic growth and acquisitions. In connection with the Pending
Acquisitions, they will continue to grow at an even greater
pace. This rapid growth has placed, and we expect will continue
to place, a significant strain on our management and our
administrative, operational and financial infrastructure. We
anticipate further growth of headcount, and facilities will be
required to address increases in our product offerings and the
geographic scope of our customer base. Our success will depend
in part upon the ability of our senior management to manage this
growth effectively. To do so, we must continue to hire, manage,
integrate and retain a significant number of qualified managers
and engineers. If our new employees perform poorly, or if we are
unsuccessful in hiring, managing, integrating and retaining new
employees or retaining valued existing employees, then our
business may suffer.
For us to continue our growth, we must continue to improve our
operational, financial and management information systems. If we
are unable to manage our growth while maintaining our quality of
service, or if new systems that we implement to assist in
managing our growth do not produce the expected benefits, then
our business, financial condition, results of operations and
cash flows could be adversely affected.
Risks
Related to Our Business
Our
international operations, which constitute a significant
percentage of our pro forma combined revenues, will subject us
to material risks that our domestic business does
not.
We derived approximately 73% of our pro forma combined revenues
for both the year ended December 31, 2007 and the six
months ended June 30, 2008 from sales by our international
operations. In addition to those described elsewhere in these
risk factors, these operations will subject us to a number of
risks, including the following:
•
maintaining compliance with complex and unfamiliar foreign laws
and regulations;
•
maintaining compliance with U.S. laws applicable to the
operation of foreign subsidiaries, most particularly the Foreign
Corrupt Practices Act which, in some countries in which we do or
may seek to do business, may prohibit activities by our foreign
subsidiaries that are accepted and legal practices in those
countries;
•
difficulties and costs of staffing and managing foreign
operations;
•
difficulties in enforcing agreements and collecting receivables
through foreign legal systems and other relevant legal issues,
including fewer legal protections for intellectual property;
•
fluctuations in foreign economies and in the value of foreign
currencies and interest rates; and
•
general economic and political conditions in the countries in
which we operate.
Problems or negative developments in any of these areas could
adversely impact our business, financial condition or results of
operations. Furthermore, the integration of our
non-U.S. businesses
may require additional licenses or approvals from the
U.S. government or other
non-U.S. jurisdictions,
which could result in delays or constraints on our integration
plans.
Additionally,
international sales of our products and services subject us to
material risks that our domestic business does
not.
We derived approximately 78% and 82%, respectively, of our pro
forma combined revenues for the year ended December 31,2007 and the six months ended June 30, 2008 from sales to
non-U.S. customers.
Our international sales are subject to a number of risks,
including the following:
•
the unavailability of, or difficulties in obtaining, any
U.S. governmental authorizations necessary for the export
of our products and services to certain foreign jurisdictions;
•
laws or regulations relating to
non-U.S. military
contracts that favor purchases from
non-U.S. manufacturers
over U.S. manufacturers; and
•
the risk that we do not comply with U.S. government laws
and regulations, including
•
the International Traffic in Arms Regulations, which regulate
the export of controlled technical data, defense articles and
defense services and restrict the countries to or in which we
may sell our products and services;
•
the Export Administration Regulations, which regulate the export
of dual-use goods, software and technology that have both
commercial and military applications and may restrict certain
export or reexport transactions; and
•
the Foreign Corrupt Practices Act, which prohibits bribes,
kick-backs and other payments to foreign public officials and
governments that have discretionary authority over the granting
or retention of business.
Our failure to comply with laws and regulations applicable to
our international sales could subject us to fines, penalties and
other legal consequences that could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
Fluctuations
in currency exchange rates may materially and adversely impact
our financial results.
Upon completion of the Pending Acquisitions, we will have
significant revenues, expenses, assets and liabilities in
countries denominated in currencies other than the
U.S. dollar. Approximately 49% and 51%, respectively, of
our pro forma combined revenues for the year ended
December 31, 2007 and the six months ended June 30,2008 were denominated in euros. An additional 13% and 14%
respectively, of pro forma combined revenues for those periods
were denominated in the Mexican peso. Because our consolidated
financial statements are presented in U.S. dollars, we must
translate revenues, income and expenses, as well as assets and
liabilities, into U.S. dollars at exchange rates in effect
during or at the end of each reporting period. Therefore,
increases or decreases in the value of the U.S. dollar
against these other currencies will affect our net operating
revenues, our operating income and the value of balance sheet
items denominated in foreign currencies, even if those values
have not changed in the original currencies. In the past, only
Isoclima has used currency hedges. In the future we may
implement additional currency hedges intended to reduce our
exposure to changes in foreign currency exchange rates; however,
our hedging strategies may not be successful. As a result,
fluctuations in foreign currency exchange rates, particularly
significant strengthening of the U.S. dollar against the
euro, could materially and adversely affect our business,
financial condition, results of operations and cash flows.
The
loss of, or significant reduction in business from, one or more
of our major customers could have a material adverse effect on
our business, financial condition, results of operations and
cash flows.
Aggregate revenues from the U.S. Marine Corps and
Mercedes-Benz, our two largest customers, represented
approximately 12% and 15% of pro forma combined revenues for the
year ended December 31, 2007 and the six months ended
June 30, 2008. In the future, we may enter into one or more
contracts that will constitute a significant portion of our
revenue during the period of contract performance. Our success
will depend on our continued ability to develop and manage
relationships with significant customers. We cannot be sure that
we will be able to retain our largest customers, that we will be
able to attract additional customers or that our customers will
continue to buy our products and services in the same volume as
in prior years. The loss of one or more of our largest
customers, any reduction or delay in sales to these customers or
our inability to successfully develop relationships with
additional customers could have a material adverse effect on our
business, financial condition, results of operations and cash
flows.
Pricing
pressures, vehicle manufacturers’ cost reduction
initiatives and the ability of vehicle manufacturers to
re-source or cancel vehicle orders could have a material adverse
effect on our business, financial condition, results of
operations and cash flows.
Cost-cutting initiatives adopted by some of our Advanced
Transparent and Mobile Systems customers may result in downward
pressure on pricing. Vehicle manufacturers historically have had
significant leverage over their outside suppliers because the
automotive component supply industry is fragmented and serves a
limited number of automotive vehicle manufacturers. Four vehicle
manufacturers accounted for approximately 10% and 18%,
respectively, of our pro forma combined revenues for the year
ended December 31, 2007 and the six months ended
June 30, 2008. It is possible that pricing pressures could
intensify as vehicle manufacturers pursue cost cutting
initiatives, the impact of which may be exacerbated by our
reliance on a relatively small number of manufacturers. If we
are unable to generate sufficient production cost savings in the
future to offset price reductions, our gross margin and
profitability would be adversely affected.
Furthermore, in most instances our vehicle manufacturer
customers are not required to purchase any minimum amount of
products from us. The contracts we have entered into with most
of our customers provide for supplying glass for a particular
vehicle model, rather than for manufacturing a specific quantity
of products. Such contracts range from one year to the life of
the model (usually three to seven years), typically are
non-exclusive or permit the vehicle manufacturer to re-source if
we do not remain competitive and do not require the purchase by
the customer of any minimum amount of glass from us.
The
cyclical nature of automotive sales and production can adversely
affect our Advanced Transparent and Mobile Systems
business.
Our Advanced Transparent and Mobile Systems business is directly
impacted by the level of automotive sales and automotive vehicle
production by our customers. Approximately $55.9 million
and $32.0 million, or 31% for both periods, of our pro
forma combined revenues for the year ended December 31,2007 and the six months ended June 30, 2008 were
attributable to transparent armor and other specialized
enhancements to automobiles. Automotive sales and production are
highly cyclical and depend on general economic conditions and
other factors, including consumer spending and preferences. Our
sales also are affected by vehicle manufacturers’ inventory
levels. This cyclical nature for products in automobile sales,
among other things, may result in variability in our sales,
which may adversely affect our quarterly results of operations
and the market price of our common stock.
Our
business, financial condition, results of operations and cash
flows may be adversely affected by increased costs or
disruptions in the sourcing of raw materials and other
components.
Our operations require the use of various raw materials and
other components. Historically, we have attempted to manage the
cost of these items by passing on any increases to our
customers. However, we have not always been successful in these
efforts. Moreover, in the future, we may not have access to the
same sources of raw materials as we currently do, which could
impact their cost. For example, the quartz sand
utilized by our Lipik Glas subsidiary to manufacture some of our
transparent armor, impact-resistant glass and other specialized
glass is extracted from sand mines pursuant to long-term
concessions from the government of Croatia that expire in 2020
and 2030, with potential for extension. We also extract water
used in the manufacturing process pursuant to 20 year
concessions from the Croatian government. Although these
concessions are long-term contracts, the Croatian government may
revoke our concession or otherwise determine that we do not have
other appropriate authorizations or rights necessary for our
activities on these properties or that our activities do not
comply with environmental requirements. In such event, our Lipik
glass manufacturing operations could be seriously disrupted, we
may not be able to deliver our glass products to our customers
on a timely or cost-effective basis and we may be required to
acquire these raw materials from other sources that may not be
as cost-effective. These and similar events affecting our raw
materials and other components could increase our costs and
seriously harm our business, financial condition, results of
operations and cash flows.
We may
not be able to compete effectively with other firms, many of
which have substantially greater resources.
The market for our products and services is rapidly evolving and
highly competitive. We compete for customers, contracts and key
personnel with organizations varying in size, including large,
well established multinational corporations, as well as small,
start-up
companies. We believe that our principal competitors are as
follows:
•
In our Advanced Transparent and Mobile Systems division, we
compete with both manufacturers of specialized protective
materials and producers of vehicle armoring systems. In the area
of transparent armor, high-impact glass and other specialized
glass, we compete principally with PPG Industries, Inc.,
American Glass Products Company, Saint-Gobain-Sully and SIA
Triplex. In the market for vehicle armoring systems, we compete
or expect to compete with worldwide companies, principally
Centigon, BAE Systems, Inc. and Scalette Moloney Armoring
Corporation, as well as with smaller armoring companies
operating primarily on a home-country basis. In addition,
several original equipment manufacturers (OEMs), such as
Mercedes-Benz and BMW, which are also our customers for
transparent armor, offer factory-equipped armoring packages that
compete with our vehicle armoring systems business. OEMs have a
greater technical understanding of the vehicle platform they
have manufactured than we do.
•
In our Sensor Systems division, we compete principally with
Insight Technology, Inc. and Knight’s Armament Company in
the U.S., Elbit Systems, Ltd. in Israel and Photonis Netherlands
B.V. in Europe and ITT Corporation and L-3 Electro-Optics
worldwide.
•
In our Training and Services division, we compete with
established companies such as Blackwater USA, Olive Group
FZ-LLC, Kroll-Crucible, Science Applications International
Corporation and Armor Group International plc and with a highly
fragmented group of smaller companies, typically headed by
retired Special Operations Forces personnel.
We compete on many factors including, among others, technical
expertise, ability to deliver cost-effective solutions in a
timely manner, reputation and standing with government and
commercial customers, pricing, geographic reach, company size
and scale, and availability of key professional personnel,
including those with security clearances.
Some of our competitors have substantially greater financial,
management, research and marketing resources than we do and may
be able to utilize their greater resources to develop competing
products and technologies. If these competing products or
technologies provide the same or superior benefits as our
products at equal or lesser cost, they could render our products
obsolete or unmarketable. Because some of our products can have
long development cycles, we must anticipate changes in the
marketplace and the direction of technological innovation and
customer demands. Our competitors may have better access to
potential customers than we do and may be able to divert sales
away from us by winning broader contracts. In order to secure
contracts successfully when competing with larger, well-financed
companies, we may be forced to agree to contractual terms that
provide for lower aggregate payments to us over the life of the
contract, which
could adversely affect our margins. In addition, larger
diversified competitors serving as prime contractors may be able
to supply underlying products and services from affiliated
entities, which would prevent us from competing for
subcontracting opportunities on these contracts.
We are also at a disadvantage when bidding for contracts put up
for re-competition for which we are not the incumbent provider,
because incumbent providers are frequently able to capitalize on
customer relationships, technical knowledge and pricing
experience gained from their prior service. In addition, we must
compete to attract the skilled and experienced personnel
integral to our continued operation. Our larger competitors may
be able to hire away our employees by offering more lucrative
compensation packages. Our failure to compete effectively with
respect to any of these or other factors could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
We
currently obtain critical components for some of our products
from a small number of suppliers. If the supply of these
components becomes scarce or unavailable, or if we are unable to
obtain these components on competitive terms, we may incur
delays in manufacturing and delivery of our products, which
could damage our business, financial condition, results of
operations and cash flows.
We rely on a small number of suppliers for critical components
in the production of certain of our products. In particular, in
our Sensor Systems Division, we rely on two main suppliers, ITT
Corporation and L-3 Electro-Optics Systems, a business division
of L-3 Communications, for the production of the image
intensifier tubes we utilize in our night vision goggles and
other night vision devices. Each of these companies produces a
wide variety of night vision devices, including goggles and
weapons sights, and is a competitor of ours. We do not currently
have long-term agreements with these suppliers, and either could
discontinue supplying components to us at any time for
competitive or other reasons. In addition, because these and
other potential suppliers also use these tubes in night vision
goggles that they manufacture and sell, we have in the past
experienced delays in receiving this component due to supply
shortages. For example, Northrop Grumman, which owned the tube
manufacturing business now owned by L-3 Electro-Optics, had been
unable to produce and deliver any significant quantity of image
intensifier tubes to us since 2004. Also, during the last half
of 2005 and beginning of 2006, the U.S. government
purchased most of the available image intensifier tubes on the
market, severely limiting our supply for
non-U.S. government
projects.
Our reliance on these suppliers involves significant risks and
uncertainties, including whether they will provide the required
components in sufficient quantities, of desirable quality, at
acceptable prices and on a timely basis. If for any reason we
are unable to obtain components from third-party suppliers in
the quantities and of the quality that we require, on a timely
basis and at acceptable prices, we may not be able to deliver
our products on a timely or cost-effective basis to our
customers, which could cause customers to terminate their
contracts with us, increase our costs and seriously harm our
business, financial condition, results of operations and cash
flows. If we have to find new suppliers, it may take several
months to do so or require us to redesign our products to
accommodate components from different suppliers. As a result, we
could experience significant delays in manufacturing and
shipping our products to customers and incur additional
development, manufacturing and other costs. We cannot predict if
we will be able to obtain replacement components within the time
frames that we require at an affordable cost, if at all.
We may
not be able to attract and retain the highly skilled employees
needed to succeed in our competitive business.
Our success depends in large part on our ability to recruit and
retain the highly skilled personnel necessary to serve our
customers effectively. Competition for scientists, engineers,
technicians and professional personnel, including employees with
sophisticated electrical, optical, manufacturing and mechanical
engineering expertise and qualified personnel with extensive
military and law enforcement training and backgrounds, is
intense and competitors aggressively recruit key employees. We
also require employees with security clearances for classified
work. These employees are in great demand and are likely to
remain a limited resource in the foreseeable future. If we are
unable to recruit and retain a sufficient number of these and
other employees, our ability to maintain our competitiveness and
grow our business could be negatively affected. Moreover, some
of our U.S. government contracts contain provisions
requiring us to staff the contracts with
personnel with specific skill sets that the customer considers
key to our successful performance. In the event we are unable to
provide these key personnel or acceptable substitutes, the
customer may terminate the contract and our business, financial
condition, results of operations and cash flows could be
materially adversely effected.
We
have collective labor agreements with various employees in
Italy, Croatia and Mexico. We cannot guarantee that we will not
in the future face labor problems that adversely affect
business, financial condition, results of operations and cash
flows.
Relationships with our employees in the Italian-based operations
of our Advanced Transparent and Mobile Systems division are
governed by a national collective labor agreement, and some
employees are members of the Italian General Confederation and
the Italian Confederation of Trade Unions. Substantially all of
our Croatian production employees are members of the Autonomous
Trade Union of Energy, Chemical and Non-Metal Workers of
Croatia. In Mexico, many of the employees of TPS are represented
by the Sindicato Industrial de Trabajadores. We cannot guarantee
that we will not be subject to strikes, work stoppages, work
slowdowns, grievances, complaints, claims of unfair labor
practices, other collective bargaining disputes or anti-union
behavior in the future. Some of these activities could cause
production delays and negatively affect our ability to deliver
our production commitments to customers. Others could adversely
affect our reputation. Any significant labor difficulties could
have a material adverse effect on our business, financial
condition, results of operations and cash flows.
Risks
Related to Our Technology and Intellectual Property
The
markets in which we compete are characterized by rapid changes
in technology, which require us to develop responsive new
products, services and enhancements rapidly so as to not render
our offerings obsolete.
Our products and services are intended to enhance the safety and
security of our customers in the face of rapidly evolving
threats and, thus, must continue to evolve in step with those
threats as they become increasingly sophisticated. Our future
success will depend on our ability to develop and introduce a
variety of new capabilities and enhancements to our existing
products and services, as well as to introduce a variety of new
product and service offerings that address the changing needs of
the markets we serve. An inability to improve existing products
and services, and to develop new product technologies and
training processes, could make our products and services less
competitive or obsolete, either generally or for particular
applications, resulting in a material adverse effect on our
business. We must be able to devote adequate resources to the
development and introduction of new and enhanced products and
services that meet customer requirements on a timely basis, to
choose correctly among technical alternatives and to price our
offerings competitively. If we are unable to do any of these
things, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
A
patent used in the manufacture of our low profile night vision
goggles expires in early January 2009, after which we could face
competition for sales of this product that could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
We currently have an exclusive worldwide license of a patent
that is integral to the manufacture of the low profile night
vision goggles (LPNVGs) sold by our Sensor Systems division.
Sales of these goggles contributed approximately
$16.7 million and $9.1 million, or 45% and 41%,
respectively, of the Sensor Systems division’s pro forma
combined revenues for the year ended December 31, 2007 and
the six months ended June 30, 2008, and 9.3% and 8.9% of
our pro forma combined revenues for the same periods. If one or
more competitors were to enter the market when the patent on the
LPNVGs expires in 2009 and we were unable to maintain our market
share for LPNVGs, our business, financial condition, results of
operations and cash flows could be materially adversely affected.
If we
fail to protect, cannot protect or incur significant costs in
defending our intellectual property and other proprietary
rights, our business, financial condition, results of operations
and cash flows could be materially adversely
affected.
Our success depends, in large part, on our ability, and the
ability of third-parties from whom we license our intellectual
property, to protect our intellectual property and other
proprietary rights, especially with respect to that of our
Sensor Systems and Advanced Transparent and Mobile Systems
divisions. However, a significant portion of our technology is
not patented, and we may be unable or may not seek to obtain
patent protection for this technology. Additionally, patents we
own or license will expire. As noted above, we have an exclusive
worldwide license for a patent that is integral to the
manufacture of our LPNVGs, which expires in early January 2009.
Moreover, existing U.S. legal standards offer only limited
protection of intellectual property rights, may not provide us
with any competitive advantage, and may be challenged by third
parties. Furthermore, despite our efforts, we may be unable to
detect unauthorized use of our intellectual property and prevent
third parties from infringing upon or misappropriating our
intellectual property or otherwise gaining access to our
technology. Unauthorized third parties may try to copy or
reverse engineer our products, without infringing any patents
that we own or have rights to.
In addition to patents, we rely on trademarks, copyrights, trade
secrets and unfair competition laws, as well as license
agreements, confidentiality agreements and other contractual
provisions, to protect our intellectual property and other
proprietary rights. Many of our employees have access to our
trade secrets and other intellectual property. We generally
require our
U.S.-based
employees, consultants and advisors to execute confidentiality
agreements with us and to disclose and assign to us all
inventions conceived during the term of their employment or
engagement while using our property or which relate to our
business. We intend to implement these requirements for
appropriate employees of the companies to be acquired in the
Pending Acquisitions to the extent they do not already have such
agreements. However, these measures may not be adequate to
safeguard our proprietary intellectual property. Our employees,
consultants and advisors may unintentionally or willfully
disclose our confidential information to competitors. In
addition, confidentiality agreements may be unenforceable or may
not provide an adequate remedy in the event of unauthorized
disclosure. Enforcing a claim that a third party illegally
obtained and is using our trade secrets may be expensive and
time consuming, and the outcome is unpredictable.
The laws of countries other than the U.S. may be even less
protective of intellectual property rights than those in the
U.S. Accordingly, despite our efforts, we may be unable to
prevent third parties from infringing upon or misappropriating
our intellectual property or otherwise gaining access to our
technology. Many countries, including certain countries in
Europe, have compulsory licensing laws under which a patent
owner may be compelled to grant licenses to third parties. In
addition, many countries limit the enforceability of patents
against third parties, including government agencies or
government contractors. In these countries, the patent owner may
have limited remedies, which could materially diminish the value
of the patent.
In some cases, the U.S. government retains certain rights
in intellectual property that we have developed using government
research and development funds. Some of our U.S. government
contracts permit us to retain ownership of the technology
developed under the contracts, so long as we timely report the
inventions and provide the applicable government agency a
license to use the inventions for non-commercial purposes. The
government also may exercise “march in” rights if we
fail to continue developing the technology, under which the
government may exercise a non-exclusive, royalty-free,
irrevocable, worldwide license to any technology developed under
contracts it has funded.
We may
be sued by third parties for alleged infringement of their
proprietary rights, which could be costly, time-consuming and
limit our ability to use certain technologies or intellectual
property in the future.
We may become subject to claims that our products or services
infringe upon the intellectual property or other contractual or
proprietary rights of third parties. Any such claims, with or
without merit, could be
time-consuming
and expensive to defend and could divert our management’s
attention away from the execution of our business plan. Some of
our competitors may be able to sustain the costs of complex
patent or intellectual property litigation more effectively than
we can because they have substantially greater resources.
We cannot be certain that we will successfully defend against
allegations of infringement of third-party intellectual property
rights. Moreover, any adverse judgment or settlement resulting
from these claims could require us to pay substantial amounts in
damages for infringement or substantial amounts to license
continued use of the disputed technology or intellectual
property, or could prohibit our use of the technology or
intellectual property altogether. We cannot assure you that we
would be able to obtain a license from the third party asserting
the claim on commercially reasonable terms, if at all, that we
would be able to develop alternative technology or intellectual
property on a timely basis, if at all, or that we would be able
to obtain a license to use a suitable alternative technology or
intellectual property to permit us to continue offering, and our
customers to continue using, our affected products or services.
If we were unable to sell a product at competitive prices or at
all, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
Sales
to the U.S. government, particularly to agencies of the DoD,
comprise a significant percentage of our revenues. A loss of a
substantial portion of these contracts, or a delay or decline in
funding of existing or future contracts, could adversely affect
our business, financial condition, results of operations and
cash flows.
Revenues from contracts and subcontracts with the
U.S. government and its agencies represented approximately
18% and 15%, respectively, of our pro forma combined revenues
for the year ended December 31, 2007 and the six months
ended June 30, 2008. The DoD accounted for approximately
12% and 10%, respectively, of these pro forma combined revenues.
We expect that U.S. government contracts, particularly with
the DoD, will continue to be an important source of revenue for
the foreseeable future. Many of our government customers,
including the DoD, are subject to customary budgetary
constraints and our continued performance under these contracts,
or the award of additional contracts from the
U.S. government, could be jeopardized by spending
reductions or budget cutbacks, resulting in unexpected loss of
revenue. The funding of U.S. government programs is
uncertain and dependent on continued congressional
appropriations and administrative allotment of funds based on an
annual budgeting process. We cannot assure you that current
levels of congressional funding for our products and services
will continue.
Other factors that could impact U.S. government spending
and reduce our federal government contracting business include:
•
changes, delays or cancellations in government programs,
requirements or policies that are related to our products and
services;
•
adoption of new laws or regulations relating to government
contracting or changes to existing laws or regulations;
•
changes in political or public support for security, safety and
defense programs, including with regard to the funding or
operation of the products or services we provide;
•
impairment of our reputation or relationships with any
significant government agency with which we conduct business;
•
delays or changes in the government appropriations process;
•
curtailment of the U.S. government’s outsourcing of
services to private contractors; and
•
uncertainties associated with the war on terrorism and other
geo-political matters.
These and other factors could cause governmental agencies to
reduce their purchases under existing contracts, to exercise
their rights to terminate contracts at-will, to issue temporary
stop-work orders or to abstain from renewing contracts, any of
which would cause our revenue to decline and could otherwise
harm our business, financial condition, results of operations
and cash flows.
A
decrease in U.S. military operational levels in Afghanistan and
Iraq may affect the U.S. government’s future procurement
priorities and existing programs, which could reduce demand for
certain of our products and services.
The current high levels of operational activity in Afghanistan
and Iraq have led to an increase in demand for the specialized
products and services of our Sensor Systems and Training and
Services divisions. We cannot predict whether the current nature
and magnitude of operations in Afghanistan and Iraq will afford
new opportunities for these products and services in terms of
existing, additional or replacement programs. Furthermore, we
cannot predict whether or to what extent the current operational
levels in Afghanistan or Iraq will continue. If operations in
Afghanistan and Iraq cease or slow down and other opportunities
for the sale of our products and services do not materialize,
our business, financial condition, results of operations and
cash flows could be materially adversely affected.
Some
of the business of our Sensor Systems and Training and Services
divisions depends on our employees obtaining and maintaining
required security clearances.
Some of our Sensor Systems division and Training and Services
division contracts with the DoD and other government agencies
are classified and have strict security clearance requirements
for the personnel who work on them. We must comply with these
requirements and with various other executive orders, federal
laws and regulations and customer security requirements, which
may include restrictions on how we develop, store, protect and
share information. Obtaining and maintaining security clearances
for employees involves a lengthy process, and it is difficult to
identify, recruit and retain employees who already hold security
clearances. If our employees are unable to obtain security
clearances in a timely manner, or at all, or if our employees
who hold security clearances are unable to maintain the
clearances or terminate their employment with us, customers
requiring classified work could terminate their contracts with
us or decide not to renew the contracts upon their expiration.
We expect that many of the contracts on which we will bid in the
future will require us to demonstrate our ability to employ
personnel with specified types of security clearances. If we are
not able to retain and engage employees with the required
security clearances for particular contracts, we may not be able
to bid on or win new contracts.
A
failure to comply with stringent regulations applicable to our
contracts with the U.S. and foreign governments could subject us
to penalties, disbarment or other actions that could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
We are subject to and must comply with various governmental
regulations that impact, among other things, our revenue,
operating costs, profit margins and the internal organization
and operation of our business. The most significant regulations
and regulatory authorities affecting our U.S. government
business include:
•
the Federal Acquisition Regulations and supplemental agency
regulations, which comprehensively regulate the formation and
administration of, and performance under, U.S. government
contracts and, among other things, impose accounting rules that
define allowable and unallowable costs and govern our right to
reimbursement under certain contracts;
•
the False Claims Act and the False Statements Act, which impose
penalties for payments made on the basis of false facts provided
to the government and on the basis of false statements made to
the government, respectively; and
•
laws, regulations and executive orders restricting the use and
dissemination of information classified for national security
purposes and the exportation of certain products and technical
data.
Our failure to comply with applicable regulations, rules and
approvals or misconduct by any of our employees could result in
the imposition of fines and penalties, the loss of security
clearances, the loss of our U.S. government contracts or
our suspension or debarment from contracting with the
U.S. government generally, any of which could have a
material adverse effect our business, financial condition,
results of operations and cash flows.
In addition, we are subject to certain regulations of comparable
government agencies in other countries, and our failure to
comply with these
non-U.S. regulations
also could have a material adverse effect our business,
financial condition, results of operations and cash flows.
Our
U.S. government contracts may be unilaterally terminated or
modified by the government prior to completion and contain other
unfavorable provisions, which could adversely affect our
business, financial condition, results of operations and cash
flows.
Our contracts with the U.S. government typically contain
provisions and are subject to laws and regulations that provide
the government with rights and remedies not generally found in
ordinary commercial contracts. For example, under the terms of
our contracts, the U.S. government may unilaterally:
modify some of the terms and conditions of our existing
contracts;
•
suspend or permanently prohibit us from doing business with the
government or with any specific government agency;
•
cancel or delay existing multi-year contracts and related orders
if the necessary funds from contract performance for any
subsequent year are not appropriated;
•
decline to exercise an option to extend an existing multi-year
contract;
•
delay the payment of our invoices by government payment
offices; and
•
prohibit us from receiving new contracts pending resolution of
alleged violations of procurement laws and regulations.
If the U.S. government terminated a contract with us for
convenience, we generally could recover only our incurred or
committed costs, settlement expenses and profit on the work
completed prior to termination. If any of our contracts were
terminated or adversely modified, it could have a material
adverse effect on our business, financial condition, results of
operations and cash flows.
Our
business could be adversely affected by a negative audit by the
U.S. government.
U.S. government agencies, primarily the Defense Contract
Audit Agency and the Defense Contract Management Agency,
routinely audit and investigate government contractors. These
agencies review a contractor’s performance under its
contracts, cost structure and compliance with applicable laws,
regulations and standards. They also may review the adequacy of,
and a contractor’s compliance with, its internal control
systems and policies, including the contractor’s
purchasing, estimating, compensation and management information
systems. Any costs found to be improperly allocated to a
specific contract will not be reimbursed, and such costs already
reimbursed must be refunded. If an audit of our business were to
uncover improper or illegal activities, we could be subject to
civil and criminal penalties and administrative sanctions,
including termination of contracts, forfeiture of profits,
suspension of payments, fines and suspension or prohibition from
doing business with the U.S. government. We also could
suffer serious harm to our reputation if allegations of
impropriety or illegal acts were made against us, even if the
allegations were inaccurate. If any of the foregoing were to
occur, our business, financial condition, results of operations
and cash flows could be materially adversely affected.
Our
subsidiaries may lose their small business eligibility for U.S.
government contracts, which could have a material adverse effect
on our business, financial condition, results of operations and
cash flows.
In the past, some of our subsidiaries have been eligible or may
in the future be eligible to bid on certain government
procurement contracts restricted by the U.S. government to
small businesses under the Small Business Administration
set-aside program. “Small business” status is measured
on a
procurement-by-procurement
basis, and depends on the number of employees
and/or the
annual revenue of a company. As a result of growth or other
factors, our subsidiaries that may in the past have qualified
as, or may in the future qualify as,
small businesses could lose such status, and as a result could
lose certain advantages or incur additional charges and costs
related to disclosure, accounting and reporting requirements
applicable to a government contractor not qualified as a small
business.
Risks
Related to Our Organization and Structure
We may
not be able to obtain capital when desired on favorable terms,
or at all.
It is possible that we may not generate sufficient cash flow
from operations or otherwise have the capital resources to meet
our future capital needs. If this occurs, then we may need
additional financing to pursue our business strategies,
including to:
•
develop new or enhance existing products;
•
acquire businesses or technologies;
•
enhance our operating infrastructure;
•
hire additional personnel;
•
fund working capital requirements; or
•
otherwise respond to competitive pressures.
We cannot assure you that additional financing will be available
on terms favorable to us, or at all. In addition, our new
$80 million credit facility will contain financial and
other covenants, including coverage ratios and other limitations
on our ability to incur indebtedness, sell all or substantially
all of our assets and engage in mergers, consolidations and
acquisitions, that could restrict our ability to engage in
transactions that would be otherwise in our best interests.
Future debt agreements may contain similar or more restrictive
covenants. Failure to comply with any of the covenants in a debt
instrument could result in a default under that instrument and
trigger a default under other debt instruments, if any, thus
causing the lenders to accelerate the repayment of the
indebtedness and adversely affecting our business, financial
condition, results of operations and cash flows.
In addition, certain of our customers require that we obtain
letters of credit to support our obligations under some of our
contracts. Our new credit facility will have a limit on
outstanding letters of credit of $10 million that, to the
extent utilized, will limit the amount that we may borrow under
the revolver portion of the credit facility. Continued access to
letters of credit may be important to our ability to retain
current contracts and win contracts in the future. If adequate
funds are not available or are not available on acceptable
terms, if and when needed, then our ability to fund our
operations, take advantage of unanticipated opportunities,
develop or enhance our products, or otherwise respond to
competitive pressures would be significantly limited.
Our
current senior management and key employees are important to our
customer relationships and overall business. The loss of any of
these persons or the failure to attract and retain employees
with the expertise required for our business could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
We believe that our success depends in part on the continued
contributions of our current senior management and key
employees, on whom we rely to generate business and execute
programs successfully. In addition, the relationships and
reputation that these persons have established and maintain with
government defense personnel contribute to our ability to
maintain good customer relations and to identify new business
opportunities. Our future success will depend in part on our
ability to retain our senior management and key employees and to
identify, hire and retain additional qualified personnel with
expertise in key areas. Each member of our senior management and
each of our key employees may terminate his or her employment at
will at any time. The loss of any of our senior management team
or key employees could significantly delay or prevent the
achievement of our business objectives, materially harm our
business and customer relationships
and impair our ability to identify and secure new contracts and
otherwise manage our business. We do not maintain, and do not
currently intend to obtain, key employee life insurance on any
of our personnel.
Provisions
in our Articles of Incorporation, Code of Regulations and Ohio
law may discourage takeovers, which could affect the rights of
holders of our common stock.
Some provisions of our Articles of Incorporation and Code of
Regulations, as well as Ohio law, may have the effect of
delaying or preventing a change in control. These provisions may
make it more difficult for other persons, without the approval
of our board of directors, to make a tender offer or otherwise
acquire substantial amounts of our common stock or to launch
other takeover attempts that shareholders might consider to be
in their best interest. These provisions could limit the price
that some investors might be willing to pay in the future for
shares of our common stock. See “Description of Capital
Stock — Anti-takeover Effects of Certain Provisions of
Our Amended and Restated Articles of Incorporation and Code of
Regulations and of the Ohio General Corporation Law.”
Our
management and managers of the companies acquired in the Pending
Acquisitions, whose interests may not be aligned with yours,
will have substantial influence over the vote on all matters
requiring shareholder approval.
Upon completion of this offering, our directors, executive
officers and their affiliates will collectively beneficially
own shares,
or %, of our total
outstanding shares of common stock, assuming no exercise of
outstanding stock options held by them and no exercise of the
underwriters’ over-allotment option. If all currently
outstanding stock options held by our directors, executive
officers and employees were exercised, this percentage would
increase to % of our outstanding
shares of common stock. The managers of the companies acquired
in the Pending Acquisitions will beneficially own an
additional shares,
or % of our total outstanding
shares of common stock, assuming no exercise of the
underwriters’ over-allotment option. Accordingly, these
persons collectively will have substantial influence over the
vote on all matters requiring shareholder approval, including
the election of directors. The interests of our directors,
executive officers and key employees may not be fully aligned
with yours. Although there is no agreement among them with
respect to the voting of their shares, this concentration of
ownership may delay, defer or even prevent a change in control
of our company, and make transactions more difficult or
impossible without the support of all or some of our directors
and executive officers. These transactions might include proxy
contests, tender offers, mergers or other purchases of common
stock that could give you the opportunity to realize a premium
over the then-prevailing market price for shares of our common
stock. In addition, there may be an appearance of a conflict
between the interests of our executive officers and our other
shareholders as a result of certain relationships and
transactions among our executive officers.
As a
result of this offering, we will be subject to financial
reporting and other requirements for which our accounting and
other management systems and resources may not be adequately
prepared, which could adversely affect our business, financial
condition, results of operations and cash flows.
Under Section 404 of the Sarbanes-Oxley Act, beginning with
our first annual report on
Form 10-K,
our management will be required to deliver an annual report that
attests to the effectiveness of our internal control over
financial reporting. Beginning with our second Form
10-K, our
independent registered public accounting firm will be required
to deliver an opinion on the effectiveness of internal control.
We will be required to devote significant resources to complete
the assessment and documentation of our internal control system
and financial processes, including an assessment of the design
of our information systems. This process may be more difficult
and costly given the increased complexity and expanded geography
added by Isoclima, TPS and OmniTech. We also may incur
significant costs to remediate any control deficiencies we
identify through these efforts. We cannot assure you that we
will be able to complete the required management assessment by
our Section 404 reporting deadline. An inability to
complete and document this assessment would cause our auditors
to conclude that our internal control over financial reporting
is or was not effective. In addition, if a material weakness is
identified with respect to our internal
control over financial reporting, then neither we nor our
auditors would be able to conclude that our internal control
over financial reporting was effective. Ineffective internal
control over financial reporting could cause investors to lose
confidence in our reported financial information, which could
cause the price of our common stock to drop significantly. Any
weakness or deficiencies identified in our internal controls
also could make it more difficult for us to obtain certain types
of insurance, including director and officer liability
insurance, and we might be forced to accept reduced policy
limits and coverage
and/or incur
substantially higher costs to obtain the same or similar
coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to
serve on our board of directors, on committees of our board of
directors, or as executive officers.
We do
not expect to pay cash dividends on our common stock in the
foreseeable future.
We do not expect to pay cash dividends on our common stock,
including the common stock issued in this offering. Any future
dividend payments are within the absolute discretion of our
board of directors and will depend on, among other things, our
financial condition, results of operations, contractual
restrictions, working capital requirements, business
opportunities, anticipated cash needs and other factors that our
board of directors may deem relevant.
Risks
Related to This Offering
There
currently is no public market for our common stock and an active
trading market may never develop following this offering. The
price of our common stock could decline substantially following
this offering.
Prior to this offering, there has been no public market for our
common stock, and there can be no assurance that an active
trading market will develop and be sustained after this
offering. If an active sustained trading market does not
develop, it would affect your ability to sell your common stock
and depress the market price of your common stock. In addition,
the initial offering price will be determined through
negotiations between us and the representative of the
underwriters and may bear no relationship to the price at which
the common stock will trade after this offering.
Our
quarterly operating results may vary widely.
Our quarterly revenue, cash flow and operating results have
fluctuated, and may continue to fluctuate significantly in the
future, due to a number of factors, including the following:
•
the size, and timing of completion of, large orders for our
products and services;
•
the mix of products that we sell in the period;
•
timing of receipt of critical supplies, such as image
intensifying tubes, from the manufacturers;
•
exchange rate and currency fluctuations;
•
costs incurred in the introduction of new products;
•
the timing of acceptance of our products in new markets;
•
production or other delays in shipping our products;
•
cancellations, delays or contract amendments by our governmental
agency customers; and
•
changes in policy or budgetary measures that adversely affect
our governmental agency customers.
Because a relatively large amount of our expenses are fixed,
changes in the volume of products and services provided under
existing contracts and the number of contracts commenced,
completed or terminated during any quarter may cause significant
variations in our cash flow from operations. We incur
significant operating costs during the
start-up and
early stages of large commercial and government contracts and
typically do not receive corresponding payments in that same
quarter. We may also incur significant or unanticipated expenses
when contracts expire or are terminated or are not renewed. In
addition, payments due to us from government
agencies may be delayed due to billing cycles or as a result of
failures of governmental budgets to gain congressional and
presidential approval in a timely manner.
Our
stock price may be volatile, which could affect negatively the
value of your investment.
The equity markets, including The NASDAQ Global Market where we
anticipate listing our common stock, have experienced extreme
price and volume fluctuations in recent years that often may
have been unrelated or disproportionate to the operating
performance of listed companies. As a result, the market price
of our common stock may be similarly volatile to the extent such
fluctuation continues, and you could experience a decrease in
the value of your shares unrelated to our operating performance
or prospects.
The price of our common stock also could be subject to wide
fluctuations in response to all of the factors described above
and a number of other factors, such as:
•
variations in our quarterly operating results;
•
perceptions of the prospects for the markets in which we compete;
•
changes in securities analysts’ estimates of our financial
performance;
•
regulatory developments in the U.S. and foreign countries;
•
the initiation of litigation against us, regardless of the merit
of the claims;
•
changes in general economic conditions;
•
terrorist acts or military action related to international
conflicts, wars or otherwise;
•
sales of large blocks of our common stock, including sales by
our executive officers, directors and significant shareholders;
•
sales of common stock or other securities by us in the future;
•
trading volume of our common stock; and
•
additions or departures of key personnel.
Future
sales of our common stock may depress our stock
price.
After completion of this offering and the Pending Acquisitions,
we will have shares of common
stock outstanding. The shares
sold in this offering,
or shares if the
underwriters’ over-allotment is exercised in full, will be
freely tradable without restriction or further registration
under federal securities laws, unless purchased by our
“affiliates” as such term is used in Rule 144 of
the Securities Act of 1933 (the Securities Act) or by any person
who is subject to a
lock-up
agreement.
All of our directors and executive officers and the holders of
substantially all of our shares of common stock and options to
purchase common stock are subject to
lock-up
agreements. We are in the process of obtaining, and do not
intend to proceed with this offering unless we have obtained,
lock-up
agreements from all persons who will receive shares of our
common stock upon completion of the Pending Acquisitions. The
lock-up
agreements generally prohibit the sale or other disposition of
their shares for 365 days, in the case of our three
founders, and for 180 days, in the case of all others,
after the date of this prospectus. After the
180-day
lock-up
agreements expire,
approximately shares of our
common stock will be eligible for sale in the public market. Of
these, are held by our
directors, executive officers and other affiliates and may only
be sold in accordance with the volume limitations of
Rule 144. When the
365-day
lock-up
agreements expire, the shares
held by our founders will become eligible for sale, subject to
the volume limitations of Rule 144.
The above information assumes the effectiveness of the
lock-up
agreements. Morgan Keegan & Company, Inc., on behalf
of the underwriters, may, in its sole discretion and at any time
without notice, release all or any portion of the securities
subject to
lock-up
agreements. In considering any request to release shares subject
to
a lock-up
agreement, Morgan Keegan will consider the facts and
circumstances relating to a request at the time of that request.
In addition, as soon as practicable after the completion of this
offering, we intend to register under the Securities Act
61,570 shares of common stock reserved for issuance under
our 2004 and 2005 Option Plans
and shares reserved under our
2008 Incentive Plan. No awards are outstanding under the 2008
Incentive Plan. However, stock options for 55,445 shares
are outstanding under the 2004 and 2005 Option Plans, most of
which will be exercisable immediately. Of these, options for
11,975 shares are held by persons not subject to the
lock-up
agreements. Shares issued upon exercise of these options will
become freely tradable on the effective date of the registration
statement for the 2004 and 2005 Option Plans. Of the remaining
options, 13,470 are covered by
180-day
lock-up
agreements and 30,000 are covered by
365-day
lock-up
agreements. Shares issued upon the exercise of these options
will be freely tradable when the
lock-up
agreements expire, subject to compliance with certain
restrictions on sales by our affiliates.
If our existing shareholders and option holders sell substantial
amounts of common stock in the public market, or if the market
perceives that these sales may occur, then the market price of
our common stock may decline, including below the initial public
offering price. See “Shares Eligible for Future Sale.”
As a
new investor, you will experience immediate and substantial
dilution in the pro forma net tangible book value of your shares
of $ .
The initial public offering price of our common stock is
substantially higher than the pro forma net tangible book value
per share of our outstanding common stock immediately after this
offering. If you purchase our common stock in this offering, you
will incur immediate dilution of approximately
$ in the book value per share
based on the mid-point of the range on the cover page of this
prospectus. This means that investors who purchase common stock
in this offering:
•
will pay a price per share of common stock that substantially
exceeds the per share book value of our tangible assets after
subtracting our liabilities; and
•
will have contributed % of the
total amount of our pro forma net tangible book value since
inception but will only own % of
the shares outstanding.
If outstanding options to purchase our common stock are
exercised, you will experience additional dilution. See the
section entitled “Dilution” in this prospectus for a
more detailed description of this dilution.
Securities
analysts could issue negative reports on our common stock, or
cease coverage of our company, either of which could have a
negative impact on the market price of our common
stock.
The trading market for our common stock may be affected in part
by the research and reports that industry or financial analysts
publish about us or our business. We do not control these
analysts. If one or more of the analysts who elects to cover us
downgrades our stock, our stock price would likely decline
rapidly. If one or more of these analysts ceases coverage of our
company, we could lose visibility in the market, which in turn
could cause our stock price to decline.
Some of the statements under the sections of this prospectus
entitled “Prospectus Summary,”“Risk
Factors,”“Use of Proceeds,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and
“Business” and elsewhere in this prospectus contain
forward-looking statements. In some cases, you can identify
forward-looking statements by the following words:
“may,”“will,”“could,”“would,”“should,”“expect,”“intend,”“plan,”“anticipate,”“believe,”“estimate,”“predict,”“project,”“potential,”“continue,”“ongoing” or the negative of
these terms or other comparable terminology, although not all
forward-looking statements contain these words. These statements
involve known and unknown risks, uncertainties and other factors
that may cause our actual results, levels of activity,
performance or achievements to be materially different from the
information expressed or implied by these forward-looking
statements. Although we believe that we have a reasonable basis
for each forward-looking statement contained in this prospectus,
we caution you that these statements are based on a combination
of facts and factors currently known by us and our projections
of the future, about which we cannot be certain.
You should refer to the section of this prospectus entitled
“Risk Factors” for a discussion of important factors
that may cause our actual results to differ materially from
those expressed or implied by our
forward-looking
statements. As a result of these, as well as other factors not
presently known to us or that we currently consider immaterial,
we cannot assure you that the forward-looking statements in this
prospectus will prove to be accurate. Furthermore, if our
forward-looking statements prove to be inaccurate, the
inaccuracy may be material. In light of the significant
uncertainties in these forward-looking statements, you should
not regard these statements as a representation or warranty by
us or any other person that we will achieve our objectives and
plans in any specified time frame, or at all. We do not
undertake to update any of the forward-looking statements after
the date of this prospectus, except to the extent required by
applicable securities laws.
We estimate that our net proceeds from the sale
of shares of common stock
being offered hereby, after deducting underwriting discounts and
commissions and estimated offering expenses, will be
approximately $ million (or
$ if the underwriters exercise the
over-allotment option), based on an offering price of
$ per share, which is the
mid-point of the estimated offering price range set forth on the
cover page of this prospectus.
We intend to use all of the net proceeds from this offering and
approximately $54.8 million in borrowings under our new
credit facility to fund the approximately $149.9 million
aggregate cash portion of the purchase price required for the
Pending Acquisitions, to refinance all outstanding indebtedness
under our existing credit facility, which was approximately
$4.9 million as of June 30, 2008, to refinance
approximately $32.6 million of the debt assumed in the
Pending Acquisitions and to pay $2.0 million in bonuses to
two of our founders that become payable on completion of the
offering.
We intend to use the proceeds sold pursuant to the
underwriters’ over-allotment option to reduce amounts
outstanding under our new credit facility which will then be
available for working capital and general corporate purposes.
We have not declared or paid any cash dividends in the past, and
currently do not anticipate declaring or paying any cash
dividends in the future, on the common stock of The O’Gara
Group, Inc. Any future determination as to the declaration and
payment of dividends will be at the discretion of our board of
directors and will depend on then-existing conditions, including
our financial condition, results of operations, contractual
restrictions, working capital requirements, business
opportunities, anticipated cash needs and other factors our
board of directors may deem relevant. Additionally, our new
credit facility will limit our ability to pay cash dividends on
our common stock.
The following table sets forth our capitalization as of
June 30, 2008:
•
on an actual basis;
•
on a pro forma basis to reflect:
•
the filing of our amended and restated Articles of Incorporation
to authorize shares of common
stock and shares of
undesignated preferred stock;
•
the conversion of all outstanding shares of our preferred stock
into shares of common stock,
and the issuance of shares of
common stock in payment of all accrued dividends on our
preferred stock (based on a value
of per share, the mid-point
of the estimated offering price range set forth on the cover
page of this prospectus); and
•
a -to-one split of our common stock
in the form of a stock dividend;
•
on a pro forma as adjusted basis to reflect:
•
the sale by us of shares of
common stock in this offering at an assumed initial offering
price of $ per share, which is the
mid-point of the estimated offering price range set forth on the
cover page of this prospectus, after deducting underwriting
discounts and commissions and estimated offering expenses;
•
the closing of our new credit facility; and
•
the issuance of shares of
common stock in connection with the completion of the Pending
Acquisitions (based on a value
of per share, the mid-point
of the estimated offering price range set forth on the cover
page of this prospectus and an exchange rate of $1 = €
).
You should read the information in this table together with our
financial statements and accompanying notes and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” appearing elsewhere in
this prospectus.
New Class A 3% Cumulative Participating Preferred Stock, no
par value: 280,000, 0 and 0 shares authorized actual, pro
forma and pro forma as adjusted, respectively; 130,671, 0 and
0 shares issued and outstanding as of June 30, 2008
actual, pro forma, and pro forma as adjusted, respectively(1)
15,530
New Class B 5% Cumulative Participating Preferred Stock, no
par value: 315,000, 0 and 0 shares authorized actual, pro
forma and pro forma as adjusted, respectively; 312,890, 0 and
0 shares issued and outstanding as of June 30, 2008
actual, pro forma and pro forma as adjusted, respectively(1)
23,315
Undesignated preferred stock, no par
value: shares authorized; no
shares issued and outstanding
—
Common stock, no par value:
956,000, and shares
authorized actual, pro forma and pro forma as adjusted,
respectively;
20,510, and shares
issued and outstanding as of June 30, 2008 actual, pro
forma and pro forma as adjusted, respectively
All shares of preferred stock are convertible into shares of
common stock at any time and will convert automatically, on a
1-for-1
basis, into shares of common stock immediately prior to this
offering. The New Class A 3% Cumulative Participating
Preferred Stock has a liquidation value of $118.85 per share and
accrued cumulative dividends of $1,029,083 as of June 30,2008 and the New Class B 5% Cumulative Participating
Preferred Stock has an average liquidation value of $75.54 per
share and accrued cumulative dividends of $2,790,569 as of
June 30, 2008. At an assumed public offering price of
$ per share, an aggregate
of shares of common stock
will be issued in payment of accrued dividends on the preferred
stock in connection with its conversion to shares of common
stock.
If you invest in our common stock in this offering, your
ownership interest will be diluted to the extent of the
difference between the initial public offering price per share
and the pro forma net tangible book value per share of our
common stock after this offering. Net tangible book value per
share is determined by dividing the number of outstanding shares
of our common stock into our total tangible assets (total assets
less intangible assets) less total liabilities and outstanding
preferred stock. The pro forma net tangible book value of our
common stock as of June 30, 2008 was approximately
$ million, or approximately
$ per share, based on the number
of shares outstanding as of June 30, 2008, after giving
effect to the conversion of all outstanding shares of our
preferred stock
into shares
of common stock, the issuance
of shares
of common stock in payment of all accrued dividends on our
preferred stock and
our -for-one
stock split.
Investors participating in this offering will incur immediate,
substantial dilution in net tangible book value per share. After
giving effect to the sale of common stock offered in this
offering at an assumed initial public offering price of
$ per share, the mid-point of the
estimated offering price range set forth on the cover page of
this prospectus and the issuance of
approximately shares
for the stock portion of the consideration for the Pending
Acquisitions and after deducting underwriting discounts and
commissions and estimated offering expenses payable by us, our
pro forma as adjusted net tangible book value as of
June 30, 2008 would have been approximately
$ million, or approximately
$ per share of common stock. This
represents an immediate increase in pro forma as adjusted net
tangible book value of $ per share
to existing stockholders, and an immediate dilution of
$ per share to investors
participating in this offering. The following table illustrates
this per share dilution:
Initial public offering price per share
$
Pro forma net tangible book value per share as of June 30,2008
$
Pro forma increase in net tangible book value per share
attributable to investors participating in this offering
$
Pro forma as adjusted net tangible book value per share after
this offering
$
Pro forma dilution per share to investors participating in this
offering
$
If the underwriters exercise their over-allotment option in
full, the pro forma as adjusted net tangible book value per
share after the offering would be
$ per share, the increase in the
pro forma net tangible book value per share to existing
stockholders would be $ per share
and the pro forma dilution to new investors purchasing common
stock in this offering would be $
per share.
Differences
Between New and Existing Investors in Number of Shares and
Amount Paid
The following table summarizes, on a pro forma basis as of
June 30, 2008, the number of shares of common stock
purchased from us, the total consideration and the average price
per share paid by existing stockholders and by investors
participating in this offering at the initial public offering
price of $ per share, before
deducting underwriting discounts and commissions and estimated
offering expenses:
Shares Purchased
Total Consideration
Average Price
Number
Percent
Amount
Percent
per Share
Existing shareholders before this offering
$
Investors participating in this offering
Total
100.0
%
100.0
%
The number of shares of common stock outstanding in the table
above is based on the pro forma number of shares outstanding as
of June 30, 2008 and assumes no exercise of the
underwriters’ over-allotment option. If the
underwriters’ over-allotment option is exercised in full,
the number of shares of common stock held by existing
stockholders will be reduced to %
of the total number of shares of common stock to be outstanding
after this offering, and the number of shares of common stock
held by investors participating in
this offering will be increased
to shares
or % of the total number of shares
of common stock to be outstanding after this offering.
The above discussion and table also assumes no exercise of any
outstanding stock options. As of June 30, 2008, there were
55,445 shares of our common stock issuable upon the
exercise of outstanding stock options under our 2004 and 2005
Option Plans, having a weighted average exercise price of $51.32
per share. Assuming the exercise of all these options, the
information presented in the table above would be as follows:
Shares Purchased
Total Consideration
Average Price
Number
Percent
Amount
Percent
per Share
Existing shareholders before this offering
%
%
$
Investors participating in this offering
Total
100.0
%
100.0
%
Effective upon the closing of this offering, an aggregate
of shares of our common stock
will be reserved for future issuance under our 2004 and 2005
Option Plans and the 2008 Incentive Plan. To the extent that any
of these shares are issued or that we issue additional shares of
common stock in the future, there will be further dilution to
investors participating in this offering.
The following unaudited pro forma condensed combined statements
of operations for the year ended December 31, 2007 and the
six months ended June 30, 2008 and balance sheet at
June 30, 2008 of The O’Gara Group, Inc. and our
subsidiaries give effect to the closing of this offering, the
Pending Acquisitions and our new credit facility, as described
in the notes to these financial statements, as if the
transactions had occurred on January 1, 2007.
The assumptions used and pro forma adjustments derived from such
assumptions are based on currently available information and we
believe such assumptions are reasonable under the circumstances.
The following unaudited pro forma condensed combined financial
statements and other data should be read in conjunction with the
historical consolidated or combined financial statements of The
O’Gara Group, Inc., Finanziaria Industriale S.p.A, Optical
Systems Technology, Inc., Keystone Applied Technologies, Inc.
and OmniTech Partners, Inc. and Transportadora de
Protección y Seguridad, S.A. de C.V., and
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” of The O’Gara
Group, Inc. included elsewhere in this document.
These unaudited pro forma condensed combined financial
statements and other data are not necessarily indicative of our
future results of operations or financial condition.
Unaudited
Pro Forma Condensed Combined Statement of Operations
For the Year Ended December 31, 2007
Pro Forma
The O’Gara
TPS
Acquisition
Group(1)
3S(2)
OmniTech(1)
Armoring(1)
Isoclima(1)(3)
Adjustments
Combined
(in thousands, except per share data)
Revenues:
Advance Transparent and Mobile Security
$
2,965
$
1,278
$
—
$
30,277
$
99,793
$
(2,528
)(4)
$
131,785
Sensor Systems
24,715
—
12,715
—
—
—
37,430
Training and Services
10,641
—
—
—
—
—
10,641
Total revenues
38,321
1,278
12,715
30,277
99,793
(2,528
)
179,856
Cost of goods sold:
Advance Transparent and Mobile Security
2,697
1,121
—
20,176
70,042
(384
)(5)
93,652
Sensor Systems
15,127
—
9,178
—
—
—
24,305
Training and Services
7,912
—
—
—
—
—
7,912
Total cost of goods sold
25,736
1,121
9,178
20,176
70,042
(384
)
125,869
Gross profit
12,585
157
3,537
10,101
29,751
(2,144
)
53,987
Operating expenses:
Selling, general and adminstrative
12,361
691
2,019
5,633
22,601
903
(6)
44,208
Amortization of intangible assets
1,189
—
—
—
—
3,751
(7)
4,940
Income (loss) from operations
(965
)
(534
)
1,518
4,468
7,150
(6,798
)
4,839
Interest expense (income)
620
91
(3
)
107
3,896
359
(8)
5,070
Other expense (income)
(26
)
—
(3
)
(146
)
644
—
469
Income (loss) before provision
(benefit) for income taxes
(1,559
)
(625
)
1,524
4,507
2,610
(7,157
)
(700
)
Income tax provision (benefit)
(116
)
—
—
1,347
3,337
(1,805
)(9)
2,763
Income (loss) related to equity method investments
—
—
—
—
297
—
297
Minority interests’ loss
—
—
—
—
279
—
279
Net income (loss)
$
(1,443
)
$
(625
)
$
1,524
$
3,160
$
(151
)
$
(5,352
)
$
(2,887
)
Net income (loss) per share
Basic and diluted
$
(144,294.30
)
$
Weighted average shares of common stock outstanding:
Derived from the audited consolidated statement of operations
for each entity as of December 31, 2007 included elsewhere
in this prospectus.
(2)
Derived from the unaudited condensed consolidated statement of
operations for 3S for the six month period prior to acquisition
in June 2007.
(3)
Converted Isoclima statement of operations from Euros to U.S.
Dollars using an average exchange rate of
€1 = $1.368 for the year ended December 31,2007.
(4)
Adjusted to eliminate the effect of intercompany revenues
between Isoclima and TPS.
(5)
Adjustments to cost of goods sold to:
Eliminate the effect of cost of goods sold associated with
intercompany revenues between Isoclima and TPS
$
(2,528
)
Eliminate Isoclima gross profit in TPS ending inventory
145
Record additional cost of goods sold as a result of the fair
value adjustment to inventory recorded in connection with the
acquisitions
1,826
Record additional depreciation expense resulting from the
adjustment to the fair market value of property, plant and
equipment in connection with the acquisitions
173
$
(384
)
(6)
Adjustments to selling, general and administrative expenses to:
Eliminate expenses related to assets of subsidiaries included in
Isoclima’s financial statements not included in the
purchase agreement
$
(173
)
Eliminate excess compensation expense to the former owner of TPS
pursuant to an employment agreement effective upon completion of
the acquistion
(924
)
Add expenses associated with the founders bonus payable to two
of our founders upon completion of this offering
2,000
$
903
(7)
Adjustment to reflect the additional amortization expense
associated with the preliminary fair value of the identifiable
intangible assets acquired. The amortization expense is
calculated on an accelerated basis over the assets’
estimated useful lives, ranging from 9 to 18 years. The
final purchase price allocation may be different than the
amounts estimated and the differences may be material, which
could result in significant changes to the additional
amortization expense reflected above.
(8)
Additional interest expense based on average debt of
$78 million assuming completion of the offering on
January 1, 2007 at an average interest rate of 6.5%.
(9)
Additional income tax benefit resulting from the effect of the
acquisitions and the related pro forma adjustments on the
consolidated tax calculation.
Unaudited
Pro Forma Condensed Combined Statement of Operations
For the Six Months Ended June 30, 2008
Pro Forma
The O’Gara
TPS
Acquisition
Group(1)
OmniTech(1)
Armoring(1)
Isoclima (1)(2)
Adjustments
Combined
(in thousands, except per share data)
Revenues:
Advanced Transparent and Mobile Security
$
811
—
$
17,756
$
56,701
$
(1,028
)(3)
$
74,240
Sensor Systems
12,111
$
9,822
—
—
—
21,933
Training and Services
6,391
—
—
—
—
6,391
Total revenues
19,313
9,822
17,756
56,701
(1,028
)
102,564
Cost of goods sold:
Advanced Transparent and Mobile Security
691
—
11,152
37,417
(808
)(4)
48,452
Sensor Systems
7,913
6,508
—
—
—
14,421
Training and Services
4,669
—
—
—
—
4,669
Total cost of goods sold
13,273
6,508
11,152
37,417
(808
)
67,542
Gross profit
6,040
3,314
6,604
19,284
(220
)
35,022
Operating expenses:
Selling, general and adminstrative
6,654
876
5,607
11,603
(1,480
)(5)
23,260
Amortization
680
—
—
—
1,876
(6)
2,556
Income (loss) from operations
(1,294
)
2,438
997
7,681
(616
)
9,206
Interest expense (income)
168
6
113
2,524
(175
)(7)
2,636
Other expense (income)
(1
)
(1
)
91
141
—
230
Income (loss) before provision (benefit) for income taxes
(1,461
)
2,433
793
5,016
(441
)
6,340
Income tax provision (benefit)
(413
)
—
225
2,156
809
(8)
2,777
Minority interest’s loss
—
—
—
121
—
121
Net income (loss)
$
(1,048
)
$
2,433
$
568
$
2,981
$
(1,250
)
$
3,684
Net income (loss) per share
Basic and diluted
$
(1,023.14
)
$
Weighted average shares of common stock outstanding:
1,024
(1)
Derived from the unaudited consolidated statement of operations
for each entity as of June 30, 2008 included elsewhere in
this prospectus.
(2)
Converted Isoclima statement of operations from Euros to U.S.
Dollars using an average exchange rate of
€1 = $1.529 for the six months ended
June 30, 2008.
(3)
Adjusted to eliminate the effect of intercompany revenues
between Isoclima and TPS.
(4)
Adjustment to cost of revenues to:
Eliminate the effect of cost of goods sold associated with
intercompany revenues between Isoclima and TPS.
$
(1,028
)
Eliminate Isoclima gross profit in TPS ending inventory.
133
Record additional depreciation expense resulting from the
adjustment to the fair market value of property, plant and
equipment in connection with the acquisitions.
87
$
(808
)
(5)
Adjustments to selling, general and administrative expenses to:
Eliminate expenses related to assets of subsidiaries included in
Isoclima’s financial statements not included in the
purchase agreement.
$
(84
)
Eliminate excess compensation expense to the former owner of TPS
pursuant to an employment agreement effective upon completion of
the acquisition.
Adjustment to reflect the additional amortization expense
associated with the preliminary fair value of the identifiable
intangible assets acquired. The amortization expense is
calculated on an accelerated basis over the assets’
estimated useful lives, ranging from 9 to 18 years. The
final purchase price allocation may be different than the
amounts estimated. The differences may be material, which could
result in significant changes to the additional amortization
expense reflected above.
(7)
Adjustment to reflect interest expense based on average debt of
$81 million assuming completion of the offering on
January 1, 2007 at an average interest rate of 6.5%.
(8)
Additional income tax expense resulting from the effect of the
acquisitions and the related pro forma adjustments on the
consolidated tax calculation.
The following table presents the selected consolidated
historical financial data of The O’Gara Group, Inc. as of
December 31, 2003 and the four months then ended, as of
December 31, 2004, 2005, 2006, 2007 and for the years then
ended and as of and for the six months ended June 30, 2007
and 2008. The selected financial data as of and for the years
ended December 31, 2005, 2006 and 2007 is derived from the
audited financial statements of The O’Gara Group, Inc.,
which appear elsewhere in this prospectus. The selected
financial data as of and for the years ended December 31,2003 and 2004 is derived from audited financial statements of
The O’Gara Group, Inc. that are not included in this
document. The selected financial data of The O’Gara Group,
Inc. as of and for the six months ended June 30, 2007 and
2008 is unaudited, but includes, in the opinion of our
management, all adjustments, consisting only of normal,
recurring adjustments, necessary for a fair presentation of such
data. Due to the fact that the information below relates only to
the operations of The O’Gara Group, Inc. prior to the
consummation of the Pending Acquisitions, our historical
financial results are not indicative of our results after the
completion of this offering and those acquisitions.
This information should be read together with the sections
entitled “Summary Consolidated Historical and Pro Forma
Financial and Other Data,”“Unaudited Pro Forma
Condensed Combined Financial and Other Data,”“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and the consolidated
financial statements and the notes to those statements included
elsewhere in this prospectus.
See Note 1 to the Consolidated Financial Statements of The
O’Gara Group, Inc., for information on acquisitions. See
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” for information
related to significant items affecting operating income (loss).
(2)
Includes related party amounts of $(33), $(150), $(204),
$(157), $(130), $(79) and $(18) as of December 31, 2003,
2004, 2005, 2006 and 2007 and the six months ended June 30,2007 and 2008, respectively.
The following discussion and analysis of our financial
condition and results of operations is based on the actual,
historical financial statements of The O’Gara Group, Inc.
It is not based on, nor does it otherwise give effect to, the
financial condition and results of operations of the companies
to be acquired in the Pending Acquisitions unless it
specifically states otherwise. A discussion giving pro forma
effect to these acquisitions would differ substantially. This
discussion should be read together with the sections entitled
“Summary Consolidated Historical and Pro Forma Financial
and Other Data,”“Unaudited Pro Forma Condensed
Combined Financial and Other Data,”“Selected
Historical Consolidated Financial Data” and the
consolidated financial statements and the notes to those
statements included elsewhere in this prospectus. This
discussion also contains forward-looking statements that involve
risks and uncertainties. See “Forward-Looking
Statements.” For additional information regarding some of
the risks and uncertainties that affect our business and the
industry in which we operate and that apply to an investment in
our common stock, please see “Risk Factors” beginning
on page 11.
Overview
We provide security, safety and defense products and services to
commercial and government organizations in the U.S. and
abroad, including highly specialized products and services that
safeguard government officials, security and military personnel,
corporate executives and other individuals from terrorism,
violent crime and other hazards. We have secured a varied and
distinguished list of customers around the world, including,
among others: the U.S. Marine Corps, the U.S. Special
Operations Command (SOCOM), the U.K. Ministry of Defence,
the Italian Ministry of Defense, the U.S. Department of
State, the U.S. Intelligence Community, various state and
local governments and law enforcement agencies and high-profile
individuals.
Prior to the Pending Acquisitions, we have conducted our
business in three divisions — Sensor Systems, Training
and Services and Mobile Security. These divisions are consistent
with our business segments for financial reporting purposes.
•
Sensor Systems. Our Sensor Systems division
designs, manufactures and sells specialized night vision
equipment and tagging, tracking and locating systems to the
government and military markets.
•
Training and Services. Our Training and
Services division provides technical services, such as threat
and vulnerability assessments and weapons of mass destruction
training; tactical services, such as urban warfare and tactical
driving training; and preparedness and response services, such
as emergency response and continuity of operations planning. We
offer our training and services to government, military and
corporate customers.
•
Mobile Security. Our Mobile Security division
distributes armored cars, trucks and SUVs to corporations,
governments and individuals worldwide. The name of this division
will be changed to Advanced Transparent and Mobile Systems after
the closing of this offering.
Most of our revenues are derived from contracts with the
U.S. government and European governments, under which we
are either the prime contractor or a subcontractor. Contracts
with the U.S. government and three European governments
combined accounted for approximately $11.6 million or 80%,
$11.4 million or 69%, $32.5 million or 85%, and
$15.5 million or 81% of our revenues for the years ended
December 31, 2005, 2006 and 2007 and the six months ended
June 30, 2008, respectively.
Our most significant expenses are cost of goods sold and
services provided, which consist primarily of direct labor and
associated costs for program personnel and direct expenses
incurred to complete projects, including the costs of materials,
equipment and subcontractors. Selling, general and
administrative expenses consist primarily of costs associated
with our management, finance and administrative groups; business
development expenses, including bid and proposal efforts; and
leasehold expenses, travel and other corporate
costs. We receive revenue from some contracts for which our
U.S. government customers pay us to develop specific
products on their behalf. We also spend funds on internal
research and development.
Historical
Acquisitions
Historically, we have grown our business through acquisitions
financed through private placements of equity and promissory
notes issued to the sellers. Key milestones in the development
of our business include the following:
•
In August 2003, we acquired 100% of the outstanding common stock
of Specialized Technical Services, Inc. (STS), a developer and
producer of night vision devices, the core product of which is
our low-profile night vision goggles (LPNVGs). The value of the
consideration and related expenses was approximately
$4.8 million. The STS purchase agreement included
provisions for contingent payments to the former owners of STS
upon the successful realization of performance goals. This has
resulted in additional consideration of approximately
$1.5 million.
•
In August 2004, we started operations of a subsidiary in Great
Britain, Sensor Technology Systems, LTD (STSL), for the primary
purpose of servicing products already sold in this region and
establishing a sales presence.
•
In May 2005, we acquired 100% of the outstanding common stock of
Diffraction, Ltd., a product-oriented solutions provider focused
on the development, rapid prototyping and low rate initial
production of next generation optoelectronic technology for the
U.S. military. The value of the consideration and related
expenses was approximately $9.8 million. Diffraction’s
products and research activities, most of which are classified
by the U.S. government, include digital and fused night
vision devices, Identification Friend or Foe systems,
illuminators/pointers, intelligent sensors, optical and radio
frequency communication devices, and signature management
devices.
•
In April 2006, we acquired certain assets of Safety and Security
Institute (SSI), a provider to the U.S. military and
private companies of anti-terrorist and protective security
drivers training, as well as basic, intermediate and tactical
firearms training. The value of the consideration and related
expenses was approximately $3.2 million. The SSI purchase
agreement included provisions for contingent payments to the
former owners upon the successful realization of specific
performance goals for the four fiscal years after the
acquisition. The contingent payments may be made in cash or
stock at our election. Additional purchase price paid, if any,
will be recorded in the period in which the specific provisions
of the future contingent payments have been met. To date no
payments have been made and future payments are not expected.
•
In November 2006, we acquired all of the capital stock of
Homeland Defense Solutions, Inc. (HDS), a provider of
preparedness and response training for private sector and
government security personnel and emergency first responders,
threat and vulnerability assessments, and emergency operations
and response plan development. The value of the consideration
and related expenses was approximately $10.9 million. The
purchase price was subject to upward or downward adjustment
based on the earnings of HDS from November 1, 2006 through
October 31, 2007. As a result of operations during the
performance period, the purchase price and goodwill were reduced
by approximately $2.6 million.
•
In June 2007, we acquired all of the capital stock of Security
Support Solutions (3S), a U.K.-based company that markets and
sells armored vehicles to customers who need to obtain armored
vehicles quickly or who are looking for a third party to
simplify and manage the acquisition and delivery process for
them. The value of the consideration and related expenses was
approximately $4.0 million. The purchase price is subject
to upward or downward adjustment based on the earnings of 3S
from July 1, 2007 through June 30, 2008 and from
July 1, 2008 through June 30, 2009. No adjustments
were made for the first period; adjustments for the second
period cannot be predicted at this time.
Simultaneously with the closing of this offering, we will
complete the acquisitions of the following companies:
•
Isoclima, a designer and manufacturer of transparent armor and
impact-resistant and other specialized glass for the armored
vehicle, premium automotive, rail, marine, aviation and other
markets, for approximately $165.3 million in a combination
of cash, common stock and the assumption of debt, to join our
Advanced Transparent and Mobile Systems division.
•
TPS Armoring, a manufacturer of vehicle armoring systems, for
approximately $35.5 million in a combination of cash,
common stock and the assumption of debt, also to join our
Advanced Transparent and Mobile Systems division.
•
OmniTech, a designer and manufacturer of optoelectronic systems
serving the government and military markets, for approximately
$31.3 million in a combination of cash, common stock and
the assumption of debt, to join our Sensor Systems division.
We believe that these companies will add significant value to
our organization as they will substantially increase our size,
extend and enhance our product portfolio, broaden and deepen our
customer base, expand our geographic presence and enhance our
management team. Assuming the Pending Acquisitions occurred as
of January 1, 2007, our pro forma combined revenues for the
year ended December 31, 2007 and the six months ended
June 30, 2008 were $179.9 million and
$102.6 million, respectively.
Factors
That May Influence Future Results of Operations
We are subject to a variety of trends, events and uncertainties
that may have a material impact on our future results of
operations. Most notably, our future results of operations will
be significantly affected by the closing of the Pending
Acquisitions. We believe that the following factors, among
others, will influence our results of operations upon completion
of this offering and the Pending Acquisitions:
•
At this time we do not foresee a leveling off in the global
trends of increasing terrorist activities and other asymmetrical
threats, and continue to foresee an expansion of criminal
activities in certain parts of the world, that create a demand
for our security, safety and defense-related products and
services. We also believe that the increased use of outsourcing
by governments will continue. Adverse global economic
conditions, however, may adversely affect sales of commercial
products by our Advanced Transparent and Mobile Systems
division, which we expect to contribute the majority of our
revenues after completion of the Pending Acquisitions.
Significant changes in U.S. or foreign defense policies may
adversely affect sales by our Sensor Systems
and/or
Training and Services divisions.
•
Our business mix will shift from one primarily involving sales
to the U.S. government and its agencies to one with
substantial sales to the commercial and international markets.
•
We expect to derive a significantly greater portion of our
revenues from our Advanced Transparent and Mobile Systems
division. This division operates at historically lower gross
margins than we have experienced in the past. Because of this,
we expect gross margin as a percentage of sales to be negatively
affected in the future. However, due to the significant increase
in revenues resulting from the division, we expect our overall
profitability to increase.
•
We will conduct a significantly greater portion of our business
in Euros and currencies other than the U.S. dollar, the
currency in which we report our consolidated financial
statements. As a result, currency rate fluctuations will have a
much greater impact on our results of operation than previously.
We intend to enter into currency hedging agreements to offset a
portion of this risk.
•
The completion of the Pending Acquisitions will result in
significant amortization expense, which may affect our results
of operations for an extended period of time. Although increases
in revenues and
gross profit will diminish this effect if other factors remain
static, amortization expense will increase if and as we complete
additional acquisitions.
•
After this offering and the closing of the Pending Acquisitions,
we will have significantly higher relative interest expense than
in the past, due to both borrowings under our new credit
facility and debt of Isoclima that will remain outstanding. This
may have a negative impact on our net income and also could
limit the availability of cash for other purposes.
Select
Key Performance Measures
EBITDA. We manage and assess the performance
of our business by evaluating a variety of metrics, including
non-GAAP measures such as EBITDA. We consider EBITDA as a key
indicator of financial performance and cash flow potential. We
define EBITDA as net income before interest, income taxes,
depreciation and amortization, minority interest and equity
investment income or loss. Minority interest represents
third-parties’ ownership interests in certain
non-wholly-owned
consolidated subsidiaries of Isoclima, the effect of which we
eliminate because we believe this more accurately reflects our
less than 100% ownership in these entities. Our management uses
EBITDA:
•
as a measurement of operating performance because it assists us
in comparing our operating performance on a consistent basis as
it removes the impact of items not directly resulting from our
core operations;
•
for planning purposes, including the preparation of our internal
annual operating budget;
•
to allocate resources to enhance the financial performance of
our business;
•
to evaluate the effectiveness of our operational strategies; and
•
to evaluate our capacity to fund capital expenditures and expand
our business.
EBITDA is not a measure of financial performance under generally
accepted accounting principles. Items excluded from EBITDA are
significant components in understanding and assessing financial
performance. EBITDA should not be considered in isolation or as
an alternative to, or substitute for, net income, cash flows
generated by operations, investing or financing activities, or
other financial statement data presented in the consolidated
financial statements. Because EBITDA is not a measurement
determined in accordance with generally accepted accounting
principles and is thus susceptible to varying calculations,
EBITDA as presented may not be comparable to similarly titled
measures of other companies.
Our historical EBITDA was $1,061 and $(31) for the year ended
December 31, 2007 and the six months ended June 30,2008, respectively.
Backlog. We track backlog in order to assess
our current business development effectiveness and to assist us
in forecasting our future business needs and financial
performance. Our backlog consists of funded and unfunded amounts
under contracts. Funded backlog is equal to the amounts actually
appropriated by a customer for payment of goods and services
less revenue already recognized under that appropriation.
Unfunded backlog is the actual dollar value of unexercised
priced contracts and their respective options for which funding
has not yet been allocated. Most of our U.S. government
contracts give the customer an option to extend the period of
performance of the contract for a period of one or more years.
These priced options may or may not be exercised at the sole
discretion of the customer. Historically, it has been our
experience that the customer has typically exercised contract
options.
Firm funding for our contracts is usually made for one year at a
time, with the remainder of the contract period consisting of a
series of one-year options. As is the case with the base period
of our U.S. government contracts, option periods are
subject to the availability of funding for contract performance.
The U.S. government is legally prohibited from ordering
work under a contract in the absence of funding. Our historical
experience has been that the government has typically funded the
option periods of our contracts.
Our funded backlog was $47.2 million and $37.6 million
as of December 31, 2006 and 2007. Our unfunded backlog was
$31.5 million and $24.3 million as of
December 31, 2006 and 2007, respectively. As of
July 31, 2008, our funded backlog was $37.6 million
and unfunded backlog was $16.1 million.
Critical
Accounting Policies and Estimates
As previously noted, this discussion and analysis of our
financial condition and results of operations is based on the
actual, historical consolidated financial statements of The
O’Gara Group, Inc. and does not give effect to the Pending
Acquisitions unless specifically stated. These consolidated
financial statements have been prepared in accordance with
accounting principles generally accepted in the U.S. The
preparation of financial statements requires us to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses and the related
disclosure of contingent assets and liabilities. On an ongoing
basis, we
re-evaluate
our estimates, including those related to revenue recognition,
research and development, intangible assets and contingencies.
We have based our estimates on historical experience and on
various other assumptions that we believe are reasonable under
the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different
assumptions or conditions. Our significant accounting policies
are described in Note 2 to the consolidated financial
statements of The O’Gara Group, Inc. included elsewhere in
this prospectus. We believe the following critical accounting
policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.
Revenue
Recognition.
We recognize revenues as services are rendered and when title
transfers for products, subject to any special terms and
conditions of individual contracts. We enter into two types of
contracts:
•
Fixed price. For fixed price services
contracts, we must determine that the costs incurred provide a
proportionate amount of progress on the work and that the
ultimate costs incurred will not overrun the funding on the
award and that the required hours will be delivered. On fixed
price product orders, revenue is not recorded until we determine
that the goods have been delivered and title has transferred,
subject to any special terms and conditions of specific
contracts. During the performance of such contracts, estimated
final contract prices and costs are periodically reviewed and
revisions are made as required. The effect of these revisions to
estimates is included in earnings in the period in which the
revisions are made.
•
Time and materials. For time and materials
contracts, revenue is recognized to the extent of billable rates
multiplied by hours delivered, plus other direct costs.
Anticipated losses on contracts are recorded when first
identified.
The following table sets forth the percentage of revenues under
each type of agreement for the fiscal years 2005, 2006 and 2007
and for the six months ended June 30, 2008:
Allowance for Doubtful Accounts. We evaluate
the collectability of accounts receivable based on numerous
factors, including past transaction history with customers and
their creditworthiness. This estimate is periodically adjusted
when we become aware of specific customers’ inability to
meet their financial obligations
(e.g. bankruptcy filing or other evidence of liquidity
problems). As we determine that specific balances ultimately
will be uncollectible, we remove them from accounts receivables
and record an allowance.
Inventories. Inventories are stated at the
lower of cost or market determined on the
first-in,
first-out method. Pursuant to contract provisions, agencies of
the U.S. government and certain other customers have title
to, or a security interest in, inventories related to their
contracts as a result of advances,
performance-based
payments and progress payments. These advances and payments are
reflected as an offset against the related inventory balances.
Goodwill. Business acquisitions typically
result in the recording of goodwill, which is the excess of the
purchase price over the fair value of the net assets acquired.
Goodwill and other intangible assets are stated on the basis of
cost net of any impairment. The purchase method of accounting
for business combinations requires us to make estimates and
judgments to allocate the purchase price paid for acquisitions
to the fair value of the net tangible and identifiable
intangible assets acquired and liabilities assumed. We have
adopted Statement of Financial Accounting Standards (SFAS)
No. 142, Goodwill and Other Intangible Assets
(SFAS 142) which requires that we calculate, on an
annual basis, the fair value of a reporting unit that contains
goodwill and compare that to the carrying value of the reporting
unit to determine if impairment exists. Impairment testing must
take place more often if circumstances or events indicate a
change in the impairment status. Management judgment is required
in calculating the fair value of the reporting units. We
performed our annual assessment of goodwill during the fourth
quarter of 2007 and determined that no impairment existed.
Long-lived assets. Long-lived assets,
including certain identifiable intangibles and goodwill, are
reviewed annually for impairment or whenever events or changes
in circumstances indicate that the carrying amount of the asset
in question may not be recoverable including, but not limited
to, a deterioration of profits for a business segment. We use
the two-step methodology to determine any impairment. The
initial step requires us to assess the fair value of intangible
assets with respect to their carrying amounts. If a carrying
amount exceeds fair value, step two of the impairment test must
be performed to measure the amount of the impairment loss, if
any. Step two uses discounted operating cash flows estimated
over the remaining useful lives of the related long-lived asset
or asset groups. Impairment is measured as the difference
between fair value and the unamortized cost at the date an
impairment is determined.
Income taxes. We account for income taxes
pursuant to SFAS No. 109, Accounting for Income
Taxes (SFAS 109). Under the asset and liability method
specified thereunder, deferred taxes are determined based on the
difference between the financial reporting and tax bases of
assets and liabilities. Deferred tax liabilities are offset by
deferred tax assets relating to net operating loss
carryforwards, tax credit carryforwards and deductible temporary
differences. Recognition of deferred tax assets is based on
management’s belief that it is more likely than not that
the tax benefit associated with temporary differences and
operating and capital loss carryforwards will be utilized. A
valuation allowance is recorded for those deferred tax assets
for which it is more likely than not that the realization will
not occur.
Stock options. We recognize the cost of equity
classified share-based awards on a straight-line basis over the
vesting period of the award. Prior to January 1, 2006, we
accounted for our stock option plans under the recognition and
measurement provisions of Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees and
related interpretations, as permitted by SFAS No. 123,
Accounting for
Stock-Based
Compensation. No stock option-based employee compensation
cost was recognized in the income statement, as all stock
options granted under those plans had an exercise price equal to
or greater than the estimated fair market value of the
underlying common stock on the date of grant.
On January 1, 2006, we adopted SFAS No. 123
(revised 2004), Share-Based Payments (SFAS 123(R)),
requiring us to recognize expense related to the fair value of
our stock option awards. We adopted the fair value recognition
provisions of SFAS 123(R) using the prospective transition
method. Under this transition method, expense recognized during
2006 includes compensation cost for all share-based payments
granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the
provisions of SFAS 123(R). Results for prior periods have
not been restated. The effect on our income before income taxes
as a result of adopting SFAS 123(R) was immaterial.
We have estimated the fair value of our option awards granted
after January 1, 2006 using the Black-Scholes option
pricing model. The expected life of the options granted is
management’s estimate and represents the period of time
that options granted are expected to be outstanding. We
currently do not pay dividends on our common stock. Volatility
is based on the historic volatility of comparable public
companies. The risk-free interest rate for periods within the
contractual life of the option is based on the
U.S. Treasury yield curve in effect at the time of grant.
The fair value of each option grant during the years ended
December 31, 2006 and 2007 has been estimated on the date
of grant with the following weighted-average assumptions:
2006
2007
Expected life of option
5.6 yrs
5.6 yrs
Dividend yield
0
%
0
%
Volatility
57.1
%
50.2
%
Risk-free interest rate
4.6
%
4.3
%
Results
of Operations
The following table sets forth, for each period indicated,
components of the statement of operations of The O’Gara
Group, Inc. expressed as a percentage of total revenues.
Fiscal Year Ended
Six Months Ended
December 31,(1)
June 30,(1)
2005
2006
2007
2007
2008
Revenues:
Sensor Systems
100
%
87
%
65
%
70
%
63
%
Training and Services
—
13
28
30
33
Mobile Security
—
—
8
—
4
Other
—
—
—
—
—
Total
100
100
100
100
100
Costs of goods sold
61
67
67
63
69
Gross profit
39
33
33
37
31
Selling, general and administrative expenses
25
36
32
29
34
Amortization of other intangible assets
3
8
3
3
4
Income (loss) from operations
11
(11
)
(3
)
5
(7
)
Interest expense, net
(3
)
(3
)
(2
)
(1
)
(1
)
Income (loss) before provision (benefit) for income taxes
Revenues. Total revenues increased
$3.2 million, or 20%, to $19.3 million for the six
months ended June 30, 2008, compared to $16.1 million
for the six months ended June 30, 2007. This increase in
revenues was attributable to: (1) an increase of
$1.6 million in revenue in the Training and Services
division associated with additional government funding of
certain long-term contracts, (2) an increase of
$0.8 million in revenue associated with the acquisition of
3S in late June 2007 as we began development of our Mobile
Security division and (3) an increase of $0.8 million
in revenue in our Sensor Systems division due to strong product
shipments in early 2008 which had been delayed from 2007.
Sensor Systems revenues increased $0.8 million, or 7%, to
$12.1 million for the six months ended June 30, 2008,
compared to $11.3 million for the six months ended
June 30, 2007. This increase was primarily due to shipment
of product to a foreign customer in early 2008 which had been
postponed in 2007 while the customer obtained a financing
instrument to support payment on the executed contract. A
similar situation occurred at the end of 2006 with this
customer, as discussed below.
Training and Services revenues increased $1.6 million, or
33%, to $6.4 million for the six months ended June 30,2008, compared to $4.8 million for the six months ended
June 30, 2007. This increase resulted from additional
funding on certain long-term U.S. government contracts the
division had previously been awarded.
Mobile Security revenues for the six months ended June 30,2008 were $0.8 million. There were no revenues related to
this division in the first six months of 2007 as the division
did not begin operations until the second half of 2007 following
our acquisition of 3S.
Cost of Goods Sold. Cost of goods sold
increased $3.1 million, or 31%, to $13.3 million for
the six months ended June 30, 2008, compared to
$10.1 million for the six months ended June 30, 2007.
This increase was due primarily to higher revenues in each of
our three divisions. Gross margin was 31.3% in 2008 compared to
37.1% in 2007. Gross margin was negatively impacted in 2008 by a
combination of factors discussed below.
Cost of goods sold in the Sensor Systems division increased
$1.2 million, or 18%, to $7.9 million for the six
months ended June 30, 2008, compared to $6.7 million
for the six months ended June 30, 2007. This increase was
due primarily to the higher level of revenues for the division
as well as increased costs associated with less profitable
U.S. government contracts during the first six months of
2008. Gross margin was 34.7% in 2008 compared to 41.0% in 2007
due to the less profitable mix of sales in 2008 when the
revenues derived from lower margin U.S. government funded
low-rate-initial-production (LRIP) contracts increased relative
to sales of higher margin LPNVGs.
Cost of services sold in the Training and Services division
increased $1.2 million, or 35%, to $4.7 million for
the six months ended June 30, 2008, compared to
$3.5 million for the six months ended June 30, 2007.
This increase was due primarily to the higher level of revenues
for the division. Gross margin was 26.9% in 2008 compared to
28.1% in 2007 primarily due to a slightly less profitable mix of
U.S. government sales as prices are fixed for several of
our large long-term U.S. government contracts and labor and
other costs have increased slightly.
Cost of goods sold in the Mobile Security division for the six
months ended June 30, 2008 was $0.7 million. There was
no cost of goods sold in 2007 as the division did not begin
operations until the second half of 2007. Gross margin was 14.8%
in 2008.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses increased $2.0 million, or 42%, to
$6.7 million for the six months ended June 30, 2008,
compared to $4.7 million for the six months ended
June 30, 2007. This increase was attributable to:
(1) expenses of $0.6 million incurred by 3S in the
first half of 2008 as we began development of the Mobile
Security division, (2) increased personnel, finance, legal
and business development expenses of $0.6 million
associated with the growth of the company in 2008 and in
connection with preparations for this initial public offering,
(3) increased expenses of $0.5 million due to
increased internal research and development efforts and expenses
associated with the increase in revenues in the Sensor Systems
division, and (4) increased depreciation expense of
$0.2 million due to the implementation of a new software
system in early 2007.
As a percentage of revenues, selling, general and administrative
expenses increased from 29% in 2007 to 34% in 2008.
Sensor Systems selling, general and administrative expenses
increased $0.5 million, or 36%, to $1.7 million for
the six months ended June 30, 2008, compared to
$1.3 million for the six months ended June 30, 2007.
This increase was primarily due to higher selling expenses for
commissions as a result of the increased revenues during the
period, as well as to increased internal research and
development expenses. As a percentage of net
sales, selling, general and administrative expenses increased
from 11.3% in 2007 to 14.3% in 2008. This increase was primarily
due to the increase in expenses discussed above.
Training and Services selling, general and administrative
expenses increased $0.2 million, or 21%, to
$1.2 million for the six months ended June 30, 2008,
compared to $1.0 million for the six months ended
June 30, 2007. This increase was due to additional
administrative expenses to administer the growth experienced
within the division during 2008. As a percentage of net sales,
selling, general and administrative expenses decreased from
21.1% in 2007 to 19.3% in 2008. This decrease was primarily due
to the higher level of revenues in 2008 which offset the
increased administrative expenses incurred.
Mobile Security selling, general and administrative expenses for
the six months ended June 30, 2008 were $0.6 million.
As discussed above, this division had no operations in the first
half of 2007. As a percentage of net sales, selling, general and
administrative expenses were 79.2% due to the low level of
revenue in the first six months of 2008.
Amortization of Other Intangible
Assets. Amortization expense increased
$0.2 million to $0.7 million for the six months ended
June 30, 2008, compared to $0.5 million for the six
months ended June 30, 2007, primarily due to amortization
of identifiable intangible assets associated with the
acquisition of 3S in June 2007. Amortization expense is related
to patents and trademarks with finite lives and acquired
amortizable intangible assets that meet the criteria for
recognition as an asset apart from goodwill under SFAS 141.
Income (Loss) from Operations. The operating
loss for the six months ended June 30, 2008 was
$(1.3) million, compared to operating income for the six
months ended June 30, 2007 of $0.8 million. This
decrease in operating income of $2.1 million in 2008
resulted primarily from the less profitable mix of sales
discussed above as well as from higher selling, general and
administrative expenses incurred during the period.
Sensor Systems operating income for the six months ended
June 30, 2008 was $2.5 million, compared to operating
income for the six months ended June 30, 2007 of
$3.4 million. The decrease in operating income of
$0.9 million, or 27%, was due to the less profitable mix of
sales and increased selling, general and administrative expenses
discussed above.
Training and Services operating income for the six months ended
June 30, 2008 was $0.5 million, compared to operating
income for the six months ended June 30, 2007 of
$0.3 million. The increase in operating income of
$0.2 million, or 46%, was due to higher revenue levels in
2008 partially offset by increased selling, general and
administrative expenses, as discussed above.
Mobile Security operating loss for the six months ended
June 30, 2008 was $(0.5) million. The division had no
operations in the first six months of 2007.
Interest Expense, Net. Interest expense, net,
remained relatively consistent at $0.2 million for each of
the six month periods ended June 30, 2007 and 2008.
Income Tax Provision (Benefit). The income tax
benefit for the six months ended June 30, 2008 was
$0.4 million, compared to income tax expense for the six
months ended June 30, 2007 of $0.2 million. The
effective tax rate was 28% in 2008 compared to 41% in 2007. The
decrease in the effective tax rate related to realized losses in
certain foreign jurisdictions from which the company was not
able to benefit for tax purposes due to uncertainty relating to
the future realizability of the net operating loss carryforward.
Net Income (Loss). The net loss for the six
months ended June 30, 2008 was $(1.0) million compared
to net income for the six months ended June 30, 2007 of
$0.3 million.
Fiscal
Year 2007 Compared to Fiscal Year 2006
Revenues. Total revenues increased
$21.7 million, or 131%, to $38.3 million for the year
ended December 31, 2007, compared to $16.6 million for
the year ended December 31, 2006. This increase in revenues
primarily was attributable to: (1) an increase of
$10.2 million in revenue in our Sensor Systems
division due to product shipments in 2007 which had been delayed
in 2006, (2) an increase of $8.5 million in revenue in
the Training and Services division associated with companies
acquired during 2006 for which we had a full year of revenues in
2007 and (3) an increase of $3.0 million in revenue
associated with our 2007 acquisition of 3S as we began
development of our Mobile Security division.
Sensor Systems revenues increased $10.2 million, or 71%, to
$24.7 million for the year ended December 31, 2007,
compared to $14.5 million for the year ended
December 31, 2006. This increase was due primarily to
shipment of product to a foreign customer in 2007 that had been
postponed in 2006 while the customer obtained a financing
instrument to support payment on the executed contract, which
resulted in a more profitable mix of sales.
Training and Services revenues increased $8.5 million, or
403%, to $10.6 million for the year ended December 31,2007, compared to $2.1 million for the year ended
December 31, 2006. The increase was primarily due to a full
year of operations in 2007 of companies acquired at various
times during 2006. Had all acquisitions in 2006 been completed
at the beginning of that year, year-over-year revenue would have
increased $2.7 million, or 34%. Contributing to 2007
revenues were a large U.S. military contract awarded to the
division during the early part of 2007 resulting in
$1.5 million of revenue, several smaller U.S. military
contracts awarded during the year for $0.3 million and
increased tactical and driver training of $0.6 million as
the division expanded its operations into the Mexican market.
Mobile Security revenues for the year ended December 31,2007 were $3.0 million. There were no revenues related to
this division in 2006 as the division began operations in 2007.
Cost of Goods Sold. Cost of goods sold
increased $14.6 million, or 131%, to $25.7 million for
the year ended December 31, 2007, compared to
$11.1 million for the year ended December 31, 2006.
This increase was primarily due to the increased level of
revenues in the Sensor Systems and Training and Services
divisions discussed above. In addition, expenses of
$2.7 million were incurred in connection with the
acquisition of 3S. Gross margin was 32.8% in 2007 compared to
32.9% in 2006. Gross margin was negatively impacted in 2007 by
the addition of the Mobile Security division which operates at
historically lower margins than have been experienced in the
Sensor Systems division.
Cost of goods sold in the Sensor Systems division increased
$5.8 million, or 62%, to $15.1 million for the year
ended December 31, 2007, compared to $9.4 million for
the year ended December 31, 2006. This was primarily due to
the increased level of revenues for the division. Gross margin
was 38.8% in 2007 compared to 35.4% in 2006 due to a more
profitable sales mix of higher margin LPNVGs versus lower margin
government funded LRIP contracts in 2006.
Cost of services sold in the Training and Services division
increased $6.1 million, or 346%, to $7.9 million for
the year ended December 31, 2007, compared to
$1.8 million for the year ended December 31, 2006.
This was primarily due to the increased level of revenues for
the division. Gross margin was 25.7% in 2007, compared to 16.1%
in 2006, as the division focused on cost reductions resulting
from integrated operations. In 2006, operations were less
efficient as multiple companies were acquired and were not
integrated into a new division until 2007. Once integration was
completed in early 2007, communication and decision making were
streamlined which resulted in better allocation of resources for
training and the elimination of non-essential expenses.
Cost of goods sold in the Mobile Security division for the year
ended December 31, 2007 was $2.7 million. There was no
cost of goods sold in 2006 as the division started operations in
2007. Gross margin was 9.0% in 2007.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses increased $6.3 million, or 104%, to
$12.3 million for the year ended December 31, 2007,
compared to $6.0 million for the year ended
December 31, 2006. The increase primarily was attributable
to (1) increased personnel, finance, legal and business
development expenses of $1.3 million associated with the
growth of the company in 2007, (2) a full year of selling,
general and administrative expenses incurred by the companies
acquired in 2006 resulting in an additional $1.1 million of
expense, (3) $1.0 million of compensation expense for
options issued
during 2007, (4) $0.8 million of expenses associated
with the termination of negotiations with several acquisition
targets during the year, (5) selling, general and
administrative expenses incurred by 3S of $0.8 million,
(6) increased selling and administrative expenses of
$0.8 million due to the increase in revenues in the Sensor
Systems division and (7) increased depreciation expense of
$0.3 million due to the implementation of a new software
system in early 2007.
As a percentage of net sales, selling, general and
administrative expenses decreased from 36% in 2006 to 32% in
2007. This decrease was primarily due to the increased level of
revenues in 2007 but was partially offset by significant
expenses associated with the termination of acquisition due
diligence and by the compensation expense for the issuance of
stock options.
Sensor Systems selling, general and administrative expenses
increased $0.8 million, or 40%, to $2.8 million for
the year ended December 31, 2007, compared to
$2.0 million for the year ended December 31, 2006.
This increase was attributable to higher expenses for sales
commissions as a result of the increased revenues during the
year. As a percentage of net sales, selling, general and
administrative expenses decreased from 14% in 2006 to 11% in
2007. This decrease was due primarily to the increase in
revenues in 2007, which more than offset the increase in
expenses that resulted from those revenues.
Training and Services selling, general and administrative
expenses increased $0.9 million, or 94%, to
$1.9 million for the year ended December 31, 2007,
compared to $1.0 million for the year ended
December 31, 2006. This increase was primarily due to a
full year of expenses being recognized in 2007 from the
companies acquired throughout 2006 when the division was
started. As a percentage of net sales, selling, general and
administrative expenses decreased from 46.3% in 2006 to 17.8% in
2007, due primarily to the higher level of revenues in 2007.
Mobile Security selling, general and administrative expenses for
the year ended December 31, 2007 were $0.8 million. As
discussed above, this division had no operations in 2006. As a
percentage of net sales, selling, general and administrative
expenses were 26.2%.
Amortization of Other Intangible
Assets. Amortization expense remained relatively
stable with a slight decrease of $0.1 million, or 5%, to
$1.2 million for the year ended December 31, 2007,
compared to $1.2 million for the year ended
December 31, 2006. Amortization expense is related to
patents and trademarks with finite lives and acquired
amortizable intangible assets that meet the criteria for
recognition as an asset apart from goodwill under SFAS 141.
Income (Loss) from Operations. The operating
loss for the year ended December 31, 2007 was
$(1.0) million, compared to an operating loss for the year
ended December 31, 2006 of $(1.8) million. This
decrease in operating loss of $0.8 million in 2007 resulted
primarily from increased revenues which were partially offset by
higher selling, general and administrative expenses incurred
during the year.
Sensor Systems operating income for the year ended
December 31, 2007 was $6.8 million, compared to
operating income for the year ended December 31, 2006 of
$3.1 million. The increase in operating income of
$3.7 million, or 117%, was due to the more profitable mix
of higher margin LPNVGs versus lower margin government funded
LRIP contracts in 2006.
Training and Services operating income for the year ended
December 31, 2007 was $0.8 million, compared to an
operating loss for the year ended December 31, 2006 of
$0.6 million. The increase in operating income of
$1.4 million was due to higher revenue levels in 2007 and
the cost reductions implemented as discussed above.
Mobile Security operating loss for the year ended
December 31, 2007 was $(0.5) million.
Interest Expense, Net. Interest expense, net,
increased $0.1 million, or 28%, to $0.6 million for
the year ended December 31, 2007, compared to
$0.5 million for the year ended December 31, 2006.
This increase was attributable to increased debt resulting from
the acquisitions completed in 2006 and 2007 as well as increased
working capital requirements associated with the acquired
companies.
Income Tax Provision (Benefit). The income tax
benefit for the year ended December 31, 2007 was
$0.1 million, compared to an income tax benefit for the
year ended December 31, 2006 of $0.5 million. The
effective tax rate was 7% in 2007, compared to 21% in 2006. The
decrease in the effective tax rate related to realized losses in
certain foreign jurisdictions from which the company was not
able to benefit for tax purposes due to uncertainty relating to
the future realizability of the net operating loss carryforward.
Net Income (Loss). The net loss for the year
ended December 31, 2007 was $(1.4) million compared to
the net loss for the year ended December 31, 2006 of
$(1.8) million.
Fiscal
Year 2006 Compared to Fiscal Year 2005
Revenues. Total revenues increased
$2.0 million, or 14%, to $16.6 million for the year
ended December 31, 2006, compared to $14.6 million for
the year ended December 31, 2005. This increase in revenues
was due to an increase of $2.1 million in revenue
associated with companies acquired during 2006 as we developed
our Training and Services division.
Sensor Systems revenues decreased $0.1 million, or 1%, to
$14.5 million for the year ended December 31, 2006,
compared to $14.6 million for the year ended
December 31, 2005. Revenues in 2005 included eight months
of operations for Diffraction. If Diffraction had been included
in our results of operations for the entire fiscal 2005,
revenues would have decreased $2.0, or 12.3%. This decrease was
primarily due to a delay in receiving a financing instrument
from one of our significant foreign customers, which resulted in
our inability to ship product associated with and recognize
revenue on an executed contract. Product related to this delay
was shipped in fiscal year 2007.
Training and Services revenues for the year ended
December 31, 2006 were $2.1 million. There were no
revenues related to this division in 2005 as the division began
operations in 2006.
Cost of Goods Sold. Cost of goods sold
increased $2.2 million, or 24%, to $11.1 million for
the year ended December 31, 2006, compared to
$9.0 million for the year ended December 31, 2005.
This increase was primarily due to an increase of
$1.8 million in expenses related to services provided by
companies acquired during 2006 in the Training and Services
division. Gross margin was 32.9% in 2006 compared to 38.7% in
2005. Gross profit was negatively impacted in 2006 by the
addition of the Training and Services division which operates at
historically lower margins than have been experienced in the
Sensor Systems division.
Cost of goods sold in the Sensor Systems division increased
$0.4 million, or 4%, to $9.4 million for the year
ended December 31, 2006, compared to $9.0 million for
the year ended December 31, 2005. This was primarily due to
a higher level of less profitable government funded LRIP
contracts in 2006, which resulted in irregular production and
decreased overhead absorption. Gross margin was 35.4% in 2006
compared to 38.7% in 2005 due to this less profitable sales mix.
Cost of services sold in the Training and Services division for
the year ended December 31, 2006 was $1.8 million.
There was no cost of services sold in 2005 as the division
started operations in 2006. Gross margin was 16.1% in 2006 as
the startup of operations of the division had a negative impact
on profitability due to inefficiencies in work throughput at
certain times in 2006.
Selling, General and Administrative
Expenses. Selling, general and administrative
expenses increased $2.4 million, or 68%, to
$6.0 million for the year ended December 31, 2006,
compared to $3.6 million for the year ended
December 31, 2005. The increase was attributable to
expenses incurred by the companies acquired in 2006 of
$1.0 million and increased finance, legal and business
development expenses of $1.3 million associated with the
growth of the company in 2006.
As a percentage of net sales, selling, general and
administrative expenses increased from 24.7% in 2005 to 36.4% in
2006, primarily due to increased fixed costs to administer the
growth resulting from the acquisitions completed in 2005 and
2006.
Sensor Systems selling, general and administrative expenses
increased $0.1 million, or 6%, to $2.0 million for the
year ended December 31, 2006, compared to $1.9 million
for the year ended December 31, 2005. This increase was
primarily due to an increase in depreciation expense resulting
from capital expenditures made for demonstration units used for
marketing purposes. As a percentage of net sales, selling,
general and administrative expenses increased from 12.9% in 2005
to 13.7% in 2006.
Training and Services selling, general and administrative
expenses for the year ended December 31, 2006 were
$1.0 million. This division had no operations in 2005. As a
percentage of net sales, selling, general and administrative
expenses were 46.3% in 2006 primarily due to the startup
inefficiencies discussed previously.
Amortization of Other Intangible
Assets. Amortization expense increased
$0.8 million, or 179%, to $1.2 million for the year
ended December 31, 2006, compared to $0.4 million for
the year ended December 31, 2005, primarily due to the
acquisitions completed in 2005 and 2006. Amortization expense is
related to patents and trademarks with finite lives and acquired
amortizable intangible assets that meet the criteria for
recognition as an asset apart from goodwill under SFAS 141.
Income (Loss) from Operations. The operating
loss for the year ended December 31, 2006 was
$(1.8) million, compared to operating income for the year
ended December 31, 2005 of $1.6 million. This decrease
in operating income of $3.4 million resulted primarily from
increased selling, general and administrative expenses as well
as increased amortization expenses due to the factors discussed
above.
Sensor Systems operating income for the year ended
December 31, 2006 was $3.1 million, compared to
operating income for the year ended December 31, 2005 of
$3.8 million. The decrease in operating income of
$0.7 million, or 17%, primarily was due to the delay in
product shipment.
Training and Services operating loss for the year ended
December 31, 2006 was $(0.6) million due primarily to
the costs associated with the startup of operations.
Interest Expense, Net. Interest expense, net,
increased $0.1 million, or 29%, to $0.5 million for
the year ended December 31, 2006, compared to
$0.4 million for the year ended December 31, 2005.
This increase was primarily due to increased debt resulting from
the acquisitions completed in 2006 as well as increased working
capital requirements associated with the acquired companies.
Income Tax Provision (Benefit). The income tax
benefit for the year ended December 31, 2006 was
$(0.5) million, compared to a provision for income taxes
for the year ended December 31, 2005 of $0.5 million.
The effective tax rate was 21% in 2006 compared to 38% in 2005.
The decrease in the effective tax rate related to realized
losses in certain foreign jurisdictions from which the company
was not able to benefit for tax purposes due to uncertainty
relating to the future realizability of the net operating loss
carryforward.
Net Income (Loss). The net loss for the year
ended December 31, 2006 was $(1.8) million, compared
to net income for the year ended December 31, 2005 of
$0.8 million.
Liquidity
and Capital Resources
Historically, we have funded our operations primarily through a
combination of the private placements of equity securities,
issuances of debt and cash provided by operations. The company
was initially funded with a capital contribution of
$1.3 million in September 2003 through the issuance of
common shares. Those shares were converted to preferred stock in
conjunction with a recapitalization of the company in May 2004.
Since May 2004, we have raised gross proceeds of
$22.3 million from the sale of preferred stock. We also
issued $15.5 million in preferred stock and
$1.5 million in promissory notes as consideration for
acquisitions in 2005, 2006 and 2007. All shares of our preferred
stock will convert into shares of our common stock on a
one-for-one basis upon the consummation of this offering and all
accrued dividends on the preferred shares will be paid in shares
of common stock.
Our principal historical liquidity requirements have consisted
of working capital, acquisition consideration, capital
expenditures and general corporate expenses. As of June 30,2008, we had $0.3 million of cash and cash equivalents and
working capital of ($1.3) million, net of cash.
Credit
Facility and Other Debt Issuances
Existing Credit Facility. On July 13,2007, we entered into a one year credit facility with PNC Bank,
National Association (PNC) for total maximum borrowings of
$10.0 million and a $6.0 million sub-limit for the
issuances of commercial and standby letters of credit. All
borrowings under the credit facility bear interest at a rate
equal to LIBOR plus 1.85% (4.32% at June 30, 2008). The
credit facility is guaranteed by our domestic subsidiaries and
is collateralized by substantially all of the assets of those
subsidiaries. On September 14, 2007 the credit facility was
amended to provide for additional maximum borrowings of
$1.0 million, and on March 11, 2008 the credit
facility was further amended to extend the expiration date to
October 13, 2008. The credit facility includes customary
affirmative and negative covenants. We also must maintain a
funded debt to EBITDA ratio of less than 3.75 to 1.00 on a
consolidating rolling four quarter basis measured quarterly. As
of June 30, 2008, we believe we were in compliance with all
covenants except for one requiring delivery of financial
information within a specified time period. The bank has waived
this covenant violation as of June 30, 2008. Outstanding
borrowings were $4.4 million at June 30, 2008.
New Credit Facility. We have entered into a
commitment letter with PNC pursuant to which, simultaneously
with the closing of this offering, we expect to enter into a new
$80 million credit facility with PNC Bank as Administrative
Agent, comprised of a three-year $30 million senior secured
term loan and a three-year $50 million senior secured
revolving credit facility. The new credit facility will replace
our existing revolving credit facility and will be used to repay
the borrowings outstanding on our existing facility and to pay a
portion of the purchase price for the Pending Acquisitions.
Based on the commitment letter, we believe the new credit
facility will contain the terms described below.
The new term loan will mature three years from the closing of
this offering. The term loan is expected to bear interest, at
our option, at a rate per annum equal to either (i) the
“Base Rate,” which is the higher of (a) the
Federal Funds Rate plus 0.5% and (b) the PNC prime rate,
plus in each case 2.50% (or 2.00% if the underwriters’
overallotment is exercised and the consolidated leverage ratio
is less than 3.0 to 1 at closing) through the receipt of the
March 2009 compliance certificate and between 1.00% and 2.50%
(based on the Company’s consolidated pro forma leverage
ratio) thereafter; or (ii) the LIBOR Rate plus 4.00% (or
3.50% in the event that the underwriters’ overallotment is
exercised and the consolidated leverage ratio is less than 3.0
to 1 at closing) through the receipt of the March 2009
compliance certificate and between 2.50% to 4.00% (based on the
Company’s consolidated pro forma leverage ratio)
thereafter. The term loan requires quarterly principal payments
based upon annual reductions as follows: $5 million for
year one; $7 million for year two; and $18 million for
year three. The full $30 million term loan must be drawn on
the closing date.
The revolving credit facility will mature three years from the
closing of this offering and will include a $10 million
sublimit for the issuance of letters of credit. Borrowings under
the swing line will reduce availability under the revolving
credit facility. The revolving credit facility will bear
interest, at our option, at a rate per annum equal to either the
“Base Rate” or the LIBOR Rate at the same rates as
described above. We will be required to pay a fee on the daily
unused portion of the new revolving credit facility of 0.50% per
annum. Borrowings under the revolving credit facility may be
used for working capital requirements and other general
corporate purposes, including permitted acquisitions, and for
issuances of letters of credit.
Our obligations under the revolving credit facility and the term
loan will be guaranteed on a senior secured basis by us, all of
our domestic subsidiaries and certain of our foreign
subsidiaries. The obligations under the revolving credit
facility and term loan will be secured by a first priority lien
on substantially all of our assets and the assets of our
domestic subsidiaries, including real property, 100% of the
stock of our domestic subsidiaries, and at least 65% of the
stock of certain foreign subsidiaries.
We will be permitted to repay the revolving credit facility and
term loan without penalty, but amounts repaid under the term
loan may not be reborrowed. The credit facility will include
covenants that (a) require
us to maintain a minimum EBITDA amount, a maximum leverage ratio
and a minimum fixed charge coverage ratio, and (b) place
limitations on our ability and the ability of our subsidiaries
to incur debt, create liens, dispose of assets, carry out
mergers and acquisitions, and make investments and capital
expenditures.
STS Seller Note. In connection with our
acquisition of the stock of STS in September 2003, we issued
subordinated promissory notes in the aggregate principal amount
of $2.5 million to the former shareholders of STS. The
subordinated notes are payable annually in principal
installments of $0.5 million plus interest at the prime
rate and are due on November 30, 2008. The notes are
secured by the stock of STS.
Diffraction Seller Note. In connection with
our acquisition of the stock of Diffraction in May 2005, we
issued a subordinated promissory note in the principal amount of
$0.5 million to an entity affiliated with the former
shareholders of Diffraction in exchange for equipment
contributed as part of the transaction. The subordinated note
was payable quarterly beginning August 1, 2005 in principal
installments of $33,333, plus interest at prime plus 1% not to
exceed 7%. This note was repaid in full in February 2007.
HDS Seller Note. In connection with our
acquisition of the stock of HDS in November 2006, we issued a
subordinated promissory note in the principal amount of
$1.0 million to the former shareholder of HDS. The
subordinated note was payable in semi-annual installments of
varying amounts, plus interest at 8.25%. This note was repaid in
full in April 2008.
Cash
Flows
The following table sets forth the components of our cash flows
for the following periods, in thousands:
Net cash provided by (used in) operating activities
$
(424
)
$
(6,570
)
$
3,134
$
3,436
$
2,220
Net cash provided by (used in) investing activities
(4,614
)
(4,255
)
(4,358
)
(2,501
)
(3,371
)
Net cash provided by (used in) financing activities
5,064
10,819
1,288
638
1,307
Net cash provided by (used in) operating
activities. Cash used in operating activities for
2005 was primarily attributable to investments in working
capital of $1.9 million partially offset by net income of
$0.8 million and depreciation and amortization expense of
$0.7 million. Investments in working capital consisted
primarily of an increase in accounts receivable resulting from a
significant shipment of product at the end of the year.
Cash used in operating activities for 2006 was primarily
attributable to investments in working capital of
$6.7 million and a net loss of $1.8 million, partially
offset by depreciation and amortization of $1.9 million.
Working capital investments in 2006 consisted primarily of a
$3.5 million increase in accounts receivable due to several
large orders being shipped just prior to year end as well as an
increase in inventory of $3.4 million as the company
purchased inventory at the end of the year in order to support
its revenue growth in 2007.
Cash provided by operating activities in 2007 resulted from
non-cash charges related to a $1.0 million stock based
compensation charge and $2.0 million of depreciation and
amortization expenses as well as a reduction in working capital
of $1.6 million partially offset by a net loss of
$1.4 million. Cash provided by operations during the first
half of 2007 and 2008 resulted primarily from non-cash charges
for depreciation and amortization as well as a decreased level
of working capital investments. In 2007, working capital
decreased primarily due to a reduction in accounts receivable as
revenues shipped just prior to year end in 2006 were collected
in the first half of 2007.
In the first half of 2008, working capital decreased primarily
due to a reduction in inventory levels resulting from supplier
difficulties in producing a key component for one of our main
products.
Net cash used in investing activities. Cash
used in investing activities included capital expenditures of
$0.5 million for 2005, $1.6 million for 2006 and
$1.5 million for 2007 and of $0.8 million and
$0.4 million
for the six months ended June 30, 2007 and 2008,
respectively. Cash used in investing activities in 2005, 2006
and 2007 and in the first six months of 2007 and 2008 also
included:
•
in 2005, $4.1 million, net of cash acquired, in payments
for the acquisition of Diffraction;
•
in 2006, $2.3 million, net of cash acquired, in payments
for the acquisition of HDS, and expenses of $0.2 million
associated with the acquisition of SSI;
•
in 2007, $1.7 million, net of cash acquired, in payments
for the acquisition of 3S, $0.6 million of expenses related
to the Pending Acquisitions, and $0.5 million in contingent
purchase price payments related to the 2003 acquisition of STS;
•
in the first six months of 2007, $1.4 million, net of cash
acquired, in payments for the acquisition of 3S; and
•
in the first six months of 2008, $2.5 million of expenses
related to the Pending Acquisitions and $0.5 million in
contingent purchase price payments related to the 2003
acquisition of STS.
Net cash provided by financing
activities. Cash provided by financing activities
for 2005 was primarily attributable to the issuance of
$4.7 million of preferred stock.
Cash provided by financing activities in 2006 was attributable
to the issuance of $11.3 million of preferred stock but was
partially offset by debt repayments under the company’s
then current credit facility of $0.5 million.
Cash provided by financing activities in 2007 was attributable
to the issuance of $3.9 million of preferred stock but was
partially offset by debt repayments under the company’s
then current credit facility of $2.2 million and
$0.4 million of expenses related to this offering. During
the first six months of 2007, cash provided by financing
activities was attributable to the issuance of $1.0 million
of preferred stock but was partially offset by $0.4 million
of debt repayments under the company’s then current credit
facility.
During the first six months of 2008, cash provided by financing
activities was primarily attributable to net borrowings from the
revolving line of credit under the company’s current credit
facility.
Liquidity
Requirements Following Completion of the Offering and the
Pending Acquisitions
Short-term liquidity requirements. Concurrent
with the completion of this offering, we will enter into a new
credit facility with maximum borrowings of $80 million and
a $10 million sub-limit for the issuance of commercial and
standby letters of credit. Borrowings under this facility will
bear interest at a rate equal to LIBOR plus 2.5% to 4%,
depending on certain financial results to be evaluated
quarterly. The credit facility will be guaranteed by our
domestic subsidiaries and collateralized by substantially all of
the assets of those subsidiaries. After the completion of this
offering and given our cash and cash equivalents, availability
of borrowings under our new credit facility and our cash flows
from operations, we believe that we will have sufficient
liquidity to fund our business and meet our contractual
obligations over a period beyond the next 12 months. We
expect to use the net proceeds of this offering as well as
availability under our new credit facility to fund the cash
portion of the Pending Acquisitions.
Following the consummation of this offering, our principal
short-term funding requirements will be as follows:
•
Debt service obligations of up to $28.8 million over the
next 12 months in respect of indebtedness that we expect to
remain outstanding following the consummation of this offering
and the repayment of debt assumed in the Pending Acquisitions.
•
Capital expenditures of approximately $5.3 million over the
next 12 months.
•
Payments relating to the contractual obligations described in
the table below.
Long-term liquidity requirements. We expect to
satisfy our long-term liquidity requirements through cash flow
from operations, offerings of equity or debt securities or
issuances of promissory notes, and borrowings under our new
credit facility. We expect to assess our financing alternatives
periodically and access the source of capital that we believe is
in our shareholders’ best interest at any given point in
time. If our existing resources are insufficient to satisfy our
liquidity requirements, or if we enter into an acquisition or
strategic arrangement with another company, we may need to sell
additional equity or debt securities. Any sale of additional
equity or debt securities may result in dilution to our
shareholders, and debt financing may involve covenants limiting
or restricting our ability to take specific actions, such as
incurring additional debt or making capital expenditures. We
cannot be certain that additional public or private financing
will be available in amounts or on terms acceptable to us, if at
all.
Contractual
Obligations and Commitments
The following table shows our contractual cash obligations as of
December 31, 2007. We have no contractual cash obligations
due after 2016.
Payments Due by Period
Less Than One
More Than
Contractual Obligations
Total
Year
1-3 Years
3-5 Years
5 Years
(In thousands)
Operating leases
$
1,992
$
441
$
839
$
455
$
257
Short-term borrowings
2,789
2,789
—
—
—
Long-term debt obligations
788
788
—
—
—
Total
$
5,569
$
4,018
$
839
$
455
$
257
The following table shows our contractual cash obligations
assuming completion of this offering, the new credit facility
and the Pending Acquisitions as of December 31, 2007.
Less Than One
More Than
Total
Year
1-3 Years
3-5 Years
5 Years
(In thousands)
Operating leases
$
3,189
$
803
$
1,422
$
707
$
257
Short-term borrowings
22,065
22,065
—
—
—
Capital leases
19,035
2,572
4,823
4,142
7,498
Long-term debt obligations
18,731
4,159
9,374
2,794
2,404
Total
$
63,020
$
29,599
$
15,619
$
7,643
$
10,159
Quantitative
and Qualitative Disclosure About Market Risk
We are exposed to certain market risks in the normal course of
business. At December 31, 2007 and June 30, 2008, our
primary exposure to market risk was through our line of credit,
under which loans bear interest at a floating rate based on
LIBOR. Assuming that we borrowed the entire $11.0 million
available, a 1% change in interest rates would result in an
immaterial change to our interest expense. We have entered into
a commitment letter with PNC Bank to provide for maximum
borrowings of $80.0 million and a $10.0 million
sub-limit for the issuance of commercial and standby letters of
credit, which will have variable interest rates based on LIBOR.
Assuming that we borrowed the entire amount available, a 1%
change in interest rates would have resulted in a change to
interest expense of approximately $0.8 million annually. We
also intend to maintain the €5 million notional amount
interest rate swap contract in place at Isoclima to reduce the
impact of interest rate changes.
Currently, substantially all of our products and services sales
are denominated in U.S. dollars, so we are exposed to
minimal foreign currency exchange rate risk. Upon the closing of
this offering, approximately 50% of our products and services
sales will be denominated in Euros. The Euro is the functional
currency in most
cases. A decline in the strength of the Euro in relation to the
U.S. dollar will impact negatively our financial results
due to the effect of transactions that are not in the same
currency and the translation required for the presentation of
our financial statements. We intend to engage in undetermined
hedging transactions to reduce our exposure to fluctuations in
the U.S. dollar to Euro exchange rate.
New
Accounting Pronouncements
In June 2006, the FASB issued Financial Accounting Standards
Board Interpretation No. 48 (FIN 48), Accounting
for Uncertainty in Income Taxes — An Interpretation of
SFAS No. 109. FIN 48 clarifies the accounting
for uncertainty in income taxes recognized in an
enterprise’s financial statements in accordance with
SFAS 109. The interpretation prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax provision taken or expected
to be taken in a tax return. It also provides guidance on
derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition.
FIN 48 is effective for non-public entities for fiscal
years beginning after December 15, 2007. We adopted
FIN 48 on January 1, 2007. The adoption of FIN 48
did not have a material effect on our consolidated financial
statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157). SFAS 157
defines fair value, establishes a framework for measuring fair
value in accordance with generally accepted accounting
principles and expands disclosures about fair value
measurements. SFAS 157 is effective for fiscal years
beginning after November 15, 2007 and interim periods
within those fiscal years. We adopted SFAS 157 on
January 1, 2008. The adoption of SFAS 157 did not have
a material effect on our consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. The objective of SFAS 159 is to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 is
effective for the first fiscal year beginning after
November 15, 2007. In adopting SFAS 159 on
January 1, 2008, we did not elect the fair value option for
any financial assets or liabilities; as such, the adoption did
not have a material impact on our consolidated financial
condition, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations (SFAS 141(R)).
SFAS 141(R) presents several significant changes from
current accounting practices for business combinations, most
notably the following: revised definition of a business; a shift
from the purchase method to the acquisition method; expensing of
acquisition-related transaction costs; recognition of contingent
consideration and contingent assets and liabilities at fair
value; and capitalization of acquired in-process research and
development. This statement applies prospectively to business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or
after December 15, 2008. The impact of this new accounting
principle on the company’s consolidated financial
condition, results of operations and cash flows will be
dependant upon the level of future acquisitions.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51
(SFAS 160). SFAS 160 (a) amends ARB
No. 51 to establish accounting and reporting standards for
the noncontrolling interest in a subsidiary and the
deconsolidation of a subsidiary; (b) changes the way the
consolidated income statement is presented; (c) establishes
a single method of accounting for changes in a parent’s
ownership interest in a subsidiary that do not result in
deconsolidation; (d) requires that a parent recognize a
gain or loss in net income when a subsidiary is deconsolidated;
and (e) requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish
between the interests of the parent’s owners and the
interests of the noncontrolling owners of a subsidiary.
SFAS 160 must be applied prospectively, but the
presentation and disclosure requirements must be applied
retrospectively to provide comparability in the financial
statements. Early adoption is prohibited. SFAS 160 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
impact of this new accounting principle on the company’s
consolidated financial condition, results of operations and cash
flows will be dependant upon the level of future acquisitions.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the
principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
generally accepted accounting principles in the United States.
SFAS 162 is effective 60 days following approval by
the Securities and Exchange Commission of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. We do not expect the
adoption of SFAS 162 to have a material impact on our
consolidated financial condition, results of operations and cash
flows.
Inflation
We believe that the relatively moderate rates of inflation in
recent years have not had a significant impact on our revenue or
profitability. Historically, we have been able to offset any
inflationary effects by either increasing prices or improving
cost efficiencies.
Off
Balance Sheet Arrangements
As of June 30, 2008, other than the operating leases noted
in “Contractual Obligations and Commitments,” which do
not have and are not reasonably likely to have a current or
future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is
material to investors, we had no off-balance-sheet arrangements.
Simultaneously with the closing of this offering, we will
acquire Finanziaria Industriale S.p.A. together with its wholly-
and partially- owned subsidiaries (Isoclima), Transportadora de
Protección y Seguridad, S.A. de C.V. (TPS Armoring or
TPS), and OmniTech Partners, Inc., Optical Systems Technology,
Inc. and Keystone Applied Technologies, Inc. (collectively,
OmniTech) using the proceeds from this offering, borrowings
under our new credit facility and issuances of our common stock.
The acquisitions of Isoclima, TPS and OmniTech are referred to
as the Pending Acquisitions. These Pending Acquisitions will
significantly increase our size, expand and enhance our product
portfolio, broaden and deepen our customer base, expand our
geographic presence and enhance our management team. As a
result, except in circumstances where the context indicates
otherwise, we have described our business below assuming that
our new credit facility is in place and the Pending Acquisitions
already have occurred. See “The Pending Acquisitions”
and “Risk Factors — Risks Related to Our Pending
and Future Acquisitions.”
Unless the context indicates otherwise, references in this
prospectus to “we,”“us,”“our,”
the “company” or “The O’Gara Group”
refer to The O’Gara Group, Inc. and its consolidated
subsidiaries and assume and give effect to the consummation of
the Pending Acquisitions.
Company
Overview
We provide a diverse portfolio of security, safety and defense
products and services to commercial and government organizations
worldwide. Our business activities are focused on delivering
specialized products and services that improve the ability of
organizations and individuals to prepare for, respond to and
recover from acts of terrorism, violent crime and other hazards.
We have a varied and distinguished list of customers, including:
Mercedes-Benz, BMW and Azimut-Benetti in the commercial market;
the U.S. Marine Corps, U.S. Special Operations
Command (SOCOM), U.K. Ministry of Defence and Italian Ministry
of Defense in the military market; the U.S. Department of
State, U.S. Intelligence Community and various state and
local governments and law enforcement agencies in the government
market; and high-profile individuals. Including the Pending
Acquisitions, our pro forma combined revenues for the year ended
December 31, 2007 and the six months ended June 30,2008 were $179.9 million and $102.6 million,
respectively. Our pro forma EBITDA for the year ended
December 31, 2007 and the six months ended June 30,2008 were $19.0 million and $17.1 million,
respectively. Please see note 5 to “Summary Consolidated
Historical and Pro Forma Financial and Other Data” for a
description of how we use EBITDA and its limitations as a
non-GAAP measure. Our pro forma combined backlog at
June 30, 2008 was $126.7 million.
Our business is organized into three divisions —
Advanced Transparent and Mobile Systems, Sensor Systems and
Training and Services.
•
Advanced Transparent and Mobile Systems. Our
Advanced Transparent and Mobile Systems division designs,
manufactures and sells highly engineered transparent armor,
vehicle armoring systems and impact-resistant and other
specialized glass. Our products safeguard government officials,
security and military personnel, corporate executives and other
individuals from terrorism, violent crime and other hazards. The
majority of our revenues in this division are derived from sales
to commercial market customers operating in the automotive,
rail, marine and aviation industries. In the automotive
industry, we supply transparent armor used in commercial and
military armored vehicles, and we are a vertically integrated
provider of armoring systems for cars, trucks and SUVs. For the
rail, marine and aviation industries, our activities are focused
on the production of impact-resistant and other specialized
glass used to protect a range of high-value assets, such as
high-speed trains, yachts and aircraft. Our specialized glass
products are also used in solar panels for alternative energy
applications and for architectural purposes.
•
Sensor Systems. Our Sensor Systems division
designs, manufactures and sells optoelectronic equipment to the
government and military markets. Our principal products in this
division are specialized night vision equipment and tagging,
tracking and locating systems, all of which enable government
agencies and militaries to conduct covert intelligence,
surveillance and reconnaissance missions and battlefield
operations more effectively. We believe our proprietary
technologies for illumination and
detection are among the most advanced in the industry, in part
as a result of our use of certain infrared bands that are
undetectable by conventional night vision equipment. Our
products also incorporate other advanced technologies, including
heads-up
displays and thermal imaging sensors to enhance their overall
functionality.
•
Training and Services. Our Training and
Services division provides technical services, such as threat
and vulnerability assessments and weapons of mass destruction
training; tactical services, such as urban warfare and tactical
driving training; and preparedness and response services, such
as emergency response and continuity of operations planning.
These offerings enhance our customers’ ability to prepare
for, operate during and recover from high-risk situations and
emergencies. We offer our training and services to government,
military and corporate customers, both at our tactical training
complex and at customer locations worldwide.
Our management team possesses a long history of building and
acquiring businesses focused on the security, safety and defense
markets. We believe their resident knowledge of and
relationships within these markets have been instrumental in the
acquisition, integration and growth of the businesses we have
acquired to date and will be critical to the execution of our
business strategy. Our founders, Thomas M. O’Gara, Wilfred
T. O’Gara and Michael J. Lennon, previously managed
O’Gara-Hess & Eisenhardt Armoring Company, a
pioneer and leader in designing, engineering and manufacturing
armored vehicles, including the Up-Armored High Mobility
Multi-purpose Wheeled Vehicle, a key tactical vehicle now used
by militaries around the world. In addition to the companies we
have acquired since our inception, our founders successfully
completed the acquisition of 19 businesses during their previous
ventures. We intend to continue leveraging the extensive
knowledge and experience of our management team as we pursue
expansion through a combination of organic growth and
acquisitions.
Simultaneously with the closing of this offering, we will
complete the acquisitions of the following three companies:
•
Isoclima — Established in 1977 and based in
Este, Italy, Isoclima is a designer and manufacturer of
transparent armor and impact-resistant and other specialized
glass for the automotive, rail, marine, aviation and other
markets. Isoclima will join our Advanced Transparent and Mobile
Systems division. Subject to customary adjustments, we will
acquire Isoclima for approximately $165.3 million in a
combination of cash, common stock and the assumption of debt.
•
TPS Armoring — Established in 1994 and based in
Monterrey, Mexico, TPS Armoring is a manufacturer of vehicle
armoring systems used primarily by government officials and
private individuals. TPS Armoring also will join our Advanced
Transparent and Mobile Systems division. Subject to customary
adjustments, we will acquire TPS for approximately
$35.5 million in a combination of cash, common stock and
the assumption of debt.
•
OmniTech — Established in 1995 and based in
Freeport, Pennsylvania, OmniTech is a designer and manufacturer
of optoelectronic systems serving government and military
customers. OmniTech will join our Sensor Systems division.
Subject to customary adjustments, we will acquire OmniTech for
approximately $31.3 million in a combination of cash,
common stock and the assumption of debt.
We believe that these companies will add significant value to
our organization as they will substantially increase our size,
extend and enhance our product portfolio, broaden and deepen our
customer base, expand our geographic presence and enhance our
management team.
We were formed in August 2003 to acquire Specialized Technical
Services, Inc., a manufacturer of night vision equipment
established in 1991 and the foundation of our Sensor Systems
division. In 2005, we created our current holding company
structure and also acquired Diffraction, Ltd., a developer and
manufacturer of optoelectronic systems since 1993, now part of
the Sensor Systems division. Our Training and Services division
was established in early 2006, when we hired the owners and
employees of Tracor, Inc. to develop their training concepts.
The division was enhanced later that year by the purchase of
certain assets of Safety and Security Institute (SSI), the
security and safety training division of VIR Rally, LLC, and by
the acquisition of Homeland Defense Solutions, Inc. In 2007, we
created the Mobile Security division, which is being renamed the
Advanced
Transparent and Mobile Systems division, with the acquisition of
Security Support Solutions Limited (3S). 3S has sold, leased and
serviced armored military and commercial vehicles since 2003.
Industry
Our advanced security, safety and defense products and services
address a large and growing worldwide market comprised of
governments, militaries, corporations and individuals seeking to
more effectively execute their security and defense-related
initiatives. Both our commercial and government customers are
affected by common trends, including geopolitical and
socioeconomic unrest, terrorism, violent crime and natural
disasters, that have resulted in elevated concern over the
protection of people and assets. These trends have resulted in
increased demand for products and services that enhance
situational awareness, improve the ability to respond to,
operate during and recover from critical events and protect
personnel in hostile, high-risk environments.
In the U.S. government market, expanding budgets related to
the procurement of mission-critical products and services for
security and defense initiatives are evidence of this increasing
demand. For the U.S. government fiscal year (GFY) 2009,
budget requests for Department of Defense (DoD) and homeland
security-related initiatives are $581 billion and
$66 billion, respectively, representing increases of
approximately 31% and 63%, respectively, in the five-year period
since GFY 2004. While these budgets are devoted to a diverse
range of activities and initiatives, we expect certain areas of
increased focus, such as counterterrorism, emergency
preparedness and response and military capability enhancement,
will continue to require accelerated growth in spending for the
types of products and services that we offer.
Similarly, in the commercial market, both corporations and
individuals have been affected by increasing security threats,
and we believe there will be continued investment in products
and services to enhance the security and protection of key
assets and individuals. According to Homeland Security Research
Corporation, the U.S. private sector is expected to procure
approximately $28.5 billion of homeland security products
and services between 2007 and 2011.
We believe the following trends will drive the growth in demand
for our products and services.
Evolving asymmetrical nature of
threats. Governments and commercial organizations
worldwide are increasingly encountering asymmetrical threats,
such as highly organized and sophisticated terrorist groups and
the use of unconventional weapons, that are presenting
challenges to the operational efficacy of traditional security
and defense practices unaccustomed to assessing and defeating
those threats. In response, governments in particular are taking
decisive actions, such as realigning spending priorities, to
more effectively address the evolving nature of threats. In
recent years, the U.S. government has shifted spending
priorities away from large-scale weapons platforms used
primarily during periods of high-intensity conflict to tactical
products more suited to combating the dangers associated with
asymmetrical threats and to gathering intelligence to
prevent — or more effectively respond to —
such threats. This has resulted in the procurement of additional
advanced products and services to enhance the capabilities of
security and military personnel, particularly as part of the
Global War on Terror (GWOT), the DoD-led initiative focused
specifically on fighting against and eliminating terrorist
organizations worldwide.
In procuring these products and services, the government relies
upon elite military organizations, such as the U.S. Special
Operations Command (SOCOM), the lead DoD agency in the planning
and synchronizing of operations for the GWOT, to test and
validate solutions in the field. The growing importance of SOCOM
in implementing DoD strategy will require increasing procurement
of advanced technology solutions. The 2006 Quadrennial Defense
Review (QDR) announced a force structure and budget increase for
SOCOM that is intended to address the challenges of evolving
asymmetric threats. The QDR announced that SOCOM will add more
than 13,000 personnel to its existing
52,000-personnel
command and projected that its budget will increase by
approximately $9 billion by 2011. Internationally, foreign
governments have similar anti-terrorism initiatives in place,
and we believe they also will continue to demand advanced
products and services in support of these initiatives.
Since September 11, 2001, the U.S. government has
appropriated $636 billion for the GWOT. The GFY 2009 budget
request for the GWOT is $66 billion. The GFY 2009 DoD and
GWOT budget requests allow for
appropriations for training services to prepare field personnel,
protection systems that provide mobile security and advanced
sensor and surveillance systems to enhance situational
awareness. For instance, the GFY 2009 DoD budget request
includes line items for force protection and training of
$5.6 billion and $7.4 billion, respectively, as well
as $5.7 billion in funding for building SOCOM capabilities
through improved surveillance, communication and weapons
technologies, specialized skills training and tactical vehicles.
Increased emphasis on emergency preparedness and
response. In response to destructive manmade and
natural threats worldwide, U.S. federal, state and local
governments, foreign governments and commercial organizations
have been devoting increased funding to prepare for, respond to
and recover from acts of terror and other catastrophic events.
These organizations are procuring services such as vulnerability
assessments, emergency response planning, business continuity
planning and recovery services, which have become critical to
the operational efficacy of governments and commercial
organizations faced with these events.
Funding of preparedness and continuity planning initiatives
continues to be a high priority for federal, state and local
governments as they strive to create a viable homeland security
infrastructure across all levels of government and encourage
uniformity in practices and procedures instituted for addressing
emergencies. In its GFY 2009 budget request, the
U.S. government allocates approximately $5.0 billion
to emergency preparedness and response initiatives. It has spent
over $30 billion enhancing state and local terrorism
preparedness since GFY 2001 through programs such as the
National Incident Management System, which facilitates
nationwide adoption of certain procedures by first responders,
and the Department of Homeland Security (DHS) Office of Grant
Programs, which serves as the primary vehicle for federal
funding of state and local preparedness efforts. These
initiatives include disbursements for training and exercises as
well as products enabling more efficient, effective responses to
emergency situations.
Additionally, corporations continue to invest in emergency
planning and response services in order to ensure continuity of
operations and minimize business disruption following critical
incidents. These measures range from the creation of emergency
response plans to the utilization of training exercises for
employees, and we believe commercial organizations will continue
to increase adoption of these services to protect against
threats.
Expanding criminal threats. As a result of
increased criminal threats in certain parts of the world, such
as Latin America, the Middle East and areas of Europe,
commercial and governmental organizations as well as individuals
have taken measures to increase protection against these
activities. Within the government market, law enforcement
agencies are working to equip officers with the capabilities to
combat escalating criminal threats, such as narcoterrorism and
organized crime. In June 2005, the U.S. State Department
launched the Worldwide Personal Protective Services (WPPS) II
program, which was implemented to provide for the security of
U.S. government officials, U.S. diplomats and certain
foreign heads of state in high-risk environments. The WPPS II
contract has a ceiling of $3.6 billion over five years and
substantially upgrades personnel qualifications, training,
equipment and management requirements in order to further
increase the security and oversight of these operations.
Within the commercial market, both corporations and individuals
are taking proactive measures to enhance security in
increasingly high-risk environments, particularly in response to
criminal acts such as the kidnapping for ransom of high-profile
individuals. For example, the average number of serious federal
crimes reported daily in Mexico grew approximately 86% over the
five-year period from 2002 to 2007, evidencing the rapidly
escalating criminal threats in this region. To provide
protection against these threats, corporations and individuals
have increased their investment in and use of security products
and services. A common example of this is the growing use of
armored vehicles to transport government officials, business
executives and other high profile individuals. We believe that
the use of armored vehicles will increase as multinational
corporations continue to expand their operations geographically.
Additionally, commercial organizations such as financial
institutions continue to invest in protective capabilities to
enhance security at high-risk locations and safeguard key assets.
Increased reliance upon government
outsourcing. In order to maximize efficiency,
reduce costs and replace an aging government workforce,
governments have come to rely upon the products and services of
the private sector. This enables government agencies to leverage
the highly skilled and experienced labor forces of
leading commercial organizations to enhance their capabilities.
Domestically, in the field of training, organizations such as
the DoD, DHS and the Department of State all utilize the
services of third-party professionals, many of whom are former
military and government officials, to ensure proper education
and preparation of soldiers, first responders and government
employees. According to the U.S. Government Accountability
Office, the DoD’s obligations under third-party service
contracts grew from approximately $85 billion in GFY 1996
to more than $151 billion in GFY 2006, representing an
increase of approximately 78%. As a result of the diverse
priorities of U.S. government agencies and the need to cost
effectively train government employees and military personnel,
we believe the trend in outsourcing will continue to benefit the
government and lead to increased spending on third-party
products and services.
Market
Opportunity
As threats to the security and safety of governments,
militaries, corporations and individuals continue to increase
and evolve, demand for technologies, products and services to
more effectively combat such threats is growing rapidly. We
believe that this has furthered the need for advanced products
and services like ours that enhance situational awareness,
improve the ability to respond to, operate during and recover
from critical events and protect personnel in hostile, high-risk
environments.
As a global provider of a diverse portfolio of advanced
capability products and services, we believe we are uniquely
positioned to capitalize upon the strong growth trends within
the security, safety and defense markets worldwide.
Specifically, we are acutely focused on — and able to
provide — complementary solutions in three distinct,
high-priority segments of these markets, namely specialty
products used to safeguard government and civilian constituents,
proprietary technologies used to enhance the operational
effectiveness of military officials and services to train
government and military personnel and private citizens in the
processes and procedures to mitigate the risks associated with
manmade and natural disasters. For example, we believe we are
one of the few vertically integrated providers in the world
capable of manufacturing the transparent armor required for the
vehicle armoring systems that we also produce. We believe that
we are a leading provider of proprietary optoelectronic sensor
and imaging technologies that are superior to currently deployed
technologies. We have bases of operation in the U.S., Europe and
Mexico, which we believe will serve as strong platforms for
growth in the markets we currently serve as well as enable us to
penetrate new markets globally. We believe our ability to
develop and produce market-leading products and services coupled
with our deep knowledge of our customers and end markets will
enable us to expand our domestic and international market share
and continue to offer our customers high-value solutions.
Our
Competitive Strengths
Experienced and deep management team. Our
management team has an average of 23 years of experience
managing businesses that serve the security, safety and defense
markets. Many of our management team members, including our
divisional executives, were involved in the formation of, and
continue to actively manage, the businesses that currently
constitute our company. In addition, our founders previously
formed and managed a public company that served the security,
safety and defense markets. As we continue to grow, we believe
that the experience and depth of our management team will serve
as a significant competitive advantage and enable us to more
effectively execute our strategy.
Diversified business model. Our broad
portfolio of products and services addresses the needs of both
commercial and government customers operating in domestic and
international markets. For the year ended December 31, 2007
and the six months ended June 30, 2008, sales to commercial
market customers represented 62% and 60%, respectively, of our
pro forma combined revenues and sales to government market
customers represented 38% and 40%, respectively, of those
revenues. In addition to broadening our addressable market, our
strategy of serving both the commercial and government markets
makes us less dependent upon government funding and commercial
business cycles than businesses focused solely on either market.
Similarly, by selling our products and services in many
countries, we are less susceptible to economic and political
uncertainties in any particular geographic region. For the year
ended December 31, 2007 and the six months ended
June 30, 2008, sales to domestic customers were 22% and
18%, respectively, of our pro forma combined revenues and sales
to international customers were 78% and 82%, respectively, of
those revenues.
As a result of this diversity, we believe that our future
success is not dependent upon a single technology, product,
service, customer, government program or geographic market.
Attractive, global customer base. We have
built a worldwide customer base that includes many highly
discerning commercial, government and military organizations
that typically are very difficult to penetrate without
pre-existing business relationships. Because our products are
often used in extreme conditions and for mission-critical
purposes, our customers scrutinize them carefully during the
procurement process. We believe that we have built a high degree
of confidence with key customers, including commercial
businesses recognized for their exacting quality standards, such
as Mercedes-Benz and BMW, and government organizations known for
demanding high-performance tactical equipment, such as SOCOM,
the U.S. Intelligence Community, the U.S. Marine Corps
and the U.K. Ministry of Defence. Our existing customer base
provides us with substantial organic growth opportunities, and
because of our customers’ reputation and stature, with
strong references as we pursue new opportunities worldwide.
Strong knowledge of customer requirements. In
each of our divisions, our familiarity and direct interaction
with customers provide us with strong knowledge of their
requirements. Many of our personnel in the Training and Services
division are former members of Special Operations Forces and
other specialized U.S. military and federal government
agency teams, which provides us with a means of continuing
direct contact with these customers. Our Sensor Systems division
has development contracts with SOCOM and other government
agencies for prototype products that give us insight into, and
we believe, advantageous positioning for future projects and
contracts. Our Advanced Transparent and Mobile Systems division
works in collaboration with major car manufacturers such as
Mercedes-Benz, BMW, Audi and Fiat in developing new models of
their armored vehicles as well as developing and incorporating
high technology components into glass used in both armored and
non-armored vehicles, such as advanced solar controls that
reflect infrared energy and protect sensitive electronic
instruments from interference. As a result, we have continual
sources of information regarding our customers’ evolving
needs that we can apply in creating innovative solutions for
them.
Proprietary manufacturing methods, technologies and
processes. We have developed proprietary
manufacturing methods, technologies and processes that, we
believe, provide us with competitive advantages in producing
highly reliable and technologically advanced products. For
example, our Advanced Transparent and Mobile Systems division
has invested in state-of-the-art production and testing
facilities for producing advances in transparent armor and other
protective glass and has developed proprietary production
processes for outfitting vehicles with transparent and opaque
armor. These facilities and processes are integral to our
ability to exceed the stringent performance and quality
assurance standards mandated by our customers. Our Sensor
Systems division has developed proprietary sensor and imaging
technologies, such as sensor technologies incorporated into our
patented dual-band night vision scope, which we believe to be
superior to those currently deployed. We also have developed
other proprietary technologies for illumination and detection,
such as those using certain infrared bands that are undetectable
by conventional night vision equipment, which can be leveraged
across multiple product platforms.
Successful acquisition and integration track
record. Since our inception, we have acquired and
integrated five businesses, implementing initiatives at each to
enhance operational efficiencies and financial performance. This
growth has allowed us to pursue and procure larger, more
competitive opportunities from new customers and to capture
additional revenues from existing customers. For example, in
building our Training and Services division, we acquired and
consolidated the operations of multiple businesses, each with
distinct capabilities and in disparate locations, and hired new
personnel to create a single division that addresses a
significantly broader range of training and services
requirements than each business previously provided. By drawing
on the combined contracting experience, tactical combat
experience and subject matter expertise of our personnel, in
2007, we were able to win a multi-million dollar, two-year
tactical training contract with the U.S. Marine Corps
Special Operation Group that we believe would not have been
possible if any of the former businesses had pursued this
opportunity independently. Since the initial contract was
awarded, our revenues derived from it have expanded by more than
25% due to requests for additional training personnel.
Our objective is to become the leading global provider of
security, safety and defense products and services used by
commercial, military and government customers to address risks
associated with terrorism, violent crime and other hazards. We
intend to realize this objective by implementing the following
strategies:
Integrate our Pending Acquisitions. A critical
element of our growth strategy is the timely and successful
integration of companies that we acquire, both across our entire
company and within the division, with the goal of achieving
sustained operational and financial benefits. We began this
integration process during the negotiation and due diligence
processes for each of the Pending Acquisitions. As a result, we
expect to be in a position to implement our plan quickly after
closing. For example, prior to this offering, we coordinated
customer visits for TPS and Isoclima with a select group of our
customers to begin evaluating additional business opportunities.
We expect to integrate Isoclima, TPS and OmniTech and achieve
benefits by, among other things:
•
capitalizing on our experience in selling to the
U.S. government to generate incremental revenues through
new sales opportunities for Isoclima and TPS;
•
coordinating our expanded sales and marketing resources to
increase the reach of our product and service offerings by, for
example, expanding TPS’s distribution capabilities from
within Mexico to other parts of the world and providing OmniTech
with access to our existing international sales network;
•
implementing our lean manufacturing techniques throughout our
company to enhance the efficiency of our manufacturing processes;
•
coordinating the research and development activities of OmniTech
with our current efforts in the Sensor Systems division to
accelerate the development of the next generation night vision
and covert imaging equipment and broaden our product portfolio
by combining various components currently produced by us with
OmniTech’s products; and
•
sourcing internally the transparent armor that Isoclima
previously sold to TPS to realize manufacturing and other
efficiencies, such as access to priority deliveries and the
newest technological advances.
Extend and enhance our product and service
portfolio. We expect to continue developing
innovative technologies that can be leveraged across multiple
product platforms within our divisions and introducing new
products and services that expand our offerings and help us
maintain our competitive advantages within our existing markets.
Through ongoing customer contact and market interaction, we
monitor changing trends in all of our target markets and
continually modify our portfolio of products and services to
address these changing demands. For example:
•
Our Sensor Systems division has developed extensive capabilities
in a broad range of covert imaging, illumination and signaling
technologies. Because many of today’s adversaries possess
night vision equipment, our customers’ ability to observe,
track and illuminate a target or to prevent friendly fire
incidents while remaining invisible to the enemy is a crucial
advantage. Our expertise also includes both exchanging data via
the imaging system and fusing multiple bands of light into a
single, lightweight, compact instrument that takes advantage of
the strengths of both systems. We have included these
technologies on platforms as diverse as weapons-mounted scopes,
head-mounted goggles and hand-held, vehicle-mounted and unmanned
aerial vehicle (UAV)-borne observation turrets.
•
In our Training and Services division, we develop specific
training doctrine for special units in the military. In the
course of this work, we collaborate closely with our customers
to understand their current priorities and the strategic
direction of their training operations. This, in turn, allows us
to be proactive in our training offerings before an official
requirement is established.
Broaden and deepen our customer base. We
intend to further penetrate our existing customer base by
marketing additional products from our expanded portfolio to
existing customers, migrating products from early adopters and
validators to a broader group of customers and using our
enhanced financial and operational resources to identify and
pursue larger-scale opportunities.
We also intend to increase the marketing of products we
currently produce internationally to the U.S. domestic
market and of those we produce domestically to the international
market. For example, in our Sensor Systems division, our low
profile night vision goggles initially were developed for and
sold to small groups within SOCOM. Over the years, sales of
these goggles have expanded not only within the DoD but also to
international customers, as evidenced by the fact that the
Italian Ministry of Defense is currently one of our largest
customers for these products. In the Advanced Transparent and
Mobile Systems division, we intend to market our transparent
armor, which is currently sold predominantly to the commercial
market and, to a lesser extent, the European military market, to
the U.S. military market.
Expand our geographical presence. We intend to
continue expanding our geographical presence, both domestically
and internationally in attractive markets across all of our
divisions. In our Advanced Transparent and Mobile Systems
division, we will consider opening select domestic and
international facilities to compete more effectively for
business opportunities that arise. We believe the combination of
our management team’s prior experience of expanding
domestically and internationally and the resident knowledge of
our managers will enable us to pursue these areas of growth
systematically and efficiently. For example, in 2004, we opened
a London office for our Sensor Systems division, which allowed
us to expand and build upon existing relationships and to obtain
follow-on contracts to supply night vision goggles to the U.K.
Ministry of Defence.
Grow through complementary acquisitions. We
plan to grow our business by selectively acquiring companies and
assets that enhance our technology portfolios, broaden our
product and services offerings
and/or
expand our customer relationships or geographical presence.
Overall, we believe the security, safety and defense markets are
highly fragmented, with numerous small to medium size companies
that have strong technologies and products but that may lack the
necessary human or capital resources to achieve sustainable
growth. We look for companies with proprietary products or
services that fit our business model and that have reached the
point at which they can recognize the benefits of our
competitive strengths to support their long-term growth. We
intend to continue to maintain a highly disciplined approach in
our pursuit of acquisitions by performing assessments of a
target’s proprietary technologies and processes, growth
prospects, synergy potential and management aptitude.
Products
and Services
Advanced
Transparent and Mobile Systems Division
Our Advanced Transparent and Mobile Systems division designs,
engineers, manufactures and sells highly engineered protective
systems to corporations, governments and individuals worldwide.
Specifically, we produce transparent armor used in automobiles
and other modes of transportation to safeguard government
officials, security and military personnel, corporate executives
and other individuals from terrorism, violent crime and other
hazards. We also produce other specialized glass used in all
major modes of transportation and in alternative energy and
architectural applications, that reduces noise
and/or
reflects heat. Our transparent armor products are manufactured
to very strict quality standards and stringent dimensional
tolerances for compound and simple curvatures.
Isoclima has been developing and implementing new technologies
and processes for the production of composite laminate glass
since 1977, and we believe we are a leader in the manufacture of
ballistic resistant composite laminate, a critical component of
our transparent armor products. Recently, we have made
significant advances in the coating and tempering of
transparencies. In the area of coating, we electronically coat
glass or plastic with thin films of metal-oxide through the
magnetron sputtering process. This process permits the heating
and defrosting of windshields without wires, which disrupt
vision, and also reflects a large part of the infrared spectrum,
which greatly reduces heat build up. This metal-oxide film also
can be used to shield sensitive electronic instruments from
electro-magnetic interference. Although historically we have
used this composite laminate process solely for the development
of transparent armor, we recently have leveraged this experience
to develop new laminate technologies for additional
applications. For example, we have developed a proprietary
process, known as
Chromalitetm,
that incorporates laminates and an emulsion between glass layers
that, with a flip of a switch, makes transparent glass opaque
from one side while it continues to be transparent on the other.
We also use the laminate process to produce photovoltaic glass
panels used to
generate solar energy and manufacture a special patterned glass
used for photovoltaic applications that intensify the sun’s
rays on the cells. For applications requiring ballistic glass in
which weight reduction is an important consideration, we
recently have begun producing chemically tempered glass.
Chemically tempered glass is much lighter and thinner than an
equivalently hardened composite laminate glass; it also is
flexible, thus allowing easier application by our customers.
Furthermore, we have implemented technology and processes for
bonding transparencies to opaque surfaces, eliminating
traditional containment frames and allowing for maximum
continuity between opaque and transparent surfaces together with
curved and sinuous lines.
Automotive. Currently, our principal focus in
the Advanced Transparent and Mobile Systems division is on the
automotive market, for which we provide specialized protective
glass, fully integrated armoring systems and a customer focused
sales and marketing operation that sources armored vehicles from
a variety of producers around the world.
We provide specialized protective glass for both commercial and
government vehicles, primarily for the purposes of enhanced
ballistic protection, privacy and comfort. Our
ballistic-resistant transparent armor significantly enhances the
safety of vehicle occupants, as compared to standard automotive
glass, while maintaining optical clarity. Many of the
world’s leading manufacturers of armored automobiles,
including Mercedes-Benz, BMW, Audi, Fiat, Jaguar, Range Rover,
Maserati and Rolls Royce, use our transparent armor in the
vehicles they produce for corporate executives, government and
military officials and private citizens. In addition to
transparent armor, we produce non-armored glass that is
currently included as standard equipment in the vehicles
produced by many of the world’s leading premium car
manufacturers, including Bentley, Aston Martin, McLaren,
Ferrari, Lamborghini, Maserati and Alfa Romeo.
We are able to incorporate our technologies for electronic
defrosting and defogging and the
ChromaliteTM
system for complete passenger privacy in either our ballistic or
non-armored glass. Adding our chemically bonded films to reduce
infrared radiation and heat build up becomes important when
vehicle designers incorporate premium features, such as
panoramic moon roofs.
In addition, we provide fully integrated armoring systems for a
variety of vehicle makes and models and are capable of
outfitting vehicles with the highest classification of
protection commercially available against ballistic threats. Our
highly customized processes and methodologies incorporate
ballistic-resistant materials and structural modification
technologies into these vehicles. There are two general
classifications of armored vehicles that we manufacture: fully
armored vehicles (FAVs), which represent the majority of our
sales, and light armored vehicles (LAVs). The armoring package
is priced and sold based upon the ability to defeat a particular
number of shots of a specific type and caliber of ammunition
within a defined area in accordance with U.S. or European
standards.
The FAV designation means the vehicle is designed to protect
against attacks from military assault rifles, such as an AK-47
or M-16 with standard ball ammunition or armor-piercing rounds,
as well as from certain underbody explosives. The base vehicle
that is converted into a FAV typically is a large sedan, such as
a Mercedes-Benz S600 or BMW 750, or a sport utility vehicle,
such as a Chevrolet Suburban or Jeep Cherokee, which is
purchased new from a dealership or factory or provided by the
customer directly to us.
The LAV designation means the vehicle is designed to protect
against handguns, such as a 9mm or .357 Magnum. The
armoring necessary for LAV protection uses substantially less
total weight of armoring than a FAV. This allows smaller sedans
and SUVs to be used as base vehicles in addition to the larger
vehicles described above.
Our armoring process begins with disassembly of the new vehicle
at our production facility. This typically involves the complete
removal of the interior trim, seats, doors and windows. The
passenger compartment then is armored with both opaque armor
(metallic, fibrous and ceramic materials) and transparent armor
(glass/
plastic laminate). Other features, such as run flat tires and
heavy-duty suspension and brakes, also may be added to FAVs.
Finally, the vehicle is reassembled as close to its original
appearance as possible.
A small component of our Advanced Transparent and Mobile Systems
business involves providing related services. As a complement to
our fully integrated armoring systems, we sell
on-site and
on-road service packages and maintain a small rental fleet of
our armored vehicles for the Mexican market. We also operate a
sales and marketing organization based in the U.K., which
sources vehicles from a variety of armored vehicle producers
around the world and therefore is able to provide a large
variety of vehicles very rapidly at competitive prices. We are a
supplier to the United Nations, NATO, the U.K. government, the
U.S. DoD and other U.S. government agencies.
Rail. In the rail market, we provide
impact-resistant and other specialized glass to protect
high-speed trains and metro systems from natural risks such as
falling ice and rocks and man-made risks such as items thrown
from overpasses. Historically, the glass windshields used in
railway applications have lacked advanced protective and
aerodynamic properties. However, with the advent of high-speed
rail systems and the resulting harm that can occur from falling
or thrown objects, the composition, quality, level of protection
and performance of a windshield have become a significant
concern to transit system operators. Our proprietary
manufacturing processes allow us to create specially formulated
and coated glass with increased impact resistance, advanced
solar temperature controls, built-in defog and defrost systems
and enhanced aerodynamics while preserving the optical
performance of the glass. Our specialized glass is in use at
numerous high-profile locations, including the metro systems of
Strasbourg, London, Milan and Helsinki and high-speed trains in
Italy, Switzerland, Germany, China, Norway and Finland.
Marine. For the marine market, we provide
protective glass used in windshields and windows of yachts. In
many applications we utilize our advanced chemically tempered
glass, which offers functional advantages by enabling
aerodynamic design while maximizing protection from both natural
and man-made threats. Specifically, we introduced the concept of
bonded structural glass for marine use, resulting in substantial
advantages, such as solar control, improved acoustic reduction,
impact and ballistic resistance and improved aerodynamics and
aesthetics. Our glass has been approved by major registers such
as Lloyds, Norske Veritas, Germanish Lloyd and Rina, which
classify vessels according to certain criteria of physical
structure and equipment to enable underwriters, shipbrokers, and
shipowners to assess commercial risk and negotiate marine
insurance rates. Our glass for maritime applications has become
the preferred material for numerous premier yacht manufacturers.
Aviation. In the aviation market, we provide
specialized materials used in both civilian and military
aircraft that are manufactured to each customer’s
specifications. Specifically, we produce composite windshields
and one-piece canopies for military aircraft. We also supply
thermally or chemically strengthened glass as a part of
windshields for the civil and military aviation industry. The
materials are designed to protect the occupants from certain
munitions and other objects or debris. Our ability to combine
strengthened composite materials in specialized curved
formations has enabled us to penetrate this market and secure
new customers.
Architectural and Other Applications. We also
produce ballistic and impact-resistant and other specialized
glass for architectural use, including in high-risk environments
such as banks, embassies and government facilities. Our
architectural glass is installed in locations as diverse as the
Andromeda Tower in Vienna, Canary Wharf in London, the
Italian embassy in Washington, D.C. and the flagship Apple
Store in New York City. Additionally, we manufacture a low-iron
patterned glass for various applications, including solar
collecting panels used to produce electrical energy and solar
collectors used to produce hot water. This glass is in great
demand in many European countries in response to the European
Commission’s proposed directive that 20% of energy used
must be sourced from renewable sources by 2020.
For the year ended December 31, 2007 and the six months
ended June 30, 2008, the Advanced Transparent and Mobile
Systems division contributed 73% and 72%, respectively, of our
pro forma combined revenues. Of these revenues, sales by
Isoclima contributed 54% and 54%, respectively, and sales by TPS
Armoring contributed 16.8% and 17.3%, respectively.
Sensor
Systems Division
Our Sensor Systems division designs and manufactures products
that provide our customers with enhanced visual capability and
tactical advantages in dark or near-dark conditions. The
principal products sold by our Sensor Systems division include:
Night Vision Goggles. Our Low Profile Night
Vision Goggles (LPNVGs) provide the lowest profile available in
the industry and have a unique “see-through”
capability to allow a seamless transition from dark conditions
to bright light. In contrast to a standard night vision goggle,
which projects 5.86 inches from the face, the LPNVG has a
profile of only 3.15 inches. This results in only a minimal
change to the center of gravity of the helmet to which the
goggle is attached. As a result, the LPNVG can be used in a wide
variety of operational situations and harsh environments in
which a standard goggle could not perform effectively. Because
of the patented design of the LPNVG’s optical path, other
capabilities and accessories may be integrated within the field
of view. For example, our Enhanced
Heads-Up-Display
(EHUD) module overlays or fuses other video outputs such as
thermal weapon information in the operator’s normal night
vision view. Our LPNVGs are used in a wide variety of
operational situations due to their design and features that
enable a user to perform tasks and extract situational
information that would be difficult or impossible with a
standard goggle.
The table below highlights our Night Vision Goggle products:
Product
Description
Customer(s)
AN/PVS-21
LPNVG with integral EHUD Ports; allows for aggressive movements
in rough terrain, reduced neck strain, and seamless transition
from dark to lit environments
SOCOM and other elite organizations, both domestic and
international, such as U.K. Ministry of Defence and Italian
Ministry of Defense.
Model 2740 Monocular
Same as AN/PVS-21, but in a monocular (one-eye) configuration;
device weighs and costs approximately half as much as a goggle,
but has less depth-perception performance than a goggle
configuration
Elite organizations, both domestic and international
Model 2758 DayViewer
Allows the use of an EHUD, without the need for the night vision
goggle
SOCOM and elite international organizations
Model 2755 EHUD
When attached to goggle, monocular, or Dayviewer, allows overlay
of external data (similar to picture-in-picture on a TV)
SOCOM and other elite organizations, both domestic and
international
Various Accessories
Mounts, helmet adapters, head straps, quick-refocus lenses
SOCOM and other elite organizations, both domestic and
international
Night Vision Surveillance Products. Our family
of multi-spectral optical imaging products provide our
customers, such as the U.S. Department of Homeland
Security, Customs and Border Protection (CBP), FBI and DoD, with
short-, medium- and long-range surveillance capabilities for
night operations. These products provide stand-alone viewing
capabilities that can be coupled with photographic and video
equipment.
The table below highlights our Night Vision Surveillance
products:
Product
Description
Customer(s)
SCIB Mark 4
Short-wave infrared (SWIR) reconnaissance imager with integrated
laser illuminator/pointer
U.S. Intelligence Agencies, SOCOM, FBI
MK880 Pocketscope
Universal handheld night vision surveillance device that can be
used with video and still image photographic equipment
DoD, DoE, DoJ, CBP, Law Enforcement, Fish and Game
NiteCattm
Catadioptric Lenses
High performance specialized optical lenses used with night
vision devices to extend operational range
DoD, DoE, DoJ, Law Enforcement, Fish and Game
Small Arms Night Vision Weapon Sights. Our
night vision weapon sight product line provides the DoD,
Department of Energy, Department of Justice, U.S. law
enforcement and international customers with clip-on,
permanently aligned, in-line, night vision weapon sights used
with existing day scopes. This configuration eliminates the need
to boresight the weapon each time an operator is required to
change from day to night time operations and thereby minimizes
time delays and inaccuracies inherent in frequent changes of
stand alone night vision weapon sights. Our products incorporate
a patented permanent boresight alignment system and a
proprietary Shock Mitigation
Systemtm
(SMStm)
to reduce system failures due to weapon induced shock upon
discharge. We offer a range of products to suit the
operators’ specific needs. Four of our products, the
Tactical Night
Sight®
(TaNS®),
the AN/PVS-22 Universal Night
Sighttm
(UNStm),
the AN/PVS-27 MAGNUM Universal Night
Sighttm
(MUNStm),
and the Universal Night Sight
XRtm,
utilize image intensifier technology and provide the operator
with night vision capabilities from tactical weapon effective
ranges to extreme engagement scenarios for longer range sniper
weapons. For example, our MAGNUM Universal Night
Sighttm
has been selected by the U.S. Marine Corps as its Scout
Sniper Mid-Range Night Sight (SSMRNS) and type classified by the
U.S. Government as the AN/PVS-27. Our Dual Band Universal
Night
Sighttm
(DUNStm)
provides the operator with the additional capability to operate
in smoke, haze and light foliage by optically combining
intensified images with long-wave infrared sensor images for
improved target detection.
The table below highlights our Small Arms Night Vision Weapon
Sights products:
Product
Description
Customer(s)
AN/PVS-22 UNStm
Mid-range clip on night vision weapon sight
Law Enforcement
AN/PVS-27 MUNStm
Long-range clip on night vision weapon sight
Law Enforcement
TaNS®
Night vision weapon sight for use with tactical weapons
Law Enforcement
DUNStm
Fused imagery (thermal overlaid on an intensified image) clip on
night vision weapon sight
Law Enforcement
Tagging, Tracking and Locating. In
counter-terrorism operations, a rapidly growing tactical need is
the ability to locate, identify, mark (or tag) and subsequently
track enemy forces, as well as to identify and track friendly
forces to prevent fratricide, or “friendly fire”,
incidents and to enable quick rescue operations. The shorthand
term for this capability is TTL. We provide an array of TTL
products to SOCOM and other U.S. military, federal law
enforcement and intelligence agencies. Our TTL products include
miniature covert optical beacons and covert reconnaissance
imagers. These devices are used to mark targets for surveillance
and tracking by operators on the ground as well as by aircraft
and unmanned aerial vehicles (UAVs). They are capable of marking
targets in daylight and night and in all weather conditions
while remaining invisible to the naked eye or conventional night
vision systems. We believe the combined high power, high
efficiency, small size and covert nature of these beacons is
unique in our industry and positions us as a leading innovator
in this field.
A suite of beacons in the mid and long wave infrared
bands — visible from 3 km
U.S. Intelligence Agencies, SOCOM, FBI
SWIR Beacons
A suite of beacons in the short wave infrared band —
visible from 5 km
U.S. Intelligence Agencies, SOCOM, FBI
SWIR TTL Imager
Long range short wave infrared imager for covert imaging of SWIR
beacons and tracking of targets
U.S. Intelligence Agencies, SOCOM, FBI
Advanced Prototype Solutions. The use of night
vision equipment by terrorist and criminal organizations has
proliferated since the 1990 Gulf War, reducing the tactical
advantage of counter-terrorism, military and homeland security
forces in night operations. We have produced a number of
products on a prototype and low-rate initial production basis
that focus on certain infrared illumination bands, predominately
short wave infrared (SWIR) and near infrared (NIR), that are
undetectable by conventional night vision equipment. These
products offer our customers, predominately U.S. Special
Forces and selected U.S. government agencies, the ability
to regain a strategic advantage of operation in the night. The
products include advanced fused night vision devices,
“friend or foe” identification systems, illuminators,
intelligent sensors, optical and radio frequency communications
and signature management.
The table below highlights our Advanced Prototype Solutions:
Product
Description
Customer(s)
Fused Weapon Sight (FWS)
Fused image intensifier and SWIR clip-on weapon sight for long
range sniper operation
SOCOM
FWS Dual Band Laser Pointer/Illuminator
Weapon mount infrared (NIR and SWIR) scope, spot and flood laser
pointer/illuminator
SOCOM
UAV Miniature Illuminator Module
Miniature NIR or SWIR laser illuminator for use with existing
infrared camera on UAV for reconnaissance
SOCOM, U.S. Air Force
UAV Miniature Dual Laser Illuminator Module
Miniature NIR or SWIR laser illuminator, for UAV reconnaissance
application
U.S. Air Force
UAV High Power Laser Illuminator Module
NIR or SWIR laser illuminator
U.S. Air Force, Lockheed Martin, SOCOM
For the year ended December 31, 2007 and the six months
ended June 30, 2008, the Sensor Systems division
contributed 21% and 21%, respectively, of our pro forma combined
revenues.
Training
and Services Division
Our Training and Services division provides technical services,
tactical operations and preparedness and response training and
services that enhance our customers’ ability to prepare
for, operate during and recover from high-risk situations or
emergencies. We offer our training and services at our tactical
training complex and at customer locations worldwide.
We have assembled a highly experienced employee base to perform
the services offered by our Training and Services division, and
we consider the credentials of our personnel to be a competitive
advantage. Our staff is comprised of personnel with a range of
backgrounds and experiences, including service in SOCOM, the
U.S. Marine Corps, law enforcement and public health and
emergency management, most of whom are subject matter experts in
their fields. In delivering our services worldwide to highly
demanding organizations, we have developed a strong customer
base and expect to continue to expand the range of our services
for these and other customers. Twenty of our Training and
Services division employees have Top Secret security clearances.
Technical Services. We provide a range of
services that assist customers in assessing potential threats to
critical facilities and inform and train personnel regarding
non-conventional threats, such as those posed by weapons of mass
destruction (WMDs). Our offerings include:
•
threat and vulnerability assessments;
•
emergency preparedness and planning;
•
homeland security exercise and evaluation programs;
•
WMD/chemical, biological, radiological, nuclear and explosive
response training;
We provide our technical services to customers that include
federal, state and local government organizations, hospitals,
schools and utilities. Most notably, our technical services
group delivers ongoing threat assessment support services to
over 250 U.S. embassies and consulates worldwide.
Tactical Operations Training. We provide
comprehensive anti-terrorism, force protection and tactical
training, and training management services using the latest
tactics, techniques and procedures during both static and
realistic scenario-based evaluations. Our offerings include:
•
tactical mobility training relating to mobile force protection,
mounted patrols, convoys and escorts, airborne insertion and
extraction and on/off road driving;
•
firearms and marksmanship training for both basic and tactical
pistols and carbines, as well as sniper training; and
•
special tactics training in areas such as urban warfare and
close quarters combat, maritime operations, reconnaissance and
surveillance.
We provide our tactical operations services to federal, state
and local law enforcement agencies and military organizations as
well as private customers. We offer our services at our tactical
training center in Danville, Virginia and at client locations
worldwide.
Preparedness and Response Training. We provide
training, exercise and evaluation programs that inform and
support emergency planners and decision-makers in crisis
management situations. Our offerings include:
•
National Incident Management System/Incident Command System
certification training;
•
pandemic (public health) response;
•
vulnerability, threat and risk assessments;
•
table-top, functional and full-scale homeland security exercises;
•
emergency operations and response plans; and
•
business continuity and hazard mitigation plans.
We provide our preparedness and response services primarily to
state and local government organizations responsible for public
safety and typically conduct training and assessments
on-site.
For the year ended December 31, 2007 and the six months
ended June 30, 2008, the Training and Services division
contributed 5.9% and 6.2%, respectively, of our pro forma
combined revenues.
Customers
We market and sell our products and services to a wide range of
customers, including corporations, federal, state and local
governments, domestic and foreign militaries and individuals
worldwide. We define our customers as those with whom we
contract and, in certain other instances, the end user as well.
The following table sets forth representative customers of each
of our divisions with whom we have done business since
January 1, 2007:
Representative
Customers
Advanced
Transparent and Mobile Systems
Automotive
Alfa Romeo
Aston Martin
Audi
Bentley
BMW
Ferrari
Fiat
Lamborghini
Maserati
Mercedes-Benz(1)
Rolls Royce
Mexican government agencies and individuals
U.S. Intelligence Community
Marine
Azimut
Benetti
Ferretti
Mochi Craft
Perini Navi
Pershing
Riva
San Lorenzo
Rail
Alstom
Bombardier
Breda
Aircraft
Aermacchi
Agusta
Sensor Systems
Australia Department of Defence
Canada Ministry of Defence
German Federal Police
Italian Ministry of
Defense(1)
Lockheed Martin
Poland Ministry of
Defense(2)
Portugal Ministry of Defense
Spain Ministry of Defense
Taiwan Ministry of Defense
U.K. Ministry of
Defence(3)
U.S. Air Force
U.S. Army
U.S. Customs and Border Protection
U.S. Intelligence Community
U.S. Marine
Corps.(3)
U.S. Navy
U.S. Special Forces
Training and Services
Florida Department of Health
U.S. Intelligence Community
U.S. Marine
Corps.(1)
U.S.
Navy(1) U.S. Department of
State(3)
(1) Customer
accounted for 10% or more of the division’s pro forma
combined revenue for the six months ended June 30, 2008.
(2) Customer
accounted for 10% or more of the division’s pro forma
combined revenue for the twelve months ended December 31,2007.
(3) Customer
accounted for 10% or more of the division’s pro forma
combined revenue for the twelve months ended December 31,2007 and the six months ended June 30, 2008.
The following table sets forth, for the year ended
December 31, 2007 and the six months ended June 30,2008, each division’s pro forma combined revenue by
geographic area and customer type.
We employ a team-based sales and marketing approach in which our
senior management, sales and marketing personnel and business
development staff collaborate to identify and develop domestic
and international business opportunities. Some elements of our
sales and marketing strategy are division specific and executed
at the divisional level. Other elements of our sales and
marketing strategy are coordinated across divisions to deliver a
more comprehensive and effective solution to our customers.
Advanced
Transparent and Mobile Systems Division
In our Advanced Transparent and Mobile Systems division, we
organize our sales force, which includes employees and agents,
by product line and geographic area. This organization allows
our sales force to become more familiar with customers and the
product requirements of our customers.
We market our transparent armor and other specialized glass
products by highlighting our quality standards for ballistics,
optics and dimensional tolerances and our ability to produce
intricate shapes that meet demanding specifications for impact
resistance and weight. We believe the TPS brand is associated
with quality and superior ballistic performance. Our transparent
armor sales team is comprised of six individuals based in Europe
and Latin America who sell primarily to luxury vehicle
manufacturers. Our marine, rail, aviation, architectural and
other sales teams are comprised of ten individuals located
throughout the world. In addition to these direct sales teams,
we also engage a network of agents who work on a commission-only
basis. We generate sales by developing relationships with key
customers and responding to government requests for proposals
(RFPs) and other commercial solicitations. We also market our
products at four major trade shows each year.
We have historically focused our marketing of armored vehicles
in Mexico on large corporations, high net worth families,
government officials and federal and state police organizations.
In addition to traditional
marketing strategies, we rely on word-of-mouth recommendations.
We believe the TPS brand is associated with high quality and
ballistic performance. Our armored vehicle sales team is
comprised of 16 individuals who sell to corporations and
individuals in assigned geographic territories. We coordinate
our sales to the Mexican federal government primarily through
its bidding process. We believe we have been successful in
winning business at the state and federal levels because of our
competitive prices and commitment to quality and service.
Our international sales team for armored vehicles is comprised
principally of two individuals based near London. These
individuals focus on marketing and sales in the Middle East, Far
East and Africa. Historically, prior to our acquisition of TPS,
all of the armored vehicles we sold internationally were sourced
by us from third parties. Typically, we generated these sales
when customers required an armored vehicle immediately or when
they outsourced the procurement process to us and relied upon
our expertise to fulfill the requirement.
In the U.S., our marketing and sales efforts in 2008 have
focused on introducing our products to U.S. government
armored vehicle purchasers and marketing transparent armor
products to U.S. military vehicle manufacturers. We intend
to expand this activity going forward.
Sensor
Systems Division
Our Sensor Systems division generally markets and sells its
products directly to domestic and foreign militaries and
federal, state and local law enforcement agencies. Our
Washington, D.C.-based business development office
routinely works with federal government customers to generate
sales opportunities for both existing and potential new Sensor
Systems division products from discretionary funds in existing
budgets or through requests in the yearly appropriation budgets
of federal agencies. We also have an arrangement with a
Washington, D.C.-based consulting firm that assist us in
this process. Proposal preparation and presentation for
government project opportunities is managed by a proposal team
that consists of division personnel as well as other business
development personnel when appropriate. Our office in the U.K.
serves as our base for international sales. We believe our U.K.
sales team gives us a competitive advantage because it allows us
to better support our customers in Europe, the Middle East and
the Far East. For some of our international customers, we use
local companies, working as brokers or on commission, to market
and sell our products.
We sell our products through multiple channels, including
competitive quotations, competitive government RFPs, General
Services Administration (GSA) Federal Supply Schedules and
original equipment manufacturer contracts. The majority of our
sales for small arms night vision sights and scopes result from
our responses to RFPs.
Our Sensor Systems division also markets products by
participating in approximately
10-15 trade
shows and exhibitions each year. These shows and exhibitions are
typically sponsored and heavily attended by our current and
potential customers. To maximize our exposure at these events,
we often present technical papers that educate existing and
potential customers on the advanced capabilities of our product
offerings. In 2007 and to date in 2008, we have marketed our
products at shows and exhibitions by attending over 30 events in
the U.S., Europe, the Middle East and the Far East.
Training
and Services Division
We generate sales in our Training and Services division through
a focused sales and marketing effort on government procurement.
The majority of our sales to federal, state and local
governments result from our responses to RFPs. One team tracks
all RFPs issued by the federal government and establishes
contract mechanisms to facilitate the task of procuring our
services. Once these contract mechanisms are established, our
proposal development team, which typically consists of division
employees and, when helpful, employees from our other divisions,
prepares and submits our RFP response.
Our responses target specific commands in government agencies
with large training requirements, such as emergency planning
committees. Because many of our employees have served on these
types of committees at the federal, state and local levels, we
have extensive knowledge of the requirements and preferences of
these customers. In addition to sales resulting from RFP
responses, some of our services are listed on GSA
Schedules, which enables customers to make purchases without
completing the otherwise extensive negotiation and procurement
process.
Similar to the Sensor Systems division, our Training and
Services division participates in trade shows and exhibitions.
In 2007 and to date in 2008, we have participated at
approximately 15 shows and exhibitions. The Training and
Services division also engages in a web-based marketing effort
that provides details of course offerings, instructor
experience, customer feedback and online class registration for
potential customers.
Coordinated
Sales and Marketing Strategy
Although certain elements of our sales and marketing strategy
are division-specific and executed at that level, we coordinate
other elements of our strategy across divisions to deliver a
more comprehensive and effective solution to our customers. We
expect to continue this strategy after the consummation of the
Pending Acquisitions. We believe our coordinated approach allows
us to more effectively market and sell our products and services
across divisions. For example, our Advanced Transparent and
Mobile Systems and Training and Services divisions coordinate to
market and sell driver training to customers purchasing our
armored vehicles. Also, our Sensor Systems and Training and
Services divisions coordinate to market and sell training
services to our LPNVG customers. We believe our ability to
market and offer these types of single-source solutions
increases our business opportunities and revenue. We also expect
to coordinate our sales and marketing efforts to the
U.S. government by leveraging the experience and contacts
within each division to develop new sales.
Case
Studies
The following tables present selected case studies of products
and services provided by each of our divisions during the past
five years.
Advanced
Transparent and Mobile Systems Division
Customer
Product/Service
Description
U.K. Government
Agency
Coordination between customer and manufacturer in design and
development of armored vehicle system
• Assisted in coordination of initial
design and development of transparent armoring for a
Mercedes-Benz G-wagon prototype for use alongside military
operational vehicles.
• Assisted in addressing substantial
design challenges, including providing a high post-armoring
payload capacity and the inclusion of highly sophisticated
communications and electronic systems.
Mexican Federal Policy Agency (PGR)
Armored vehicle
system
• Manufacture armored vehicles for the
PGR, which assigns the vehicles to all of its representatives in
each state of Mexico.
• 52 armored vehicles ordered.
Bombardier/London Underground Metroline
Protective glass windshields and side windows
• Utilizing proprietary manufacturing
processes, produced specially formulated and coated glass that
met stringent aerodynamic and impact resistance requirements.
• Our coating expertise enabled us to
provide enhanced features, including advanced control of solar
heating and improved defog/defrost capability.
Advanced
Transparent and Mobile Systems Division,
cont’d
Customer
Product/Service
Description
Alfa Romeo/Italian
Police & Carabinieri
Design and
development of transparent armoring system
• Developed and produced a light
transparent armoring system for use in police vehicles,
requiring only minor vehicle modifications during the
installation process.
• Approximately 4,000 vehicles outfitted
since 1996.
Mercedes-Benz
Transparent armor
• Annual contract with Mercedes-Benz to
fulfill their production needs for transparent armor used in
their factory-built armored vehicles.
• Continuous collaboration with
Mercedes-Benz engineers to modify transparent armor for changes
in body designs and to incorporate additional features to meet
new requirements.
• Proprietary coating enables favorable
aesthetics and equips transparent armor with specialized
capabilities, such as de-ice/defrost capabilities, noise and
heat reduction and embedded antennas.
Sensor
Systems Division
Customer
Product/Service
Description
SOCOM
LPNVG and MHUD
• SOCOM required high-end sensor fusion
capability to conduct “brown” water
insertion/extraction for similar special operations teams.
• Fulfilled requirement of establishing
night vision capability in rough waters and other difficult
conditions.
Elite Special Operations Organization for a Member of NATO
LPNVG and LPNVM
• Provided equipment to support urgent
operations outside the U.S., which required high-quality night
vision equipment in order to operate effectively within the
dark, mountainous terrain of the combat zone.
• Delivered 350 systems within customer
required timeframe, fulfilling the organization’s
requirement.
U.K. Ministry of
Defence
LPNVG
• U.K. Ministry of Defence selected LPNVG
due to requisite capabilities to withstand continuous use in
support of the war efforts outside the U.S.
• Due to equipment capabilities and
contract performance, Ministry of Defence later doubled original
requirement, procuring approximately 500 night vision systems
that were delivered within a short timeframe.
• Required night vision equipment with
sensor fusion capability to enable radio downlink of video
imagery for personnel operating alongside military units outside
the U.S.
• Provided goggle and EHUD systems
enabling the operator to simultaneously view the night vision
scene and imagery from unmanned aerial vehicles operating
overhead.
Elite Special Operations Organization for a Member of NATO
Dayviewer and EHUD
• Organization had urgent requirement for
robust, hands-free,
heads-up
video display with recording capability for combat operations in
Afghanistan.
• Delivered four integrated systems in
less than two months.
Italian Ministry of Defense
LPNVG
• Required night vision capability to
support multi-role combat responsibilities of first-responder
army units.
• AN/PVS-21 selected as standard issue for
first responder units and contracted for approximately 2,300
systems.
• Delivered over 1,200 systems to date of
the 2,300 units ordered
U.S. SOCOM
SCIB Mark 4 Reconnaissance Imager
• Required covert imaging and optical
tagging capability to support reconnaissance and tagging,
tracking, and locating missions.
• Developed covert beacons and a handheld
reconnaissance imager.
• Delivered 10 devices to date.
Federal Bureau of Investigation and U.S. Intelligence Agencies
Micro Thermal Beacons
• Fulfilled requirement for miniature
covert thermal beacons for tagging and tracking persons of
interest.
• Developed miniature thermal beacons with
the highest optical output and efficiency available.
• Delivered over 1,000 beacons to date.
Training
and Services Division
Customer
Product/Service
Description
U.S. Marine Corps Special Operations Training Group
Tactical Training
• Conducted special operations training
for Marine Corps personnel, including close quarters battle,
sniper and weapons manipulation training.
Department of State
Technical Training
• Performed ongoing Weapons of Mass
Destruction training and provided threat assessment support
services to over 250 U.S. embassies and consulates worldwide.
• Conducted surveillance detection
training both domestically and internationally for Department of
State employees.
DynCorp International Inc.
Tactical Training
• Provided training and facility support
to DynCorp International for the Department of State Worldwide
Personnel Protective Program.
• Conducted training program that included
tactical driving, shooting and protective security detail.
U.S. Navy
Technical Training
• Provided counter-improvised explosive
device (IED) training to Navy Explosive Ordnance Disposal
teams.
• Designed and built IED training aids
based on actual roadside bombs encountered in combat zones.
Department of Public Health Florida
Preparedness and Response Training
• Conducted security assessments for 95
hospitals in the state of Florida utilizing the Homeland
Security Comprehensive Assessment Model.
Technology
and Product Development
We emphasize engineering excellence in all of our products and
have invested heavily in developing proprietary technologies
throughout the company, particularly in our Advanced Transparent
and Mobile Systems and Sensor Systems divisions.
Advanced
Transparent and Mobile Systems Division
In the Advanced Transparent and Mobile Systems division, we have
developed proprietary technologies, processes and design
capabilities that we believe serve as substantial competitive
differentiators. We have invested in state-of-the-art,
customized production and testing facilities for producing
specialized, protective glass. We continually work to further
refine the composition, quality and performance of our specialty
materials through internal research and development.
Specifically, we conduct analysis and testing of composite
materials, design and implement quality control and verification
systems and assess the efficacy and optical clarity of all
materials. In doing so, we believe we have established further
credibility with our customer base, with whom we work on
research and development projects on a regular basis to assess
their evolving needs.
With regard to armored vehicles, we employ proprietary design
methods involving ratchets and gears for window lifts,
reinforced hinges for armored doors and glass support
structures, all of which increase the efficiency of the armoring
process as well as vehicle and passenger protection.
Additionally, we conduct significant research and development on
materials used in the armoring process. Development of
manufacturing technologies to handle, form and cut new
materials, such as high-hardness ballistic steel and ballistic
fiber material, and the testing and evaluation of stronger,
lower cost, lighter weight materials are core activities due to
the potential impact of improvements on the price and quality of
the end product.
Sensor
Systems Division
In the Sensor Systems division, we are engaged in the research,
development and production of advanced technology applications
in support of U.S. Special Forces and other sophisticated
U.S. government agency customers.
Research and development in our Sensor Systems division focuses
on the areas of digitally augmented vision systems, short wave
infrared fused day/night weapon sights, reconnaissance imagers,
thermal beacons for tagging, tracking and locating activities,
and laser illuminators/pointers. The division also has produced
innovations in applying new technology to existing products,
such as our Digital Universal Night
Sighttm,
Fused Weapon Sight and Magnum Universal Night
Sighttm.
Similarly, the development of our Enhanced Heads Up Display
(EHUD) and various sensors that function with the EHUD has led
to additional applications for our low profile night vision
goggles. Additionally, we have made innovations that improve
functionality, including our Shock Mitigation System
(SMStm)
for the installation of image intensifier tubes in weapon
mounted night scopes. This proprietary approach protects the
tubes from damage upon the weapon’s discharge, which often
is especially severe on larger caliber weapons such as sniper
rifles. We believe SMS technology was a significant contributor
in the decision by the U.S. Marine Corps. to purchase our
night sights and that it has given us a distinct competitive
advantage over other manufacturers.
Some of the research and development in our Sensor Systems
division takes place pursuant to U.S. government-funded
contracts. Our government contracts generally permit us to
retain ownership of the rights and inventions developed under
the contracts so long as we timely report the inventions and
provide the applicable government agency a license to use the
inventions for non-commercial purposes. The government receives
unlimited rights in technical data produced under government
contracts, but we may nevertheless use it for commercial
purposes. In order to retain ownership over pre-existing
technology developed privately, we must mark this technology
with restrictive legends to limit the government’s right to
use the technology. In addition, the government may also
exercise “march-in” rights if we fail to continue to
develop the technology, under which the government may exercise
a non-exclusive, royalty-free, irrevocable, worldwide license to
any technology developed under contracts it has funded.
We augment our internal research and development capabilities by
partnering with companies and universities to obtain the
subcomponents of products that are outside of our areas of
expertise. For example, we are collaborating with ICx
Technologies to develop high performance thermal beacons for the
U.S. Army. We enter into non-disclosure agreements to
protect the intellectual property disclosed or developed by us
during these arrangements. However our partners may use the
technology developed by them.
Our internally funded research and development expenditures, on
a pro forma combined basis, were $4.0 million during 2007.
Additionally, approximately $4.2 million was spent during
2007 on government funded research and development activities on
a pro forma combined basis. Research and development costs
incurred under contracts are charged directly to the related
contract and are reflected in the cost of sales and revenues.
Costs not specifically covered by a contract are expensed as
incurred.
Intellectual
Property
We protect our technology and products through the pursuit of
patent protection in the U.S. and internationally. We have
built a portfolio of patents and patent applications relating to
various aspects of our technology and products. We have three
issued U.S. patents, 16 issued patents in various European
countries, 13 pending U.S. patents and eight pending
Patent Cooperation Treaty applications. Twelve of our patents
and patent applications relate to technology used by our Sensor
Systems division. Our patents expire at various dates from 2009
through 2025. We do not believe that any single registered or
pending patent is material to us.
In addition to our own patent rights, we license certain patent
rights from third parties for use in connection with some of our
technology and products. In particular, we have an exclusive
worldwide license for a patent that is integral to the
manufacture of our low profile night vision goggles, for which
we pay a per unit royalty. This patent covers the general
configuration of the goggle. After the patent expires in early
January 2009, others will be able to use the technology. Because
we have made substantial proprietary refinements to the original
patent, we currently believe that our position in this market,
coupled with the investment necessary to enter the market, will
provide us with a competitive advantage over future competitors
who might otherwise seek to compete with us after the patent
expires.
We also have significant rights in trademarks and trade secrets
which we use to protect our intellectual property. In addition
to common law trademark and trade secret rights, we have 10
issued U.S. registered
trademarks and 11 pending applications in the U.S. and
numerous registered trademarks and pending applications in
Italy, Mexico, the U.K., Germany and other countries. We
currently are involved in a dispute with Knight’s Armament
Company over the rights to certain trademarks. See “Legal
Proceedings.”
Our subsidiaries’ products and services have established
brand recognition in their respective markets. Following the
closing we intend to continue to market both our existing
products and services and those acquired in the Pending
Acquisitions under their current brands. However, as part of our
integration process, we will engage in a rigorous branding
review to determine a transitional and longer term branding
strategy for all our products and services, including how they
interrelate with our future planned product and services
offerings. Other parties own rights to use, or limit the use of,
the O’Gara name, including, for example, Armor Holdings,
Inc. which acquired such rights in connection with its
acquisition in 2001 of O’Gara Hess & Eisenhardt
Armoring Company and its affiliates, Thomas M. O’Gara,
owner of O’Gara Coach Company, and Edward F. O’Gara,
owner of O’Gara Protective Services and O’Gara
Aviation. Edward F. O’Gara is the brother of Wilfred T.
O’Gara and Thomas M. O’Gara. The rights of those
parties may limit some of our future branding strategies as they
relate to the use of the O’Gara name. There is no guarantee
that we will be able to develop a successful branding strategy,
that if we do decide to develop a new branding strategy the
goodwill associated with our established and acquired brands can
be transferred successfully to one or more new brands or that
any new brands, including brands using the O’Gara name, may
not ultimately be determined to violate proprietary or contract
rights of third parties.
Our employees who have access to confidential information and
our contractors and customers who have access to our
intellectual property are bound by strict confidentiality and
nondisclosure obligations. A significant number of our trade
secrets are internally “compartmentalized” to increase
their protection. Our engineering and research and development
employees and those who supervise them also are obligated to
assign to us the rights to inventions made by them while
employed by us.
Ownership of technology developed with third-party research
partners and customers who are involved in the research and
development of some products is determined on a
contract-by-contract
basis. We maintain all ownership rights over work-for-hire
developments. In the case of joint development agreements, each
party typically maintains ownership rights based on the market
for the product.
Competition
The market for our products and services is rapidly evolving and
highly competitive. Many of our target markets are subject to
quickly changing product technologies, continuously evolving
customer needs, stringent regulatory requirements and frequent
introductions of new products and services. We compete with
organizations varying in size, including many small,
start-up
companies as well as large, established and
well-capitalized
international businesses. As the markets for our products and
services continue to expand, we expect that competition will
continue to increase within our target markets. We encounter
different competitors in each of our divisions.
Advanced
Transparent and Mobile Systems Division
In our Advanced Transparent and Mobile Systems division, we
compete with both manufacturers of specialized protective
materials and producers of vehicle armoring systems. In the area
of transparent armor, high-impact glass and other specialized
glass, we compete principally with PPG Industries, Inc.,
American Glass Products Company, Saint-Gobain-Sully, GKN plc and
SIA Triplex. In the market for vehicle armoring systems, we
compete or expect to compete with worldwide companies,
principally Centigon, BAE Systems plc and Scalette Moloney
Armoring Corporation, as well as with smaller armoring companies
operating primarily on a regional basis. In addition, several
OEMs, such as Mercedes-Benz and BMW, which are our customers for
transparent armor, offer factory equipped armoring packages that
compete with our vehicle armoring systems business. OEMs have a
greater technical understanding of the vehicle platforms they
manufacture than we do. However, we compete by providing
customized armoring options that are not available from OEMs,
and we may also act as an OEM subcontractor.
In each case, the principal competitive factors are engineering
quality, the protective capabilities of the product, price,
service and reputation in the industry. We believe that we
compete effectively in the markets in
which we operate and that the vertical integration capabilities
resulting from the Isoclima and TPS acquisitions will enhance
our competitive position in both the transparent armor and other
specialized glass markets and the vehicle armoring market,
including those markets in which we currently do not have a
presence.
Sensor
Systems Division
Competitors in our Sensor Systems division include Insight
Technology, Inc. and Knight’s Armament Company in the U.S.,
Elbit Systems, Ltd. in Israel and Photonis Netherlands B.V. in
Europe and ITT Corporation and L-3 Electro-Optics Systems
worldwide. Currently, we have an exclusive worldwide license for
a patent that is integral to the manufacture of our low profile
night vision goggles. When our exclusive license for the patent
used in the manufacture of those goggles expires in January
2009, these and other competitors could choose to enter this
market. ITT Corporation and L-3 Electro-Optics Systems also are
the primary producers of image intensifier tubes, which are the
core component of night vision goggles.
The principal competitive factors in sales of our Sensor Systems
division products are technology, device capability and
functionality, price, quality, durability and speed of delivery.
We believe that we are at the forefront in the design of
next-generation night vision products and that our design
innovations, willingness to meet special customer requirements,
response time and reputation as a high-technology supplier have
enabled us to compete effectively in this market and will enable
us to continue to do so.
Training
and Services Division
Our Training and Services division faces competition both from
established businesses such as Blackwater USA, Olive Group
FZ-LLC, Kroll-Crucible, Science Applications International
Corporation and Armor Group International plc and from a highly
fragmented group of smaller companies, typically headed by
retired Special Operations Forces personnel. Competitive factors
in this market vary depending on the services desired by a
customer but generally involve the expertise of the trainers,
facility capabilities, proximity of facilities and price. We
believe that our ability to compete is enhanced by the personal
reputations of our highly credentialed training personnel, our
ability to deliver custom training and exercise programs quickly
and efficiently, both at our tactical training complex in
Virginia and at customer locations, and the competitive pricing
of our services.
Manufacturing
Our manufacturing facilities and processes are designed to
produce cost-competitive, quality-assured products. We believe
that we emphasize the highest standards and that our proprietary
manufacturing processes serve as market differentiators and have
allowed us to compete successfully domestically and
internationally.
Advanced
Transparent and Mobile Systems Division
We produce our transparent armor and other specialized glass at
manufacturing facilities in Italy, Mexico and Croatia with a
total of approximately 4.2 million square feet of
manufacturing space. We emphasize the highest standards and
believe our proprietary manufacturing processes serve as market
differentiators that have allowed us to compete successfully
internationally in supplying some of the most discerning
customers in the world.
Our facilities employ proprietary technologies and include
high-value manufacturing equipment and assets that are specific
to the production of transparent armor, impact resistant glass
and other specialized glass. Our transparent armor consists of
multiple layers of glass of various thicknesses (totaling
.03 inch to 4 inches) and hardnesses based on
individual client requirements and international standards for
protection. The layered glass required for each particular order
is cut to size from large glass plates. Materials are shaped to
the required curvature on special bending fixtures in tooling
furnaces, further shaped by cutting and grinding and then bonded
together with interlayers that incorporate various additional
functions such as: heating systems for defrosting and defogging,
communications antennas, metal coatings for controlling solar
heat, electromagnetic interference shielding, noise reduction,
and switchable capability to control visible light transmission.
Typically, an additional inner layer of an elastic polycarbonate
or similar material also is included to provide
spall protection. The bonding of the layers and interlayers is
done through heat and pressure in high pressure autoclave
vessels.
In addition, our Croatian operations manufacture glass sheets
from very high quality silica sand. The basic process includes
preparing the required raw materials and melting them at high
temperatures in a glass furnace. Raw material enters the melting
furnace through a feeder on a continuous flow basis. As the
silica melts, the molten glass moves to the front of the melter
and flows through to the refiner. Once in the refiner, the
molten glass is heat conditioned to a specific temperature and
ready for the forming process. Our forming process consists of
drawing the glass horizontally on plain or patterned rollers,
with thickness of the sheet determined by the speed of the draw
and configuration of the patterned rollers. The end product then
is annealed, cut to required size, edge ground to requirement
and thermally tempered.
Our Monterrey, Mexico armoring facility employs lean
manufacturing concepts. In-house processes include disassembly
of the new vehicle, complete removal of the interior trim,
seats, doors and windows, armoring with both opaque armor and
transparent armor and reassembly as close to its original
appearance as possible. Inspection controls exist for each step
of the process as well as for the finished product. Raw
materials such as armored steel, aramid fabrics and transparent
armor are sourced through U.S. and Mexican suppliers,
including Isoclima, that have a proven track record of
delivering quality products. We are not dependent on any one
supplier for key components.
Sensor
Systems Division
We manufacture our small arms night vision weapon sight products
at our ISO-compliant facility in Freeport, Pennsylvania. This
facility contains approximately 16,000 square feet of
manufacturing space including clean room assembly areas, optical
fabrication and test equipment and machine shop and
environmental test systems. Manufacturing operations are divided
into distinct fabrication and assembly processes and employ
personnel with skill sets in optics, electronics and precision
mechanical mechanisms. We employ sophisticated temperature,
shock, pressure and performance test systems in the product
manufacturing cycle to increase product integrity in the severe
operating environment in which these products are required to
perform. A second 20,000 square foot facility in North
Buffalo, Pennsylvania currently is in the initial
start-up
phase and will, when renovations are completed at the end of
2008, be the location of a state-of-the art precision
computerized optical lens fabrication and coating facility. This
facility will produce optical lens elements as well as complete
assemblies to military standards.
We manufacture our low profile night vision goggles and related
products at our ISO-compliant facility in Beavercreek, Ohio.
This facility contains approximately 6,000 square feet of
manufacturing space, including a 1,200 square foot clean
room for optical assembly. In-house processes include electrical
assembly, precision mechanical component assembly and precision
electro-optical component assembly. Engineering design, research
and development and product support and repair functions also
are located at the facility. Product components are sourced both
domestically and internationally. We attempt to dual-source
critical components such as the image intensifier tubes used in
our low profile night vision goggles. Because our suppliers of
image intensifier tubes also use these tubes in night vision
goggles they manufacture and sell, we have in the past
experienced delays in receiving this component due to supply
shortages. Currently, ITT Corporation is our primary supplier of
these tubes.
Our tagging, tracking and locating products and our prototype
and low rate initial production optoelectronic devices are
manufactured at our facility in Waitsfield, Vermont. The
12,000 square foot facility includes electronics assembly
and test areas, optical assembly and test laboratories, a
machine shop, and environmental and mechanical test
laboratories. The facility also houses engineering and research
and development groups. In-house manufacturing capabilities
include printed circuit board manufacturing, optoelectronic
assembly, precision optical alignment, and computer numerical
control machining. A local U.S. Army training center is
used for outdoor optical system testing and live fire testing.
A significant portion of our business is with the
U.S. government. U.S. government contracts are
generally awarded through formal, competitive bidding processes
initiated through RFPs and, for certain products and services,
pursuant to GSA Federal Supply Schedules, which enable federal
agencies to order services and supplies directly from vendors
holding such schedules at specified prices without engaging in a
formal solicitation and bidding process. We have secured
contracts with the U.S. government through both of these
processes. These contracts are generally structured as
fixed-price or
time-and-materials
contracts as described below:
•
Fixed-Price Contracts: In a fixed-price
contract, the price is not subject to adjustment based on costs
incurred, which can favorably or adversely impact our
profitability depending upon our execution in performing the
contracted service. Most of our U.S. government contracts
are firm fixed-price contracts. Fixed-price contracts from the
U.S. government represented approximately 11% and 8% of our
pro forma combined revenues for the year ended December 31,2007 and the six months ended June 30, 2008, respectively.
•
Time-and-Materials
Contracts: A
time-and-materials
contract provides for acquiring supplies or services on the
basis of direct labor hours at fixed hourly/daily rates plus
materials at cost.
Time-and-material
contracts from the U.S. government represented
approximately 3% of our pro forma combined revenues for the year
ended December 31, 2007 and the six months ended
June 30, 2008.
In addition, our U.S. government contracts may be executed
under an indefinite-delivery/indefinite-quantity (IDIQ)
contract, which may be awarded to multiple contractors. IDIQ
contracts obligate the government to order only a minimum
quantity. When the U.S. government wishes to order services
under an IDIQ contract, it issues a task order
and/or
request for proposal to the contractor awardees.
U.S. government contracts are conditioned upon the
continuing availability of Congressional appropriations.
Congress appropriates funds on a fiscal-year basis even though
contract performance may extend over many years. Long-term
government contracts and related orders are thus subject to
cancellation if appropriations for subsequent performance
periods are not provided.
Our contracts with the U.S. government or the
U.S. government’s prime contractor (to the extent that
we are a subcontractor) generally contain standard, unilateral
provisions under which the U.S. government may terminate
for convenience or for default. Government contracts generally
also contain provisions that allow the U.S. government
unilaterally to suspend us from receiving new contracts pending
resolution of alleged violations of procurement laws or
regulations, to reduce the value of existing contracts or to
issue modifications to contracts. U.S. government agencies
routinely audit government contractors for performance under its
contracts, cost accounting and compliance with applicable laws,
regulations and standards.
A small portion of our pro forma combined revenue is classified
by the U.S. government and cannot be specifically
described. The operating results of these classified programs
are included in our consolidated financial statements. The
business risks associated with classified programs, as a general
matter, do not differ materially from those of our other
government programs and products.
Regulations
Since we contract with the DoD and other agencies of the
U.S. government, we are subject to and must comply with
numerous federal laws and regulations, including the Federal
Acquisition Regulations, the Defense Federal Acquisitions
Regulations, the Truth in Negotiations Act, the Foreign Corrupt
Practices Act, the False Claims Act and the regulations
promulgated under the National Industrial Security Program
Operating Manual, which establishes the security guidelines for
classified programs and facilities as well as individual
security clearances. We provide all employees with written
guidelines on interactions with government officials and on the
provision of gifts and entertainment. We also carefully monitor
all of our contracts and contractual efforts to minimize the
possibility of any violation of these regulations.
We are subject to further U.S. and
non-U.S. government
regulations due to the nature of some of the products and
services we provide. U.S. export control laws include the
International Traffic in Arms Regulations, which are
administered by the Department of State, and the Export
Administration Regulations, which are administered by the
Department of Commerce. These regulations give those agencies
great flexibility in preventing the export of any controlled
items, software, or technical data. Under U.S. sanctions
laws, we are prohibited from exporting our products, technology
or services to certain sanctioned countries, including Cuba,
Iran, North Korea, Syria or Sudan, or to certain restricted
entities or individuals designated by the U.S. Government
for terrorism, narcotics trafficking, and proliferation reasons,
and our compliance system is structured to address these
restrictions as well. These U.S. export control laws and
regulations place licensing restrictions on certain transfers of
products, software, technology and services to our foreign
subsidiaries or customers, and export licenses or other
appropriate authorizations are obtained, as appropriate, from
the U.S. Department of State or the U.S. Department of
Commerce, when required by law.
U.S. export control and sanctions regulations carry
substantial penalty provisions, including fines and suspension
or debarment from government contracting or subcontracting for a
period of time if we are found to be in violation. We recognize
that an effective compliance program can help protect the
reputation and relationship of a regulated company with the
federal agencies administering these laws. Each of the
regulatory agencies administering these laws has a voluntary
disclosure program that offers the possibility of significantly
reduced penalties, if any are applicable, and we have utilized
these agency disclosure procedures as part of our overall
compliance policy and system of internal controls.
In the ordinary course of business, we are subject to numerous
other laws and regulations ranging from those relating to labor
and health and safety requirements to those designed to protect
the environment. In the opinion of management, compliance with
existing laws and regulations applicable to us will not
materially affect our business or financial condition.
Employees
As of August 1, 2008 we had 1,450 employees, of
which 252 were located in the U.S., 334 were located in Mexico
and 864 were located in Europe. Approximately 90 of our
employees have U.S. security clearances. We believe that
our relations with our employees are good. Relationships with
our employees in the Italian-based operations of our Advanced
Transparent and Mobile Systems division are governed by a
national collective labor agreement and some employees are
members of the Italian General Confederation and the Italian
Confederation of Trade Unions. Substantially all of our Croatian
production employees are members of the Autonomous Trade Union
of Energy, Chemical and Non-Metal Workers of Croatia. In the
Mexico-based operations of our Advanced Transparent and Mobile
Systems division, many of our employees are represented by the
Sindicato Industrial de Trabajadores.
As of August 1, 2008, our employees were divided among our
three divisions and corporate parent level as follows: 1,198
employees in the Advanced Transparent and Mobile Systems
division, 124 employees in the Sensor Systems division, 116
employees in the Training and Services division and 12 in
corporate.
Properties
and Facilities
Our principal executive and administrative offices are located
in Cincinnati, Ohio, where we lease approximately
5,300 square feet under an agreement expiring in 2012. We
also lease or own facilities around the world, including six
additional facilities or properties in the U.S., seven
facilities in Italy, four facilities in Mexico, three locations
in the U.K., one facility in Croatia and one location in Germany.
Our principal properties and facilities as of August 1,2008 were as follows:
Location
Approximate Size
Owned/Leased
Facility Use
Cincinnati, Ohio
5,300 sq. ft.
Leased
Executive offices
Beavercreek, Ohio
12,000 sq. ft.
Leased
Office/manufacturing
Waitsfield, Vermont
14,000 sq. ft.
Subleased
Office/manufacturing
Waitsfield, Vermont
6,600 sq. ft.
Leased
Office/manufacturing
Freeport, Pennsylvania
16,000 sq. ft.
Leased
Office/manufacturing
North Buffalo, Pennsylvania
20,000 sq. ft.
Leased
Office/manufacturing
Alton, Virginia
174 acres dedicated,
use of additional 853 acres
Subleased
Training
Cincinnati, Ohio
14,000 sq. ft.
Leased
Office
Bletchingley, Surrey (England)
1,200 sq. ft.
Subleased
Office
Mexico City, Mexico
4,800 sq. ft.
Leased
Office
Monterrey (Santa Catarina),
Mexico
371,000 sq. ft.
Leased
Office/production/warehouse
Naucalpan de Juarez, Mexico
19,000 sq. ft.
Leased
Office/production
Este, Italy
12 acres uncovered
377,000 sq. ft. covered
Owned
Office/production
Lipik, Croatia (1)
45 acres uncovered
25 acres covered
Owned &
leased
Office/production
Mexicali, Mexico
161,000 sq. ft. uncovered
71,000 sq. ft. covered
Leased
Office/production
(1)
Includes land on which Lipik has concessions from the Croatian
government to mine sand and remove water.
Legal
Proceedings
On August 23, 2007, Knights Armament Company (KAC) filed
suit in the federal district court for the Middle District of
Florida against Optical Systems Technology, Inc. (OSTI),
OmniTech Partners, Inc., Keystone Applied Technologies, Inc. and
Paul Maxin (Knights Armament Company v. Optical Systems
Technology, Inc., et al. (M.D.Fla.)), alleging federal and
Florida state trademark infringement and related claims in
connection with certain of OSTI’s night vision products.
KAC seeks unspecified damages as well as injunctive and
declaratory relief. OSTI counterclaimed against KAC and its
owner, alleging misappropriation of OSTI’s trade secrets
and asserting trademark infringement and related claims. On
May 21, 2008, the court dismissed OmniTech Partners,
Keystone Applied Technologies and Mr. Maxin from the
proceedings for lack of personal jurisdiction. On July 15,2008, the court dismissed OSTI’s claim for declaratory
judgment without leave to amend; dismissed without prejudice
OSTI’s claims for trade secret misappropriation, common law
unfair competition, business disparagement and federal trade
dress infringement; and denied OSTI’s motion to dismiss
with respect to the claims for trademark infringement and unfair
competition under the Lanham Act. This case involves common
issues of law and fact with a proceeding initially filed by OSTI
in 2005 with the U.S. Trademark Trial and Appeal Board
(Optical Systems Technology, Inc. v. Knight’s
Armament Company, Proceeding No. 92044819), which has
been suspended pending resolution of the federal litigation.
In addition to the above, we are periodically subject to various
other claims and lawsuits incidental to the operation of our
business. We believe that none of these other claims or lawsuits
to which we are currently subject, individually or in the
aggregate, will have a material adverse effect on our business,
financial position, results of operations or cash flows.
We have entered into definitive purchase agreements for the
acquisition of each of Finanziaria Industriale S.p.A. (together
with its wholly- and partially- owned subsidiaries, Isoclima),
Transportadora de Protección y Seguridad, S.A. de C.V. (TPS
Armoring or TPS), and OmniTech Partners, Inc., Optical Systems
Technology, Inc. and Keystone Applied Technologies, Inc.
(collectively, OmniTech) (OmniTech, together with Isoclima and
TPS, the Pending Acquisitions). We intend that all of the
conditions to the closing of each of the Pending Acquisitions,
other than the closing of this offering, will have been
satisfied prior to the pricing of this offering. Simultaneously
with the closing of this offering, we will close each of the
Pending Acquisitions using the proceeds from this offering,
borrowings under our new credit facility and issuances of our
common stock. These Pending Acquisitions will significantly
increase our size, expand and enhance our product portfolio,
broaden and deepen our customer base, expand our geographic
presence and enhance our management team.
Isoclima
Isoclima, a privately-held Italian company founded in 1977,
together with its wholly- and partially- owned subsidiaries, is
a recognized producer of high-quality, ballistic-resistant
transparent armor, impact-resistant glass and other specialized
glass used throughout the world. With manufacturing operations
in Italy, Croatia and Mexico and offices in the U.K. and
Germany, Isoclima employs approximately 970 persons.
Transparent armor is a critical component of vehicle armoring
systems due to a number of factors including: the difficulty of
fitting transparent armor to the original sweep of the
windshield; the need for a thin cross-section in order to reduce
overall vehicle weight; the need for optical clarity to operate
the vehicle safely; and, most importantly, the need to protect
what is visible, and therefore vulnerable, through the
transparency. The high quality of Isoclima’s transparent
armor has made it a key supplier to many vehicle armoring
businesses, including TPS, and luxury car manufacturers such as
Mercedes-Benz, BMW and Audi. In addition, Isoclima’s
specialized and impact-resistant glass are used in various modes
of transportation, such as high-speed rail, yachts, military and
commercial aircraft and racing cars, to provide one or more key
capabilities, such as ballistic or impact resistance, acoustic
reduction, thermal resistance and improved aerodynamics.
Isoclima’s specialized glass also serves architectural
uses, including in high-risk environments such as banks,
embassies, government facilities and detention facilities.
Isoclima’s manufacturing facilities total approximately
4.2 million square feet, including approximately
1.6 million square feet of covered space. Its facilities
employ sophisticated proprietary technologies and include
high-value manufacturing equipment and assets that are specific
to the production of transparent armor, impact-resistant glass
and other specialized glass. Isoclima owns four sand mines in
Croatia through its majority-owend Lipik Glas subsidiary that
supply a major component of the raw materials necessary for some
of its glass products. Additionally, Isoclima purchases float
glass from a variety of suppliers in Europe and Mexico.
Upon closing of the Iscolima acquisition, we will own, among
other things, Isoclima’s equity interests in its
partially-owned subsidiaries, including LIPIK Glas d.o.o. Under
the direction of Isoclima, Lipik Glas has made a capital call
for 3.0 million Euros. Depending on whether Lipik
Glas’ two other shareholders participate in the capital
call, Isoclima’s holdings will increase from 57.5% to
either 63.5% or 68.5% of Lipik Glas after this investment is
complete. In 2009, Isoclima is obligated to purchase the stock
held by one of the minority shareholders for approximately
1.8 million Euros, subject to the third shareholder’s
right to exercise preemptive rights with respect to such
purchase. Depending on the third shareholder’s decision
with respect to its preemptive rights, Isoclima will own between
76.6% and 88.5% of Lipik Glas after the purchases.
Isoclima had consolidated revenues of $99.8 million and
$56.7 million for the year ended December 31, 2007 and
the six months ended June 30, 2008, respectively, and
EBITDA of $14.8 million and $12.3 million for the same
periods.
Income (loss) related to equity method investments
(297
)
—
Minority interest
(354
)
(177
)
Depreciation and amortization
8,410
4,784
EBITDA
$
14,841
$
12,268
Please see note 5 to “— Summary Consolidated
Historical and Pro Forma Financial and Other Data” for a
description of how we use EBITDA and its limitations as a
non-GAAP measure.
TPS
Armoring
TPS Armoring, a privately-held Mexican company founded in 1994,
is a recognized provider of vehicle armoring systems and related
services to large corporations, high net worth families and
individuals, government officials and federal and state police
organizations in Mexico. It employs approximately
201 persons at its headquarters and production facilities
in Monterrey and 23 sales and service employees in Mexico City.
The primary production facility is approximately
59,000 square feet and is fully equipped to design,
engineer, manufacture and service vehicle armoring systems.
During the year ended December 31, 2007 and the six months
ended June 30, 2008, TPS armored 227 and 119 vehicles,
respectively. TPS’s facilities employ manufacturing
processes and proprietary methods that are designed to achieve
high-quality results while maintaining cost efficiencies. Unlike
luxury car OEMs that provide standardized armored vehicles for
commercial sale, TPS customizes its armored vehicle systems to
the customer’s specifications, using one of many
commercially available models as the base vehicle. TPS obtains
the steel, other hardware components and raw materials necessary
for its operations from various suppliers within Mexico and
throughout the world. It obtains the substantial majority of its
transparent armor from Isoclima.
In addition to its primary business of producing vehicle
armoring systems, TPS maintains a fleet of approximately 10
armored vehicles for lease and provides related services.
Generally, sales are generated directly by TPS’s sales and
marketing force, which is led by the company’s founder and
principal owner.
TPS Armoring had consolidated revenues of $30.3 million and
$17.8 million for the years ended December 31, 2007
and the six months ended June 30, 2008, respectively, and
EBITDA of $4.9 million and $1.1 million for the same
periods.
The following table reconciles net income of TPS Armoring to
EBITDA:
Please see note 5 to “— Summary Consolidated
Historical and Pro Forma Financial and Other Data” for a
description of how we use EBITDA and its limitations as a
non-GAAP measure.
OmniTech
OmniTech, a group of Pennsylvania corporations founded in 1995,
designs and manufactures multi-spectral optical systems and
optical platforms, including night vision weapon sights, pocket
scopes, and camera kits and catadioptic lenses, for military and
law enforcement applications. The company also designs, develops
and builds prototypes of next-generation, multi-spectral optical
imaging and surveillance systems. OmniTech employs approximately
74 persons at its headquarters and manufacturing facilities
in Freeport and North Buffalo, Pennsylvania. Its primary
manufacturing facility is approximately 16,000 square feet
of multiple use buildings that house administration and
engineering offices, laboratories and production space as well
as a 3,000 square feet warehouse.
OmniTech emphasizes an innovative approach to addressing
customers’ needs. For instance, OmniTech developed the
ability to mount its night sights in front of a standard day
scope, which provides users with increased functionality for
night firing without the complication of resighting the main
scope. Additionally, OmniTech developed a shock attenuation
process that extends the image tube life and increases
durability, particularly when used with high caliber weapons,
which is critically important to customers.
OmniTech had consolidated revenues of $12.7 million and
$9.8 million for the years ended December 31, 2007 and
the six months ended June 30, 2008, respectively, and
EBITDA of $1.7 million and $2.5 million for the same
periods.
The following table reconciles net income of OmniTech to EBITDA:
Please see note 5 to “— Summary Consolidated
Historical and Pro Forma Financial and Other Data” for a
description of how we use EBITDA and its limitations as a
non-GAAP measure.
Acquisition
Strategy
Consistent with our acquisition strategy, we engaged in a
rigorous and disciplined process of analysis before deciding to
engage in discussions regarding the potential acquisition of
each of Isoclima, TPS and OmniTech. While our management had
knowledge of the reputation of each of these companies from
current experience or from many years of working in related
industries, we also engaged in an extensive review of the
financial, business and legal aspects of each company prior to
entering into the agreement for its acquisition.
We considered, among others, the following factors in pursuing
the Isoclima acquisition:
•
Isoclima is an industry leader in Europe and in other parts of
the world, with strong brand recognition and well-established
relationships with customers in the vehicle armoring business,
such as Mercedes-Benz and BMW, for whom Isoclima supplies
transparent armor. We believe that, because of this market
leadership and with help from our sales networks, Isoclima is
well-positioned to pursue growth in the U.S. market,
including through U.S. military sales.
Isoclima’s diverse business portfolio, which includes sales
of high-impact and other specialized glass for use in other
modes of transportation, such as high-speed rail, marine and
aviation, as well as architectural applications, offers
diversification to our overall business.
•
Isoclima is already the primary supplier of transparent armor to
TPS, allowing us to realize potential manufacturing and other
efficiencies through vertical integration and by ensuring a
steady source of transparent armor.
We considered, among others, the following factors in pursuing
the TPS acquisition:
•
Demand for TPS’s armored vehicles in Mexico is robust and
is driven by concerns for personal safety as a result of
narco-terrorism and other violent crimes in the region, a trend
that we anticipate will continue. In addition, we believe that
much of TPS’s sales potential is untapped, presenting
opportunities for growth as we pursue sales more globally,
including to the U.S. government.
•
TPS is a seasoned player in the vehicle armoring business, with
strong brand recognition in the Mexican market and a reputation
for excellence, which reinforces the reputation that we believe
we already have established in the security, safety and defense
industry. In addition, TPS’s emphasis on customer
satisfaction is consistent with the importance we place on
customer relationships.
•
We believe that the sophistication of TPS’s engineering
capabilities, emphasis on lean manufacturing techniques and the
quality of its manufacturing facilities will allow us to capture
cost advantages, without compromising quality, as we pursue
expansion into the U.S. market. By building certain
subcomponents of the armoring system at TPS’s Mexico-based
facility, we expect to achieve an accelerated
ramp-up in
production and cost savings when we open additional armoring
facilities around the world.
We considered, among others, the following factors in pursuing
the OmniTech acquisition:
•
OmniTech’s portfolio of products is complementary to our
existing portfolio of night vision, TTL and surveillance
products, allowing us to create new synergies by incorporating
our existing technologies onto OmniTech platforms and
integrating our research and development efforts. The increased
breadth of product offerings will also allow customers to buy a
wider array of night vision and imaging products from one source.
•
We believe that the addition of OmniTech’s domestic sales
force to our existing sales force will increase market exposure
for and sales of both OmniTech products and our existing
products. Our international sales capabilities also have the
potential to help grow OmniTech’s international business.
•
Our combined product volume will be greatly increased, allowing
us to achieve better volume pricing from suppliers of certain
common components, such as image intensifier tubes, and enjoy
higher priority for obtaining capacity limited items. In
addition, our combined financial strength and production
capabilities will allow us to compete for larger orders.
Acquisition
Structure and Consideration
We have entered into agreements entitling us to purchase all of
the outstanding capital stock of each of Isoclima, TPS and
OmniTech. The Isoclima and OmniTech agreements are structured as
stock purchase agreements among us, the shareholders of each
entity and, in the case of OmniTech, the entities involved. In
the case of TPS, the agreement takes the form of an option to us
from the shareholders of TPS. Upon our exercise of the option,
TPS shareholders are required to enter into a pre-negotiated
stock purchase agreement with us for the sale of all of their
TPS stock. Prior to the consummation of this offering, we will
have exercised this option and satisfied all of the conditions
to closing the acquisition, subject only to the closing of this
offering. Other than certain customary conditions to closing,
the only other condition to closing the Isoclima and OmniTech
acquisitions is the closing of this offering. We will consummate
each of the Pending Acquisitions simultaneously with the closing
of this offering.
To finance the Pending Acquisitions, we will use the proceeds
from this offering, borrowings under our new credit facility and
issuances of our common stock valued at the offering price. The
following table summarizes the purchase price obligations with
respect to each of the Pending Acquisitions:
Includes assumed debt at June 30, 2008, cash component and
stock component.
(3)
Approximately $29,735,000 will be refinanced under our new
credit facility. A long-term mortgage and certain other debt of
Isoclima will remain outstanding under separate arrangements.
(4)
The acquisition consideration is denominated in Euros and the
numbers above assume a conversion rate of €1=$1.4697 at
August 20, 2008. The total acquisition consideration will
be adjusted upward or downward on a one-to-one basis for the
amount of Isoclima’s debt that is higher or lower than
€42,300,000 ($62,168,310). In addition:
• In 2009, Isoclima will be obligated to purchase the
stock held by one of the minority shareholders of its Lipik Glas
subsidiary for approximately €1,800,000 ($2,645,460). At
that time, the former shareholders of Isoclima will be entitled
to receive additional consideration of €4,859,000
($7,141,272). In each case, the price will be reduced
proportionately to the extent pre-emptive rights are exercised
by the other minority shareholder of Lipik Glas.
• The former shareholders of Isoclima will be entitled
to 50% of the payments received by Isoclima from a pending
arbitration proceeding.
(5)
Assumes closing occurs on or before November 30, 2008. The
total consideration will increase by $189,583 if closing occurs
between December 1 and December 31, 2008. Five percent
of the consideration, excluding assumed debt, will be paid in
stock.
(6)
Assumes closing occurs on or before November 30, 2008. The
total consideration will increase by $500,000 if closing occurs
between December 1 and December 31, 2008.
(7)
The former shareholders of Isoclima, TPS and OmniTech have been
granted registration rights with respect to the shares of our
common stock they will receive as part of the acquisition
consideration. See “Shares Eligible for Future
Sale — Registration Rights.”
Simultaneously with the closing of this offering and the
acquisitions, we will enter into employment agreements with
former principal shareholders of TPS and OmniTech. The
acquisition agreements with the shareholders of each of
Isoclima, TPS and OmniTech contain five-year non-competition
agreements with the former principal shareholders of each
company. See “Management — Key Employees.”
The following table sets forth certain information as of
August 1, 2008 concerning each of our executive officers,
directors and nominees for director.
Name
Age
Position(s)
Thomas M. O’Gara
57
Chairman of the Board
Wilfred T. O’Gara
50
President and Chief Executive Officer, Director
Michael J. Lennon
52
Executive Vice President and Chief Operating Officer, Director
Abram S. Gordon
45
Vice President, General Counsel and Secretary
Steven P. Ratterman
38
Chief Financial Officer and Treasurer
James M. Gould
59
Director
Frederic H. Mayerson
61
Director
Thomas J. Depenbrock*
52
Nominee for Director
Hugh E. Price*
71
Nominee for Director
General Henry Hugh Shelton*
66
Nominee for Director
*
We expect Messrs. Depenbrock, Price and Shelton to be
appointed to the board of directors upon completion of this
offering.
Thomas M. O’Gara, one of our founders, has been our
Chairman since our formation in August 2003.
Mr. O’Gara previously served as Vice Chairman of the
Board of The Kroll-O’Gara Company, a publicly traded
provider of specialized products and services to the risk
mitigation and security markets, from 1997 until 2001. He served
as Chairman of the Board of The O’Gara Company from 1996
until the 1997 merger of Kroll Holdings, Inc. with The
O’Gara Company. Mr. O’Gara also was Chairman of
the Board of the O’Gara-Hess & Eisenhardt
Armoring Company since 1990 and was its Chief Executive Officer
from 1990 until 1995. Thomas M. O’Gara and Wilfred T.
O’Gara are brothers.
Wilfred T. O’Gara, one of our founders, has been our
President and Chief Executive Officer and a director since our
formation in August 2003. Mr. O’Gara was the Chief
Executive Officer and a director of Ohio Medical Inc., a medical
instrument manufacturer, from January 2002 until the sale of
substantially all of its assets in May 2004. Previously, he
served as Co-Chief Executive Officer and a director of The
Kroll-O’Gara Company and Chief Executive Officer of its
Security Products and Services Group from 2000 until 2001 when
that company’s O’Gara-Hess & Eisenhardt
Armoring Company subsidiary was sold. He served as
Kroll-O’Gara’s President and Chief Operating Officer
from 1997 to 2000 and as Chief Executive Officer and a director
of The O’Gara Company from 1996 until the 1997 merger of
Kroll Holdings, Inc. with The O’Gara Company.
Mr. O’Gara also serves on the board of directors of
LSI Industries Inc., a publicly traded company.
Michael J. Lennon, one of our founders, has been our
Executive Vice President and a director since August 2003 and
our Chief Operating Officer since January 2006. Mr. Lennon
previously served as President of U.S. Aeroteam Inc., a
component manufacturer for the aerospace and defense industries,
from 2001 to June 2003; as Chief Operating Officer, Security
Products and Services Group and a director of The
Kroll-O’Gara Company, with responsibility for its worldwide
armored vehicle operations and various security training and
services businesses, from 1998 to 2000; and as President and
Chief Operating Officer of The O’Gara Company’s
O’Gara-Hess & Eisenhardt Armoring Company
subsidiary from 1996 to 1997. Prior to joining The O’Gara
Company in 1994, Mr. Lennon held various management
positions within manufacturing, engineering, and marketing at
General Electric Company. During his 15 years at General
Electric Mr. Lennon held positions at several GE businesses
including GE Aircraft Engines, GE Aerospace, and GE Major
Appliances. U.S. Aeroteam filed a petition for
reorganization under Chapter 11 of the U.S. Bankruptcy
Code in December 2003.
Abram S. Gordon has been our Vice President, General
Counsel and Secretary since our formation in August 2003. He
also has served as General Counsel of Oncology Hematology Care,
Inc. since 2002.
Previously, Mr. Gordon was Vice President, General Counsel
and Secretary of The Kroll-O’Gara Company from 1997 to 2001
and Vice President, General Counsel, Chief Administrative
Officer and Chief Information Officer of
O’Gara-Hess & Eisenhardt Armoring Company from
2000 to 2001.
Steven P. Ratterman has been our Chief Financial Officer
and Treasurer since November 2005. Mr. Ratterman previously
served as Group Controller of O’Gara-Hess &
Eisenhardt Armoring Company from 2000 until October 2005; as
Manager Financial Reporting of The Kroll-O’Gara Company
from 1999 to 2000; Corporate Controller and Chief Accounting
Officer of Brazos Sportswear, Inc., a publicly traded sportswear
manufacturer, from 1996 to 1999; and a Senior Accountant with
Arthur Andersen from 1992 to 1996.
James M. Gould has been a director since May
2004. Mr. Gould has been a Managing General
Partner of The Walnut Group, a group of affiliated venture
capital funds, since 1994. He is also the Managing Member of
Gould Venture Group V, LLC, a diversified financial
concern, and the owner of Management One Ltd., a firm that
represents professional athletes. Mr. Gould also serves on
the board of directors of
Build-A-Bear
Workshop, Inc., a publicly traded company.
Frederic H. Mayerson has been a director since May 2004.
Mr. Mayerson has been the Chairman and a Managing General
Partner of The Walnut Group since 1994, and Principal of The
Frederic H. Mayerson Group, a diversified private equity
investment company, since 1988. Since October 2006, he has
served as Chairman of Stir Crazy Partners, LLC, a Pan-Asian
restaurant chain. He is a member of the U.S. Bank
Cincinnati Region Board of Advisors. Mr. Mayerson also has
co-produced twelve Broadway musicals. His professional and
charitable affiliations include service as trustee of the
Mayerson Foundation, member of the League of American Theatres
and Producers and member of The Robert F. Kennedy Memorial Board.
Thomas J. Depenbrock has been Vice President, Treasurer,
Secretary and Chief Financial Officer of Robbins, Inc., a
privately-owned sports flooring manufacturing and services
company, since January 2008. Mr. Depenbrock previously
served as Vice President, Treasurer, Chief Financial Officer and
Corporate Secretary of NS Group, Inc., a publicly traded
producer of tubular steel products serving the domestic and
international oil and natural gas drilling exploration and
production industry, from 2000 until its merger with IPSCO Inc.
in 2006.
Hugh E. Price has been an Operating Advisor with Pegasus
Capital Advisors, a private equity firm, since March 2008.
Mr. Price previously served as Chairman Lehman Brothers
India, from August 2005 until December 2007 and a Managing
Director and Director of Global Security of Lehman Brothers from
December 2001 until August 2005. He was an intelligence
professional with the Central Intelligence Agency from 1960
until his retirement as Deputy Director for Operations in May
1995.
General H. Hugh Shelton, U.S. Army (Retired), served
as the President, International Operations, for M.I.C.
Industries, an international manufacturing company, from January
2002 until April 2006. General Shelton served as the
14th Chairman of the Joint Chiefs of Staff from October
1997 until September 2001. General Shelton also serves on the
board of directors of the following public companies:
Anheuser-Busch Companies, Inc., Red Hat, Inc., and Ceramic
Protection Corporation (Canada). He has been a consultant to us
and chairman of our board of advisors since 2004.
Each officer serves at the discretion of our board of directors
and holds office until his or her successor is elected and
qualified or until his or her earlier resignation or removal.
Key
Employees
Alberto Bertolini, age 64, is a founding partner of
Isoclima S.p.A. and currently serves as its Managing Director.
He has been involved with Isoclima and its predecessors since
1967. Upon completion of this offering, Mr. Bertolini will
become the General Manager of Isoclima within the Advanced
Transparent and Mobile Systems division.
Enrique Homero Herrera Martinez, age 47, has been
the President, Chief Executive Officer and General Manager of
TPS since its formation in 1994. Upon completion of this
offering, Mr. Herrera will become the General Manager of
TPS within the Advanced Transparent and Mobile Systems division.
Paul F. Maxin, age 58, has been President of
OmniTech since 1996. Mr. Maxin previously served as Vice
President of Contraves USA, Inc., a designer and manufacturer of
electro-optical surveillance systems and as a nuclear engineer
for Westinghouse Electric Corporation. Upon completion of this
offering, Mr. Maxin will become the President of the Sensor
Systems division.
James W. Noe, age 38, has been President of our
Training and Services division since October 2006 when we
acquired Homeland Defense Solutions and its subsidiaries.
Mr. Noe founded Homeland Defense Solutions and had served
as its President since 2002. He served in the U.S. Army
from 1988 to 1999.
Messrs. Herrera and Maxin, the principal shareholders of
TPS Armoring and OmniTech, respectively, each will have a
two-year employment agreement with us that contains customary
confidentiality, noncompetition and nonsolicitation provisions.
Each agreement also contains a provision confirming that we will
own any intellectual property newly conceived or developed by
Messrs. Herrera or Maxin during his employment. In
addition, the acquisition agreements to which
Messrs. Bertolini, Herrera and Maxin are a party prohibit
each of them from engaging in a business that is competitive
with us and from soliciting our employees for five years after
the closing. Mr. Noe entered into similar agreements with
us when we acquired HDS in 2006.
Board of
Directors
Our amended and restated Code of Regulations, which will become
effective immediately before this offering, provides for a board
of directors of at least three persons, with the size to be
fixed from time to time by resolution of the directors.
Currently, the board of directors is composed of five directors,
Messrs. Thomas M. O’Gara, Wilfred T. O’Gara,
Gould, Lennon, and Mayerson. We expect that, upon completion of
this offering, the size of the board will be increased to eight,
consisting of the current five directors and
Messrs. Depenbrock, Price and Shelton, who will be
appointed to fill the vacancies.
Directors will be elected annually at the annual meeting of
shareholders. Under our amended and restated Articles of
Incorporation, which also will become effective immediately
before this offering, each director normally must be elected by
a majority of the votes cast on his or her nomination (excluding
abstentions and broker non-votes). If the election is contested,
election will be by a plurality.
Our board of directors has determined that each of
Messrs. Gould, Mayerson, Depenbrock and Price is, or will
be when appointed, an independent director as defined in the
listing requirements of The NASDAQ Global Market. The board has
also determined that each of Messrs. Depenbrock and Price
will be when appointed, an independent director for audit
committee service as defined in
Rule 10A-3
under the Securities Exchange Act of 1934. Although NASDAQ rules
require that a majority of the board of directors be
independent, under special phase-in rules applicable to initial
public offerings we have twelve months from the date of listing
to comply with the majority board independence requirement. We
expect to be in compliance with this requirement before the
expiration of the phase-in period.
None of our current directors has received any fees or other
compensation for his service as a director. General Shelton, who
will become a director, has received compensation for certain
consulting services. See “Certain Relationships and Related
Person Transactions.”
Upon completion of this offering, each non-employee director
will receive an annual fee of $25,000, payable quarterly in
arrears, with each quarterly payment consisting of $3,750 in
cash and a number of shares of our common stock having an
aggregate fair market value of $2,500, based on the closing
price of our common stock on The NASDAQ Global Market on the
grant date. The chair of the audit committee will receive an
annual fee of $6,000 in cash and members of that committee will
receive an annual fee of $3,000. The chairs of the compensation
committee and the nominating and governance committee each will
receive an annual fee of $3,000 in cash and members of those
committees will receive an annual fee of $1,500. In addition,
fees of $500 per meeting will be paid to members of the audit
committee and fees of $750 per meeting will be paid to members
of the compensation and the nominating and governance committees.
Immediately after completion of this offering, each non-employee
director will be granted an option under the 2008 Incentive Plan
to purchase 1,500 shares of our common stock. Equivalent
grants will be made
in the future to each new director who joins the board. Upon
re-election at each annual meeting of shareholders, each
non-employee director who has served as a director for at least
six months will be granted an additional option for
1,500 shares of common stock. Options granted to
non-employee directors will vest over a one year period at the
rate of 25% of the shares every three months.
Committees
of the Board of Directors
Upon completion of this offering, our board of directors will
have an audit committee, a compensation committee and a
nominating and governance committee. The board has adopted a
written charter for each of these committees, as well as written
board governance standards and policies and a code of ethics for
senior financial officers, all of which will be available on our
website, www.ogaragroup.com, after this offering. We currently
expect that, at a minimum, our audit committee will meet
quarterly and each of our compensation committee and nominating
and governance committee will meet semi-annually.
Audit
Committee
Upon the completion of this offering, our audit committee will
be comprised of Messrs. Depenbrock (Chairman), Mayerson and
Price. Mr. Depenbrock will be designated as the audit
committee financial expert, as defined in Item 407(d) of
Regulation S-K
under the Securities Act. Although NASDAQ rules require that the
audit committee be comprised solely of independent directors,
under special phase-in rules applicable to initial public
offerings, we have twelve months from the date of listing to
comply with this requirement. We expect to be in compliance
before the expiration of the phase-in period.
The principal duties of the audit committee will be to:
•
appoint, retain and oversee our independent auditors;
•
approve all fees and all audit and non-audit services of our
independent auditors;
•
annually review the independence of our independent auditors;
•
assess annual audit results;
•
periodically reassess the effectiveness of our independent
auditors;
•
review our annual and quarterly financial statements and our
financial and accounting policies and disclosures;
•
review the adequacy and effectiveness of our internal accounting
controls and our internal control over financial reporting;
•
oversee our programs for compliance with laws, regulations and
our policies;
•
consider any requests for waivers from our code of ethics for
our senior financial officers (any such waivers being subject to
board approval); and
•
in connection with the foregoing, meet with our independent
auditors, internal auditors and financial management.
Compensation
Committee
Our compensation committee will be comprised of
Messrs. Gould (Chairman), Price and Shelton. Although
NASDAQ rules require that the compensation committee be
comprised solely of independent directors, under special
phase-in rules applicable to initial public offerings, we have
twelve months from the date of listing to comply with this
requirement. We expect to be in compliance before the expiration
of the phase-in period.
The principal duties of the compensation committee will be to:
•
review and approve corporate goals and objectives relevant to
the compensation of our executive officers in light of our
business strategies and objectives;
review and approve all compensation of our chief executive
officer and our other executive officers and any employment or
severance agreements or arrangements with them;
•
administer our incentive compensation plans, including our 2008
Incentive Plan described below, and, in this capacity, make all
grants or awards to our directors and employees under these
plans; and
•
oversee the company’s leadership and organization
development, including our executive succession planning.
Nominating
and Governance Committee
Our nominating and governance committee will be comprised of
Messrs. Shelton (Chairman), Depenbrock and Price. Although
NASDAQ rules require that the nominating and governance
committee be comprised solely of independent directors, under
special phase-in rules applicable to initial public offerings,
we have twelve months from the date of listing to comply with
this requirement. We expect to be in compliance before the
expiration of the phase-in period.
The committee’s principal duties will be to:
•
develop qualification criteria for members of the board of
directors;
•
recommend to the board nominees for election and re-election at
our annual meetings of shareholders and qualified candidates to
fill vacancies that occur between annual meetings;
•
recommend to the board the members and chairperson of each board
committee;
•
review, and make recommendations to the board regarding, the
level and forms of director compensation; and
•
develop and periodically review the company’s corporate
governance policies and practices, and recommend any proposed
changes to the board.
Compensation,
Discussion and Analysis
The following discussion and analysis of compensation
arrangements of our named executive officers should be read
together with the compensation tables and related disclosures
that follow. This discussion contains statements that are based
on our current expectations regarding certain aspects of our
future compensation program. We will, however, have a newly
formed compensation committee after completion of this offering.
See “Committees of the Board of Directors —
Compensation Committee.” In some cases, features of our
compensation program ultimately adopted could differ materially
from those discussed below.
Compensation
Philosophy and Objectives
Our compensation philosophy is to offer our named executive
officers compensation and benefits that are competitive with
executive officers of similarly situated companies in our
industry and that meet our goals of attracting, retaining and
motivating highly skilled management so that we can achieve our
financial and strategic objectives and create long-term value
for our shareholders.
In furtherance of this philosophy, our compensation programs are
intended to:
•
be “market-based” and flexible, taking into
consideration competitive market requirements and strategic
business needs;
•
enable us to attract and retain talented individuals who can
contribute to our long-term success;
•
motivate and reward high levels of performance and ensure
commitment to the success of the company; and
•
align the interests of our named executive officers with those
of our shareholders.
Role
of Directors, Executive Officers and Compensation
Consultants
To date, the amounts of base salary and cash bonus awarded, and
the number of stock options granted, to our named executive
officers have been determined primarily by our Chief Executive
Officer, in consultation with our Chairman and one other
director, based upon the company’s retention, performance
and alignment objectives. All stock option grants were approved
by our board of directors.
After this offering, we expect that all compensation decisions
for named executive officers will be made by the compensation
committee of the board of directors. We expect that, in making
its decisions regarding officer compensation other than that of
the Chief Executive Officer, the compensation committee will
take into consideration the recommendations of the Chief
Executive Officer. He and certain of our other named executive
officers will attend compensation committee meetings when and to
the extent their input is requested by the chairman of the
committee, but none of these officers will attend the portion of
the meeting during which his compensation is approved.
We historically have not performed competitive reviews of our
compensation programs with those of similarly-situated
companies, nor have we engaged in “benchmarking” of
compensation paid to our named executive officers. In May 2008,
however, we retained the services of Towers Perrin to review the
company’s compensation levels and overall compensation
structure and to recommend a framework for the compensation of
our named executive officers after this offering. Towers Perrin
provided the company with competitive analyses of base salaries
and maximum bonus opportunities for each named executive officer
position, as well as with market information on long-term
incentive opportunities and target total direct compensation
(base salary, annual bonus and long-term incentives). In
providing its analyses, Towers Perrin relied on survey
databases, specifically the Watson Wyatt Top Management Database
and the Towers Perrin Executive Compensation Database, using
data for companies with less than $1 billion in revenues,
and on proxy disclosures of a group of similarly sized public
companies in comparable industries. This peer group of public
companies was comprised of the following 24 companies:
AeroVironment Inc.
Cubic Corporation
Lakeland Industries Inc.
American Science and Engineering, Inc.
Digimarc Corporation
LMI Aerospace
Apogee Enterprises Inc.
Excel Techonology
Meridian Bioscience, Inc.
Argon ST, Inc.
FLIR Systems, Inc.
Mine Safety Appliances Company
Axsys Technologies
GP Strategies Corporation
OSI Systems, Inc.
Cepheid
Herley Industries
PGT Inc.
Ceradyne, Inc.
II-VI Inc.
Rae Systems Inc.
Cogent, Inc.
L-1 Identity Solutions Inc.
Sparton Corporation
Elements
of Our Compensation Program
Overview
The key elements of our compensation program prior to this
offering have been base salary, cash bonus, stock option grants
and benefits. Each of these compensation elements satisfies one
or more of our retention, performance and alignment objectives
described above. While we have combined the compensation
elements for each named executive officer in a manner that we
believe is consistent with the executive’s contributions to
the company and with the overall goals of our compensation
program, we have not adopted any formal policies with respect to
long-term versus currently-paid compensation or cash versus
equity compensation. Historically, our named executive officers
(and employees generally) have been paid greater amounts of cash
compensation, in the form of base salaries and bonuses, as
compared to equity compensation, due primarily to the lack of
liquidity of stock in a private company.
The Towers Perrin report concluded that our historical executive
compensation has been significantly below market when compared
to that of the peer companies of our approximate size after the
completion of the Pending Acquisitions. Based upon this finding
and the recommendation of our Chief Executive Officer, in
discussion with our Chairman and one other director, we
currently expect to target total direct compensation
of our named executive officers after this offering at
approximately the 50th percentile (excluding the
Founders’ Bonus described below) for comparable positions
at the peer companies. The new employment agreements with our
named executive officers reflect this decision.
We anticipate that, after this offering, our compensation
committee will review the Towers Perrin report and our overall
compensation program, compare its features to those of other
companies and make additional adjustments as it deems necessary.
The compensation committee may begin to increase the amounts of
equity compensation awarded to our named executive officers as
part of our efforts to meet the target for total direct
compensation and may consider the adoption of stock ownership
guidelines for our executive officers, so as to further our
objective of aligning the interests of our employees with those
of our shareholders. Additionally, we expect that the
compensation committee will adopt a long-term incentive plan,
consistent with our goal of retaining top corporate talent,
which will be payable in either cash or equity. The compensation
committee may engage a compensation consultant, which may or may
not be Towers Perrin, to assist in this review. Any compensation
consultant will be engaged directly by, and report to, the
committee.
Employment
Agreements
We have entered into employment agreements with each of our
named executive officers that will become effective upon the
completion of this offering. The agreements provide for minimum
base salaries and annual raises and for minimum target bonus
opportunities as a percentage of base salary. We believe that
the employment agreements are necessary and appropriate to
retain the services of these executives, each of whom has been
instrumental in the development of the company prior to this
offering and is expected to be key to its future growth and
success. Mr. Lennon has a current employment agreement that
will be superceded by his new agreement. For additional
information on these agreements, see “Employment
Agreements” below.
Base
Salary
We believe that a competitive base salary is an important
component of compensation and is critical to recruitment and
retention. The base salaries paid in 2007 to the named executive
officers, as shown in the Summary Compensation Table that
follows this discussion, primarily reflect each executive’s
position, his management experience, qualifications and
contributions, the company’s size and its relative
profitability. We made a subjective determination of base salary
after considering these factors collectively. Base salaries
generally are reviewed annually and adjusted, if and as deemed
appropriate, at the beginning of each year.
The base salaries of Messrs. W. O’Gara, Lennon and
Ratterman were increased effective January 1, 2007 to
$280,000, $200,000 and $172,000, respectively, reflecting
increases of approximately 4.5%, 5.8% and 2.4%, respectively,
over their 2006 base salaries. Effective January 1, 2008,
each of Messrs. W. O’Gara, Lennon and Ratterman
received a base salary increase of approximately 5% over 2007,
which was in line with the company’s merit increase
guidelines for employees for the year. Mr. T. O’Gara
and Mr. Gordon have not been employees of the company but
have been retained by us as consultants. To date, each received
base compensation for his consulting and other services to the
company. In addition, Mr. Gordon has been paid on an hourly
basis for work directly associated with certain acquisitions.
Messrs. T. O’Gara and Gordon did not receive increases
in their base compensation in 2007 or 2008. Each will become an
employee upon the closing of this offering.
After this offering, the initial base salary and the minimum
annual increase in base salary of each executive officer will be
as set forth in his employment agreement. As indicated above,
the base salary amounts, together with other elements of the
executive officers’ total direct compensation, generally
target the 50th percentile of market compensation for
comparable positions, based on the information provided by
Towers Perrin. Mr. T. O’Gara’s duties and
responsibilities include acting as our Chairman and business
development efforts directed to the achievement of our strategic
objectives. Because these duties and responsibilities will
demand less than his full time attention, his base salary has
been adjusted accordingly.
Our cash bonus compensation is designed to reward achievement of
corporate strategic and financial goals and to motivate
executives to achieve superior performance in their areas of
responsibility. Since 2005, each of our named executive officers
other than Mr. Gordon has been eligible to receive a
discretionary annual cash bonus of up to 40% of base
compensation. As with base salaries, these bonuses were
determined by our Chief Executive Officer in consultation with
our Chairman and another director. The bonus amounts awarded
primarily have reflected the Chief Executive Officer’s
assessment of actual company performance for the completed year
in relation to budget and achievement of certain performance
expectations for that year.
For 2007, each of Messrs. T. O’Gara, W. O’Gara
and Lennon received a bonus of $75,000, representing 41.7%,
26.8% and 37.5%, respectively, of base compensation.
Mr. Ratterman received a 2007 bonus of $64,500,
representing 37.5% of base salary. For 2006, Messrs. T.
O’Gara, W. O’Gara, Lennon and Ratterman received
bonuses of 27.8%, 18.7%, 26.4% and 26.8%, respectively, of base
compensation. In addition to performance against plan, the
increased bonus amounts and percentages for 2007 were intended
to reward these persons for their work during the year in
identifying, analyzing and negotiating the Pending Acquisitions.
Mr. T. O’Gara’s bonus was slightly outside the
usual maximum because his base compensation was lower than that
of Messrs. W. O’Gara and Lennon and was not increased
in 2007 from 2006. Mr. W. O’Gara traditionally has
taken a lower percentage bonus than has been awarded to the
other participating named executive officers.
The employment agreement of each named executive officer other
than Mr. T. O’Gara provides for a minimum target bonus
opportunity as a percentage of base salary. The target bonus
amounts are intended to further the decision to move total
direct compensation of those named executive officers to the
market median. Although our compensation committee could decide
otherwise, we currently do not expect to adopt a formal
performance-based bonus plan. Rather, we expect that each
executive officer’s bonus will continue to be discretionary
and be based on an assessment of the executive’s
performance in relation to both internal company goals and the
executive’s personal goals.
Equity
Compensation
We have historically made grants of stock options to our named
executive officers, and to our key employees and advisors, other
than Messrs. T. O’Gara, W. O’Gara and Lennon. We
believe stock options further our compensation objective of
aligning the interests of these persons with those of our
shareholders, encouraging long-term performance and providing a
simple and easy-to-understand form of equity compensation that
promotes retention. We view these grants both as incentives for
future performance and as compensation for past accomplishments.
We have had no set schedule for the granting of stock options to
existing personnel, and an employee or advisor may receive no or
multiple grants in any year. With respect to selected
newly-hired employees, our practice has been to make stock
option grants at the first meeting of the board of directors
following the employee’s hire date. In 2007,
Mr. Ratterman and Mr. Gordon each received two stock
option awards; in 2006, Mr. Ratterman received two awards
and Mr. Gordon received three, the last of which was a
“catch up” award designed to bring his total stock
option awards in line with those of Mr. Ratterman. As a
result, at year-end 2007, each of these executives held options
to purchase 5,500 shares of our common stock.
Although stock options were not previously a part of the
compensation of Messrs. T. O’Gara, W. O’Gara and
Lennon, in December 2007 the board of directors granted each of
them an option to purchase 15,000 shares of common stock.
In making these awards, the board considered the contributions
of each executive to building the business to its current level
as well as the desire to maintain a strong alignment with our
shareholders. It concluded that the value of these options,
together with the founders’ bonus discussed below, was
appropriate for each executive’s contribution. See the
“Grants of Plan-Based Awards” table below for
additional details regarding these option awards.
Prior to this offering, all stock option grants were made
pursuant to the 2004 or 2005 Stock Option Plan. Following this
offering, all equity awards will be made pursuant to our 2008
Stock Incentive Plan. These plans are described below under
“2008 Stock Incentive Plan” and “2004 and 2005
Stock Option Plans.”
The employment agreements that become effective on completion of
this offering entitle each named executive officer to
participate in the 2008 Stock Incentive Plan, with the terms and
conditions of any awards being determined by the compensation
committee. As indicated above, we anticipate that our newly
formed compensation committee will review our compensation
program as an entirety after the offering, and we expect that
equity compensation will be a principal area of the
committee’s focus. The 2008 Stock Incentive Plan permits
multiple types of awards, which may or may not be
performance-based. At this time, we cannot anticipate the
type(s), structure or amounts of equity compensation that the
compensation committee will determine to grant.
Benefits
We have designed our benefits, such as our basic health
benefits, 401(k) plan and life insurance, to be both affordable
and competitive in relation to the market. We monitor the
market, country specific laws and practices and adjust our
benefits as needed. Our benefits program provides an element of
core benefits and, to the extent possible, offers various
options for additional benefits. The benefits program generally
does not affect decisions regarding other elements of our
compensation program. The named executive officers generally
participate in our benefit plans on the same terms as other
employees, except that those executives with employment
agreements will be provided with term life insurance and
supplemental disability insurance benefits. We believe that the
additional benefits are appropriate for these named executive
officers for retention purposes.
We currently do not intend to establish any deferred
compensation plans, defined benefit pension plans or similar
benefit plans. Employees who participate in our 401(k) plan may
elect to make pre-tax salary deferral contributions to the plan
from 1% to 75% of their total annual compensation, subject to
applicable Internal Revenue Code limitations. We match 100% of
the first 3%, and 50% of the next 2%, of pre-tax salary deferral
contributions made by each plan participant. These matching
contributions are fully vested when made. Although we have not
done so in the past, we also may make discretionary
profit-sharing contributions to the plan on behalf of
participants.
Perquisites
We currently do not provide, nor do we expect to provide,
perquisites with an aggregate value in excess of $10,000 to any
executive officer, including the named executive officers,
because we believe we can better incentivize desired performance
with compensation in the forms described above. However,
consistent with our compensation objectives, we recognize that,
from time to time, it may be appropriate to provide certain
perquisites in order to attract, motivate and retain our
executives. Any such decision will be reviewed and approved by
the compensation committee as needed.
Severance
and Change of Control Arrangements
Prior to this offering we have not had severance or change in
control agreements with any of our named executive officers
other than a severance provision in Mr. Lennon’s
employment agreement. The employment agreements of our named
executive officers that will become effective upon completion of
this offering provide for severance payments following the
executive’s termination of employment for any reason other
than “cause” or by the executive without “good
reason” and following certain change of control events.
Pursuant to these agreements, none of the named executive
officers is automatically entitled to payments under his
employment agreement upon a change of control unless, within
24 months, his employment is terminated by the company
without cause, he terminates his employment for good reason or
his employment agreement is not renewed. See “Employment
Agreements” and “Potential Payments Upon Termination
and Change of Control” below for a description of these
arrangements for our named executive officers.
One task of our compensation committee will be to decide whether
to take these severance packages into account,
and/or
whether to engage in a wealth accumulation analysis, in
determining the amounts of other elements of our executive
officers’ compensation. We cannot predict what conclusions
may be reached by the committee as to these matters.
As part of the Walnut Group’s May 2005 equity investment in
the company of $2.7 million, Walnut negotiated a price per
share for its preferred stock that was dilutive to our three
founders. In order to offset this dilution, Walnut agreed to
compensate our founders for their achievement of certain
strategic company goals, including growth through acquisitions
and the completion of an initial public offering. As a result of
this agreement, in December 2007, our board of directors
approved a one-time cash bonus to each of Messrs. T.
O’Gara, W. O’Gara and Lennon of $1 million,
payable upon the completion of this offering. As previously
indicated, these bonus payments, along with the stock option
grants described above, are intended to reward them for their
efforts in growing the company to a stage at which this initial
public offering is possible. Mr. T. O’Gara
subsequently agreed to forego his bonus in exchange for the
forgiveness of certain indebtedness and a cash payment of
$250,000 in August 2008. See “Certain Relationships and
Related Person Transactions.” A portion of the proceeds
from this offering and the borrowings under our new credit
facility will be used to pay the bonuses to
Messrs. W. O’Gara and Lennon.
Effect
of Tax and Accounting Treatment on Compensation
Decisions
As a public company, our executive compensation practices will
have tax and accounting implications for us that previously were
either not applicable or not material to our decisions. In
particular, Section 162(m) of the Internal Revenue Code
will disallow a tax deduction for any non-performance-based
compensation over a $1 million that we pay to a
“covered employee” in any one year. Generally, a
public company’s “covered employees” are its
chief executive officer and the four other highest paid officers
named on the Summary Compensation Table who were serving as such
at the end of the year. Compensation is
“performance-based,” and deductible, if the
performance measures applicable to its payment have been
approved by shareholders and other requirements are satisfied.
Our annual bonus program currently is not structured so as to
qualify the amounts paid as performance-based compensation under
Section 162(m). Section 162(m) will not apply,
however, to the founders’ bonuses discussed above because
they will be paid pursuant to an agreement entered into prior to
this offering.
Although we intend to consider the anticipated tax and
accounting consequences of our compensation decisions, we do not
expect these factors alone to be dispositive. We also will
consider factors such as whether the compensation is consistent
with our overall philosophy and whether it furthers our ability
to attract, retain and reward the executive talent necessary to
advance our corporate goals. Due to our levels of pay, we do not
expect Section 162(m) to be a constraint on our
compensation decisions in the near future. However, we expect
that our compensation committee will assess the impact of
Section 162(m) on our compensation practices as part of its
overall review of our program. This review, or a subsequent
review, could result in changes to our compensation program
designed to qualify additional elements of compensation as
performance-based and, therefore, not subject to
Section 162(m).
The table below summarizes the 2007 compensation of our
principal executive officer, principal financial officer and the
three most highly paid other executive officers (collectively
referred to as the “named executive officers”). The
information in this section regarding equity compensation does
not reflect
the -for-one
common stock split which will occur immediately prior to this
offering. In addition, please see “Employment
Agreements” below for a narrative description of factors
related to the Summary Compensation Table and Grants of
Plan-Based Awards Table.
Summary
Compensation Table
Option
All Other
Name and Principal Position
Year
Salary ($)
Bonus ($)
Awards ($)(1)
Compensation ($)(2)
Total ($)
Wilfred T. O’Gara President & Chief
Executive Officer
2007
280,000
75,000
279,900
7,781
642,681
Steven P. Ratterman Chief Financial Officer
2007
172,000
64,500
65,310
9,591
311,401
Thomas M. O’Gara Chairman
2007
180,000
75,000
279,900
—
534,900
Michael J. Lennon Executive Vice
President & Chief
Operating Officer
2007
200,000
75,000
279,900
11,771
566,671
Abram S. Gordon Vice President,
General Counsel &
Secretary
2007
72,500
—
65,310
—
137,810
(1)
Represents the dollar amounts expensed for financial statement
reporting purposes for the year ended December 31, 2007 in
accordance with SFAS 123(R). See Note 14 to the
Consolidated Financial Statements of The O’Gara Group, Inc.
for a discussion of the assumptions made in determining the
valuations. Pursuant to SEC rules, the amounts shown exclude the
impact of estimated forfeitures related to service-based vesting.
(2)
For each of Messrs. W. O’Gara and Ratterman, amount
represents company contributions to our 401(k) plan. For
Mr. Lennon, amount includes $10,780 in company
contributions to the 401(k) plan and $991 for life and
supplemental disability insurance premiums paid by the company
pursuant to his existing employment agreement.
The following table provides information on each stock option
award granted to the named executive officers during 2007.
All awards were issued under the company’s 2005 Stock
Option Plan and were fully vested on the grant date. Generally,
each option terminates on the earliest of (i) ten years
less one day from the grant date, (ii) three months from
the date of termination of employment or service as a consultant
for any reason other than for cause, disability or death,
(iii) immediately upon termination for cause, or
(iv) twelve months from the date of termination of
employment or service as a consultant by reason of disability or
death.
(2)
The board of directors determined that a $50 per share exercise
price, which is greater than the grant date fair value of the
awards as described below, was appropriate because it was the
same exercise price for options recently granted to other
employees.
(3)
Represents the grant date fair value of the awards calculated in
accordance with SFAS No. 123(R). The grant date fair
value was the estimated fair market value per share of the
company’s common stock of $18.66.
The following table reports, on an
award-by-award
basis, each outstanding equity award held by the named executive
officers on December 31, 2007.
All options held by Messrs. T. O’Gara and Gordon were
exercised after year-end 2007.
Employment
Agreements
Existing
Agreement
Mr. Lennon has a current employment agreement that was
entered into in 2004 for a two-year term and now is continuing
on a month-to-month basis. This agreement will be superceded by
the new agreement described below. Under the 2004 agreement,
Mr. Lennon is entitled to a base salary of not less than
$148,000, to such incentive compensation as is approved and to
participate in the company’s health, welfare and other
employee benefit programs. The company also has provided him
with a $500,000 term life insurance policy and with supplemental
disability insurance. The 2004 agreement provides for payment to
Mr. Lennon of 18 months’ then-current base
salary, and continuation of medical benefits for the same
period, if his employment is terminated by the company other
than for cause. In the event of termination of employment for
any other reason, no further compensation would be payable other
than any accrued salary or other compensation due.
Post-Offering
Agreements
Each of our named executive officers has entered into an
employment agreement with us that will become effective upon the
completion of this offering. Other than job titles, base salary
amounts and target bonus percentages, the agreements are
substantially identical. The agreements have initial terms of
three years. Thereafter, each automatically extends for
successive one-year periods unless either party provides notice
of non-extension.
Each agreement sets an initial annual base salary, a minimum
base salary increase of 3.5% each year beginning January 1,2010 and a target bonus of not less than a specified percentage
of the executive’s base salary. The initial base salaries
and target bonus percentages are as follows:
Target
Base
Bonus
Salary
Percentage
Thomas M. O’Gara
$
240,000
—
Wilfred T. O’Gara
450,000
65
%
Michael J. Lennon
300,000
50
Steven P. Ratterman
260,000
40
Abram S. Gordon
240,000
40
Each named executive officer will be eligible to participate in
our 2008 Incentive Plan, to participate in the retirement,
health, welfare and other benefit plans generally made available
to senior executives of the company and to receive other fringe
benefits that are at least as favorable as any fringe benefits
that may be provided to other senior executives. Additionally,
the company will provide each named executive officer with a
term life insurance policy having a face value of at least
$1,750,000 and with supplemental disability insurance and will
reimburse each person’s legal fees (up to a specified
amount per person) in connection with the negotiation of his
employment agreement.
In the event that a named executive officer’s employment
terminates due to death or disability, the company terminates
his employment for “Cause” or he terminates his
employment without “Good Reason” (as each is defined
below), the executive will be entitled to receive any earned but
unpaid salary, payment for any unused vacation time for the year
and reimbursement of any unpaid business expenses and legal fees
through the termination date. If the executive’s employment
terminates due to death or disability, or he terminates his
employment without Good Reason, he also will be entitled to any
earned but unpaid annual bonus for the previous completed
calendar year. If termination of employment is due to death or
disability, all unvested awards and rights under any equity
compensation plan in which the executive participates will vest
immediately, and the executive or his estate will have two years
to exercise the rights (or until their earlier expiration); the
executive or his survivors also will be entitled to
24 months of continued life insurance and health benefits
for himself and his dependents, as applicable.
The agreements provide that, if an executive’s employment
is terminated without Cause by the company, if he terminates his
employment for Good Reason or his employment is terminated due
to Non-renewal (as defined below), he also will receive a lump
sum payment equal to two times the sum of his then-current
salary and target bonus for the year, 24 months of
continued life insurance and health benefits for himself and his
dependents, payment for any unused vacation and immediate
vesting of all unvested awards under any company equity
compensation plan in which he participates. If the
executive’s employment is terminated by the company without
Cause, by the executive for Good Reason or due to Non-renewal
within 24 months of a
Change of Control (as defined below), the payments will be as
described above except that he will be entitled to three, rather
than two, times the sum of then-current salary and target bonus
for the year.
Each employment agreement contains a covenant prohibiting the
executive, during the agreement’s term and for
24 months after his termination of employment for Cause by
the company or without Good Reason by himself, from engaging in
specified activities and employments that are competitive with
the business of the company.
For purposes of the employment agreements:
“Cause” means (i) the executive’s
willful failure or refusal to materially perform his duties
under his agreement, provided that the company may not terminate
the executive’s employments for Cause because of
dissatisfaction with the quality of the executive’s
services or disagreement with actions taken by the executive in
good faith performance of his duties; (ii) the
executive’s willful failure or refusal to follow material
directions of the board of directors or any other act of
material, willful insubordination on the part of the executive;
(iii) the engaging by the executive in willful misconduct
which is materially and demonstrably injurious to the company or
any of its divisions, subsidiaries or affiliates, monetarily or
otherwise; (iv) any conviction of, or plea of guilty or
nolo contendere by, the executive with respect to an act of
fraud or embezzlement against the Company; (v) any
conviction of, or plea of guilty or nolo contendere by, the
executive with respect to a felony (other than a traffic
violation); or (vi) any conviction of, or plea of guilty or
nolo contendere by, the executive with respect to an act of
fraud which is materially detrimental to the business or
reputation of the company. The agreements provide that no act or
failure to act on an executive’s part will be considered
“willful” unless he has acted or failed to act with an
absence of good faith and without reasonable belief that his
action or failure to act was in the best interests of the
company;
“Good Reason” means, without the consent of the
executive, (i) the assignment to executive of any duties
inconsistent with his position and authority as contemplated in
his employment agreement; (ii) any adverse or material
change in the executive’s reporting responsibilities
and/or
diminution of any material duties or responsibilities previously
assigned to him; (iii) the failure of the company to
perform any of its material obligations under the employment
agreement; (iv) a reduction in the overall compensation and
benefits available to the executive; or (v) any requirement
by the company that the executive’s services be principally
rendered in a location that is more than 50 miles from his
normal work location. The agreements require that notice of Good
Reason be timely provided to the company by the executive and
provide the company with a
30-day cure
period;
“Non-renewal” means the executive’s
termination of employment due to the company’s
non-extension of the term of his agreement, other than due to
the executive’s request of non-extension, where the
executive is willing and able to continue performing services;
and
“Change of Control” has the meaning given that
term in the 2008 Incentive Plan described below.
Potential
Payments Upon Termination and Change of Control
The following table shows the payments the named executive
officers would have received under various termination
scenarios, assuming that the triggering event occurred on
December 31, 2007 and that the new employment agreements
described above were in effect on that date. We have also
assumed that no unused vacation days were outstanding on that
date.
Mr. W. O’Gara
Mr. Ratterman
Mr. T. O’Gara
Mr. Lennon
Mr. Gordon
Termination without Cause, for Good Reason or upon
Non-renewal
Salary
$
900,000
$
520,000
$
480,000
$
600,000
$
480,000
Bonus
585,000
208,000
—
300,000
192,000
Accelerated vesting of equity awards(1)
—
11,259
—
—
—
Health and welfare benefits
28,254
28,254
28,254
28,254
28,254
Total
$
1,513,254
$
767,513
$
508,254
$
928,254
$
700,254
Termination after Change of Control without Cause, for Good
Reason or upon Non-renewal
Salary
$
1,350,000
$
780,000
$
720,000
$
900,000
$
720,000
Bonus
877,500
312,000
—
450,000
288,000
Accelerated vesting of equity awards(1)
—
11,259
—
—
—
Health and welfare benefits
28,254
28,254
28,254
28,254
28,254
Total
$
2,255,754
$
1,131,513
$
748,254
$
1,378,254
$
1,036,254
Death
Life insurance proceeds
$
1,750,000
$
1,750,000
$
1,750,000
$
1,750,000
$
1,750,000
Accelerated vesting of equity awards(1)
—
11,259
—
—
—
Survivor health and welfare benefits
28,254
28,254
28,254
28,254
28,254
Total
$
1,778,254
$
1,789,513
$
1,778,254
$
1,778,254
$
1,778,254
Disability
Accelerated vesting of equity awards(1)
$
—
$
11,259
$
—
$
—
$
—
Health and welfare benefits
28,254
28,254
28,254
28,254
28,254
Total
$
28,254
$
39,513
$
28,254
$
28,254
$
28,254
(1)
At December 31, 2007, the only equity awards outstanding
were stock options, all of which were fully vested except for
667 options held by Mr. Ratterman. These options vest on
October 17, 2008.
Stock
Option and Incentive Plans
We have three plans under which stock incentives may be provided
to our employees, directors and consultants and advisors. Our
2008 Stock Incentive Plan was adopted by our board of directors
on and
was approved by our shareholders
on . It will become effective at
the time of the closing of this offering. Our 2004 and 2005
Stock Option Plans were adopted by our board of directors and
became effective on January 5, 2004 and June 28, 2005,
respectively. The purposes of the plans are to promote our
long-term growth and success by enabling us to compete
successfully in attracting and retaining employees, directors
and consultants and advisors of outstanding ability, to
stimulate the efforts of these persons to achieve our objectives
and to encourage the identification of their interests with
those of our shareholders.
Summaries of the material features of the plans are given below.
The full texts of the plans are filed as exhibits to the
registration statement of which this prospectus is a part and
should be consulted for additional information.
2008
Stock Incentive Plan
Shares Available. Subject to adjustment for
changes in capitalization, including
the -for-one stock split that will
occur immediately before this offering, the maximum number of
shares of our common stock that may be issued under the 2008
Incentive Plan
is ,
the full amount of which may be issued in the form of incentive
stock options. Any shares that are not issued pursuant to awards
that expire, terminate or are forfeited may be re-used for
future grants under the 2008 Incentive Plan. However, shares
tendered to or withheld by the company to pay an option’s
exercise price or to satisfy required withholding taxes relating
to a Plan award will not be added back to the number of shares
available for future grants under the Plan.
Maximum Awards Per Individual. The 2008
Incentive Plan provides that the total number of shares of
common stock covered by options, together with the number of
stock appreciation right units, granted to any one individual
may not
exceed during
any calendar year, except that this limit
is in
the case of an inducement award made to a new employee. Also, no
more
than shares
of common stock may be issued in payment of performance awards
denominated in shares of common stock, and no more than
$ in cash (or fair market value if
paid in shares) may be paid pursuant to performance awards
denominated in dollars, to any person during any calendar year.
Administration. The 2008 Incentive Plan must
be administered by a committee of directors, each of whom is a
“non-employee” director under Securities and Exchange
Commission
Rule 16b-3
and an “outside director” for purposes of
Section 162(m) of the Internal Revenue Code of 1986 (the
Code). The 2008 Incentive Plan will be administered by the
compensation committee of our board of directors or, to the
extent necessary, a subcommittee thereof, all of the members of
which will satisfy these criteria. Any function of the
committee, other than a function necessary to preserve the
status of an award as performance-based compensation under
Section 162(m) of the Code, may be performed by the full
board of directors. The committee may delegate any of its
functions to one or more of our officers, except that only the
committee may grant awards to officers and directors and make
decisions with respect to those awards.
Eligibility. Any of our employees (including
employees of our subsidiaries), non-employee directors and
advisors and consultants are eligible to be selected to
participate in the 2008 Incentive Plan. Participants will be
selected by the committee; there is no limit on the number of
participants in the 2008 Incentive Plan.
Duration of the Plan. No award may be granted
under the 2008 Incentive Plan on or after the tenth anniversary
of the date on which it was adopted by our shareholders. Any
outstanding awards will continue in accordance with their terms.
Types of Awards. The 2008 Incentive Plan
provides for the grant of the following types of awards:
(i) stock options, including incentive stock options and
nonqualified stock options; (ii) stock appreciation rights
(SARs); (iii) stock awards, including awards of restricted
stock, restricted stock units and unrestricted stock; and
(iv) performance awards. Awards may be granted singly or in
combination, as determined by the committee. Except to the
extent provided by law, awards generally are non-transferable.
However, the committee may in its discretion permit a
participant to transfer an award (other than an incentive stock
option) to a member of, or for the benefit of, his or her
immediate family for no consideration.
Stock Options. An option to purchase shares of
our common stock permits the holder to purchase a fixed number
of shares at a fixed price. At the time a stock option is
granted, the committee determines the number of shares subject
to the option, the term of the option, the time or times at
which the option will become exercisable, the price per share of
common stock that a participant must pay to exercise the option
and any other terms and conditions of the option. No option may
be granted with an exercise price per share that is less than
100% of the fair market value of our common stock on the date of
grant or with a term longer than 10 years from the date of
grant. Incentive stock options may be granted only to our
employees and must otherwise comply with the requirements of
Section 422 of the Code. An incentive stock option granted
to any
person who owns more than 10% of our common stock (determined
after the application of certain stock attribution rules) must
have an exercise price at least equal to 110% of the fair market
value of a share on the date of grant and may have a term no
longer than 5 years from the date of grant.
For purposes of the 2008 Incentive Plan, fair market value means
the closing price of a share of common stock on The NASDAQ
Global Market, with the exception that, on the date of this
offering, it means the initial public offering price.
The exercise price of a stock option may be paid by a
participant in cash, in shares of our common stock owned by the
participant or via a cashless exercise procedure in which the
company withholds enough shares to satisfy the exercise price
and any applicable withholding taxes. If payment is made with
already owned shares or in a cashless exercise procedure, the
shares will be valued at their fair market value on the date
they are tendered or withheld. A participant also may elect to
pay an option’s exercise price by authorizing a broker to
sell all or a portion of the shares to be issued upon exercise
and remit to us a sufficient portion of the sale proceeds to pay
the exercise price and any applicable tax withholding amounts.
Stock Appreciation Rights. A SAR is a right to
receive payment equal to the excess of (i) the fair market
value of a share of common stock on the date of exercise of the
SAR over (ii) the price per share of common stock
established in connection with the grant of the SAR (the
“reference price”). The reference price must be at
least 100% of our common stock’s fair market value on the
date the SAR is granted. A SAR will become exercisable and will
terminate as provided by the committee, but no SAR may have a
term longer than 10 years from its date of grant. Payment
of a SAR must be made in shares of our common stock, cash or a
combination of both, valued at their fair market value on the
date of exercise.
Stock Awards. Stock awards are grants of
shares of common stock which may be restricted (i.e., subject to
a holding period restriction, service-based vesting restriction
or other conditions) or unrestricted. The committee will
determine the amounts, terms and conditions of these awards,
including the price to be paid, if any, for restricted stock
awards and any contingencies related to the attainment of
specified performance goals or continued employment or service.
Unless otherwise determined by the committee at the time of
grant, participants receiving restricted stock awards will be
entitled to dividend and voting rights in respect of the shares.
The committee also may grant awards of restricted stock units,
which are hypothetical units maintained on our books
representing shares of common stock. No voting or dividend
equivalent rights will apply in respect of those units. Upon
vesting, either unrestricted or restricted shares of common
stock may be issued, as determined by the committee.
Performance Awards. Performance awards are the
right to receive cash, shares of common stock or both, at the
end of a specified performance period, subject to satisfaction
of the performance criteria and any vesting conditions
established for the award. A participant who receives a
performance award payable in shares of common stock will not be
entitled to dividend or voting rights in respect of the shares
until the award vests and any shares earned are issued.
Performance-Based Compensation. Under
Section 162(m) of the Code, an income tax deduction
generally is not available for annual compensation in excess of
$1 million paid to the chief executive officer and any of
the other three most highly compensated officers of a public
corporation unless the compensation is performance-based. Stock
options and SARs are performance-based if their exercise or
reference prices are at least equal to 100% of the common
stock’s fair market value at the time of grant. To be
performance-based, other awards under the 2008 Incentive Plan
must be conditioned on the achievement of one or more objective
performance measures, to the extent required by
Section 162(m). The 2008 Incentive Plan provides that the
performance measures that may be used by the committee for these
awards must be based on any one or more of the following
criteria, as selected by the committee and applied to the
company as a whole or to individual units, and measured either
absolutely or relative to a designated group of comparable
companies: (i) earnings before interest, taxes,
depreciation and amortization; (ii) appreciation in the
fair market value, book value or other measure of value of the
common stock; (iii) cash flow; (iv) earnings
(including earnings per share); (v) return on equity;
(vi) return on investment; (vii) total stockholder
return; (viii) return on capital; (ix) return
on assets or net assets; (x) revenue; (xi) income
(including net income); (xii) operating income (including
net operating income); (xiii) operating profit (including
net operating profit); (xiv) operating margin;
(xv) return on operating revenue; and (xvi) market
share.
Other Terms of Awards. Awards under the 2008
Incentive Plan may be forfeited or vested early in certain
circumstances. An outstanding award will be forfeited upon a
participant’s separation from service for “cause”
or if, following separation for any other reason, the committee
determines either that, while employed, the participant had
engaged in an act which warranted separation for cause or that,
after separation, the participant engaged in conduct that
violates his or her continuing obligations in respect to us.
Unless the committee determines otherwise, and except as set
forth under “Change of Control, Merger or Sale” below,
if an employee or a director separates from service for any
reason other than cause, (i) all awards that are not fully
vested will be forfeited and (ii) any then-exercisable
options and SARs must be exercised within three months after the
date of separation (or the expiration date of the award, if
sooner). The Plan extends the three-month exercise period for
vested stock options and SARs to one year if separation from
service is due to death, disability or retirement. Awards
granted to consultants and advisors will terminate as provided
in the individual award agreements.
Notwithstanding the above, if a participant separates from
service for any reason other than cause, the committee has
discretion to accelerate the vesting of any or all of the
participant’s awards and to free them from any restrictions
or conditions.
The 2008 Incentive Plan also gives us the right to recapture any
gain realized by a participant from an award if, within a year
after the award is exercised or paid or restricted stock vests,
the participant is separated from service for cause or, if
following separation for any other reason, the committee
determines either that, while employed, the participant had
engaged in an act which warranted separation for cause or that,
after separation, the participant engaged in conduct that
violates his or her continuing obligations in respect to us.
The committee may establish other terms, conditions
and/or
limitations on awards, so long as they are not inconsistent with
the Plan.
The Plan prohibits certain repricings, exchanges and repurchases
of awards without shareholder approval.
Change of Control, Merger or Sale. The 2008
Incentive Plan provides that, if within three months after a
Change of Control either (i) an employee separates from
service as a result of action by the company or a subsidiary for
any reason other than cause, or (ii) a director separates
from service on the board for any reason other than death,
disability, retirement or cause, all awards held by the
participant on the date of separation will vest in full,
regardless of any unsatisfied performance criteria. In that
case, all stock options and SARs will be exercisable for one
year or until expiration of their original terms, if earlier;
all shares of restricted stock must be delivered immediately;
and all restricted stock units and performance awards must be
paid in full within 30 days.
A Change of Control occurs when (i) a person or group
(other than the company or a subsidiary, a benefit plan
maintained by the company or an underwriter temporarily holding
securities) acquires beneficial ownership of 50% or more of the
voting power of our voting securities; (ii) during any
two-year period, the members of our board of directors at the
beginning of the period (together with those directors elected
to the board with the approval of at least two-thirds of the
initial or similarly elected directors) no longer constitute at
least a majority of the board; or (iii) immediately after
any merger or consolidation of the company, or sale of all or
substantially all of its assets, in which outstanding awards are
assumed by the surviving or acquiring entity, the voting
securities that were outstanding immediately before the
transaction represent less than 50% of the voting power of the
surviving or acquiring entity.
If a merger, consolidation or sale of all or substantially all
of the company’s assets is proposed and provision is not
made for the surviving entity to assume outstanding stock
awards, or in the event of a proposal to dissolve or liquidate
the company, all awards (including awards containing unsatisfied
performance criteria) will become 100% vested. Holders of stock
options and SARs will be provided the opportunity to exercise
their awards conditioned on the transaction actually occurring
and will be allowed to defer payment of the exercise price until
after the closing of the transaction. Stock options and SARs not
exercised prior to
completion of the transaction will terminate. If the transaction
is not completed, the conditional exercises and the accelerated
vesting of awards will be annulled and the awards will return to
their prior status.
Amendment and Termination. Our board of
directors may amend or terminate the 2008 Incentive Plan at any
time but, unless required by law or integrally related to a
requirement of law (such as Code Section 409A), may not
impair the rights of a participant with respect to previously
granted awards without the participant’s consent. In
addition, no amendment may be made without shareholder approval
if that approval is required by law, regulation or rule,
including the listing criteria of The NASDAQ Global Market.
Expected Awards. No awards have been granted
under the 2008 Incentive Plan. We have not yet determined the
types and amounts of awards that will be granted or the persons
to whom they will be granted, except for the awards to
non-employee directors described under “Board of
Directors” above.
2004
and 2005 Stock Option Plans
Except as otherwise indicated below, the material terms of these
2004 and 2005 Option Plans are the same.
Shares Available. Subject to adjustment for
changes in capitalization, the maximum number of shares that may
be issued under the 2004 Option Plan is 570 and the maximum
number of shares issuable under the 2005 Option Plan is 81,500,
all of which may be granted as incentive stock options. At
June 30, 2008, 30 shares were available for issuance
under the 2004 Option Plan and 6,095 shares were available
for issuance under the 2005 Option Plan. If an option terminates
or expires without being completely exercised, the unexercised
shares may be re-used for future grants under the Option Plans.
Additionally, shares that have been owned by an optionee for at
least six months and that are tendered in payment of an
option’s exercise price will be available for issuance
under the Plans. The Plans do not limit the number of option
shares that may be granted to any individual recipient.
Administration. The Option Plans are
administered by our board of directors, which has authority to
select the persons to whom options are granted, to determine the
number of shares subject to each option and to determine all of
the terms and condition of an option. The board may delegate its
functions to a board committee.
Eligibility. Options may be granted under the
Plans to our employees (including employees of our
subsidiaries), non-employee directors and consultants and
advisors. There are no limits on the number of participants in
the Plans.
Duration of the Plans. No options may be
granted under the 2004 Option Plan after January 4, 2014 or
under the 2005 Option Plan after June 27, 2015.
Types of Awards. The Plans provide for the
grant of both nonqualified stock options and incentive stock
options. The exercise price of options granted under the 2004
Option Plan may not be less than 85% of the fair market value of
our common stock on the date of grant in the case of
nonqualified stock options, or 100% of fair market value in the
case of incentive stock options, in both instances as determined
by the board in good faith. All options under the 2005 Option
Plan must be granted with an exercise price at least equal to
the fair market value of our common stock on the date of grant,
as determined by the board in accordance with specified
requirements of the Code (except that, on the date of this
offering, fair market value means the initial public offering
price). Incentive stock options may not have a term longer than
10 years from the date of grant and otherwise must comply
with the Code requirements described above under “2008
Stock Incentive Plan — Stock Options.”
The exercise price of a stock option may be paid in cash or, in
whole or part, by the tender to us of shares of our common stock
that have been owned by the optionee for at least six months. In
the latter case, the shares will be valued at their fair market
value on the date they are tendered.
Other Terms of Awards. During the period of an
optionee’s continuous service to the company or its
subsidiaries, an option terminates only upon the earlier of the
date on which it is fully exercised, it expires by its terms or
it is terminated by mutual agreement between us and the
optionee. Generally, upon termination of
service, the unexercisable portion of any option terminates
immediately and, unless the option expires earlier by its terms,
the exercisable portion may be exercised at any time during the
three months following the date of termination. The three-month
period is extended to one year if service terminates due to
death or disability. If, however, an employee is terminated for
“cause,” or a director or advisor or consultant
engages in conduct that would be grounds for termination for
cause if the person were an employee, all unexercised options
terminate immediately. All unexercised options also terminate
immediately if an optionee terminates his or her service and the
board determines that grounds existed at the time that would
have justified termination for cause.
The board has discretion to fix exercise periods other than
those provided for in the Plans when an option is granted and,
under certain circumstances, to extend an option’s exercise
period.
Options granted under the Plans are not transferable except by
will or the laws of descent and distribution in the event of an
optionee’s death.
The Plans contain provisions for the later repurchase by us of
shares acquired by optionees. These provisions expire upon
completion of this offering.
Change of Control, Merger or Sale. The Option
Plans provide that all options become fully exercisable
(i) if any person or group (other than Thomas M.
O’Gara and his affiliates) becomes the beneficial owner of
more than 50% of the outstanding shares of our common stock or
commences a tender offer which, if successful, would have that
result or (ii) upon the execution of an agreement of
reorganization, merger or consolidation pursuant to which the
company will not be the surviving corporation or the execution
of an agreement for the sale or transfer of all or substantially
all of the company’s assets. Each Plan, as well as all
outstanding options, terminates upon the completion of a
transaction in which the successor corporation does not continue
the Plan and assume its obligations.
If amounts payable under the provisions described above,
together with other company payments to an optionee, would
constitute excess parachute payments under the Code, the amounts
payable under a Plan must be reduced such that the tax imposed
on excess parachute payments does not apply.
Amendment and Termination. The board of
directors may amend, suspend or terminate the Option Plans at
any time.
Expected Awards. As of the date of this
document, there are four participants in the 2004 Option Plan
and 46 participants in the 2005 Option Plan. Options for
520 shares of our common stock are outstanding under the
2004 Plan and options for 54,925 shares of common stock are
outstanding under the 2005 Plan (not giving effect to the
anticipated –
for-one stock split immediately before this offering). We do not
expect to grant additional stock options under either Plan.
The following table and accompanying footnotes set forth
information regarding the beneficial ownership of our common
stock by (1) each person who is known by us to own
beneficially more than 5% of our common stock, (2) each
director, nominee for director and named executive officer, and
(3) all of our directors, nominees for director and
executive officers as a group.
The information on shares beneficially owned prior to this
offering is based on 464,071 shares issued and outstanding
as of August 19, 2008 and assumes and gives effect both to
the one-for-one conversion of all outstanding shares of our
preferred stock to shares of common stock, but not to
a -for-one
stock split, that will occur immediately before the offering.
The information on shares beneficially owned after this offering
additionally assumes the issuance
of shares
in the
offering, shares
to complete the Pending Acquisitions
and shares
issued in payment of accrued dividends on our preferred stock.
Information with respect to beneficial ownership has been
furnished by each director, nominee for director, executive
officer or beneficial owner of more than 5% of our common stock.
We have determined beneficial ownership in accordance with the
SEC’s rules. These rules generally attribute beneficial
ownership of securities to persons who possess sole or shared
voting power or investment power with respect to those
securities. In addition, the rules include shares of common
stock issuable pursuant to the exercise of stock options that
are either immediately exercisable or exercisable within
60 days of August 19, 2008. These shares are deemed to
be outstanding and beneficially owned by the person holding
those options for the purpose of computing the percentage
ownership of that person, but they are not treated as
outstanding for the purpose of computing the percentage
ownership of any other person. Unless otherwise indicated, the
persons or entities identified in this table have sole voting
and investment power with respect to all shares shown as
beneficially owned by them, subject to applicable community
property laws. Additionally, unless otherwise indicated, the
address for each person is
c/o The
O’Gara Group, Inc., 7870 East Kemper Road, Suite 460,
Cincinnati, Ohio45249.
The address of Walnut Investment Partners, LP, Walnut Private
Equity Fund, LP and Walnut Holdings O’Gara LLC (Walnut
Entities) is 312 Walnut Street, Suite 1151, Cincinnati,
Ohio45202. Walnut Investment Partners, LP owns
63,398 shares; Walnut Private Equity Fund, LP owns
45,339 shares; and Walnut Holdings O’Gara LLC owns
10,834 shares. The Walnut Entities are controlled by James
M. Gould and Frederic H. Mayerson, who share voting and
investment power over the shares.
(2)
The address of Mr. and Mrs. Parker and PMR, LLC, an entity
they control, is P.O. Box 1508, 4919 Main Street,
Waitsfield, Vermont 06573. Mr. and Mrs. Parker collectively
own 42,071 shares and PMR, LLC owns 300 shares.
(3)
The address for Mr. Hauser and Hauser 43, LLC, an entity he
controls, is 4300 Glendale Milford Road, Cincinnati, Ohio45242.
Mr. Hauser and his spouse collectively own
6,931 shares and Hauser 43, LLC owns 34,695 shares.
(4)
The address of VIR Rally, LLC is 1245 Pinetree Road, Alton,
Virginia24520.
(5)
Mr. T. O’Gara owns 15,000 shares individually and
The Thomas M. O’Gara Family Trust, for which Mr. T.
O’Gara serves as trustee, owns 86,172 shares.
(6)
Includes 15,000 vested stock options issued under our 2005
Option Plan.
(7)
Consists of vested stock options issued under our 2004 and 2005
Option Plans.
The following is a description of transactions since
January 1, 2005 in which we have been a participant, in
which the amount involved in the transaction exceeded $120,000,
and in which any of our directors, executive officers or
beneficial owners of more than 5% of our capital stock had or
will have a direct or indirect material interest, other than
compensation, termination or change in control arrangements,
which are described under “Management.” See
“Principal Shareholders” for additional information
regarding the equity holdings of our directors, executive
officers and 5% beneficial owners.
Preferred
Stock Offerings
Some of our directors, executive officers and shareholders
beneficially owning more than 5% of our common stock have
participated in transactions in which they purchased shares of
our preferred stock. The share numbers and prices described
below have not been adjusted for the conversion of our preferred
stock into common stock or
the -for-one
stock split that will occur immediately prior to this offering.
On May 6, 2005, we sold 8,414 shares of Series E
5% Cumulative Participating Preferred Stock at $118.8476 per
share and 34,380 shares of Series D 5% Cumulative
Participating Preferred Stock at $90.1675 per share for
aggregate proceeds of $14.1 million. The Series D
purchasers included The Thomas M. O’Gara Family Trust for
4,149 shares and Mr. W. O’Gara for
4,148 shares. The Series D purchasers included Walnut
Investment Partners, L.P. and Walnut Private Equity Fund, L.P.
for 15,507 shares each and Mark J. Hauser for
3,366 shares.
On December 16, 2005, we sold 25,243 shares of
Series F 5% Cumulative Participating Preferred Stock for
aggregate of proceeds of approximately $3.0 million, or
$118.8476 per share. The purchasers included The Thomas M.
O’Gara Family Trust for 11,082 shares, Mr. W.
O’Gara for 421 shares, Mr. Lennon for
210 shares, Walnut Investment Partners, L.P. for
3,845 shares, Walnut Private Equity Fund, L.P. for
5,767 shares and Mr. Hauser for 373 shares.
On July 14, 2006 and December 28, 2006, we sold an
aggregate of 86,119 shares of New Class B 5%
Cumulative Participating Preferred Stock for aggregate proceeds
of $10.2 million, or $118.8476 per share. The purchasers
included The Thomas M. O’Gara Family Trust for
13,841 shares, Walnut Investment Partners, L.P. for
4,207 shares, Walnut Private Equity Fund, L.P. for
24,065 shares, Walnut Holdings O’Gara LLC for
10,434 shares, Hauser 43, LLC for 32,815 shares and
PMR LLC for 252 shares.
On December 20, 2007, we sold 24,000 shares of New
Class B 5% Cumulative Participating Preferred Stock for
aggregate proceeds of $3.0 million, or $125 per share. The
purchasers included Mr. W. O’Gara for 160 shares,
Walnut Investment Partners, L.P. for 12,880 shares, Walnut
Holdings O’Gara LLC for 400 shares, Mr. Hauser,
his spouse and Hauser 43 LLC for 5,072 shares and PMR LLC
for 48 shares.
Immediately before this offering, we will convert all of our
outstanding shares of preferred stock to common stock and issue
additional shares of common stock in payment of accrued
dividends. At an assumed public offering price of
$ per share, an aggregate
of shares
of common stock will be issued in payment of accrued dividends
on our preferred stock in connection with the conversion.
Stock
Option Grants
From January 1, 2005 to December 31, 2007, we granted
options to purchase an aggregate of 75,405 shares of common
stock to our current directors and executive officers, with
exercise prices ranging from $50.00 to $61.22. Because of
certain negative accounting consequences to the company had
their stock options remained outstanding through the public
offering, in June 2008, each of Messrs. T. O’Gara and
Gordon exercised all of his outstanding options and issued a
demand note to us in payment of the exercise price, which was
$750,000 in the case of Mr. T O’Gara and $294,885
in the case of Mr. Gordon, bearing interest at the
applicable federal rate. In August 2008, to comply with certain
legal requirements, we made a cash payment of $250,000 to
Mr. T. O’Gara and forgave $750,000 owed by
Mr. T. O’Gara to us in payment of the exercise
price for his 15,000 share stock option in exchange for
Mr. T. O’Gara’s waiver of his right to the
$1 million founder’s bonus to which he otherwise would
have been entitled upon closing of the offering. In addition, in
August 2008 Mr. Gordon paid off his note using, in part,
$250,000 borrowed from Mr. T. O’Gara.
Since we were founded, Thomas M. O’Gara, our Chairman of
the Board and a founder, has provided consulting services to us
through his company O’Gara Automotive Group, LLC, primarily
in connection with business development activities. We paid
O’Gara Automotive Group approximately $169,000, $147,000
and $260,000 for Mr. O’Gara’s services during
2005, 2006 and 2007, respectively.
H. Hugh Shelton, a nominee for director, has a consulting
arrangement with the company pursuant to which he also
participates as a member of our board of advisors. In connection
with these services, he receives an annual retainer of $16,000,
fees of $1,000 for each board of advisors meeting attended in
person and $250 for each meeting attended telephonically, a fee
of $7,000 per month for services representing the company and an
annual stock option award. General Shelton also is entitled to
sales commissions calculated as a percentage of the gross sales
from orders he develops for the company. During 2005, 2006 and
2007, General Shelton received payments of $100,000, $100,000
and $150,000, respectively, and stock option grants for an
aggregate of 600 shares of our common stock.
Since our 2005 acquisition of Diffraction, Ltd. from its former
owners, William and Julie Parker, we have leased a facility used
for the Diffraction business from Platypus LLC, an entity owned
by Mr. and Mrs. Parker. We paid Platypus LLC approximately
$119,000, $162,000 and $120,000 for lease payments during 2005,
2006 and 2007, respectively. We also sold products to Creative
Micro Corporation, which is owned by Mr. and Mrs. Parker.
Payments from Creative Micro Corporation were approximately
$67,000, $95,000 and $21,000 during 2005, 2006 and 2007,
respectively.
In April 2006, we purchased substantially all of the assets of
the driver training business of VIR Rally, LLC. Since then we
have rented land and paid raceway usage fees to VIR Rally. We
paid VIR Rally approximately $175,000 and $234,000 during 2006
and 2007, respectively.
Review of
Transactions
Prior to the adoption of the formal policy on transactions with
related persons described below, the board generally reviewed
and approved the arrangements described above, except the
consulting arrangement with General Shelton, who was not a
related person at the time. The related person transactions
described above predate the adoption of our formal policy.
Our board intends to adopt a written policy prior to the
completion of this offering that will govern transactions in
which we participate and related persons have a material
interest. Related persons include our executive officers,
directors, director nominees, 5% or more beneficial owners of
our common stock and immediate family members of these persons.
Under the policy, the audit committee will be responsible for
reviewing and approving or ratifying related person transactions
that exceed $120,000 per year. Certain related person
transactions will be deemed pre-approved by the audit committee
and will not require any other approval under the policy. If an
audit committee member or his or her family member will be
involved in a related person transaction, the member will not
participate in the approval or ratification of the transaction.
In instances where it will not be practicable or desirable to
wait until the next meeting of the audit committee for review of
a related person transaction, the policy will grant to the chair
of the audit committee (or, if the chair or his or her family
member will be involved in the related person transaction, any
other member of the audit committee) delegated authority to act
between committee meetings for these purposes. The policy will
require that a report of any action taken pursuant to delegated
authority be made at the next audit committee meeting.
For the audit committee to approve a related person transaction,
it must be satisfied that it has been fully informed of the
interests, relationships and actual or potential conflicts
present in the transaction and must believe that the transaction
will be fair to us. The committee also must believe, if
necessary, that we will have developed a plan to manage any
actual or potential conflicts of interest. The audit committee
will have the power to ratify a related person transaction that
did not receive pre-approval if it determines that there is a
compelling business or legal reason for us to continue with the
transaction, the transaction is fair to us and the failure to
comply with the policy’s pre-approval requirements was not
due to fraud or deceit.
Our authorized capital stock currently consists of
956,000 shares of common stock, of which 20,510 shares
are outstanding; 280,000 shares of New Class A 3%
Cumulative Participating Preferred Stock, of which
130,671 shares are outstanding; and 315,000 shares of
New Class B 5% Cumulative Participating Preferred Stock, of
which 312,890 shares are outstanding.
In ,
2008, our shareholders adopted amended and restated Articles of
Incorporation and an amended and restated Code of Regulations,
both of which will become effective immediately before this
offering. Pursuant to the amended and restated Articles of
Incorporation:
•
our authorized capital stock will consist
of shares
of common stock, no par value,
and shares
of preferred stock, no par value;
•
each share of preferred stock outstanding on the effective date
of the amended and restated Articles of Incorporation will be
converted automatically into one share of common stock and
payment of accrued dividends will be made in additional shares
of common stock; and
•
all special voting, dividend, conversion, redemption, preemptive
and other rights currently applicable to the preferred stock
will be eliminated.
Except where the text or context indicates otherwise, all
descriptions of our capital stock in this prospectus reference
the amended and restated Articles of Incorporation and Code of
Regulations as they will become effective immediately before
this offering.
The following summary of the material terms and provisions of
our capital stock is qualified in its entirety by reference to
the full terms and provisions contained in the forms of our
amended and restated Articles of Incorporation and Code of
Regulations, copies of which have been filed as exhibits to the
registration statement of which this prospectus is a part.
We anticipate that, upon the filing of our amended and restated
Articles of Incorporation immediately prior to this offering,
our board of directors will declare a stock dividend effecting
a –
for-one split of our common stock.
Common
Stock
General. All outstanding shares of common
stock are, and all shares of common stock to be outstanding upon
completion of the offering will be, fully-paid and nonassessable.
Dividends. Subject to any preferential rights
of any outstanding series of preferred stock that our board of
directors may create from time to time and to restrictions under
our new credit facility, the holders of our common stock will be
entitled to such dividends as may be declared from time to time
by the board of directors from funds available for the purpose.
See “Dividend Policy and Restrictions.”
Voting Rights. Each share of common stock will
entitle its holder to one vote on all matters to be voted on by
the shareholders. Our Articles of Incorporation do not provide
for cumulative voting in the election of directors. Generally,
all matters to be voted on by the shareholders must be approved
by a majority of the votes present in person or by proxy and
entitled to vote. In an uncontested election of directors, the
directors will be elected by a vote of the majority of the votes
cast with respect to each director. If an election is contested
(that is, the number of director nominees exceeds the number of
directors to be elected), plurality voting will apply. For
purposes of uncontested director elections, a majority of the
votes cast means that the number of shares voted “for”
a director must exceed the number of votes cast
“against” that director. Abstentions and “broker
non-votes” will not be counted.
Preemptive Rights. Holders of common stock
will not have preemptive or other subscription or purchase
rights with respect to the issuance and sale by us of additional
shares of common stock or other equity securities.
Liquidation Rights. Upon dissolution,
liquidation or
winding-up,
the holders of shares of common stock will be entitled to
receive our assets available for distribution proportionate to
their pro rata ownership of the outstanding shares of common
stock, subject to any preferential rights granted to holders of
preferred stock.
Preferred
Stock
Our board of directors has the authority, without further action
of our shareholders, to issue our authorized preferred stock, in
one or more classes or series within a class, and to determine
the designation, number and relative rights, preferences and
limitations of the issued preferred stock, which may include
dividend rights, conversion rights, voting rights, terms of
redemption and liquidation preferences. The issuance of
preferred stock could adversely affect the holders of our common
stock. The potential issuance of preferred stock also may
discourage bids for shares of our common stock at a premium over
the market price of our common stock, may adversely affect the
market price of shares of our common stock and may discourage,
delay or prevent a change of control. We have no current plans
to issue any shares of preferred stock.
Anti-takeover
Effects of Certain Provisions of Our Amended and Restated
Articles of Incorporation and Code of Regulations and of the
Ohio General Corporation Law
The provisions of our amended and restated Articles of
Incorporation and Code of Regulations and of Ohio law summarized
below may have the effect of discouraging, delaying or
preventing a hostile takeover, including one that might result
in a premium being paid over the market price of our common
stock, and discouraging, delaying or preventing changes in the
control or management of our company.
Articles
of Incorporation and Code of Regulations
No Cumulative Voting. Where cumulative voting
is permitted, each share is entitled to as many votes as there
are directors to be elected and each shareholder may cast all of
his or her votes for a single candidate or distribute those
votes among two or more candidates. Cumulative voting makes it
easier for a minority shareholder to elect a director. Our
Articles of Incorporation deny shareholders the right to vote
cumulatively.
Authorized But Unissued Shares. Our Articles
of Incorporation authorize the board of directors to issue up
to preferred
shares and to determine the relative rights, preferences and
limitations of the preferred shares, including voting rights,
qualifications, limitations and restrictions on those shares,
without any further action by the shareholders. These additional
shares may be utilized for a variety of corporate purposes,
including future public offerings and corporate acquisitions.
They also could be placed in “friendly hands” with the
purpose of delaying, deterring or preventing an attempt to
obtain control of us by means of a proxy contest, tender offer,
merger or otherwise.
Special Meetings of Shareholders. Our Code of
Regulations provides that special meetings of our shareholders
may be called only by the board of directors, the chairman of
the board, the president (or, in certain cases, the vice
president authorized to exercise the authority of the president)
or the holders of at least 25% of all shares outstanding and
entitled to vote at the meeting. Only business specified in the
notice of a special meeting may be brought before the meeting.
These provisions may preclude shareholders from calling, or
bringing business before, a special meeting.
Advance Notice Requirements for Shareholder Proposals and
Director Nominations. Our Code of Regulations
provides that shareholders seeking to bring business before, or
nominate candidates for election as directors at, meetings of
shareholders must provide timely notice to us in writing. To be
timely for an annual meeting, a shareholder’s notice
generally must be received at our principal office not less than
90 days nor more than 120 days prior to the first
anniversary date of the previous year’s annual meeting. To
be timely for nominating directors at a special meeting called
to elect directors, a shareholder’s notice must be received
at our principal office not later than the 15th day
following the earlier of the date that notice of the special
meeting was sent and the date that the special meeting date was
first publicly announced. Our Code of Regulations also
prescribes the information required in a shareholder’s
notice. These provisions may preclude shareholders from bringing
business before, or making nominations for directors at,
meetings of shareholders.
Ohio Control Share Acquisition Statute. After
the completion of this offering, we will be an issuing public
corporation subject to Section 1701.831 of the Ohio Revised
Code, known as the “Ohio Control Share Acquisition
Statute.” This statute provides that notice and information
filings, and special shareholder meetings and voting procedures,
must occur prior to any person’s acquisition of the
corporation’s shares that would entitle the acquirer,
directly or indirectly, alone or with others, to exercise or
direct the voting power of the corporation in the election of
directors within any of the following ranges: (i) one-fifth
or more but less than one-third of the voting power,
(ii) one-third or more but less than a majority of the
voting power and (iii) a majority of the voting power.
Under the statute, a control share acquisition must be approved
at a special meeting of shareholders, at which a quorum is
present, by at least a majority of the voting power of the
corporation in the election of directors represented at the
meeting and by the holders of a majority of the voting power
excluding the voting power of shares owned by the acquiring
shareholder and certain “interested shares,” including
shares owned by officers elected or appointed by the directors
of the corporation and by directors of the corporation who also
are employees of the corporation.
Merger Moratorium Statute. As an issuing
public corporation, we also will be subject to Chapter 1704
of the Ohio Revised Code, known as the “Merger Moratorium
Statute.” This statute prohibits certain transactions if
they involve both the corporation and a person that is an
“interested shareholder” (or anyone affiliated or
associated with an “interested shareholder”), unless
the board of directors has approved, prior to the person
becoming an interested shareholder, either the transaction or
the acquisition of shares pursuant to which the person became an
interested shareholder. An interested shareholder is any person
who is the beneficial owner of a sufficient number of shares to
allow such person, directly or indirectly, alone or with others,
to exercise or direct the exercise of 10% of the voting power of
the corporation in the election of directors. The prohibition
imposed on a person by Chapter 1704 is absolute for at
least three years and continues indefinitely thereafter unless
(i) the acquisition of shares pursuant to which the person
became an interested shareholder received the prior approval of
the corporation’s board of directors, (ii) the
Chapter 1704 transaction is approved by the holders of
shares entitled to exercise at least two-thirds of the voting
power of the corporation in the election of directors, including
shares representing at least a majority of voting shares that
are not beneficially owned by an interested shareholder or an
affiliate or associate of an interested shareholder or
(iii) the Chapter 1704 transaction satisfies statutory
conditions relating to the fairness of the consideration to be
received by the shareholders of the corporation.
Other Provisions of Ohio Law. In addition:
•
Section 1707.043 of the Ohio Revised Code provides a
corporation, or in certain instances the shareholders of the
corporation, a cause of action to recover profits realized under
certain circumstances by persons who dispose of securities of
the corporation within 18 months after proposing to acquire
the corporation. Although entitled to do so, we have not opted
out of the application of this statutory provision.
•
Section 1707.041 of the Ohio Revised Code imposes advance
filing and notice requirements for tender offers for more than
10% of certain Ohio corporations. We may not opt out of the
application of this statutory provision.
Listing
We intend to list our common stock on The NASDAQ Global Market
under the trading symbol “OGAR.”
Transfer
Agent and Registrar
The transfer agent and registrar for our common stock will be
Computershare Trust Company, N.A.
Before this offering, there has been no public market for our
common stock. We cannot predict what effect, if any, sales of
shares of common stock, or the availability of shares of common
stock for sale in the public market, will have on the price of
our common stock. Sales of substantial amounts of common stock
in the public market, or the perception that such sales could
occur, could adversely affect the prevailing market price of our
common stock and could impair our future ability to raise
capital through the sale of our equity or equity-related
securities at a time and price that we deem appropriate.
Upon the closing of this offering, we will
have shares
of common stock outstanding, assuming the issuance
of shares
in the Pending Acquisitions (based on a value of
$ per share, the mid-point of the
estimated offering price set forth on the cover page of this
prospectus and an exchange rate of
$1 ) but assuming no exercise of
the underwriters’ option to purchase additional shares. Of
the outstanding shares,
all shares
sold in this offering, plus any shares sold upon exercise of the
underwriters’ over-allotment option, will be freely
tradable without restriction or further registration under the
Securities Act, unless they are purchased in the offering by an
“affiliate” of ours as that term is defined in
Rule 144 under the Securities Act or by any person subject
to a lock-up
agreement. Rule 144 and the
lock-up
agreements are discussed below.
The
remaining
outstanding shares of common stock will be deemed
“restricted securities” as defined in Rule 144.
These shares may not be sold in the public market unless they
are registered under the Securities Act or are sold pursuant to
an exemption from registration, including an exemption under
Rule 144. Moreover, all
except of
the restricted shares are subject to the
lock-up
agreements described below. Subject to the provisions of
Rule 144, which may limit sales in any period, but giving
effect to the
lock-up
agreements, these restricted securities will be available for
sale in the public market as follows:
Approximate
Date
Number of Shares
As of the date of this prospectus
From 90 to 180 days after the date of this prospectus
From 181 to 365 days after the date of this prospectus
Beginning more than 365 days after the date of this
prospectus
In addition, upon completion of this offering, we will have
reserved for issuance 30 shares of common stock under the
2004 Option Plan, 6,095 shares under the 2005 Option Plan
and shares
under the 2008 Incentive Plan. Of these, options
for shares
of common stock will be outstanding under the 2004 and 2005
Option Plans, most of which will be exercisable immediately. No
awards will be outstanding under the 2008 Incentive Plan. As
soon as practicable after this offering, we currently intend to
register on
Form S-8
under the Securities Act all of the shares of common stock
reserved for issuance under these three Plans. Subject to the
expiration of the
180-day and
365-day
lock-up
periods and compliance with Rule 144 by our affiliates,
shares issued upon exercise of outstanding options granted under
these Plans will become freely tradable on the effective date of
that
Form S-8
registration statement. Of
the shares
issuable upon exercise of outstanding stock
options, are
covered by
180-day
lock-up
agreements
and are
subject to a
365-day
lock-up.
Lock-Up
Agreements
We and all of our directors and executive officers and the
holders of substantially all of our shares of common stock and
options to purchase common stock are subject to
lock-up
agreements. The underwriters are in the process of obtaining,
and do not intend to proceed with this offering unless they have
obtained,
lock-up
agreements from all persons who will receive shares of our
common stock upon closing of the Pending Acquisitions. Pursuant
to these
lock-up
agreements, during the period from the date of this prospectus
through the date 180 days after the date of this prospectus
(365 days in the case of Messrs. T. O’Gara, W.
O’Gara and Lennon), we and all persons who have signed
lock-up
agreements will be prohibited, subject to certain exceptions,
from engaging in multiple types of transactions that directly or
indirectly have the effect of disposing of or hedging any of our
or their ownership of or economic interest in any shares of our
common
stock or securities convertible into or exchangeable for shares
of common stock, except with the prior written consent of Morgan
Keegan. Morgan Keegan has advised us that they have no current
intent or arrangement to release any of the shares subject to
the lock-up
agreements prior to the expiration of the
lock-up
period. Morgan Keegan does not have any pre-established
conditions to, or contractually specified conditions for,
waiving the terms of the
lock-up
agreements. Any determination to release any shares subject to
the lock-up
agreements is at the sole discretion of Morgan Keegan and would
be based on a number of factors at the time of determination,
including, but not necessarily limited to, the market price of
the common stock, the liquidity of the trading market for the
common stock, general market conditions, the number of shares
proposed to be sold and the timing, purpose and terms of the
proposed sale. See “Underwriting” for a further
description of these agreements.
Rule 144
In general, under Rule 144, an affiliate who has
beneficially owned restricted shares of our common stock for at
least six months, as well as any affiliate who owns shares
acquired in the public market, is entitled to sell in any
three-month period a number of shares that does not exceed the
greater of:
•
1% of the number of shares of our common stock then outstanding,
or
approximately shares
immediately after this offering, assuming no exercise by the
underwriters of their option to purchase additional
shares; and
•
the average weekly trading volume of the common stock on all
national securities exchanges during the four calendar weeks
preceding the sale.
These sales may commence beginning 90 days after the date
of this prospectus, subject to continued availability of current
public information about us and to the
lock-up
agreements described below. They also are subject to certain
manner of sale and notice requirements of Rule 144.
A person who is not one of our affiliates, and who is not deemed
to have been one of our affiliates at any time during the three
months preceding a sale, may sell shares according to the
following conditions:
•
If the person has beneficially owned the shares for at least six
months, including the holding period of any prior owner other
than an affiliate, the shares may be sold subject to continued
availability of current public information about us.
•
If the person has beneficially owned the shares for at least one
year, including the holding period of any prior owner other than
an affiliate, the shares may be sold without any Rule 144
limitations.
Rule 701
Rule 701 under the Securities Act, as currently in effect,
permits resales of shares in reliance upon Rule 144 but
without compliance with specified restrictions, including the
holding period requirement, of Rule 144. Most of our
employees, officers, directors or consultants who purchased
shares under a written compensatory plan or contract may be
entitled to rely on the resale provisions of Rule 701.
Rule 701 permits affiliates to sell their
Rule 701 shares under Rule 144 without complying
with the holding period requirements of Rule 144.
Rule 701 further provides that non-affiliates who purchased
shares under a written compensation plan or contract may sell
their shares in reliance on Rule 144 without having to
comply with the holding period, public information, volume
limitation or notice provisions of Rule 144. All holders of
Rule 701 shares are required to wait until
90 days after the date of this prospectus before selling
their shares. However, substantially all
Rule 701 shares are subject to
lock-up
agreements with the underwriter and will only become eligible
for sale at the expiration of the applicable
180-day or
365-day
lock-up
agreements or upon obtaining the prior written consent of Morgan
Keegan, but in either event, no sooner than 90 days after
this offering.
Registration
Rights
Non-affiliated holders
of restricted
shares of our common stock have a joint, one-time right to
require us to register those shares at any time we are entitled
to do so on
Form S-3.
This right does not apply
to shares that may be sold without registration under
Rule 144. We anticipate that all of these shares will be
eligible for sale under Rule 144 prior to the time that we
are eligible to use
Form S-3.
In addition, the former shareholders of Isoclima, TPS and
OmniTech have been granted
Form S-3
registration rights in respect of
the shares
of common stock to be received by them in the Pending
Acquisitions. The shareholders of each company may exercise
their rights on an unlimited number of occasions, but must do so
jointly. As is the case with the registration rights referenced
above, the rights granted to the former shareholders of
Isoclima, TPS and OmniTech do not apply to shares that may be
sold without registration under Rule 144. Of the
approximately shares
to be issued in the Pending Acquisitions,
approximately will
be issued to persons who will not be affiliates of ours after
the completion of this offering. The
remaining shares
will be issued to persons who become our affiliates in the
transaction. We anticipate that all of these shares will become
eligible for sale under Rule 144 at approximately the same
time as we become eligible to register the shares on
Form S-3,
subject to the volume limitations and other requirements of
Rule 144 in the case of shares held by affiliates.
Morgan Keegan & Company, Inc. is acting as sole
book-running
manager of this offering and as representative of the several
underwriters. Under the terms and subject to the conditions
contained in an underwriting agreement dated the date of this
prospectus, we have agreed to sell and the underwriters named
below severally have agreed to purchase, the following numbers
of shares of our common stock:
Name
Number of Shares
Morgan Keegan & Company, Inc.
BB&T Capital Markets, a division of Scott &
Stringfellow, Inc.
Oppenheimer & Co. Inc.
Raymond James & Associates, Inc.
Stifel, Nicolaus & Company, Incorporated
The underwriting agreement provides that the obligations of the
several underwriters to pay for and accept delivery of the
shares of common stock offered by this prospectus are subject to
the approval of certain legal matters by their counsel and to
certain other conditions. The underwriters are obligated to take
and pay for all of the shares of common stock offered by this
prospectus if any such shares are taken, other than those
covered by the underwriters’ over-allotment option
described below. If an underwriter defaults, the purchase
commitments of the non-defaulting underwriters may be increased
or the offering may be terminated.
We have granted to the underwriters an over-allotment option,
exercisable for 30 days from the date of this prospectus,
to purchase up to an aggregate
of additional
shares of common stock at the initial public offering price set
forth on the cover page of this prospectus, less underwriting
discounts and commissions. The underwriters may exercise this
option solely for the purpose of covering over-allotments, if
any, made in connection with the offering of the shares of
common stock offered by this prospectus. To the extent the
option is exercised, each underwriter will become obligated,
subject to certain conditions, to purchase approximately the
same percentage of the additional shares of common stock as the
number listed next to the underwriter’s name in the
preceding table bears to the total number of shares of common
stock listed for all underwriters in the preceding table.
The underwriters initially propose to offer part of the shares
of common stock directly to the public at the initial public
offering price listed on the cover page of this prospectus and
to dealers at the initial public offering price less a
concession not in excess of
$ per share, of which a
concession not in excess of
$ per share may be reallowed
to other dealers. After the initial offering of the shares of
common stock, the offering price and other selling terms may be
varied by the representative from time to time.
The following table summarizes the underwriting discounts and
commissions that we will pay. These amounts are shown assuming
both no exercise and full exercise of the underwriters’
option to purchase additional shares. The underwriting fee is
the difference between the initial price to the public and the
amount the underwriters pay to us for the shares.
Per Share
Total
Without
With
Without
With
Over-
Over-
Over-
Over-
allotment
allotment
allotment
allotment
Underwriting discounts and commissions paid by us
$
$
$
$
In addition, we estimate that our share of the total expenses of
this offering, excluding underwriting discounts and commissions,
will be approximately
$ million.
The underwriters have informed us that they do not intend sales
to discretionary accounts to exceed five percent of the total
number of shares of common stock offered by them.
We, each of our directors and executive officers and the holders
of substantially all of our other shares of common stock and
options to purchase common stock are subject to
lock-up
agreements. The underwriters are in the process of obtaining,
and do not intend to proceed with this offering unless they have
obtained,
lock-up
agreements from all persons who will receive shares of our
common stock upon closing of the Pending
Acquisitions. For a period of 180 days after the date of
this prospectus (365 days in the case of Messrs. T.
O’Gara, W. O’Gara and Lennon), which we refer to as
the initial lockup period, persons subject to a lock-up
agreement may not offer, sell, contract to sell, pledge, sell
any option or contract to purchase, purchase any option or
contract to sell, grant any option, right or warrant to
purchase, lend or otherwise dispose of, directly or indirectly,
any shares of our common stock or securities convertible into or
exchangeable or exercisable for any shares of our common stock,
enter into a transaction that would have the same effect, or
enter into any swap, hedge or other arrangement that transfers,
in whole or in part, any of the economic consequences of
ownership of the shares, whether any such aforementioned
transaction is to be settled by delivery of the shares or such
other securities, in cash or otherwise, or publicly disclose the
intention to make any such offer, sale, pledge or disposition,
or to enter into any such transaction, swap, hedge or other
arrangement, without, in each case, the prior written consent of
Morgan Keegan. In addition, if (1) during the last
17 days of the initial
lock-up
period, we release earnings results or publicly announce
material news or a material event relating to us or
(2) prior to the expiration of the initial
lock-up
period, we announce that we will release earnings results during
the 16-day
period beginning on the last day of the initial
lock-up
period, then in each case the initial
lock-up
period will be extended until the expiration of the
18-day
period beginning on the date of release of the earnings results
or the occurrence of the material news or material event, as
applicable, unless Morgan Keegan, waives, in writing, such
extension. The initial
lock-up
period, as so extended, is referred to as the
lock-up
period.
The foregoing restrictions do not prohibit (1) any exercise
of stock options, provided that the shares of common stock so
acquired by any executive officer, director or other person will
be subject to terms of the
lock-up
agreement signed by such person and (2) a transfer of
shares of common stock by gift, will or intestacy to a family
member, affiliate or trust, but only to the extent the
transferee agrees to be bound in writing by the terms of the
lock-up
agreement signed by the donor/transferor prior to such transfer
(or as soon as practicable after such transfer in the case of
transfer by will or intestacy) and no filing by any party
(donor, donee, transferor or transferee) under the Securities
Exchange Act of 1934, as amended, shall be required or shall be
voluntarily made in connection with such transfer (other than a
filing on a Form 5 , Schedule 13 G/G-A or
Schedule 13D/D-A made after the expiration of the
lock-up
period or filings on Form 3, Schedule 13G/G-A or
Schedule 13D/D-A as required for a transfer to an estate or
trust upon the death of the signatory to the
lock-up
agreement).
A total
of shares
of common stock are subject to the
lock-up
provisions. Morgan Keegan does not have any current intention to
release shares of common stock or other securities subject to
the lock-up.
Any determination to release any shares subject to the
lock-up
would be based upon a number of factors at the time of the
determination, including the market price of the common stock,
the liquidity of the trading market for the common stock,
general market conditions, the number of shares proposed to be
sold and the timing, purpose and terms of the proposed sale.
We have agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or
to contribute to payments that the underwriters may be required
to make in that respect.
We intend to seek approval for listing of our common stock on
The NASDAQ Global Market under the symbol “OGAR.” In
order to meet one of the requirements for listing the common
stock on The NASDAQ Global Market, the underwriters have
undertaken to sell lots of 100 or more shares to a minimum of
2,000 beneficial holders.
In connection with this offering, the underwriters may engage in
stabilizing transactions, over-allotment transactions, syndicate
covering transactions and penalty bids in accordance with
Regulation M under the Securities Exchange Act of 1934, as
amended.
•
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
•
Over-allotment transactions involve sales by the underwriters of
shares in excess of the number of shares the underwriters are
obligated to purchase, which creates a syndicate short position.
The short position may be either a covered short position or a
naked short position. In a covered short position,
the number of shares over-allotted by the underwriters is not
greater than the number of shares that they may purchase in the
over-allotment option. In a naked short position, the number of
shares involved is greater than the number of shares in the
over-allotment option. The underwriters may close out any
covered short position by either exercising their over-allotment
option or purchasing shares in the open market.
•
Syndicate covering transactions involve purchases of the common
stock in the open market after the distribution has been
completed in order to cover syndicate short positions. In
determining the source of shares to close out the short
position, the underwriters will consider, among other things,
the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through
the over-allotment option. If the underwriters sell more shares
than could be covered by the over-allotment option, a naked
short position, the position can only be closed out by buying
shares in the open market. A naked short position is more likely
to be created if the underwriters are concerned that there could
be downward pressure on the price of the shares in the open
market after pricing that could adversely affect investors who
purchase in the offering.
•
Penalty bids permit the representative to reclaim a selling
concession from a syndicate member when the common stock
originally sold by the syndicate member is purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common stock or preventing or retarding
a decline in the market price of the common stock. As a result,
the price of our common stock may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on The NASDAQ Global Market or otherwise and, if
commenced, may be discontinued at any time.
Prior to this offering, there has been no public market for the
shares of common stock. The initial public offering price will
be determined by negotiations between us and the representative
of the underwriters. Among the factors to be considered in
determining the initial public offering price will be our future
prospects and those of our industry in general; sales, earnings
and other financial operating information in recent periods; and
the price-earnings ratios, price-sales ratios and market prices
of securities and certain financial and operating information of
companies engaged in activities similar to ours. The estimated
initial public offering price range set forth on the cover page
of this prospectus is subject to change as a result of market
conditions and other factors. An active trading market for the
shares may not develop, and it is possible that after the
offering the shares will not trade in the market above their
initial offering price. A prospectus in electronic format may be
made available on the web sites maintained by one or more of the
underwriters, and one or more of the underwriters may distribute
prospectuses electronically. The underwriters may agree to
allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be
allocated by the underwriters that make Internet distributions
on the same basis as other allocations.
Certain of the underwriters and their respective affiliates may
in the future perform various financial advisory and investment
banking services for us, for which they will receive customary
fees and expenses.
The validity of the issuance of the shares of common stock to be
sold in this offering will be passed upon for us by Taft
Stettinius & Hollister LLP, Cincinnati, Ohio. Certain
other legal matters will be passed upon for the underwriters by
Hogan & Hartson LLP, Washington, D.C.
The consolidated financial statements of The O’Gara Group,
Inc. and subsidiaries as of December 31, 2006 and 2007 and
for each of the three years in the period ended
December 31, 2007 included in this prospectus have been
audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as
stated in their reports appearing herein. Such consolidated
financial statements have been so included in reliance upon the
report of such firm given upon their authority as experts in
accounting and auditing.
The financial statements of Transportadora de Protección y
Seguridad, S.A. de C.V. as of and for the years ended
December 31, 2006 and 2007 included in this prospectus have
been audited by Galaz, Yamazaki, Ruiz Urquiza, S.C., member of
Deloitte Touche Tohmatsu, independent auditors, as stated in
their report appearing herein, and have been so included in
reliance upon the report of such firm given upon their authority
as experts in accounting and auditing.
The consolidated financial statements of Finanziaria Industriale
S.p.A. as of and for the year ended December 31, 2007
included in this prospectus have been audited by
Deloitte & Touche S.p.A, independent auditors, as
stated in their report appearing herein, and have been so
included in reliance upon the report of such firm given upon
their authority as experts in accounting and auditing.
The consolidated financial statements of Finanziaria Industriale
S.p.A. as of and for the year ended December 31, 2006
included in this prospectus have been audited by Delta Erre
Revisione S.r.L., independent auditors, as stated in their
report appearing herein, and have been so included in reliance
upon the report of such firm given upon their authority as
experts in accounting and auditing.
The combined financial statements of Optical Systems
Technologies, Inc., Keystone Applied Technologies, Inc. and
OmniTech Partners, Inc. as of December 31, 2006 and 2007
and for each of the three years in the period ended
December 31, 2007 included in this prospectus have been
audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein, and have
been so included in reliance upon the report of such firm given
upon their authority as experts in accounting and auditing.
We have filed with the SEC a registration statement on
Form S-1
under the Securities Act with respect to the issuance of shares
of our common stock being offered. This prospectus, which forms
a part of the registration statement, does not contain all of
the information set forth in the registration statement. For
further information with respect to us and the shares of our
common stock, you should refer to the registration statement and
its exhibits. Statements contained in this prospectus as to the
contents of any contract, agreement or other document are not
necessarily complete; you should refer to the copies of the
actual documents that are included as exhibits to the
registration statement.
Upon the closing of the offering, we will be subject to the
informational requirements of the Exchange Act and will file
annual, quarterly and current reports, proxy statements and
other information with the SEC. You can read our SEC filings,
including the registration statement, over the internet at the
SEC’s website at www.sec.gov. You also may read and
copy any document we file with the SEC at its public reference
facility at 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain copies of the
documents at prescribed rates by writing to the Public Reference
Section of the SEC at 100 F Street, N.E.,
Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330
for further information on the operations of the public
reference facilities.
We also maintain a website at
“www.ogaragroup.com”, at which you may access
these materials free of charge as soon as reasonably practicable
after they are electronically filed with, or furnished to, the
SEC. The information contained in, or that can be accessed
through, our website is not part of this prospectus.
We have audited the accompanying consolidated balance sheets of
The O’Gara Group, Inc. and subsidiaries (the
“Company”) as of December 31, 2006 and 2007, and
the related consolidated statements of operations,
shareholders’ equity and comprehensive income (loss), and
cash flows for each of the three years in the period ended
December 31, 2007. 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 the standards of the
Public Company Accounting Oversight Board (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. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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, such consolidated financial statements present
fairly, in all material respects, the financial position of The
O’Gara Group, Inc. and subsidiaries as of December 31,2006 and 2007, and the results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
Current maturities of long-term debt — including
amounts due to related parties of $2,050,000 and $750,000 in
2006 and 2007, respectively
2,250,000
750,000
Accounts payable
2,587,216
3,345,547
Accrued liabilities and other
2,268,664
4,154,309
Total current liabilities
7,343,787
11,039,201
DEFERRED INCOME TAXES
2,037,871
3,802,810
LONG-TERM DEBT — Less current maturities —
including amounts due to related parties of $750,000 in 2006
3,500,000
—
OTHER LONG-TERM LIABILITIES
501,973
437,831
Total liabilities
13,383,631
15,279,842
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ EQUITY:
Common stock, no par value — 956,000 shares
authorized, 10 shares issued and outstanding
128
128
New Convertible preferred stock — Class A, no par
value — 280,000 shares authorized, 133,017 and
130,671 issued and outstanding at December 31, 2006 and
2007, respectively
15,808,751
15,529,935
New Convertible preferred stock — Class B, no par
value — 300,000 and 315,000 shares authorized,
288,890 and 312,890 issued and outstanding at December 31,2006 and 2007, respectively
20,373,479
23,314,608
Additional paid-in capital
—
705,636
Stock subscription receivable
(1,044,995
)
(61,000
)
Accumulated other comprehensive loss, net of tax benefit of
$27,003 in 2006 and $37,978 in 2007
(42,235
)
(59,401
)
Accumulated deficit
(953,776
)
(2,396,719
)
Total shareholders’ equity
34,141,352
37,033,187
TOTAL
$
47,524,983
$
52,313,029
See notes to the consolidated financial statements.
Operations — These consolidated financial
statements include the accounts of The O’Gara Group, Inc.
and its wholly owned subsidiaries, Sensor Technology Systems,
Inc. (STS), Diffraction, Ltd. (Diffraction), O’Gara Safety
and Security Institute. Inc. (SSI), Homeland Defense Solutions,
Inc. (HDS) and Security Support Solutions Ltd. (3S)
(collectively, the Company). The Company was formed on
August 21, 2003.
STS was acquired August 31, 2003 and is engaged primarily
in the development and production of night vision devices. The
core business is selling and assembling low-profile night vision
goggles (LPNVG). Ancillary products, which are compatible with
the LPNVG, include Heads Up Displays (HUD), helmet interfaces,
cockpit compatible filters and optical devices to enhance
close-up
operations. Additionally, the Company develops system solutions,
including integrated thermal sensor inputs that provide
situational awareness information to the operator. In August
2004, STS started operations of a wholly owned subsidiary in the
United Kingdom (U.K.), Sensor Technology Systems, LTD (STSL).
The primary purpose of this startup was to service product
already sold into the region and to establish a sales presence
in the region.
Diffraction was acquired May 10, 2005 and is a
product-oriented solutions provider focused on the development,
rapid prototyping and low rate initial production of next
generation optoelectronic technology. Diffraction’s
products and research activities, most of which are classified
by the U.S. Government, include digital and fused night
vision devices, Identification Friend or Foe systems,
illuminators/pointers, intelligent sensors, optical and radio
frequency communication devices and signature management
devices. As a result of this acquisition, the Company enhanced
its ability to create next generation night vision devices as
well as other next generation optoelectronic technology.
SSI was acquired April 4, 2006 and provides a comprehensive
curriculum for the U.S. military and private companies in
anti-terrorist and protective security drivers training, as well
as basic, intermediate and tactical firearms training. This
acquisition provided the Company with the ability to enter into
the training and services market.
HDS was acquired November 1, 2006 to be a provider of
preparedness and response training for private sector and
government security personnel and emergency first responders,
threat and vulnerability assessments, and emergency and response
plan development.
3S was acquired June 29, 2007 and is a U.K.-based company
that markets and sells armored vehicles. 3S specializes in
assisting customers who need to obtain armored vehicles quickly
or who are looking for a third party to simplify and manage the
acquisition and delivery process for them. This acquisition
positions the Company in the armored vehicle market and
establishes a platform for future growth.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation — The consolidated
financial statements include the accounts of the Company and its
wholly owned subsidiaries. The results of companies acquired
during the year are included in the consolidated financial
statements from the effective date of the acquisition. All
intercompany balances and transactions have been eliminated.
Sales and Revenue Recognition — The Company
recognizes revenues as services are rendered and when title
transfers for products, subject to any special terms and
conditions of individual contracts. Under certain long-term
fixed priced contracts, the Company generally recognizes sales
and anticipated profits based on the units of delivery method or
as work on a contract progresses under the percentage-of
completion method. Estimated contract profits are recorded into
earnings in proportion to recorded sales. During the performance
of such contracts, estimated final contract prices and costs are
periodically reviewed and revisions are made as required. The
effect of these revisions to estimates is included in earnings
in the period in which the revisions are made. Sales under
cost-reimbursement contracts are recorded as costs are incurred
and include estimated
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
earned fees or profits calculated on the basis of the
relationship between costs incurred and total estimated costs.
For
time-and-material
contracts, revenue is recognized to the extent of billable rates
times hours incurred plus material and other reimbursable costs
incurred. Anticipated losses on contracts are recorded when
first identified by the Company.
Cash and Cash equivalents — Cash and cash
equivalents can include highly liquid investments with an
original maturity date of three months or less.
Accounts Receivable and Allowance for Doubtful
Accounts — The Company extends credit in the
normal course of business to agencies of the governments of
primarily the United States, Italy, U.K., and Poland. The
related billings of these customers represented a substantial
portion of the Company’s sales for 2005, 2006 and 2007.
Sales to the U.S. government were approximately $4,385,000,
$3,405,000 and $20,829,000 for 2005, 2006 and 2007,
respectively. Sales to the Italian government were approximately
$6,530,000, $2,085,000 and $3,321,000 for 2005, 2006 and 2007,
respectively. Sales to the U.K. government were approximately
$733,000, $5,890,000 and $4,320,000 for 2005, 2006 and 2007
respectively. Sales to the Polish government began in 2007 and
were approximately $3,985,000 in that year.
Management periodically reviews the listing of accounts
receivable to assess their probability of collection. Allowances
for doubtful accounts were nominal as of December 31, 2006
and 2007.
Inventories — Inventories are stated at the
lower of cost or market with cost being determined principally
on the
first-in,
first-out method.
Property and Equipment — Property and equipment
are recorded at cost or fair value at the date of acquisition.
Depreciation of property and equipment is provided using the
straight-line basis and accelerated methods over the
assets’ estimated useful lives as follows:
Years
Equipment, furniture and fixtures
3-10
Software
3-5
Facilities and leasehold improvements
3-20
The Company charges repair, maintenance, and minor renewal
expenditures and other purchases against earnings in the year
incurred, while major improvements are capitalized and
depreciated. When an item is sold or retired, the related asset
cost and accumulated depreciation are removed from the books and
gains or losses are recognized in the consolidated statements of
operations. Leasehold improvements are depreciated over the
shorter of their estimated useful lives or the terms of the
respective leases.
Depreciation expense recorded in cost of sales for 2005, 2006
and 2007 totaled approximately $42,000, $324,000 and $317,000,
respectively. Depreciation expense recorded in selling, general,
and administrative expenses for 2005, 2006 and 2007 totaled
approximately $167,000, $333,000 and $495,000, respectively.
Long-Lived Assets — The Company records
impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets may be
impaired and the undiscounted net cash flows estimated to be
generated by those assets are less than their carrying amounts.
When the undiscounted net cash flows are less than the carrying
amount, losses are recorded for the difference between the
discounted net cash flows of the assets and the carrying amount.
Goodwill and Other Intangible Assets —
Goodwill, the excess of cost over the fair value of net assets
acquired, and indefinite-lived intangible assets are tested for
impairment on an annual basis, or more frequently if
circumstances warrant. See Note 8, Goodwill and Other
Intangible Assets, for a description of the Company’s
goodwill and other intangible assets.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Use of Estimates — The preparation of the
consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
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. Estimates are revised
as additional information becomes available. Actual results
could differ from those estimates.
Foreign Currency Translation — Operations
outside the United States include those conducted by STSL and
3S. Foreign operations are subject to risks inherent in
operating under different legal systems and various political
and economic environments. Among the risks are changes in
existing tax laws, possible limitations on foreign investment
and income repatriation, government price and foreign exchange
controls, and restrictions on currency exchange. Net assets of
foreign operations were less than 1% of the Company’s total
net assets at December 31, 2006 and approximately 2% of the
Company’s total net assets at December 31, 2007.
Results of operations for STSL and 3S are translated from the
local (functional) currency to the U.S. dollar using
average exchange rates during the period, while assets and
liabilities are translated at the exchange rate in effect at the
reporting date. Resulting gains or losses from translating
foreign currency are recorded as other comprehensive income
(loss). Foreign currency transaction gains (losses) resulting
from exchange rate fluctuations on transactions denominated in a
currency other than the British pound are included in earnings.
Earnings Per Share — The Company computes
earnings per share in accordance with the provisions of
SFAS No. 128, Earnings Per Share. The
Company’s convertible preferred stock is not considered a
participating security as preferred shareholders are not
entitled to receive dividends when dividends are paid to common
stockholders. Diluted earnings per share for common stock
reflects the potential dilution that could result if securities
or other contracts to issue common stock were exercised or
converted into common stock. Diluted earnings per share assumes
the conversion of the Company’s convertible preferred stock
using the if-converted method.
Research and Development Costs — Research and
development costs are incurred each year in connection with
research, development and engineering programs that are expected
to contribute to future earnings. Research and development costs
are charged to expense as incurred. During 2005, 2006 and 2007,
research and development costs incurred totaled approximately
$13,000, $99,000 and $288,000, respectively.
Stock-Based Employee Compensation — Effective
January 1, 2006, the Company adopted
SFAS No. 123(R), Share Based Payment
(SFAS 123(R)), using the prospective method, to account
for stock-based awards issued under its compensation plan.
SFAS 123(R) revises SFAS 123, Accounting for
Stock-Based Compensation, and supersedes Accounting
Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB 25), and its related implementation
guidance. This statement establishes standards of accounting for
transactions in which an entity exchanges its equity instruments
for goods or services. It also addresses transactions in which
an entity incurs liabilities in exchange for goods or services
that are based on the fair value of the entity’s equity
instruments or that may be settled by the issuance of those
equity instruments. This statement also requires compensation
expense to be measured based upon the estimated fair value of
the stock-based awards and recognized in income on a
straight-line basis over the related service period. The
adoption of SFAS 123(R) did not require a cumulative effect
adjustment. Prior to January 1, 2006, the Company applied
the provisions of APB 25 to account for stock-based awards
issued under its compensation plans.
Advertising — The Company expenses advertising
costs as they are incurred. Advertising expenses for 2005, 2006
and 2007 were approximately $6,000, $24,000 and $33,000,
respectively.
Concentration of Credit Risk — Financial
instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade
receivables. Accounts receivable included approximately
$6,531,000 from three customers at December 31, 2006 and
$3,216,000 from two customers at December 31, 2007.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Recent Accounting Pronouncements — In September
2006, the Financial Accounting Standards Board (FASB) issued
SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value,
establishes a framework for the measurement of fair value, and
enhances disclosures about fair value measurements. The
Statement does not require any new fair value measures. The
Statement is effective for fair value measures already required
or permitted by other standards for fiscal years beginning after
November 15, 2007. Except as discussed below, the Company
was required to adopt SFAS 157 beginning on January 1,2008. SFAS 157 is required to be applied prospectively,
except for certain financial instruments. On February 12,2008, the FASB issued FSP
FAS 157-1
and FSP
FAS 157-2,
which removed leasing transactions accounted for under
SFAS No. 13, Accounting for Leases from the
scope of SFAS 157 and partially deferred the effective date
of SFAS 157 as it relates all nonrecurring fair value
measurements of nonfinancial assets and nonfinancial liabilities
until fiscal years beginning after November 15, 2008. The
adoption of this statement on January 1, 2008 did not have
a material impact on the Company’s consolidated financial
condition, results of operations or cash flows.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. The objective of SFAS 159 is to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 is
effective for the first fiscal year that begins after
November 15, 2007. In adopting SFAS 159 on
January 1, 2008, the Company did not elect the fair value
option for any financial assets or liabilities; as such, the
adoption did not have a material impact on the Company’s
consolidated financial condition, results of operations or cash
flows.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations — a replacement of
FASB No. 141 (SFAS 141(R)). SFAS 141(R)
requires (a) a company to recognize the assets acquired,
the liabilities assumed, and any noncontrolling interest in the
acquiree at fair value as of the acquisition date; and
(b) an acquirer in preacquisition periods to expense all
acquisition-related costs. SFAS 141(R) requires that any
adjustments to an acquired entity’s deferred tax asset and
liability balance that occur after the measurement period to be
recorded as a component of income tax expense. This accounting
treatment is required for business combinations consummated
before the effective date of SFAS 141(R) (non-prospective);
otherwise SFAS 141(R) must be applied prospectively. The
presentation and disclosure requirements must be applied
retrospectively to provide comparability in the financial
statements. Early adoption is prohibited. SFAS 141(R) is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
impact of this new accounting principle on the Company’s
consolidated financial condition, results of operations and cash
flows will be dependant upon the level of future acquisitions.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51
(SFAS 160). SFAS 160 (a) amends ARB 51 to
establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and the deconsolidation
of a subsidiary; (b) changes the way the consolidated
income statement is presented; (c) establishes a single
method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation;
(d) requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated; and
(e) requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish
between the interests of the parent’s owners and the
interests of the noncontrolling owners of a subsidiary.
SFAS 160 must be applied prospectively, but the
presentation and disclosure requirements must be applied
retrospectively to provide comparability in the financial
statements. Early adoption is prohibited. SFAS 160 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
Company does not expect this Statement to have a material impact
on its consolidated financial condition, results of operations
and cash flows.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the
principles used in the preparation of financial statements of
nongovernmental entities that are presented in conformity with
generally accepted accounting principles in the United States.
SFAS 162 is effective 60 days following approval by
the Securities and Exchange Commission of the Public Company
Accounting Oversight Board amendments to AU Section 411,
The Meaning of Present Fairly in Conformity With Generally
Accepted Accounting Principles. The Company does not expect
the adoption of SFAS 162 to have a material impact on the
Company’s consolidated financial condition, results of
operations and cash flows.
Income Tax Provision — The provision for income
taxes includes federal, state, foreign, and local income taxes
currently payable and deferred taxes arising from temporary
differences between the financial statement and tax basis of
assets and liabilities. Income taxes are recorded under the
liability method. Under this method, deferred income taxes are
recognized for the estimated future tax effects of differences
between the tax basis of assets and liabilities and their
financial reporting amounts as well as net operating loss
carryforwards and tax credits based on enacted tax laws.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized.
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements and
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in an income tax return.
FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure and transition. The adoption of FIN 48
on January 1, 2007 did not have a material impact on the
Company’s consolidated financial condition, results of
operations or cash flows, and any exposure due to uncertain tax
positions is immaterial. The Company recognized no interest or
penalties relating to tax matters in 2005, 2006 and 2007.
In many cases, uncertain tax positions are related to tax years
that remain subject to examination by the relevant taxing
authorities. The earliest open tax years are 2004 in the United
States and 2003 in the U.K.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
3.
EARNINGS
PER SHARE
The calculation of basic and diluted earnings per share (EPS)
follows:
(Unaudited)
2007
2005
2006
2007
Pro Forma
Basic net income (loss) per share
Net income (loss)
$
772,201
$
(1,789,551
)
$
(1,442,943
)
$
(1,442,943
)
Weighted average shares outstanding:
Common stock
10
10
10
433,120
Number of shares used in basic EPS
10
10
10
433,120
Net income (loss) per share
$
77,220.10
$
(178,955.10
)
$
(144,294.30
)
$
(3.33
)
Diluted net income (loss) per share
Net income (loss)
$
772,201
$
(1,789,551
)
$
(1,442,943
)
$
(1,442,943
)
Weighted average shares outstanding:
Common stock
10
10
10
433,120
Preferred stock
190,837
—
—
—
Number of shares used in diluted EPS
190,847
10
10
433,120
Net income (loss) per share
$
4.05
$
(178,955.10
)
$
(144,294.30
)
$
(3.33
)
The Company excluded 315,304 and 433,110 potential common shares
resulting from the conversion of preferred stock from the
calculation of diluted EPS for 2006 and 2007, respectively,
because the effect would be anti-dilutive.
Shortly before consummation of an initial public offering of the
Company’s common stock, all of its outstanding shares of
preferred stock will convert to an equivalent number of shares
of common stock. Pro forma basic and diluted EPS have been
calculated to give effect to the conversion of the preferred
stock (using the if-converted method) into common stock as
though the conversion had occurred on the original date of
issuance.
STS — On August 31, 2003, the Company
acquired 100% of the outstanding common stock of Specialized
Technical Services, Inc. (and subsequently changed its name to
Sensor Technology Systems, Inc.). The STS purchase agreement
included several provisions for contingent payments to the
former shareholders of STS upon the successful realization of
specific performance goals contained in the purchase agreement.
In 2006 and 2007, performance goals specified in the agreement
were achieved resulting in additional consideration of $243,000
and $240,000, respectively, to the former shareholders; these
amounts have been reflected in the consolidated financial
statements as additional goodwill (see Note 8).
Additional contingent payments may be necessary if future
performance goals specified in the STS purchase agreement are
achieved. Any additional purchase price will be recorded in the
period in which the specific provisions of the future contingent
payments have been met.
O’Gara Safety and Security Institute — On
April 4, 2006, the Company acquired certain assets of VIR
Rally, LLC. The aggregate purchase price was $3,198,240,
consisting of $3,000,000 of Series G Preferred Stock
(25,242 shares) based on a valuation of the preferred
shares of $118.85 per share and $198,240 in acquisition costs.
The SSI purchase agreement included several provisions for
contingent payments to the former owners of SSI upon the
successful realization of specific performance goals specified
by the purchase agreement. Any additional purchase price will be
recorded to goodwill in the period in which the specific
provisions of the future contingent payments have been met. The
following summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Property and equipment
$
593,252
Trade name
190,000
Contractual agreement
1,450,000
Customer relationships
420,000
Goodwill
550,817
Current liabilities
(5,829
)
Net assets acquired
$
3,198,240
Goodwill associated with this transaction of $550,817 is
expected to be deductible for tax purposes.
Homeland Defense Solutions, Inc. — On
November 1, 2006, the Company acquired all of the capital
stock of HDS. The original aggregate purchase price was
$10,863,672, consisting of $7,349,881 of New Class A
Preferred Stock (61,843 shares) based on a valuation of the
preferred shares of $118.85 per share, $2,050,108 in cash, a
$1,000,000 note payable to the former HDS shareholder and
$463,683 in acquisition costs. The purchase price was subject to
upward or downward adjustment based on the earnings (as defined)
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
of HDS from November 1, 2006 through October 31, 2007.
As a result of operations during the performance period, the
purchase price and goodwill were reduced by $2,641,507,
consisting of 22,226 shares of New Class A Preferred
Stock valued at $118.85 per share. The final aggregate purchase
price was $8,222,165. The following summarizes the estimated
fair values of the assets acquired and liabilities assumed at
the date of acquisition.
Current assets
$
1,003,456
Property and equipment
58,130
Trade name
1,180,000
Customer relationships
2,310,000
Contractual agreement
200,000
Goodwill
5,947,458
Other assets
12,606
Current liabilities
(1,078,744
)
Deferred tax liabilities
(1,410,741
)
Net assets acquired
$
8,222,165
Goodwill associated with this transaction of $5,947,458 is not
deductible for tax purposes.
Security Support Solutions — On June 29,2007, the Company acquired 100% of the outstanding stock of 3S.
The aggregate purchase price was $4,034,467, consisting of
$2,225,065 of New Class A Preferred Stock
(18,722 shares) based on a valuation of the preferred
shares of $118.85 per share, $1,259,935 in cash and $549,467 in
acquisition costs. The purchase price is subject to upward or
downward adjustment based on the earnings (as defined) of 3S
from July 1, 2007 through June 30, 2008 and from
July 1, 2008 through June 30, 2009. Any adjustments to
the purchase price will be recorded in the period in which the
specific provisions of the future contingencies have been met.
The following summarizes the estimated fair values of the assets
acquired and liabilities assumed at the date of acquisition.
Current assets
$
2,241,257
Property and equipment
120,783
Trade name
340,000
Customer relationships
3,360,000
Contractual agreement
100,000
Goodwill
3,708,259
Current liabilities
(4,529,152
)
Deferred tax liabilities
(1,306,680
)
Net assets acquired
$
4,034,467
Estimated goodwill associated with this transaction of
$3,708,259 is not deductible for tax purposes.
The Company’s Consolidated Statement of Operations includes
the operations of 3S starting with its June 29, 2007
acquisition date. The following is unaudited summary pro forma
information for the Company for 2007, giving effect to the
acquisition of 3S as though it had been acquired on
January 1, 2007.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
(Unaudited)
2007
Pro Forma
Net sales
$
39,599,228
Operating loss
(1,619,461
)
Net loss
(2,135,943
)
Net loss per share — basic and diluted
$
(213,594.30
)
8.
GOODWILL
AND OTHER INTANGIBLE ASSETS
In connection with the Company’s acquisitions, management
of the Company performed valuations on the Company’s
goodwill and other intangible assets for financial reporting
purposes. Assets identified through this valuation process
included goodwill, customer relationships and contracts,
technology, contact database, contractual agreements, training
manuals and trade names.
The Company applied certain provisions of SFAS 142 for the
goodwill and other intangible assets acquired. Under the
provisions of SFAS 142, goodwill and indefinite lived
assets, such as the trade names, are not subject to
amortization. Rather, management assesses at least annually
whether there has been any impairment by utilizing a two-step
methodology. The initial step requires the Company to assess its
fair value with its respective carrying amount, including
goodwill. If the carrying value exceeds the fair value, step two
of the impairment test must be performed to measure the amount
of the impairment loss, if any. Management completed its
impairment test during the fourth quarters of 2006 and 2007 and
concluded no impairment charges were required as of those dates.
The changes in the carrying amount of goodwill at
December 31, 2006 and 2007 were as follows:
The adjustments to the purchase price allocation of STS recorded
during 2006 and 2007 were due to meeting certain contingent
payment provisions of the STS purchase agreement. The
adjustments to the purchase price allocation of Diffraction
recorded during 2006 were due to additional acquisition costs.
The adjustments to the purchase price allocation of HDS in 2007
were due to the final determinations of the fair value of the
intangible assets acquired and a decrease in the purchase price
based on the earnings of HDS as defined in the purchase
agreement.
The assets associated with customer relationships, technology
and training manuals, and customer contracts and contractual
agreements are being amortized on an accelerated basis over
their estimated useful lives.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
10.
SHORT-TERM
BORROWINGS
On July 13, 2007, the Company refinanced certain of its
short-term and long-term borrowings with a new lender. As
amended on September 14, 2007, the new senior credit
facility agreement allows for a maximum line of credit of
$11.0 million, including up to $6.0 million of
outstanding letters of credit. The line of credit bears interest
at LIBOR plus 1.85% (6.48% at December 31, 2007). The new
credit facility is secured by substantially all of the assets of
the Company. On March 11, 2008, the credit facility was
extended to October 13, 2008.
At December 31, 2007, $2,789,345 of borrowings was
outstanding under the credit facility and $4,004,778 was used to
support issued letters of credit, leaving $4,205,877 of credit
available. At December 31, 2006, $237,907 of borrowings was
outstanding under the then existing credit facility. Under the
terms of certain sales contracts, the Company is required to
maintain letters of credit supporting potential future
commitments.
At December 31, 2007, the Company was in compliance with
the financial covenant under the credit facility agreement. The
Company was not in compliance with a non-financial covenant, but
a waiver was obtained from the lender.
11.
LONG-TERM
DEBT
Long-term notes payable outstanding at December 31, 2006
and 2007 consisted of the following:
2006
2007
Subordinated installment notes payable to former shareholders of
STS, due November 30, 2008, payable annually in principal
installments of $500,000 commencing August 31, 2004, plus
interest at prime rate (7.25% at December 31, 2007);
secured by the stock of STS; immediately due and payable in the
event of a change of control of the Company
$
1,500,000
$
500,000
Subordinated note payable to the former shareholder of HDS, due
April 1, 2008, plus interest at 8.25% and secured by
certain assets of the Company
Subordinated note payable to former shareholders of Diffraction
(one of whom is a board member of the Company), repaid in
February 2007, interest rate of 7.00% at December 31, 2006
300,000
—
5,750,000
750,000
Less current maturities
(2,250,000
)
(750,000
)
Total
$
3,500,000
$
—
12.
INCOME
TAXES
In June 2006, the FASB issued FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, an interpretation
of FASB Statement No. 109 (FIN 48). FIN 48
clarifies the accounting for uncertainty in income taxes
recognized in a company’s financial statements and
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in an income tax return.
FIN 48 also provides guidance on derecognition,
classification,
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
interest and penalties, accounting in interim periods,
disclosure and transition. The adoption of FIN 48 on
January 1, 2007 did not have a material impact on the
Company’s consolidated financial condition, results of
operations or cash flows, and any exposure due to uncertain tax
positions is immaterial. The Company recognized no interest or
penalties relating to tax matters in 2005, 2006 and 2007.
In many cases, uncertain tax positions are related to tax years
that remain subject to examination by the relevant taxing
authorities. The earliest open tax years are 2004 in the United
States and 2003 in the U.K.
The income tax provision (benefit) for the years ended
December 31, 2005, 2006 and 2007 was comprised of the
following:
2005
2006
2007
Current:
Federal
$
537,073
$
(140,729
)
$
483,148
Foreign
—
70,659
—
State
78,981
73,063
112,709
616,054
2,993
595,857
Deferred:
Federal
(132,637
)
(407,209
)
(532,164
)
State
(19,506
)
(59,884
)
(179,620
)
(152,143
)
(467,093
)
(711,784
)
Total
$
463,911
$
(464,100
)
$
(115,927
)
The following table reconciles the amounts obtained by applying
the statutory U.S. federal income tax rate of 34% to income
(loss) before provision for income tax to the actual tax
provision (benefit) for the years ended December 31, 2005,
2006 and 2007:
2005
2006
2007
Federal provision (benefit) computed at statutory rate
$
420,278
$
(766,241
)
$
(530,016
)
State income tax provision (benefit) (net of federal tax
benefits and apportionment factors) computed at statutory rate
61,806
(112,683
)
31,012
Impact of foreign operations
—
132,358
137,203
Change in valuation allowance
—
139,324
196,004
Other
(18,173
)
143,142
49,870
Total
$
463,911
$
(464,100
)
$
(115,927
)
Significant components of the Company’s deferred tax assets
and liabilities as of December 31, 2006 and 2007 are
summarized as follows:
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
2006
2007
Deferred tax liabilities:
Depreciation and amortization
(1,912,284
)
(4,068,576
)
Change in acquired business’ method of accounting for tax
purposes from cash to accrual basis
(342,511
)
(194,189
)
Other
(6,727
)
(24,585
)
(2,261,522
)
(4,287,350
)
Valuation allowance
(139,324
)
(335,328
)
Net deferred tax liability
$
(1,836,034
)
$
(3,584,611
)
Classified in balance sheet:
Deferred income taxes — current
$
201,837
$
218,199
Deferred income taxes — noncurrent
(2,037,871
)
(3,802,810
)
Total
$
(1,836,034
)
$
(3,584,611
)
13.
PREFERRED
STOCK
On July 14, 2006, the Company recapitalized its preferred
stock in order to simplify its capital structure. Each share of
Preferred Stock — Series A, B, D, E and F was
recapitalized into one share of New Class B Preferred
Stock. Each share of Preferred Stock — Series C
and G was recapitalized into one share of New Class A
Preferred Stock.
On July 14, 2006, the Company issued 86,119 shares of
New Class B Preferred Stock in connection with raising
capital of $10.1 million (after expenses), including
approximately $1.0 million of a stock subscription
receivable.
On December 20, 2007, the Company issued 24,000 shares
of New Class B Preferred Stock in connection with raising
capital of approximately $3.0 million (after expenses),
including $61,000 of a stock subscription receivable.
All of the preferred stock is fully participating and requires
cumulative dividends. New Class B Preferred Stock has
certain additional blocking rights based on percentage of
ownership. Cumulative dividends are computed daily based on a
360 day year. New Class A Preferred Stock provides for
a dividend of 3% while New Class B Preferred Stock provides
for a dividend of 5%. The dividend is payable upon the sale,
initial public offering or liquidating event of the Company. As
none of these events had occurred as of December 31, 2007,
the Board of Directors has not yet declared a dividend. The
cumulative dividends through December 31, 2006 and 2007
were approximately $1,420,000 and $2,943,000, respectively, and
were not recorded in the consolidated financial statements. Each
share of preferred stock is convertible into one share of common
stock at any time. The conversion ratio is subject to adjustment
under certain circumstances. At December 31, 2007, the
liquidating values of the New Class A Preferred Stock and
New Class B Preferred Stock were $15,529,935 and
$23,634,990, respectively.
In the event of liquidation, all undeclared dividends on the
preferred stock are payable. Additionally, the preferred
shareholders would receive the stated value of their original
investment in the preferred stock prior to any distributions to
other shareholders. Once the preferred shareholders have
received their preferential payment, the remaining liquidation
value is distributed to all the preferred and common
shareholders based on the number of total shares owned.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
14.
STOCK-BASED
COMPENSATION PLANS
Shareholders’ Restricted Stock Plan — The
Company had a stock incentive plan (Stock Incentive Plan) for
employees under which the Company’s Board of Directors
could grant restricted stock with terms, vesting and exercise
prices determined at its discretion. A total of
10,000 shares could be granted under the Stock Incentive
Plan, of which 7,784 were issued prior to the termination of the
Plan in May 2004. The deferred compensation amounts issued under
the Stock Incentive Plan are presented as a reduction of
shareholders’ equity and are amortized on a straight-line
basis over the vesting periods of the applicable grants. The
Company recognized $12,995, $8,686 and $0 of deferred
compensation expense in 2005, 2006 and 2007, respectively.
Stock Option Plans — The Company has a 2004
Stock Option Plan (2004 Plan) and a 2005 Stock Option Plan (2005
Plan), each of which permits the granting of nonqualified and
incentive options to purchase shares of the Company’s
common stock. Options for a total of 570 and 81,500 shares
may be granted under the 2004 and 2005 Plans, respectively, of
which options for 540 and 75,405 shares, respectively, were
issued and outstanding at December 31, 2007. Under the
plans, the Board of Directors may grant options with terms and
vesting determined at its discretion and has issued both options
that vest immediately upon grant and options that vest ratably
over three years. All outstanding options have 10 year
terms. Prior to January 1, 2006, the Company applied the
provisions of APB 25 to account for stock-based awards
issued under its compensation plans. The Company utilized the
Black-Scholes option pricing model based on the following
assumptions at the date of the option grant:
2006
2007
Risk-free interest rate
4.64
%
4.28
%
Dividend yield
0
%
0
%
Volatility rate
57.1
%
50.2
%
Expected life (years)
5.6
5.6
Weighted average grant date fair value
$
3.73
$
14.44
Compensation expense recognized in the consolidated financial
statements related to these plans was nominal in 2005 and 2006
and was $995,000 in 2007. The income tax benefit recognized for
these plans was $0, $0 and $241,000 in 2005, 2006 and 2007,
respectively.
A summary of the status of the stock option plans at
December 31, 2005, 2006 and 2007, and the changes during
the years then ended, is presented in the table below:
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Options outstanding as of December 31, 2007 had a weighted
average remaining contractual life of 9.5 years and had
exercise prices ranging from $13.00 to $61.22. The following
table provides further information on the range of exercise
prices:
Options Outstanding
Options Exercisable
Weighted-
Weighted-
Weighted-
Weighted-
Average
Average
Average
Average
Exercise
Remaining
Exercise
Remaining
Range of Option Exercise Prices
Shares
Price
Life
Shares
Price
Life
$13.00-49.72
540
$
47.00
6.6
540
$
47.00
6.6
$50.00
66,500
50.00
9.8
53,299
50.00
9.9
$60.36 - 61.22
8,905
60.63
7.8
6,856
60.62
7.8
75,945
60,695
15.
OPERATING
LEASES
The Company leases its office and manufacturing facilities and
certain office equipment. Some of the leases are with related
parties (see Note 18). Lease expense for 2005, 2006 and
2007 was approximately $227,000, $430,000 and $480,000,
respectively. The Company recognizes lease expense on a
straight-line basis and records the difference between the
recognized expense and the amounts payable under the lease as
deferred rent when the lease contains predetermined fixed
escalations of the minimum rent.
Minimum annual rentals for operating leases with non-cancelable
terms in excess of one year (excluding renewal options) are
approximately as follows:
The Company sponsors a 401(k) plan that covers all eligible
full-time employees. Company matching contributions for 2005,
2006 and 2007 were approximately $60,000, $120,000 and $284,000,
respectively. In addition, the Company can make discretionary
profit-sharing contributions. No discretionary contributions
were made in 2005, 2006 or 2007.
17.
ROYALTY
AGREEMENT
The Company has a royalty agreement through June 1, 2010
with a company which has patented certain materials used in the
Company’s production. Total royalties paid under this
agreement were approximately $502,000, $401,000 and $765,000
during 2005, 2006 and 2007, respectively.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
18.
RELATED-PARTY
TRANSACTIONS
The Company paid a shareholder and a board member of the Company
for consulting services provided. Consulting service expenses
associated with this individual approximated $169,000, $147,000
and $260,000 in 2005, 2006 and 2007, respectively.
The Company paid a shareholder $119,000, $162,000 and $120,000
for a building lease expense in 2005, 2006 and 2007,
respectively.
The Company paid a shareholder $175,000 and $234,000 for land
and facility rental expense in 2006 and 2007, respectively.
During 2005, 2006 and 2007, the Company had sales to a company
that is owned by a shareholder and director of the Company.
Total sales approximated $67,000 in 2005, $95,000 in 2006 and
$21,000 in 2007. At December 31, 2006, the Company had a
note payable to this party in the amount of $300,000. During
2007, this note was repaid with cash of $33,333 and property and
equipment of $266,667.
During 2005, 2006 and 2007, an officer and director of the
Company provided certain legal services to the Company. Payments
associated with these services were approximately $36,000 in
2005, $71,000 in 2006 and $71,000 in 2007.
19.
COMMITMENTS
AND CONTINGENCIES
Legal Matters — The Company is from time to
time involved in legal proceedings that are incidental to the
operation of its business. The Company establishes accruals in
cases where the outcome of the matter is probable and can be
reasonably estimated. Although the ultimate outcome of any legal
matter cannot be predicted with certainty, based on present
information, including the Company’s assessment of the
merits of the particular claims as well as its current reserves
and insurance coverage, the Company does not expect that such
legal proceedings to which it is a party will have any material
adverse impact on the cash flow, results of operations or
financial condition of the Company on a consolidated basis in
the foreseeable future.
Founders’ Plan — In December 2007, the
Company entered into an agreement with its three founding
shareholders under which each was immediately granted an option
to purchase 15,000 shares of the Company’s common
stock and, upon an initial public offering by the Company, would
receive a bonus payment of $1,000,000. In August 2008, one of
the founders agreed to forego his bonus payment and entered into
a separate loan forgiveness agreement.
Product Warranties — Accruals for estimated
expenses related to warranties are made at the time products are
sold or services are rendered. These accruals are established
using historical information on the nature, frequency, and
average cost of warranty claims. While the terms of the
Company’s warranties vary widely, in general, the Company
warrants its products against defects and specific types of
nonperformance. As of December 31, 2006 and 2007 accruals
related to warranties were $6,000 and $17,000, respectively.
Shareholders Agreement — The Company has a
Shareholders Agreement dated July 14, 2006 that includes
transfer restrictions on shareholders’ preferred and common
stock and provides for the right of certain holders of the
Company’s preferred stock to designate members of the Board
of Directors for election. The Shareholders Agreement terminates
upon the closing of an initial public offering by the Company.
20.
BUSINESS
SEGMENT INFORMATION
The Company is organized by differences in products and services
and reports three business segments: Sensor Systems, Training
and Services and Mobile Security. The Company evaluates the
performance of its business segments based on operating income.
There are no intercompany transactions between segments. The
Sensor Systems segment designs, manufactures and sells
specialized night vision equipment and tagging,
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
tracking and locating systems to the government and military
markets. The Training and Services segment provides technical
and tactical services to government, military and corporate
customers worldwide. The Mobile Security division assists
customers with the acquisition and delivery of armored vehicles.
Where applicable, Corporate and Other represents items necessary
to reconcile to the consolidated financial statements, which
include corporate activity. Corporate assets include cash,
deferred income taxes, certain property and equipment, prepaid
assets, and goodwill and other intangible assets.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Net sales by geographic area, based on the domicile of the
customer:
2005
2006
2007
United States
$
7,346,319
$
8,466,010
$
24,433,680
Western Europe
7,263,383
8,128,201
12,085,556
Other
—
—
1,801,992
Total
$
14,609,702
$
16,594,211
$
38,321,228
The Company had sales to customers that accounted for more than
10% of net sales. Sales to these customers are shown by segment
below:
Sensor
Training and
Mobile
Systems
Services
Security
Total
2005
Italian government
$
6,530,829
$
—
$
—
$
6,530,829
United States government
4,385,000
—
—
4,385,000
2006
United Kingdom government
$
5,889,884
$
—
$
—
$
5,889,884
United States government
1,916,699
1,488,343
—
3,405,042
Italian government
2,085,203
—
—
2,085,203
2007
United States government
$
11,487,157
$
8,345,431
$
996,540
$
20,829,128
United Kingdom government
4,320,467
—
—
4,320,467
Poland government
3,985,002
—
—
3,985,002
21.
SUPPLEMENTAL
CASH FLOW INFORMATION
Supplemental cash flow information for 2005, 2006 and 2007 is
approximately as follows:
2005
2006
2007
Interest paid
$
369,000
$
345,000
$
777,000
Income taxes paid
$
773,000
$
542,000
$
1,434,000
The following transactions were treated as noncash activities on
the consolidated statements of cash flows for the Company:
On May 10, 2005, the Company issued $5,000,000 in
Series C Preferred Stock, subsequently recapitalized into
New Class A Preferred Stock, (42,071 shares) and
$500,000 in long-term notes to the former shareholders of
Diffraction as a partial payment on the acquisition of
Diffraction (see Note 7).
On April 4, 2006, the Company issued $3,000,000 in
Series G Preferred Stock, subsequently recapitalized into
New Class A Preferred Stock, (25,242 shares) as
payment on the acquisition of SSI (see Note 7).
On November 1, 2006, the Company issued $7,349,881 in New
Class A Preferred Stock (61,843 shares) and $1,000,000
in long-term notes to the former shareholder of HDS as a partial
payment on the acquisition of HDS (see Note 7). On
November 1, 2007, $2,641,507 in New Class A Preferred
Stock (22,226 shares) were returned to the Company as a
result of a decrease in the purchase price of HDS (see
Note 7).
In 2006 and 2007, the Company recorded a stock subscription
receivable for the issuance of preferred stock of $1,044,995 and
$61,000, respectively.
On June 29, 2007, the Company issued $2,225,065 in New
Class A Preferred Stock (18,722 shares) to the former
shareholders of 3S as a partial payment on the acquisition of 3S
(see Note 7).
Interim results for The O’Gara Group, Inc and subsidiaries
(collectively, the Company) are not necessarily indicative of
the results of operations for a full fiscal year. In the opinion
of management, all adjustments (which include only normal
recurring adjustments) necessary for a fair presentation of the
results of the interim periods shown have been made. See Notes
to Consolidated Financial Statements included in the
Company’s Consolidated Financial Statements as of
December 31, 2006 and 2007, and for each of the three years
in the period ended December 31, 2007 for additional
information relating to the Company’s financial statements.
1.
EARNINGS
PER SHARE
The calculation of basic and diluted earnings per share (EPS)
follows:
Six Months Ended June 30,
Pro Forma
2007
2008
2008
Basic net income (loss) per share
Net income (loss)
$
312,137
$
(1,047,694
)
$
(1,047,694
)
Weighted average shares outstanding:
Common stock
10
1,024
444,585
Number of shares used in basic EPS
10
1,024
444,585
Net income (loss) per share
$
31,213.70
$
(1,023.14
)
$
(2.36
)
Diluted net income (loss) per share
Net income (loss)
$
312,137
$
(1,047,694
)
$
(1,047,694
)
Weighted average shares outstanding:
Common stock
10
1,024
444,585
Preferred stock
422,687
—
—
Number of shares used in diluted EPS
422,697
1,024
444,585
Net income (loss) per share
$
0.74
$
(1,023.14
)
$
(2.36
)
The Company excluded 443,561 potential common shares from the
calculation of diluted EPS for the six months ended
June 30, 2008 because the effect would be anti-dilutive.
Shortly before consummation of an initial public offering of the
Company’s common stock, all of its outstanding shares of
preferred stock will convert to an equivalent number of shares
of common stock. Pro forma basic and diluted EPS have been
calculated to give effect to the conversion of the preferred
stock (using the if-converted method) into common stock as
though the conversion had occurred on the original date of
issuance.
The assets associated with customer relationships, technology
and training manuals, and customer contracts, and contractual
agreements are being amortized on an accelerated basis over
their estimated useful lives.
The Company has a senior credit facility agreement through
October 13, 2008 which allows for a maximum line of credit
of $11.0 million, including up to $6.0 million of
outstanding letters of credit. The line of credit bears interest
at LIBOR plus 1.85% (4.32% at June 30, 2008). The credit
facility is secured by substantially all of the assets of the
Company.
At June 30, 2008, $4,361,966 of borrowings was outstanding
under the credit facility and $4,277,778 was used to support
issued letters of credit, leaving $2,360,256 of credit
available. Under the terms of certain sales contracts, the
Company is required to maintain letters of credit supporting
potential future commitments.
At June 30, 2008, the Company was in compliance with the
financial covenant under the credit facility agreement. The
Company was not in compliance with a non-financial covenant, but
a permanent waiver was obtained from the lender.
Subordinated installment notes payable to former shareholders of
STS, due August 31, 2008, secured by the stock of STS;
immediately due and payable in the event of a change of control
of the Company
$
500,000
$
500,000
Subordinated note payable to the former shareholder of Homeland
Defense Solutions, Inc., repaid April 1, 2008
250,000
—
750,000
500,000
Less current maturities
(750,000
)
(500,000
)
Total
$
—
$
—
9.
PREFERRED
STOCK
All of the preferred stock is fully participating and requires
cumulative dividends. New Class B Preferred Stock has
certain additional blocking rights based on percentage of
ownership. Cumulative dividends are computed daily based on a
360 day year. New Class A Preferred Stock provides for
a dividend of 3% while New Class B Preferred Stock provides
for a dividend of 5%. The dividend is payable upon the sale,
initial public offering or liquidating event of the Company. As
none of these events had occurred as of June 30, 2008, the
Board of Directors has not yet declared a dividend. The
cumulative dividends through December 31, 2007 and
June 30, 2008 were approximately $2,943,000 and $3,820,000,
respectively, and were not recorded in the consolidated
financial statements. Each share of preferred stock is
convertible into one share of common stock at any time. The
conversion ratio is subject to adjustment under certain
circumstances. At June 30, 2008, the
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
liquidating values of the New Class A Preferred Stock and
New Class B Preferred Stock were $15,529,935 and
$23,634,990, respectively.
In the event of liquidation, all undeclared dividends on the
preferred stock are payable. Additionally, the preferred
shareholders would receive the stated value of their original
investment in the preferred stock prior to any distributions to
other shareholders. Once the preferred shareholders have
received their preferential payment, the remaining liquidation
value is distributed to all the preferred and common
shareholders based on the number of total shares owned.
10.
STOCK-BASED
COMPENSATION PLANS
Shareholders’ Restricted Stock Plan — The
Company had a stock incentive plan (Stock Incentive Plan) for
employees under which the Company’s Board of Directors
could grant restricted stock with terms, vesting and exercise
prices determined at its discretion. A total of
10,000 shares could be granted under the Stock Incentive
Plan, of which 7,784 were issued prior to the termination of the
Plan in May 2004. The deferred compensation amounts issued under
the Stock Incentive Plan are presented as a reduction of
shareholders’ equity and are amortized on a straight-line
basis over the vesting periods of the applicable grants. The
Company recognized no deferred compensation expense in the six
months ended June 30, 2007 and 2008.
Stock Option Plans — The Company has a 2004
Stock Option Plan (2004 Plan) and a 2005 Stock Option Plan (2005
Plan), each of which permits the granting of nonqualified and
incentive options to purchase shares of the Company’s
common stock. Options for a total of 570 and 81,500 shares
may be granted under the 2004 and 2005 Plans, respectively, of
which options for 520 and 54,925 shares, respectively, were
issued and outstanding at June 30, 2008. Under the plans,
the Board of Directors may grant options with terms and vesting
determined at its discretion and has issued both options that
vest immediately upon grant and options that vest ratably over
three years. All outstanding options have 10 year terms.
Compensation expense recognized in the consolidated financial
statements related to this plan was nominal in the six months
ended June 30, 2007 and was approximately $81,000 in the
six months ended June 30, 2008.
No options were granted in the six months ended June 30,2008. Options for 20,500 shares were exercised, resulting
in a shareholder receivable to the Company of approximately
$1 million.
Options outstanding as of June 30, 2008 had a weighted
average remaining contractual life of 9.0 years and had
exercise prices ranging from $13.00 to $61.22.
11.
COMMITMENTS
AND CONTINGENCIES
Legal Matters — The Company is from time to
time involved in legal proceedings that are incidental to the
operation of its business. The Company establishes accruals in
cases where the outcome of the matter is probable and can be
reasonably estimated. Although the ultimate outcome of any legal
matter cannot be predicted with certainty, based on present
information, including the Company’s assessment of the
merits of the particular claims as well as its current reserves
and insurance coverage, the Company does not expect that such
legal proceedings to which it is a party will have any material
adverse impact on the cash flow, results of operations or
financial condition of the Company on a consolidated basis in
the foreseeable future.
Founders’ Plan — In December 2007, the
Company entered into an agreement with its three founding
shareholders under which each was immediately granted an option
to purchase 15,000 shares of the Company’s common
stock and, upon an initial public offering by the Company, would
receive a bonus payment of $1,000,000. In August 2008, one of
the founders agreed to forego his bonus payment and entered into
a separate loan forgiveness agreement.
NOTES TO THE CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
Shareholders Agreement — The Company has a
Shareholders Agreement dated July 14, 2006 that includes
transfer restrictions on shareholders’ preferred and common
stock and provides for the right of certain holders of the
Company’s preferred stock to designate members of the Board
of Directors for election. The Shareholders Agreement terminates
upon the closing of an initial public offering by the Company.
The following transactions were treated as noncash activities on
the condensed consolidated statements of cash flows for the
Company:
On June 29, 2007, the Company issued $2,225,065 in New
Class A Preferred Stock (18,722 shares) to the former
shareholders of Security Support Solutions Ltd. (3S) as a
partial payment on the acquisition of 3S.
In June 2008, the Company recorded a stock subscription
receivable for the exercise of stock options of $1,044,885.
To the Board of Directors and Shareholders of
FINANZIARIA INDUSTRIALE S.p.A.
We have audited the accompanying consolidated balance sheets of
FINANZIARIA INDUSTRIALE S.p.A. and subsidiaries (the
Company) as of December 31, 2007, and the related
consolidated statements of operations, shareholders’
equity, and cash flows for the year then ended. These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
FINANZIARIA INDUSTRIALE S.p.A. and subsidiaries as of
December 31, 2007, and the results of its operations and
its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of
America.
The “Finanziaria Industriale S.p.A.” Group
(hereinafter Finind Group or the Company) is a group of
companies mainly operating in the production and distribution of
armoured and security glass, particularly through its
subsidiaries ISOCLIMA S.p.A., ISOCLIMA DE MEXICO S.A. and
ISOCLIMA INTERNATIONAL S.A. in Mexico, ISOCLIMA INC., a
distribution company on the American market, and LIPIK GLAS
D.O.O., a manufacturing company in Croatia, as well as through
the associated companies IONTECH S.r.l. and SIVIS S.p.A.. The
Finind Group products are sold to the following sectors: the
vehicle safety sector, the building sector, the rail sector,
including high speed trains, and the shipping and aeronautical
sectors. Finind Group services leading Italian and foreign
customers, and due to its state-of-the-art production structure,
know-how and a level of experience capable of providing suitable
solutions to complex technical problems, Finind Group offers
diverse but high quality products over a wide geographical area
that ranges from the Italian to European markets, to the markets
of North and Latin America.
Principles of consolidation and basis of
presentation — The consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States of America
(U.S. GAAP).
The significant accounting policies followed in the preparation
of the consolidated financial statements are outlined below.
The consolidated financial statements of Finind Group include
the financial statements of the parent company and all wholly or
majority owned subsidiaries.
The companies that have been consolidated on a
line-by-line
basis are listed in the following table:
Description
Company Name
Registered Office
Share Capital
% Control
Parent Company
Finanziaria Ind.le S.p.A.
Este (Padua)
929,700
€
N/A
Isoclima S.p.A.
Este (Padua)
12,000,000
€
96.00
Isoclima Gmbh
Monaco (Germany)
102,258
€
96.00
Isoclima de Mexico
Mexicali — Mexico
46,961,000
MXN
96.00
Isoclima International
Mexicali — Mexico
1,654,000
MXN
96.00
Isoclima Incorporated
U.S.A.
10,000
$ USA
96.00
Lipik-Glas
Croatia
61,700,000
HRK
55.20
Isoclima UK
United Kingdom
21,927
GBP
96.00
where €= Euro, the reporting currency; MXM = Mexican peso;
HRK = Croatian kuna; GBP = British pound.
Equity investments in associated companies, valued using the
equity method, are listed in the following table:
Company Name
Registered Office
Share Capital
% Control
Iontech S.r.l.
Este (PD
)
23,460 €
48.00
Isoclima Sud
Avellino
105,000 €
23.04
Sivis S.p.A.
Conza (AV
)
1,806,000 €
45.80
All intercompany accounts and transactions are eliminated in
consolidation.
The balance sheets and income statements of the companies
consolidated
line-by-line,
listed earlier in these notes, are aggregated in full regardless
of the interest held, with the portion of shareholders’
equity and net profit (loss) attributable to minority interests
reported separately on the face of the consolidated financial
statements.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The valuation of equity investments using the equity method
refers to the corresponding portion of shareholders’ equity
reported in the most recently approved financial statements,
prior to applying the consolidation principles.
Significant
accounting policies
Use of estimates — The preparation of
financial statements in conformity with U.S. GAAP 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. Significant judgment and estimates
are required in the determination of the valuation allowances
against receivables, inventory and deferred tax assets, legal
and other accruals for contingent liabilities and the
determination of impairment considerations for long-lived
assets, among other items. Actual results could differ from
those estimates.
Foreign currency translation and
transactions — Finind Group accounts for its
foreign currency denominated transactions and foreign operations
in accordance with SFAS No. 52, Foreign Currency
Translation. The financial statements of foreign subsidiaries
are translated into Euro, which is the functional currency of
the parent company and the reporting currency of the Finind
Group. Assets and liabilities of foreign subsidiaries, which use
the local currency as their functional currency, are translated
at year-end exchange rates. Results of operations are translated
using the average exchange rates prevailing throughout the year.
The resulting cumulative translation adjustments are recorded as
a separate component of “Accumulated other comprehensive
income (loss).”
Transactions in foreign currencies are recorded at the exchange
rate in effect at the transaction date. Gains or losses from
foreign currency transactions, such as those resulting from the
settlement of foreign receivables or payables during the year,
are recognized in the consolidated statement of income in such
year. Gains from foreign currency transactions are recognized in
the consolidated statements of income for the years ended
December 31, 2006 and 2007 for Euro 0.5 million
and Euro 1.1 million respectively. Losses from foreign
currency transactions for the same periods are recognized for
Euro 1.42 million and Euro 1.17 million
respectively.
Cash and cash equivalents — Cash and cash
equivalents includes cash on hand, demand deposits, and highly
liquid investments with an original maturity of three months or
less. Substantially all amounts in transit from the banks are
converted to cash within four business days from the time of
sale.
Accounts receivable and Allowance for doubtful
accounts — Trade accounts receivable are
recorded at the invoiced amount and do not bear interest due to
their short-term nature. Amounts collected on trade accounts
receivable are included in net cash used in operating activities
in the statements of cash flows. The Company maintains an
allowance for doubtful accounts for estimated losses inherent in
its accounts receivable portfolio. In establishing the required
allowance, management considers historical losses and current
receivables aging.
Bank overdrafts and lines of credit — Bank
overdrafts represent negative cash balances held in banks,
payable on demand, with interest rates variable from 9.5% to
14%. Lines of credit represent amounts borrowed under various
unsecured short-term agreements that the Finind Group’s
companies have obtained through local financial institutions.
These facilities usually contain provisions that allow them to
renew automatically with a cancellation notice period. Interest
rates on these lines of credit vary from 4.6% to 9.15%.
Inventories — Inventories of raw,
ancillary and consumable materials at year end are stated at the
lower of cost, as determined under the weighted average method,
or market. Inventories of work in progress and finished products
are valued at the lower of production cost, on the basis of
production costs incurred to date, or market. Contract work in
progress is valued on the basis of contractual income earned
with reasonable certainty following the percentage-of-completion
method. Inventories of slow-moving or obsolete raw
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
materials and finished products are duly written down on the
basis of their expected future use or estimated net realizable
value.
Property, plant and equipment — Property,
plant and equipment are stated at historical cost. Depreciation
is computed on the straight-line method over the estimated
useful lives of the related assets. The estimated useful lives
of the major classes of depreciable assets are 33 years for
buildings and 10 to 20 years for machinery, equipment and
fixtures. The Company periodically evaluates whether current
events or circumstances indicate that the carrying value of its
depreciable assets may not be recoverable. Maintenance and
repair expenses are expensed as incurred. Improvement
expenditures on leased assets are capitalized and amortized over
the lesser of the leasehold improvement useful life or the lease
term (including any renewal periods reasonably assured). Upon
the sale or disposition of property and equipment, the cost of
the asset and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in
the consolidated statement of income.
Capitalized leased property — Capitalized
leased assets are amortized using the straight-line method over
the term of the lease, or in accordance with practices
established for similar owned assets if ownership transfers to
the Company at the end of the lease term. For sale and
lease-back transactions, profit on the sale is deferred and
amortized in proportion of the amortization of the leased assets.
Intangibles — Intangible assets,
consisting of concessions, licenses, trademarks and patents
intangible and other intangible fixed assets, are amortized on a
straight-line basis over their useful lives, ranging from 3 to
18 years.
Impairment of Long-Lived Assets — The
Company periodically reviews for impairment whether current
facts or circumstances indicate that the carrying value of its
depreciable assets to be held and used may not be recoverable.
If such circumstances are determined to exist, an estimate of
undiscounted future cash flows produced by the long-lived asset,
or the appropriate grouping of assets, is compared to the
carrying value to determine whether impairment exists. If an
asset is determined to be impaired, the loss is measured based
on the difference between the asset’s fair value and its
carrying value. An estimate of the asset’s fair value is
based on quoted market prices in active markets, if available.
If quoted market prices are not available, the estimate of fair
value is based on various valuation techniques, including a
discounted value of estimated future cash flows.
No impairment losses have been determined to be necessary for
the years ended December 31, 2006 and 2007.
The Company reports an asset to be disposed of at the lower of
its carrying value or its estimated net realizable value.
Research and development
expenses — Research and development costs are
expensed as incurred. Research and development expenses recorded
for the years ended December 31, 2006 and 2007 were
Euro 2.9 million and Euro 2.6 million
respectively.
Fair value of financial
instruments — Financial instruments consist
primarily of cash and cash equivalents, debt obligations, and
derivative financial instruments. At December 31, 2006 and
2007, the fair value of the Company’s financial instruments
approximated the carrying value except as otherwise disclosed.
Derivative financial
instruments — Derivative financial
instruments are accounted for in accordance with
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended and interpreted.
SFAS 133 requires that all derivatives, whether or not
designed in hedging relationships, be recorded on the balance
sheet at fair value regardless of the purpose or intent for
holding them. If a derivative is designated as a fair-value
hedge, changes in the fair value of the derivative and the
related change in the hedge item are recognized in operations.
If a derivative is designated as a cash-flow hedge, changes in
the fair value of the derivative are recorded in other
comprehensive income/(loss) (OCI) in the Statements of
Consolidated
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Shareholders’ Equity and are recognized in the consolidated
statements of income when the hedged item affects operations.
The effect of these derivatives in the consolidated statements
of income depends on the item hedged (for example, interest rate
hedges are recorded in interest expense). For a derivative that
does not qualify as a hedge, changes in fair value are
recognized in the consolidated statements of income, under the
caption “Other -net”.
Designated hedging instruments and hedged items qualify for
hedge accounting only if there is a formal documentation of the
hedging relationship at the inception of the hedge, hedging
relationship is expected to be highly effective and
effectiveness is tested at the inception date and at least every
three months.
Income taxes — Income taxes are recorded
in accordance with SFAS No. 109, Accounting for
Income Taxes, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been included in the Finind Group
consolidated financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based
on the difference between the consolidated financial statement
and tax basis of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to
reverse. A valuation allowance is recorded for deferred tax
assets if it is determined that it is more likely than not that
the asset will not be realized. Changes in valuation allowances
from period to period are included in the tax provisions in the
relevant period of change.
In July 2006, the Financial Accounting Standards Board (FASB)
issued FIN 48, Accounting for Uncertainty in Income
Taxes, an interpretation of FASB Statement No. 109.
FIN 48 provides that a tax benefit from an uncertain tax
position may be recognized when it is more likely than not that
the position will be sustained upon examination, including
resolutions of any related appeals or litigation processes,
based on the technical merits. In addition, it provides
additional requirements regarding measurement, de-recognition,
disclosure, interest and penalties and classification. In
February 2008, The FASB issued FASB Staff Position (FSP)
No. FIN 48-2,
Effective Date of FASB Interpretation No. 48 for certain
Nonpublic Enterprises. FSP
FIN 48-2
defers the effective date of FIN No. 48 for certain
nonpublic enterprises as defined in paragraph 289, as
amended, of FASB Statement No. 109. FSP
FIN 48-2
applies to nonpublic enterprises subject to the provision of
FIN 48, unless that nonpublic enterprise a) is a
consolidated entity of a public enterprise that applies U.S.
GAAP or b) has issued a full set of U.S. GAAP annual
financial statements prior to the issuance of this FSP. This FSP
defers the effective date of FIN 48 for nonpublic
enterprises included within this FSP’s scope to the annual
financial statements for fiscal years beginning after
December 15, 2007.
The Finind Group is included within the scope of FSP
FIN 48-2
and, therefore, has not yet adopted FIN 48.
Liability for termination
indemnities — Within the group only Italian
consolidated companies provide for a staff leaving indemnity
(called TFR). The reserve for employee termination indemnities
of Italian companies was considered a defined benefit plan
through December 31, 2006. Therefore, Finind Group
accounted for the defined benefit plan in accordance with
EITF 88-1,
Determination of Vested Benefit Obligation for a Defined
Benefit Pension Plan, using the option to record the vested
benefit obligation, which is the actuarial present value of the
vested benefits to which the employee would be entitled if the
employee retired, resigned or were terminated as of the date of
the financial statements.
Effective January 1, 2007, the Italian employee termination
indemnity system was reformed, and such indemnities are
subsequently accounted for as a defined contribution plan.
Revenue recognition — The Finind Group
recognizes revenue from product sales when the goods are shipped
or delivered and title and risk of loss pass to the customer.
Provisions for certain rebates, product returns and discounts to
customers are accounted for as reductions in sales in the same
period the related sales are recorded. Sales returns are
estimated and recorded based on historical sales and returns
information.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Product warranty — Accruals for product
warranty (including associated legal costs) are recorded on an
undiscounted basis when it is probable that a liability has been
incurred and the amount of the liability can be reasonably
estimated based on existing information. These accruals are
adjusted periodically as assessment efforts progress or as
additional information becomes available. Receivables for
related insurance or other third-party recoveries for product
liabilities are recorded, on an undiscounted basis, when it is
probable that a recovery will be realized and are classified as
a reduction of litigation charges in the income from operations.
Contingencies — In the normal course of
business, the Finind Group is subject to loss contingencies,
such as legal proceedings and claims arising out of its
business, that cover a wide range of matters. In accordance with
SFAS No. 5, Accounting for Contingencies, the
Finind Group records accruals for such loss contingencies when
it is probable that a liability has been incurred and the amount
of loss can be reasonably estimated. The Finind Group, in
accordance with SFAS No. 5, does not recognize gain
contingencies until realized.
Government grants — Capital grants from
government agencies are granted for the acquisition of fixed
assets that are used in operations and are recorded when there
is reasonable assurance that the grants will be received and
that the Group will comply with the conditions applying to them.
Capital grants are recorded in the consolidated balance sheet
initially as deferred income and subsequently recognized in the
consolidated statement of operations as revenue on a systematic
basis over the useful life of the related asset.
Recent accounting pronouncements — In
March 2008, the FASB issued SFAS No. 161,
Disclosures about Derivative Instruments and Hedging
Activities — an amendment of FASB Statement
No. 133. SFAS 161 changes the disclosure
requirements for derivative instruments and hedging activities.
Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments,
(b) how derivative instruments and related hedged items are
accounted for under SFAS 133 and its related
interpretations, and (c) how derivative instruments and
related hedged items affect an entity’s financial position,
financial performance, and cash flows. The guidance in
SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This
Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Finind
Group is currently assessing the impact of SFAS 161.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment to ARB No. 51,
establishing new accounting and reporting standards for
noncontrolling interests (formally known as “minority
interests”) in a subsidiary and, when applicable, how to
account for the deconsolidation of such subsidiary. The key
differences include that non-controlling interests will be
recorded as a component of equity, the consolidated income
statements and statements of comprehensive income will be
adjusted to include the non controlling interest and certain
disclosures have been updated. The statement is effective for
the fiscal years and interim periods within those years
beginning on or after December 15, 2008. Earlier adoption
is prohibited. The Finind Group has minority interests in
certain subsidiaries and as such is currently evaluating the
effect of adoption.
In December 2007, FASB issued SFAS No. 141(R),
Business Combinations Revised, which revises the current
SFAS 141. The significant changes include a change from the
“cost allocation process” to determine the value of
assets and liabilities to a full fair value measurement
approach. In addition, acquisition related expenses will be
expensed as incurred and not included in the purchase price
allocation and contingent liabilities will be separated into two
categories, contractual and non-contractual, and accounted for
based on which category the contingency falls into. This
statement applies prospectively and is effective for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning after
December 15, 2008. Since it will be applied prospectively
it will not have an effect on the current financial statements.
The Finind Group is currently assessing the impact of adopting
this pronouncement.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities — Including an amendment of FASB
No. 115, which allows the entities to elect to record
at fair value financial assets and liabilities, on an instrument
by instrument basis, with the change being recorded in earnings.
Such election is irrevocable after elected for that instrument
and must be applied to the entire instrument. The adoption of
such standard is for fiscal years beginning after
November 15, 2007. The adoption is not expected to have a
material effect on the consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157), which defines
fair value, establishes a framework for measuring fair value,
and expands disclosure requirements regarding fair value
measurement. Where applicable, SFAS 157 simplifies and
codifies fair value related guidance previously issued within
generally accepted accounting principles. Although SFAS 157
does not require any new fair value measurements, its
application may, for some entities, change current practice.
SFAS 157 is effective for us beginning January 1,2008. In February 2008, the FASB issued Staff Positions
157-1 and
157-2 which
partially defer the effective date of SFAS No. 157 for
one year for certain nonfinancial assets and liabilities and
remove certain leasing transactions from its scope. We do not
expect the adoption of SFAS 157 to have a material impact
on our consolidated financial position, results of operations or
cash flows.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements
that are presented in conformity with generally accepted
accounting principles in the United States. This Statement is
effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU
Section 411, The Meaning of Present Fairly in Conformity
with Generally Accepted Accounting Principles. We do not
expect SFAS 162 to have a material impact on our
consolidated financial position, results of operations and cash
flows.
2.
CASH AND
CASH EQUIVALENTS
Cash and cash equivalents are analyzed as follows:
2006
2007
(Euro)
(Euro)
Cash on hand
10,051
17,027
Bank accounts
1,058,063
967,534
Total
1,068,114
984,561
As of December 31, 2006 and 2007 the bank accounts included
Euro 1,055,274 and Euro 816,857, respectively,
denominated in foreign currency.
At the end of 2006 and 2007, property, plant and equipment at
cost and accumulated depreciation were:
2006
2007
(Euro)
(Euro)
Land and Buildings
31,866,550
30,990,998
Plants and Machinery
44,984,179
46,459,609
Industrial and commercial equipment
5,714,591
6,267,485
Other fixed assets
4,777,587
4,998,907
Tangible assets under construction and advances
860,154
716,283
88,203,061
89,433,282
Less: accumulated depreciation
(33,595,202
)
(39,638,924
)
Total
54,607,859
49,794,358
The estimated useful lives of the major classes of depreciable
assets are 33 years for buildings and 10 to 20 years
for machinery, equipment and fixtures.
Depreciation expense for the years ended December 31, 2006
and 2007 was Euro 5.6 million and
Euro 6.1 million, respectively.
A group of owned industrial buildings are pledged as collateral
for two long-term loans obtained by the Italian subsidiary
Isoclima S.p.A. in May 1998 and November 2001, with final
maturity date December 2008 and September 2011 respectively.
These assets were recorded at the end of 2006 and 2007 at a cost
(aggregate) of Euro 7.7 million and
Euro 8.1 million respectively, with a net book value
of Euro 3 million and 2.96 million.
A group of owned industrial buildings and plants are pledged as
collateral for four long-term loans obtained by the Croatian
subsidiary Lipik Glas d.o.o. in the period between May 2003 and
January 2005, with final maturity date between January 2009 and
August 2012.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
These assets were recorded at the end of 2006 and 2007 as
follows:
2006
2007
(Euro)
(Euro)
Land and buildings
3,518,924
3,558,453
Plants
320,774
326,531
3,839,698
3,884,984
Less: accumulated depreciation
(1,360,417
)
(1,439,991
)
Total
2,479,281
2,444,993
6.
INTANGIBLE
ASSETS
At the end of 2006 and 2007, intangible assets at cost and
accumulated amortization were:
2006
2007
(Euro)
(Euro)
Permits, licenses, trademarks
712,430
723,970
Capitalized software
638,407
660,259
Other intangible fixed assets
29,196
58,789
1,380,033
1,443,018
Less: accumulated amortization
(1,245,609
)
(1,326,901
)
Total
134,424
116,117
Intangible fixed assets are amortized on a straight-line basis
over their useful lives, ranging from 3 to 18 years.
Amortization expense for the years ended December 31, 2006
and 2007 was Euro 71,126 and Euro 58,433, respectively.
7.
OTHER
FINANCIAL ASSETS
Other financial assets include:
2006
2007
(Euro)
(Euro)
Advances for the acquisition of further interest in Lipik Glas
by Isoclima
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
8.
INCOME
TAXES
The Group is subject to taxation in Italy and foreign
jurisdictions.
Total income taxes for the years ended December 31, 2006
and 2007 are allocated as follows:
2006
2007
(Euro)
(Euro)
Current taxes:
Italian companies
1,780,724
1,729,917
Foreign companies
36,734
143,804
Total provision for current income taxes
1,817,458
1,873,721
Deferred taxes
Italian companies
(2,358
)
469,069
Foreign companies
(336,819
)
96,393
Total provision for deferred income taxes
(339,177
)
565,462
Total taxes
1,478,281
2,439,183
The Italian statutory tax rate is the result of two components:
national (IRES) and regional (IRAP) tax. IRAP could have a
substantially different base for its computation than IRES. In
general, the taxable base of IRAP is a form of gross profit
determined as the difference between gross revenues (excluding
interest and dividend income) and direct production costs
(excluding labour costs, interest expenses and other financial
costs).
The differences between the Italian statutory tax provision and
the effective tax provision as reflected in the consolidated
statement of income are as follows:
2006
2007
(Euro)
(Euro)
Income before income taxes and minority interests
(928,233
)
2,125,338
Italian statutory tax rate
517,827
1,443,045
Aggregate effect of different rates in foreign jurisdiction
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Deferred tax assets and liabilities as of December 31, 2006
and 2007 were as follows:
2006
2007
(Euro)
(Euro)
Deferred tax assets
Intangible assets
2,437,235
2,372,420
Property, plant and equipment
688,629
523,749
Profit on sale and leaseback transactions
1,084,778
912,976
Inventory
175,174
151,479
Loss on investments
95,068
57,861
Bad debt reserve
1,071,474
951,195
Accrued expenses
103,065
121,252
Other
84,853
130,800
Total
5,740,276
5,221,732
Deferred tax liabilities
Property, plant and equipment
(4,694,154
)
(4,566,685
)
Other
—
(226,951
)
Total
(4,694,154
)
(4,793,636
)
Net deferred income tax assets
1,046,122
428,096
Deferred income tax assets and liabilities have been classified
in the consolidated financial statements as follows:
2006
2007
(Euro)
(Euro)
Deferred income tax assets — current
1,434,566
1,310,767
Deferred income tax assets — non current
4,305,710
3,910,965
Deferred income tax liabilities — non current
(4,694,154
)
(4,793,636
)
Net deferred income tax assets/liabilities
1,046,122
428,096
As of December 31, 2006 and 2007, the Finind Group has not
recorded any aggregate valuation allowance against deferred tax
assets, as the directors, on the basis of the long-term budget
prepared, deem is more likely than not that all the above
deferred income tax assets will be realized in future periods.
On December 24, 2007, the Italian Government issued the
Italian Finance bill of 2008 (the 2008 Bill). The 2008 Bill
decreases the national tax rate (referred to as IRES) from 33%
to 27.5%, and the regional tax rate (referred to as IRAP) from
4.25% to 3.9%. The effect of this change created an additional
Euro 62,300 of deferred tax income in 2007.
Italian companies’ taxes are subject to review pursuant to
Italian law. As of December 31, 2007, tax years from 2002
through the most recent year were open for such review.
Management believes no significant unaccrued liabilities should
arise from the related tax reviews.
As of December 31, 2007, the Croatian subsidiary Lipik Glas
d.o.o. had net operating loss carryforwards of approximately
Euro 0.5 million, which mostly begin expiring in 2008.
Accrued expenses amounted to Euro 189,672 and
Euro 153,026 as of December 31, 2006 and 2007
respectively, of which Euro 131,793 and Euro 153,026
respectively referred to interests on loans.
At the end of 2006 and 2007, employee related obligations were
Euro 4,376,642 and Euro 3,990,168 respectively.
Within the group only Italian consolidated companies provide for
a staff leaving indemnity (TFR).
With regards to staff leaving indemnities (TFR), Italian law
provides for severance payments to employees upon dismissal,
resignation, retirement or other termination of employment. TFR,
through December 31, 2006, was considered an unfunded
defined benefit plan. Therefore, through December 31, 2006,
the Finind Group accounted for the defined benefit plan in
accordance with
EITF 88-1,
“Determination of Vested Benefit Obligation for a Defined
Benefit Pension Plan,” using the option to record the
vested benefit obligation, which is the actuarial present value
of the vested benefits to which the employee would be entitled
if the employee retired, resigned or were terminated as of the
date of the financial statements.
Effective January 1, 2007, the TFR system was reformed, and
under the new law, employees are given the ability to choose
where the TFR compensation is invested, whereas such
compensation otherwise would be directed to the National Social
Security Institute or Pension Funds. As a result, contributions
under the reformed TFR system are accounted for as a defined
contribution plan. The liability accrued until December 31,2006 continues to be considered a defined benefit plan,
therefore each year the Finind Group adjusts its accrual based
upon headcount and inflation and excluding the changes in
compensation level.
The related charge to earnings for the years ended
December 31, 2006 and 2007, aggregated, is
Euro 0.96 million and Euro 1.06 million
respectively.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
12.
LONG-TERM
DEBT
Long-term debt consists of the following:
2006
2007
(Euro)
(Euro)
Credit agreements with Italian financial institutions(a)
3,803,895
2,511,714
Credit agreements with foreign financial institutions(b)
5,649,491
5,254,465
9,453,386
7,766,179
Less: Current maturities
1,675,632
1,508,370
Total
7,777,754
6,257,809
Capital lease obligations — total
12,537,602
10,741,759
Current maturities
1,752,724
1,198,319
Other loans with third parties — total(c)
5,837,242
5,102,859
Current maturities
783,198
815,454
A portion of Euro 6,965,785 and Euro 5,295,231 as of
December 31, 2006 and 2007 respectively have a
maturity — term over 5 years.
As of December 31, 2006 and 2007 the long-term debt
accounts included Euro 6,066,761 and Euro 5,626,303,
respectively, denominated in foreign currency.
(a)
In May 1998 Isoclima S.p.A. entered into a credit facility with
two banks (S.Paolo IMI S.p.A. and CAB S.p.A.) providing for
mortgage loans in the aggregate principal amount of
Euro 5.16 million. The agreement requires repayment of
quarterly instalments starting on September 15, 1998 until
the final maturity date of December 15, 2008, with an
interest rate equal to that applied by EIB to the financial
institutions plus 0.7%( 5.49% on December 31, 2007).
Residual amounts as of December 31, 2006 and 2007 were
Euro 1,156,605 and Euro 396,381 respectively.
In November 2001 Isoclima S.p.A. obtained a mortgage loan with a
group of banks (Efibanca S.p.a. and Mediocredito Trentino Alto
Adige S.p.A.) for an aggregate principal amount of
Euro 5.16 million, repayable in semi-annual
instalments starting on March 15, 2002 until
September 15, 2011. Interests accrues at a rate equal to
that applied by EIB to the financial institutions plus a
variable spread (interest rate as of December 31, 2007,
6.057%). The loan agreement contains certain financial
covenants. The Company was in compliance with those covenants as
of December 31, 2006 and 2007. Residual amounts at
December 31, 2006 and 2007 were Euro 2,647,290 and
Euro 2,115,333 respectively.
(b)
Credit agreements with foreign financial institutions mainly
concerns four mortgage loans obtained by the Croatian subsidiary
Lipik Glas d.o.o. The subsidiary entered in two credit
facilities with PBZ (Prevredna Banka Zagreb) d.d. and in two
further credit facilities with HBOR (Croatian Bank for
Reconstruction and Development) in the period between May 2003
and January 2005.
A detail of the agreements requirements is as follows:
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
(c)
Other loans with third parties consist of:
2006
2007
(Euro)
(Euro)
Loans from the Italian Government for applied research(c1)
3,057,296
2,796,412
Loan from FINEST S.p.A.(c2)
1,731,876
1,729,681
Loans for the purchase of fixed assets
274,276
204,927
Other loans
773,794
371,839
(c1)
The subsidiary Isoclima S.p.A. obtained in September 1995 a loan
granted by Italian Ministry of Scientific Research to finance
applied research activities. The loan was paid in three tranches
(September 1996, April 1997 and March 1999) for a total
amount of Euro 649,728. The agreement, as amended by the
Ministry in July 2000, requires repayment of annual installments
starting on September 13, 2001 until the final maturity
date of September 13, 2010, with a fixed 1% half-yearly
interest rate. Residual amounts as of December 31, 2006 and
2007 were Euro 286,382 and 218,362 respectively.
In December 2003, Isoclima S.p.A. obtained another loan for an
amount of Euro 2.6 million granted by Italian Ministry
of Scientific Research to finance applied research activities,
repayable in annual instalments starting on May 7, 2008
until May 7, 2017. As a consequence the residual amount as
of December 31, 2006 and 2007 is
Euro 2.6 million. Interest accrues at a 1.71%
half-yearly interest rate.
Interest expense related to long-term debt for the years ended
December 31, 2006 and 2007 was Euro 844,940 and
Euro 793,396 respectively.
(c2)
The subsidiary Isoclima S.p.A. obtained in October 2001 a loan
granted by FINEST S.p.A. The loan was paid by FINEST in
different tranches, the last in 2007.
The final repayment will be in October 2009, interests accrues
at the Euribor interest rate plus a 1.5% spread.
Future repayments for long-term debt are as follows:
2008
2,323,824
2009
5,675,046
2010
1,368,952
2011
1,282,993
2012
602,168
Thereafter
1,616,055
Total
12,869,038
13.
FINANCIAL
INSTRUMENTS
Financial instruments including cash and cash equivalents,
receivables and payables and current portions of long-term debt
are deemed to approximate fair value due to their short
maturities. The carrying amounts of long-term debt and
capitalized lease obligations are also deemed to approximate
their fair values. The fair value of derivative instruments is
disclosed below.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Derivative
instruments
For the purposes of reducing market risks associated with
interest rate changes, the Italian subsidiary Isoclima S.p.A.
utilizes interest rate swap contracts.
Following are the notional amounts and net recorded fair values
of the Isoclima S.p.A. derivative instruments:
Since these contracts do not qualify as hedge instruments,
changes in the fair values have been recognized in the
consolidated statements of income, under the caption
“Financial income (loss)-net”.
14.
SHAREHOLDERS’
EQUITY
Share capital of Finanziaria Industriale S.p.A. consists of
18,000 shares with a value of Euro 51.65 each, making
a total of Euro 929,700.
The Parent Company does not own any treasury shares, nor are
such shares owned by subsidiaries, including through nominee
companies or other intermediaries.
Italian law requires that five percent of net income be retained
as a legal reserve, until this reserve is equal to one-fifth of
the issued share capital. The legal reserve may be utilized to
cover losses; any portion which exceeds one-fifth of the issued
share capital is available for dividends to the shareholders.
On May 15, 2008, the Finanziaria Industriale S.p.A.
shareholders’ meeting approved a capital increase from
Euro 929,700 to Euro 3,808,568, issuing 55,738 new
shares with a nominal value of Euro 51.65 each. As of
June 30, 2008 the capital increase has been fully paid.
On the same date, the subsidiary Isoclima S.p.A.
shareholders’ meeting approved a capital increase from
Euro 12 million to Euro 15 million, issuing
3,000 new shares with a nominal value of Euro 1,000 each,
assigning to the shareholders 1 new share for every 4 old
shares. As of June 30, 2008 the capital increase has been
fully paid.
15.
LEASES
The Italian subsidiary Isoclima S.p.A. leases some manufacturing
equipments, as well as manufacturing, warehouse and office
facilities, under capital lease arrangements expiring between
2008 and 2012. The lease arrangements include provisions
allowing Isoclima S.p.A., at its option, to purchase the leased
properties at the end of the lease terms at a price equal to 1%
of the fair value of the property at the inception of the lease.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Assets recorded under capital leases as of December 31,2006 and 2007 were as follows:
2006
2007
(Euro)
(Euro)
Land and Buildings
6,123,416
3,541,132
Plants and Machinery
2,786,720
2,757,480
Other fixed assets
399,196
433,955
9,309,332
6,732,567
Less: accumulated depreciation
(3,564,699
)
(3,200,343
)
Total
5,744,633
3,532,224
Amortization charge for capitalized leases for the years ended
December 31, 2006 and 2007 was Euro 542,289 and
374,502 respectively.
Payments for capital leases for the years ended
December 31, 2006 and 2007 were Euro 1,113,279 and
Euro 1,175,066 respectively.
Future minimum lease payments for capital leases are as follows:
2008
498,396
2009
547,410
2010
319,365
2011
231,612
2012
172,731
Total
1,769,514
The amount of imputed interests necessary to reduce the net
minimum lease payments to present value was Euro 294,898 at
December 31, 2007.
Contingent rentals are not significant.
The Italian subsidiary Isoclima S.p.A. entered in three
sale-leaseback agreements in May, 2005, December 2005 and
September 2006 respectively, regarding manufacturing, warehouse
and office facilities. Profit on the sale, totalling
Euro 7.5 million, was deferred and amortized in
proportion of the amortization of the leased assets. Properties
were leased back to the Company under capital lease arrangements
expiring between 2015 and 2016. The lease arrangements include
provisions allowing Isoclima S.p.A., at its option, to purchase
the leased properties at the end of the lease terms at a price
equal to 10% of the fair value of the property at the inception
of the lease.
Assets recorded under lease-back agreements as of
December 31, 2006 and 2007 were as follows:
2006
2007
(Euro)
(Euro)
Land and Buildings
13,023,965
13,023,965
Less: accumulated depreciation
(699,445
)
(1,415,763
)
Total
12,324,520
11,608,202
Amortization charge for capitalized leases for the years ended
December 31, 2006 and 2007 was Euro 528,802 and
716,318 respectively.
Payments for capital leases for the years ended
December 31, 2006 and 2007 were Euro 781,554 and
Euro 1,205,179 respectively.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
Future minimum lease payments are as follows:
2008
1,205,178
2009
1,205,178
2010
1,205,179
2011
1,205,179
2012
1,205,179
Thereafter
5,094,415
Total
11,120,308
The amount of imputed interests necessary to reduce the net
minimum lease payments to present value was Euro 1,853,249
at December 31, 2007.
Contingent rentals are not significant.
Isoclima S.p.A. leases a building, utilized for manufacturing
and office activities, under an operating lease agreement with
the related party Ianua S.p.A. (common shareholders with
Isoclima). Inception of the lease was July 2006 and the
expiration date is July 2012.
Future minimum lease payments required as of December 31,2007 are as follows:
2008
84,000
2009
114,000
2010
114,000
2011
114,000
2012
57,000
Total
483,000
16.
COMMITMENTS
AND CONTINGENCIES
Supply
agreement
In May 2007 Isoclima S.p.A. entered into an open-end contract
with a supplier for the supplying of some defined products. The
agreement commits Isoclima S.p.A. to purchase from the immediate
party said products for a minimum amount of
Euro 1.5 million every 12 months. A penalty is
provided for in case Isoclima should not reach the minimum in
one 12-month period, based on a percentage (as defined) of the
difference between the minimum and the actual purchase value. No
penalty was paid in 2007.
Guarantees
The Italian subsidiary Isoclima S.p.A. is the guarantor of the
full repayment of the loan of Croatian kuna 16 million
obtained by the Croatian subsidiary Lipik Glas d.o.o from PBZ
(Prevredna Banka Zagreb) in September 2004 with last instalment
due on August 31, 2012. The guarantee is for a maximum
amount of Euro 1.5 million, with expiring date
September 30, 2012. The outstanding balance is
Euro 1,345,596 as of December 31, 2007.
Litigation
In 2002 the Italian subsidiary Isoclima S.p.A. entered into a
contract with Ingra d.d., a Croatian company which at that time
held 24% of the capital stock of Lipik Glas d.o.o. With this
contact Ingra committed itself to sell to Isoclima 20% of the
total Lipik capital stock. The contractual price was
Euro 1.9 million. Starting April 2003, Isoclima made
the payments on maturities provided for by the contract and
obtained from Ingra
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
6.46% of the Lipik capital stock. Isoclima continued to meet
payments for a total consideration of Euro 1.050.000 as of
April 2005, corresponding to 12.8% of the Ingra’s
investment in Lipik. In May 2005 Ingra offered to Isoclima to
buy the entire residual Lipik shares owned for an amount of
Euro 1.5 million. A dispute arose at that time since
Ingra deemed the Euro 1.5 million price should have
been paid in addition to the amount already received, while
Isoclima intended to pay only the difference (Euro 450,000).
At the present date, Ingra considers the shares tranfer
agreement void but doesn’t intend to give back the total
amount already received.
Isoclima decided to submit the claim to arbitration at the
Croatian Board of Trade. Ingra’s statement of defense has
been filed in April 24, 2008.
Now the arbitration is in progress. Management believes, based
in part on advice from counsel, that no estimate of the result
of arbitration can be made at this time.
Finind Group is involved in claims and legal actions arising in
the ordinary course of business, which mainly relate to claims
for damages due to defective products. A specific provision has
been accrued for an amount of Euro 259,551 and
Euro 391,914 as of December 31, 2006 and 2007
respectively. Charges recorded to the income statement in 2006
and 2007 were Euro 230,939 and Euro 185,007
respectively. In the opinion of the management, the ultimate
disposition of these matters, after considering amounts accrued,
will not have a material adverse effect on the Group’s
consolidated financial position or results of operations.
17.
RELATED
PARTY TRANSACTIONS
Fixed
assets
As described in note 15, the Italian subsidiary Isoclima
S.p.A. leases a building, utilized for manufacturing and office
activities, under an operating lease agreement with the related
party Ianua S.p.A. Inception of the lease was July 2006 and the
expiration date is July 2012. As of December 31, 2007 the
payable to the related party was Euro 69,634 (no payable as
of December 31, 2006). The related expenses for the
operating lease were Euro 84,000 in 2007 and
Euro 42,000 in 2006.
During 2007 Ianua S.p.A. also performed some maintenance
services on some Isoclima’s plants.
As of December 31, 2007 the payable to the related party
for these services was Euro 54,880 (no payable as of
December 31, 2006). The related expenses for the
maintenance services were Euro 135,407 in 2006 and
Euro 78,265 in 2007.
The Croatian subsidiary Lipik Glas d.o.o. is still debtor to the
related party Ianua S.p.A. for the supplying of some industrial
equipments and maintenance services rendered in the period
2003-2006.
As of December 31, 2006 and 2007 the outstanding amounts
were approximately Euro 3.5 million and
Euro 3.2 million respectively. With reference to the
same transactions Lipik Glas d.o.o. claimed a sum for delay in
supplying and Ianua S.p.A. recognized the debt. At
December 31, 2006 and 2007 that receivable was recorded for
Euro 360,000 and Euro 200,000 respectively. The
related expenses for maintenance services were Euro 250,000
in 2006.
Other
transactions
In November 2006, the Italian subsidiary Isoclima S.p.A. (as a
client) and the related party Ianua S.p.A. (as a supplier)
decided the consensual rescission of a contract for the
supplying of two industrial plants. As agreed between the
parties, Ianua S.p.A. committed itself to return to Isoclima
S.p.A. the advances previously received for a total amount, plus
interests.
As of December 31, 2006 and 2007 the Isoclima S.p.A.
receivable was Euro 2,073,728 and 492,174 respectively. The
residual amount as of December 31, 2007 was paid in 2008.
NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS —
(Continued)
The related interests were Euro 46,000 in 2007.
“Loans to affiliated companies” refer to a
non-interest-bearing loan that the Italian subsidiary Isoclima
S.p.A. granted to the affiliated company Iontech S.r.l.
18.
SUBSEQUENT
EVENTS
In May, 2008, the Italian subsidiary Isoclima S.p.A. entered
into a contract with a related party, Ianua S.p.A..On the basis
of this contract, Isoclima S.p.A. sold to Ianua S.p.A. a project
concerning the basic design and engineering of a float glass
manufacturing system, for the price of
Euro 3.5 million, which represents the amount of
research and development costs borne in previous years (until
2005) and charged to expense. Payment of the price will be
in 36 monthly installments, with a 4.20% annual interest
rate.
Isoclima S.p.A. signed on January 8, 2008 a licence
agreement with Saint-Gobain Glass France. With this agreement,
Saint-Gobain grants to Isoclima, including its subsidiaries for
which it holds more than 50% of the shares, a nonexclusive
licence of its patents, for the purpose of making products and
selling them worldwide.
The duration of the agreement is equal to the duration of the
patents and payments are due so long as at least one of the
patents is still alive in at least one country.
In each of the years subsequent to December 31, 2007
Isoclima will pay an annual license fee of Euro 300,000 in
the year 2008 and an annual license fee of Euro 150,000 for
each of the period
2009-2010
plus royalties (twice a year) in an amount per unit (as defined)
variable depending on the units sold.
In July, 2008 the Italian subsidiary Isoclima S.p.A. received a
preliminary assessment from the Italian tax authorities totaling
approximately Euro 193,000, excluding interests and
penalties (not yet quantified), with reference to the income tax
return and the VAT statement filed for the fiscal year 2005.
Mainly, the tax authorities pointed out that the company did not
charge interests related to loans granted to subsidiaries and
disallowed some cost deductions. The Company intends to enter
into settlement discussion with the Italian tax authorities
regarding these matters. The management, based on the advice of
outside counsel, recorded a provision equal to Euro 140,000
as an estimate of the liability that might arise from the above
settlement discussion.
No other significant events have taken place since the end of
the 2007 financial year.
The Finanziaria Industriale S.p.A. Group (hereinafter Finind
Group) is a group of companies mainly operating in the
production and distribution of armoured and security glass,
particularly through its subsidiaries ISOCLIMA S.p.A., ISOCLIMA
DE MEXICO S.A. and ISOCLIMA INTERNATIONAL S.A. in Mexico,
ISOCLIMA INC., a distribution company on the American market,
and LIPIK GLAS D.O.O., a manufacturing company in Croatia, as
well as through the associated companies IONTECH S.r.l. and
SIVIS S.p.A.. The Finind Group products are sold to the
following sectors: the vehicle safety sector, the building
sector, the rail sector, including high speed trains, and the
shipping and aeronautical sectors. Finind Group services leading
Italian and foreign customers, and due to its state-of-the-art
production structure, know-how and a level of experience capable
of providing suitable solutions to complex technical problems,
Finind Group offers diverse but high quality products over a
wide geographical area that ranges from the Italian to European
markets, to the markets of North and Latin America.
Principles
of consolidation and basis of presentation
The half year consolidated financial statements have been
prepared in accordance with accounting principles generally
accepted in the United States of America (U.S. GAAP). The
significant accounting policies followed in the preparation of
the half year consolidated financial statements are not
different from those applied at year end. They are outlined
below. The half year consolidated financial statements of Finind
Group include the financial statements of the parent company and
all wholly or majority owned subsidiaries.
The companies that have been consolidated on a
line-by-line
basis are listed in the following table:
Description
Company Name
Registered Office
Share Capital
% Control
Parent Company
Finanziaria Ind.le S.p.A.
Este (Padua)
3,808,568
€
N/A
Isoclima S.p.A.
Este (Padua)
15,000,000
€
96.00
Isoclima Gmbh
Monaco (Germany)
102,258
€
96.00
Isoclima de Mexico
Mexicali — Mexico
46,961,000
MXN
96.00
Isoclima International
Mexicali — Mexico
1,654,000
MXN
96.00
Isoclima Incorporated
U.S.A.
10,000
$USA
96.00
Lipik-Glas
Croatia
61,700,000
HRK
55.20
Isoclima UK
United Kingdom
21,927
GBP
96.00
where €= Euro, the reporting currency; MXN = Mexican peso;
HRK = Croatian kuna; GBP = British pound.
Equity investments in associated companies, valued using the
equity method, are listed in the following table:
Company Name
Registered Office
Share Capital
% Control
Iontech S.r.l.
Este (PD)
23,460 €
48.00
Isoclima Sud S.p.A.
Avellino
105,000 €
23.04
Sivis S.p.A.
Conza (AV)
1,806,000 €
45.80
The management was not able to apply the equity method for the
half year ended due to the lack of information regarding the
associated companies, the value of equity investments is assumed
to be as of December 31, 2007.
All intercompany accounts and transactions are eliminated in
consolidation.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
The balance sheets and income statements of the companies
consolidated
line-by-line,
listed earlier in these notes, are aggregated in full regardless
of the interest held, with the portion of shareholders’
equity and net profit (loss) attributable to minority interests
reported separately on the face of the consolidated financial
statements.
The valuation of equity investments using the equity method
refers to the corresponding portion of shareholders’ equity
reported in the most recently approved financial statements,
prior to applying the consolidation principles.
Significant
accounting policies
Use of estimates — The preparation of
financial statements in conformity with U.S. GAAP 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. Significant judgment and estimates
are required in the determination of the valuation allowances
against receivables, inventory and deferred tax assets, legal
and other accruals for contingent liabilities and the
determination of impairment considerations for long-lived
assets, among other items. Actual results could differ from
those estimates.
Foreign currency translation and
transactions — Finind Group accounts for its
foreign currency denominated transactions and foreign operations
in accordance with SFAS No. 52, Foreign Currency
Translation. The financial statements of foreign subsidiaries
are translated into Euro, which is the functional currency of
the parent company and the reporting currency of the Finind
Group. Assets and liabilities of foreign subsidiaries, which use
the local currency as their functional currency, are translated
at year-end exchange rates. Results of operations are translated
using the average exchange rates prevailing throughout the year.
The resulting cumulative translation adjustments are recorded as
a separate component of “Accumulated other comprehensive
income (loss).”
Transactions in foreign currencies are recorded at the exchange
rate in effect at the transaction date. Gains or losses from
foreign currency transactions, such as those resulting from the
settlement of foreign receivables or payables during the half
year, are recognized in the consolidated statement of income in
such half year. Gains from foreign currency transactions are
recognized in the consolidated statements of income for the half
years ended June 30, 2008 and 2007 for
Euro 0.3 million and Euro 0.4 million
respectively. Losses from foreign currency transactions for the
same periods are recognized for Euro 0.9 million and
Euro 0.5 million respectively.
Accounts receivable and Allowance for doubtful
accounts — Trade accounts receivable are
recorded at the invoiced amount and do not bear interest due to
their short-term nature. Amounts collected on trade accounts
receivable are included in net cash used in operating activities
in the statements of cash flows. The Company maintains an
allowance for doubtful accounts for estimated losses inherent in
its accounts receivable portfolio. In establishing the required
allowance, management considers historical losses and current
receivables aging.
Cash and cash equivalents — Cash and cash
equivalents includes cash on hand, demand deposits, and highly
liquid investments with an original maturity of three months or
less. Substantially all amounts in transit from the banks are
converted to cash within four business days from the time of
sale.
Bank overdrafts and lines of credit — Bank
overdrafts represent negative cash balances held in banks,
payable on demand, with interest rates variable from 9.5% to
14%. Lines of credit represent amounts borrowed under various
unsecured short-term agreements that the Finind Group’s
companies have obtained through local financial institutions.
These facilities usually contain provisions that allow them to
renew automatically with a cancellation notice period. Interest
rates on these lines of credit vary from 4.6% to 9.15%.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
Inventories — Inventories of raw,
ancillary and consumable materials at half year end are stated
at the lower of cost, as determined under the weighted average
method, or market. Inventories of work in progress and finished
products are valued at the lower of production cost, on the
basis of production costs incurred to date, or market. Contract
work in progress is valued on the basis of contractual income
earned with reasonable certainty following the
percentage-of-completion method. Inventories of slow-moving or
obsolete raw materials and finished products are duly written
down on the basis of their expected future use or estimated net
realizable value.
Property, plant and equipment — Property,
plant and equipment are stated at historical cost. Depreciation
is computed on the straight-line method over the estimated
useful lives of the related assets. The estimated useful lives
of the major classes of depreciable assets are 33 years for
buildings and 2.5 to 10 years for machinery, equipment and
fixtures. The Company periodically evaluates whether current
events or circumstances indicate that the carrying value of its
depreciable assets may not be recoverable. Maintenance and
repair expenses are expensed as incurred. Improvement
expenditures on leased assets are capitalized and amortized over
the lesser of the leasehold improvement useful life or the lease
term (including any renewal periods reasonably assured). Upon
the sale or disposition of property and equipment, the cost of
the asset and the related accumulated depreciation are removed
from the accounts and any resulting gain or loss is included in
the consolidated statement of income.
Capitalized leased property — Capitalized
leased assets are amortized using the straight-line method over
the term of the lease, or in accordance with practices
established for similar owned assets if ownership transfers to
the Company at the end of the lease term. For sale and
lease-back transactions, profit on the sale is deferred and
amortized in proportion of the amortization of the leased assets.
Intangibles — Intangible assets,
consisting of concessions, licenses, trademarks and patents
intangible and other intangible fixed assets, are amortized on a
straight-line basis over their useful lives, ranging from 3 to
18 years.
Impairment of Long-Lived Assets — The
Company periodically reviews for impairment whether current
facts or circumstances indicate that the carrying value of its
depreciable assets to be held and used may not be recoverable.
If such circumstances are determined to exist, an estimate of
undiscounted future cash flows produced by the long-lived asset,
or the appropriate grouping of assets, is compared to the
carrying value to determine whether impairment exists. If an
asset is determined to be impaired, the loss is measured based
on the difference between the asset’s fair value and its
carrying value. An estimate of the asset’s fair value is
based on quoted market prices in active markets, if available.
If quoted market prices are not available, the estimate of fair
value is based on various valuation techniques, including a
discounted value of estimated future cash flows.
No impairment losses have been determined to be necessary for
the half years ended June 30, 2008 and 2007.
The Company reports an asset to be disposed of at the lower of
its carrying value or its estimated net realizable value.
Fair value of financial
instruments — Financial instruments consist
primarily of cash and cash equivalents, debt obligations, and
derivative financial instruments. At December 31, 2007 and
June 30, 2008, the fair value of the Company’s
financial instruments approximated the carrying value except as
otherwise disclosed.
Research and development
expenses — Research and development costs are
expensed as incurred. Research and development expenses recorded
for the half years ended June 30, 2007 and 2008 were
Euro 0.71 million and Euro 1.4 million
respectively.
Derivative financial
instruments — Derivative financial
instruments are accounted for in accordance with
SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, as amended and interpreted.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
SFAS 133 requires that all derivatives, whether or not
designed in hedging relationships, be recorded on the balance
sheet at fair value regardless of the purpose or intent for
holding them. If a derivative is designated as a fair-value
hedge, changes in the fair value of the derivative and the
related change in the hedge item are recognized in operations.
If a derivative is designated as a cash-flow hedge, changes in
the fair value of the derivative are recorded in other
comprehensive income/(loss) (OCI) in the Statements of
Consolidated Shareholders’ Equity and are recognized in the
consolidated statements of income when the hedged item affects
operations. The effect of these derivatives in the consolidated
statements of income depends on the item hedged (for example,
interest rate hedges are recorded in interest expense). For a
derivative that does not qualify as a hedge, changes in fair
value are recognized in the consolidated statements of income,
under the caption “Other — net”.
Designated hedging instruments and hedged items qualify for
hedge accounting only if there is a formal documentation of the
hedging relationship at the inception of the hedge, hedging
relationship is expected to be highly effective and
effectiveness is tested at the inception date and at least every
three months.
Income taxes — Income taxes are recorded
in accordance with SFAS No. 109, Accounting for
Income Taxes, which requires recognition of deferred tax
assets and liabilities for the expected future tax consequences
of events that have been included in the Finind Group
consolidated financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based
on the difference between the consolidated financial statement
and tax basis of assets and liabilities using enacted tax rates
in effect for the year in which the differences are expected to
reverse. A valuation allowance is recorded for deferred tax
assets if it is determined that it is more likely than not that
the asset will not be realized. Changes in valuation allowances
from period to period are included in the tax provisions in the
relevant period of change.
In July 2006, the FASB issued FIN 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB
Statement No. 109. FIN 48 provides that a tax benefit
from an uncertain tax position may be recognized when it is more
likely than not that the position will be sustained upon
examination, including resolutions of any related appeals or
litigation processes, based on the technical merits. In
addition, it provides additional requirements regarding
measurement, de-recognition, disclosure, interest and penalties
and classification. In February 2008, The FASB issued FASB Staff
Position (FSP)
No. FIN 48-2,
Effective Date of FASB Interpretation No. 48 for certain
Nonpublic Enterprises. FSP
FIN 48-2
defers the effective date of FIN No. 48 for certain
nonpublic enterprises as defined in paragraph 289, as
amended, of FASB Statement No. 109. FSP
FIN 48-2
applies to nonpublic enterprises subject to the provision of
FIN 48, unless that nonpublic enterprise a) is a
consolidated entity of a public enterprise that applies U.S.
GAAP or b) has issued a full set of U.S. GAAP annual
financial statements prior to the issuance of this FSP. This FSP
defers the effective date of FIN 48 for nonpublic
enterprises included within this FSP’s scope to the annual
financial statements for fiscal years beginning after
December 15, 2007.
The Finind Group is included within the scope of FSP
FIN 48-2
and, therefore, adopted FIN 48 starting from the current
fiscal year. As a consequence of the adoption of FIN 48 the
company recorded against Retained Earnings an amount equal to
Euro 130,340 in the half year consolidated financial
statements as of June 30, 2008.
Liability for termination
indemnities — Within the group only Italian
consolidated companies provide for a staff leaving indemnity
(called TFR). The reserve for employee termination indemnities
of Italian companies was considered a defined benefit plan
through December 31, 2006. Therefore, Finind Group
accounted for the defined benefit plan in accordance with
EITF 88-1,
Determination of Vested Benefit Obligation for a Defined
Benefit Pension Plan, using the option to record the vested
benefit obligation, which is the actuarial present value of the
vested benefits to which the employee would be entitled if the
employee retired, resigned or were terminated as of the date of
the financial statements. Effective January 1, 2007, the
Italian employee
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
termination indemnity system was reformed, and such indemnities
are subsequently accounted for as a defined contribution plan.
Revenue recognition — The Finind Group
recognizes revenue from product sales when the goods are shipped
or delivered and title and risk of loss pass to the customer.
Provisions for certain rebates, product returns and discounts to
customers are accounted for as reductions in sales in the same
period the related sales are recorded. Sales returns are
generally estimated and recorded based on historical sales and
returns information.
Product warranty — Accruals for product
warranty (including associated legal costs) are recorded on an
undiscounted basis when it is probable that a liability has been
incurred and the amount of the liability can be reasonably
estimated based on existing information. These accruals are
adjusted periodically as assessment efforts progress or as
additional information becomes available. Receivables for
related insurance or other third-party recoveries for product
liabilities are recorded, on an undiscounted basis, when it is
probable that a recovery will be realized and are classified as
a reduction of litigation charges in the income from operations.
Contingencies — In the normal course of
business, the Finind Group is subject to loss contingencies,
such as legal proceedings and claims arising out of its
business, that cover a wide range of matters. In accordance with
SFAS No. 5, Accounting for Contingencies, the
Finind Group records accruals for such loss contingencies when
it is probable that a liability has incurred and the amount of
loss can be reasonably estimated. The Finind Group, in
accordance with SFAS No. 5, does not recognize gain
contingencies until realized.
Government grants — Capital grants from
government agencies are granted for the acquisition of fixed
assets that are used in operations and are recorded when there
is reasonable assurance that the grants will be received and
that the Group will comply with the conditions applying to them.
Capital grants are recorded in the consolidated balance sheet
initially as deferred income and subsequently recognized in the
consolidated statement of operations as revenue on a systematic
basis over the useful life of the related asset.
Recent accounting pronouncements — In
March 2008, the Financial Accounting Standards Board (FASB)
issued SFAS No. 161, Disclosures about Derivative
Instruments and Hedging Activities — an amendment of
FASB Statement No. 133. SFAS 161 changes the
disclosure requirements for derivative instruments and hedging
activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related
hedged items are accounted for under SFAS 133 and its
related interpretations, and (c) how derivative instruments
and related hedged items affect an entity’s financial
position, financial performance, and cash flows. The guidance in
SFAS 161 is effective for financial statements issued for
fiscal years and interim periods beginning after
November 15, 2008, with early application encouraged. This
Statement encourages, but does not require, comparative
disclosures for earlier periods at initial adoption. The Finind
Group is currently assessing the impact of SFAS 161.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment to ARB No. 51,
establishing new accounting and reporting standards for
noncontrolling interests (formally known as “minority
interests”) in a subsidiary and, when applicable, how to
account for the deconsolidation of such subsidiary. The key
differences include that non-controlling interests will be
recorded as a component of equity, the consolidated income
statements and statements of comprehensive income will be
adjusted to include the non controlling interest and certain
disclosures have been updated. The statement is effective for
the fiscal years and interim periods within those years
beginning on or after December 15, 2008. Earlier adoption
is prohibited. The Finind Group has minority interests in
certain subsidiaries and as such is currently evaluating the
effect of adoption.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
In December 2007, FASB issued SFAS No. 141(R),
Business Combinations Revised, which revises the current
SFAS 141. The significant changes include a change from the
“cost allocation process” to determine the value of
assets and liabilities to a full fair value measurement
approach. In addition, acquisition related expenses will be
expensed as incurred and not included in the purchase price
allocation and contingent liabilities will be separated into two
categories, contractual and non-contractual, and accounted for
based on which category the contingency falls into. This
statement applies prospectively and is effective for business
combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning after
December 15, 2008. Since it will be applied prospectively
it will not have an effect on the current financial statements.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities — Including an amendment of FASB
No. 115, which allows the entities to elect to record
at fair value financial assets and liabilities, on an instrument
by instrument basis, with the change being recorded in earnings.
Such election is irrevocable after elected for that instrument
and must be applied to the entire instrument. The adoption of
such standard is for fiscal years beginning after
November 15, 2007. The Finind Group adopted such standard
starting from the current fiscal year. No material effect have
arisen on the consolidated financial statements .
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements (SFAS 157), which defines
fair value, establishes a framework for measuring fair value,
and expands disclosure requirements regarding fair value
measurement. Where applicable, SFAS 157 simplifies and
codifies fair value related guidance previously issued within
generally accepted accounting principles. Although SFAS 157
does not require any new fair value measurements, its
application may, for some entities, change current practice.
SFAS 157 is effective for us beginning January 1,2008. In February 2008, the FASB issued Staff Positions
157-1 and
157-2 which
partially defer the effective date of SFAS 157 for one year
for certain nonfinancial assets and liabilities and remove
certain leasing transactions from its scope. We do not expect
the adoption of SFAS 157 to have a material impact on our
consolidated financial position, results of operations or cash
flows.
In May 2008, the FASB issued SFAS No. 162, The
Hierarchy of Generally Accepted Accounting Principles
(SFAS 162). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the
principles to be used in the preparation of financial statements
that are presented in conformity with generally accepted
accounting principles in the United States. This Statement is
effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU
Section 411, “The Meaning of Present Fairly in
Conformity with Generally Accepted Accounting Principles.”
We do not expect SFAS 162 to have a material impact on our
consolidated financial position, results of operations and cash
flows.
2.
CASH AND
CASH EQUIVALENTS
Cash and cash equivalents are analyzed as follows:
2007
2008
(Euro)
(Euro)
Cash on hand
17,027
17,537
Bank accounts
967,534
1,082,602
Total
984,561
1,100,139
As of December 31, 2007 and June 30, 2008 the bank
accounts included Euro 816,857 and Euro 310,872,
respectively, denominated in foreign currency.
At the end of 2007 and at the end of half year ended
June 30, 2008, property, plant and equipment and
accumulated depreciation were:
2007
2008
(Euro)
(Euro)
Land and Buildings
30,990,998
32,086,399
Plants and Machinery
46,459,609
49,184,842
Industrial and commercial equipment
6,267,485
7,477,470
Other fixed assets
4,998,907
5,038,125
Tangible assets under construction and advances
716,283
558,298
Less: accumulated depreciation
(39,638,924
)
(46,460,435
)
Total
49,794,358
47,884,699
The estimated useful lives of the major classes of depreciable
assets are 33 years for buildings and 10 to 20 years
for machinery, equipment and fixtures.
Depreciation expense for the half years ended June 30, 2007
and 2008 was Euro 2.9 million and
Euro 3 million, respectively.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
6.
INTANGIBLE
ASSETS
At the end of December 2007 and June 2008 intangible assets
including accumulated amortization were:
2007
2008
(Euro)
(Euro)
Permits, licenses, trademarks
93,736
624,743
Other intangible fixed assets
22,381
264,585
Total
116,117
889,328
Intangible fixed assets are amortized on a straight-line basis
over their useful lives, ranging from 3 to 18 years.
Amortization expense for the half years ended June 30, 2007
and 2008 was Euro 25,172 and Euro 31,689, respectively.
7.
OTHER
FINANCIAL ASSETS
Other financial assets include:
2007
2008
(Euro)
(Euro)
Advances for the acquisition of further interest in Lipik Glas
by Isoclima S.p.A.
1,050,000
1,050,000
Guarantee deposits
565,558
527,309
Other financial assets
123,516
225,868
Total
1,739,074
1,803,177
8.
INCOME
TAXES
The Group is subject to taxation in Italy and foreign
jurisdictions.
Total income taxes for the half year ended June 2007 and half
year ended June 2008 are allocated as follows:
2007
2008
(Euro)
(Euro)
Current taxes:
Italian companies
1,705,534
764,700
Foreign companies
148,282
Total provision for current income taxes
1,853,816
764,700
Deferred taxes
Italian companies
156,810
834,797
Foreign companies
158,450
(189,620
)
Total provision for deferred income taxes
315,260
645,177
Total taxes
2,169,076
1,409,877
The Italian statutory tax rate is the result of two components:
national (IRES) and regional (IRAP) tax. IRAP could have a
substantially different base for its computation than IRES. In
general, the taxable base of IRAP is a form of gross profit
determined as the difference between gross revenues (excluding
interest and
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
dividend income) and direct production costs (excluding labour
costs, interest expenses and other financial costs).
Deferred income tax assets and liabilities have been classified
in the consolidated financial statements as follows:
2007
2008
(Euro)
(Euro)
Deferred income tax assets — non current
3,910,965
3,431,334
Deferred income tax assets — current
1,310,767
1,150,018
Deferred income tax liabilities — non current
(4,793,636
)
(4,810,128
)
Net deferred income tax assets/liabilities
428,096
(228,776
)
As of December 31, 2007 and June 30, 2008, the Finind
Group has not recorded any aggregate valuation allowance against
deferred tax assets, as the directors, on the basis of the
long-term budget prepared, deem is more likely than not that all
the above deferred income tax assets will be realized in future
periods.
On December 24, 2007, the Italian Government issued the
Italian Finance bill of 2008 (the 2008 Bill). The 2008 Bill
decreases the national tax rate (IRES) from 33% to 27.5%, and
the regional tax rate (IRAP) from 4.25% to 3.9%. The effect of
this change created an additional Euro 62,300 of deferred
tax income in 2007.
Italian companies’ taxes are subject to review pursuant to
Italian law. As of June 30, 2008, tax years from 2002
through the most recent year were open for such review.
Management believes no significant unaccrued liabilities should
arise from the related tax reviews.
As of June 30, 2008, the Croatian subsidiary Lipik Glas
d.o.o. had net operating loss carryforwards of approximately
Euro 0.5 million, which mostly begin expiring in 2008.
Accrued expenses amounted to Euro 153,026 and
Euro 123,172 as of December 31, 2007 and June 30,2008 respectively, of which Euro 153,026 and
Euro 103,786, respectively, referred to interests on loans.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
11.
LIABILITIES
FOR TERMINATION INDEMNITIES
At the end of December 31, 2007 and June 30, 2008,
employee related obligations were Euro 3,990,168 and
Euro 3,714,608 respectively.
Whithin the group only Italian consolidated companies provide
for a staff leaving indemnity (called TFR).
With regards to staff leaving indemnities (TFR), Italian law
provides for severance payments to employees upon dismissal,
resignation, retirement or other termination of employment. TFR,
through December 31, 2006, was considered an unfunded
defined benefit plan. Therefore, through December 31, 2006,
the Finind Group accounted for the defined benefit plan in
accordance with
EITF 88-1,
“Determination of Vested Benefit Obligation for a Defined
Benefit Pension Plan,” using the option to record the
vested benefit obligation, which is the actuarial present value
of the vested benefits to which the employee would be entitled
if the employee retired, resigned or were terminated as of the
date of the financial statements.
Effective January 1, 2007, the TFR system was reformed, and
under the new law, employees are given the ability to choose
where the TFR compensation is invested, whereas such
compensation otherwise would be directed to the National Social
Security Institute or Pension Funds. As a result, contributions
under the reformed TFR system are accounted for as a defined
contribution plan. The liability accrued until December 31,2006 continues to be considered a defined benefit plan,
therefore each year the Finind Group adjusts its accrual based
upon headcount and inflation and excluding the changes in
compensation level.
The related charge to eamings for the half years ended
June 30, 2007 and 2008, aggregated, is
Euro 0.52 million and Euro 0.56 million
respectively.
12.
LONG-TERM
DEBT
Long-term debt consists of the following:
2007
2008
(Euro)
(Euro)
Credit agreements with Italian financial institutions (a)
2,511,714
1,850,916
Credit agreements with foreign financial institutions (b)
5,254,465
5,230,600
7,766,179
7,081,516
Less: Current maturities
1,508,370
786,639
Total long Term Debt (Bank)
6,257,809
6,294,877
Capital lease obligations — total
10,741,759
10,152,694
Less: Current maturities
1,198,319
1,190,653
Other loans with third parties — total(c)
5,102,859
4,503,950
Less: Current maturities
815,454
453,476
Total long-term Debt (Other) less current maturities
13,830,845
13,012,515
A portion of Euro 5,295,231 and Euro 4,640,838 as of
December 31, 2007 and June 30, 2008 respectively have
a maturity — term over 5 years.
As of December 31, 2007 and June 30, 2008 the
long-term debt accounts included Euro 5,626,303 and
Euro 4,463,622, respectively, denominated in foreign
currency.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
(a)
In May 1998 Isoclima S.p.A. entered into a credit facility with
two banks (S.Paolo IMI S.p.A. and CAB S.p.A.) providing for
mortgage loans in the aggregate principal amount of
Euro 5.16 million. The agreement requires repayment of
quarterly installments starting on September 15, 1998, with
an interest rate equal to that applied by EIB to the financial
institutions plus 0.7% (5.49% on December 31, 2007). During
the first months of 2008 Isoclima S.p.A. has repaid the debts,
the residual amounts as of December 31, 2007 were
Euro 396,381.
In November 2001 Isoclima S.p.A. obtained a mortgage loan with a
group of banks (Efibanca S.p.a. and Mediocredito Trentino Alto
Adige S.p.A.) for an aggregate principal amount of
Euro 5.16 million, repayable in semi-annual
installments starting on March 15, 2002 until
September 15, 2011.
Interests accrue at a rate equal to that applied by EIB to the
financial institutions plus a variable spread (interest rate as
of December 31, 2007, 6.057%). The loan agreement contains
certain financial covenants. The Company was in compliance with
those covenants as of June 30, 2008 and December 31,2007. Residual amounts at December 31, 2007 and
June 30, 2008 were Euro 2,115,333 and
Euro 1,850,916 respectively.
(b)
Credit agreements with foreign financial institutions mainly
concern four mortgage loans obtained by the Croatian subsidiary
Lipik Glas d.o.o. The subsidiary entered in two credit
facilities with PBZ (Prevredna Banka Zagreb) d.d. and in two
further credit facilities with HBOR (Croatian Bank for
Reconstruction and Development) in the period between May 2003
and January 2005.
(c)
Other loans with third parties consist of:
2007
2008
(Euro)
(Euro)
Loans from the Italian Government for applied research
(c1)
2,796,412
2,550,132
Loan from FINEST S.p.A. (c2)
1,729,681
1,729,681
Loans for the purchase of fixed assets
204,927
209,408
Other loans
371,839
14,729
(c1)
The subsidiary Isoclima S.p.A. obtained in September 1995 a loan
granted by Italian Ministry of Scientific Research to finance
applied research activities. The loan was paid in three tranches
(September 1996, April 1997 and March 1999) for a total
amount of Euro 649,728. The agreement, as amended by the
Ministry in July 2000, requires repayment of annual installments
starting on September 13, 2001 until the final maturity
date of September 13, 2010, with a fixed 1% half-yearly
interest rate. Residual amounts as of December 31, 2007 and
June 30, 2008 were both of Euro 218,362 since the
installment due for 2008 will expire in September.
In December 2003, Isoclima S.p.A. obtained another loan for an
amount of Euro 2.6 million granted by Italian Ministry
of Scientific Research to finance applied research activities,
repayable in annual installments starting on May 7, 2008
until May 7, 2017. Interests accrue at a 1.71% half-yearly
interest rate.
Interest expense related to long-term debt for the half years
ended June 30, 2007 and June 30, 2008 was
Euro 656,885 and Euro 845,300 respectively.
(c2)
The subsidiary Isoclima S.p.A. obtained in October 2001 a loan
granted by FINEST S.p.A, the final repayment will be in October
2009, interests accrue at the Euribor interest rate plus a 1.5%
spread.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
13.
FINANCIAL
INSTRUMENTS
Financial instruments including cash and cash equivalents,
receivables and payables and current portions of long-term debt
are deemed to approximate fair value due to their short
maturities. The carrying amounts of long-term debt and
capitalized lease obligations are also deemed to approximate
their fair values. The fair value of derivative instruments is
disclosed below.
Derivative
instruments
For the purposes of reducing market risks associated with
interest rate changes, the Italian subsidiary Isoclima S.p.A.
utilizes interest rate swap contracts.
Following are the notional amounts and net recorded fair values
of the Isoclima S.p.A. derivative instruments:
Since these contracts do not qualify as hedge instruments,
changes in the fair values have been recognized in the half year
consolidated statements of income, under the caption
“Financial income (loss)-net”.
14.
SHAREHOLDERS’
EQUITY
Share capital of Finanziaria Industriale S.P.A. consists of
73,738 shares with a value of Euro 51.65 each, making
a total of Euro 3,808,568.
On May 15, 2008, the Finanziaria Industriale S.p.A.
shareholders’ meeting approved a capital increase from
Euro 929,700 to Euro 3,808,568, issuing 55,738 new
shares with a nominal value of Euro 51.65 each. As of
June 30, 2008 the capital increase has been fully paid.
On the same date, the subsidiary Isoclima S.p.A.
shareholders’ meeting approved a capital increase from
Euro 12 million to Euro 15 million, issuing
3,000 new shares with a nominal value of Euro 1,000 each.
As of June 30, 2008 the capital increase has been fully
paid.
The Parent Company does not own any treasury shares, nor are
such shares owned by subsidiaries, including through nominee
companies or other intermediaries.
Italian law requires that five percent of net income be retained
as a legal reserve, until this reserve is equal to one-fifth of
the issued share capital. The legal reserve may be utilized to
cover losses; any portion which exceeds one-fifth of the issued
share capital is available for dividends to the shareholders.
Legal reserve of the Finind Group included in retained earnings
at December 31, 2007 as well as June 30, 2008 was
Euro 282,065.
15.
LEASE
The Italian subsidiary Isoclima S.p.A. leases some manufacturing
equipment, as well as manufacturing warehouse and office
facilities, under capital lease arrangements expiring between
2008 and 2012. The lease arrangements include provisions
allowing Isoclima S.p.A., at its option, to purchase the leased
properties at the end of the lease terms at a price equal to 1%
of the fair value of the property at the inception of the lease.
Isoclima S.p.A. entered into three sale-leaseback agreements in
May 2005, December 2005 and September 2006 respectively,
regarding manufacturing, warehouse and office facilities. Profit
on the sale,
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
totaling Euro 7.5 million, was deferred and amortized
in proportion of the amortization of the leased assets.
Properties were leased back to the Company under capital lease
arrangements expiring between 2015 and 2016. The lease
arrangements include provisions allowing Isoclima S.p.A., at its
option, to purchase the leased properties at the end of the
lease terms at a price equal to 10% of the fair value of the
property at the inception of the lease.
Assets recorded under capital leases and leaseback agreements as
of December 31, 2007 and June 30, 2008 were as
follows:
2007
2008
(Euro)
(Euro)
Land and Buildings
16,565,097
16,565,097
Plants and Machinery
2,757,480
2,757,480
Other fixed assets
433,955
433,955
19,756,532
19,756,532
Less: accumulated depreciation
(4,616,106
)
(5,063,446
)
Total
15,140,426
14,693,086
Amortization charge for capitalized leases for the half year
ended June 30, 2008 was Euro 447.340. Payments for
capital leases for the year ended December 31, 2007 and for
the half year ended June 30, 2008 were Euro 1,175,066
and Euro 588,981 respectively.
Future minimum lease payments for capital leases and leaseback
agreements are as follows:
2008
771,389
2009
1,752,588
2010
1,524,544
2011
1,436,791
2012
1,377,910
Thereafter
5,094,415
Total
11,957,637
The amount of imputed interest necessary to reduce the net
minimum lease payments to present value was Euro 1,804,943
at June 30, 2008.
Contingent rentals are not significant.
Isoclima S.p.A. leases a building, utilized for manufacturing
and office activities, under an operating lease agreement with
the related party Ianua S.p.A. Inception of the lease was July
2006 and the expiration date is July 2012.
Future minimum lease payments required as of June 30, 2008
are as follows:
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
16.
COMMITMENTS
AND CONTINGENCIES
Supply
agreement
In May 2007 Isoclima S.p.A. entered into an open-end contract
with a supplier for the supplying of some defined products. The
agreement commit Isoclima S.p.A. to purchase from the immediate
party said products for a minimum amount of
Euro 1.5 million every 12 months. A penalty is
provided for in case Isoclima should not reach the minimum in
one 12-month
period, based on a percentage (as defined) of the difference
between the minimum and the actual purchase value. No penalty
was paid neither in 2007 nor during the first six months of 2008.
Guarantees
The Italian subsidiary Isoclima S.p.A. is the guarantor of the
full repayment of the loan of Croatian kuna 16 million
obtained by the Croatian subsidiary Lipik Glas d.o.o from PBZ
(Prevredna Banka Zagreb) in September 2004 with last instalment
due on August 31, 2012. The guarantee is for a maximum
amount of Euro 1.5 million, with an expiration date of
September 30, 2012.
Litigation
In 2002 the Italian subsidiary Isoclima S.p.A. entered into a
contract with Ingra d.d., a Croatian company which at that time
held 24% of the capital stock of Lipik Glas d.o.o. With this
contract Ingra committed itself to sell to Isoclima a 20% of the
total Lipik capital stock. The contractual price was
Euro 1.9 million. Starting April 2003, Isoclima made
the payments on maturities provided for by the contract and
obtained from Ingra a 6.46% of the Lipik capital stock. Isoclima
continued to meet payments for a total consideration of
Euro 1,050,000 as of April 2005, corresponding to 12.78% of
the Ingra’s investment in Lipik. In May 2005 Ingra offered
to Isoclima to buy by the entire residual Lipik shares owned for
an amount of Euro 1.5 million. A dispute arose at that
time since Ingra deemed the Euro 1.5 million price
should have been paid in addition to the amount already
received, while Isoclima intended to pay only the difference
(Euro 450,000).
At the present date, Ingra consider void the shares tranfer
agreement, nevertheless does not intend to give back the total
amount already received.
Isoclima decided to submit the claim to arbitration at the
Croatian Board of Trade. Ingra’s statement of defense was
filed on April 24, 2008.
Now the arbitration is in progress. Management believes, based
in part on advice from counsel, that no estimate of the result
of arbitration can be made at this time.
Finind Group is involved in a few claims and legal actions
arising in the ordinary course of business, which mainly relate
to claims for damages due to defective products. A specific
provision has been accrued for an amount of Euro 391,914
and Euro 278,482 as of December 31, 2006 and 2007
respectively. No charges have been recorded to the income
statement for the half years ended June 30, 2007 and 2008.
In July, 2008 the Italian subsidiary Isoclima S.p.A. received a
preliminary assessment from the Italian tax authorities totaling
approximately Euro 193,000, excluding interests and
penalties (not yet quantified), with reference to the Income tax
return and the VAT statement filed for the fiscal year 2005.
Mainly, the tax authorities pointed out that the company did not
charge interests related to loans granted to subsidiaries and
disallowed some cost deductions. The Company intends to enter
into settlement discussion with the Italian tax authorities
regarding these matters. The management, based on the advice of
outside counsel, recorded a provision equal to Euro 140,000
as an estimate of the liability that might arise from the above
settlement discussion.
NOTES TO
THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) —
(Continued)
In the opinion of the management, the ultimate disposition of
these matters, after considering amounts accrued, will not have
a material adverse effect on the Group’s consolidated
financial position or results of operations.
17.
RELATED
PARTY TRANSACTIONS
Fixed
assets
As described in note 15, the Italian subsidiary Isoclima
S.p.A. leases a building, utilized for manufacturing and office
activities, under an operating lease agreement with the related
party Ianua S.p.A. Inception of the lease was July 2006 and the
expiration date is July 2012. As of December 31, 2007 the
payable to the related party was Euro 69,634 (no payable as
of June 30, 2008).
During the last year Ianua S.p.A. also performed some
maintenance services on some Isoclima’s plants. As of
December 31, 2007 the payable to the related party for
these services was Euro 54,880 (no payable as of
June 30, 2008).
The Croatian subsidiary Lipik Glas d.o.o. is still debtor to the
related party Ianua S.p.A. for the supplying of some industrial
equipments and maintenance services rendered in the period
2003-2006.
As of December 31, 2007 and June 30, 2008 the
outstanding amounts were approximately
Euro 3.2 million. With reference to the same
transactions Lipik Glas d.o.o. claimed a sum for delay in
supplying and Ianua S.p.A. recognized the debt. At
December 31, 2007 that receivable was recorded for
Euro 200,000 and it has been totally paid in May 2008.
Other
transactions
In May, 2008, the Italian subsidiary Isoclima S.p.A. entered
into a contract with a related party, Ianua S.p.A.. On the basis
of this contract, Isoclima S.p.A. sold to Ianua S.p.A. a project
concerning the basic design and engineering of a float glass
manufacturing system, for the price of
Euro 3.5 million, which represents the amount of
research and development costs borne in previous years (until
2005) and charged to expense. Such amount has been recorded
as “Other operating income” in the half year
consolidated financial statements as of June 30, 2008.
Payment of the price will be in 36 monthly instalments,
with a 4.20% annual interest rate. As of June 30, 2008 the
receivable was Euro 3.58 million V.A.T. included.
In November 2006, the Italian subsidiary Isoclima S.p.A. (as a
client) and the related party Ianua S.p.A. (as a supplier)
decided the consensual rescission of a contract for the
supplying of two industrial plants. As agreed between the
parties, Ianua S.p.A. committed itself to return to Isoclima
S.p.A. the advances previously received for a total amount, plus
interests.
As of December 31, 2007 the Isoclima S.p.A. receivable was
Euro 492,174, Ianua S.p.A. returned all the amount during
the first six months of 2008.
“Loans to affiliated companies” refer to a non
interest-bearing loan that the Italian subsidiary Isoclima
S.p.A. granted to the affiliated company Iontech S.r.l.
18.
SUBSEQUENT
EVENTS
No significant events have taken place since June 30, 2008.
We have audited the accompanying combined balance sheets of
Optical Systems Technology, Inc., Keystone Applied Technologies,
Inc., and OmniTech Partners, Inc. (the “Companies”) as
of December 31, 2006 and 2007, and the related combined
statements of operations, shareholders’ equity, and cash
flows for each of the three years in the period ended
December 31, 2007. These combined financial statements are
the responsibility of the Companies’ management. Our
responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial
statements are free from material misstatement. An audit
includes consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the
Companies’ internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the combined financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall combined 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 combined
financial position of the Companies as of December 31, 2006
and 2007, and the combined results of their operations and their
cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles
generally accepted in the United States of America.
Operations — These combined financial
statements include the accounts of Optical Systems Technology,
Inc. (OSTI), Keystone Applied Technologies, Inc. (KATI) and
OmniTech Partners, Inc. (OmniTech). OSTI was formed in 1995 to
develop multi-spectral optical systems and stabilized gimbaled
optical platforms for military and law enforcement applications.
On December 23, 1996, OSTI acquired the Star Tron Night
Vision product line and became a manufacturer of night vision
products.
KATI was formed in 2001 to design, develop and prototype new
electro-optical surveillance systems, small arms night vision
weapon sights and stabilized gimbaled products for use in
military, law enforcement and commercial purposes.
OmniTech was formed in 2002 to provide support to OSTI and KATI
as a central paymaster of payroll, payroll taxes and the related
employee benefits. OmniTech does not generate any revenue.
Basis of Combined Presentation — The combined
financial statements include the accounts of OSTI, KATI, and
OmniTech (collectively the Companies), which are owned by the
same shareholders and are under common control since inception.
All intercompany balances and transactions have been eliminated.
Revenue Recognition — For the goods and
services delivered under long-term contracts with the
U.S. government, the Companies follow Statement of
Position 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, for revenue recognition. Under
these long-term contracts, the Companies recognize revenue and
anticipated profits based on the number of units delivered.
Revenue recognized under cost-reimbursement contracts is
recorded as allowable costs are incurred and include estimated
earned fees or profits calculated on the basis of the
relationship between costs incurred and total estimated costs.
Anticipated losses on contracts are recorded when first
identified by the Companies. For other sales, the Companies
recognize revenues when services are rendered and title
transfers to the customer for the products, subject to any
special terms and conditions of specific contracts.
Cash and Cash Equivalents — The Companies
consider all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful
Accounts — The Companies extend credit in the
normal course of business to agencies of the United States
government (U.S. Government) and other customers.
Management periodically reviews the listing of accounts
receivable to assess the probability of collection. No
allowances for doubtful accounts were deemed necessary as of
December 31, 2006 and 2007.
Inventories — Inventories are stated at the
lower of cost or market with cost being determined principally
on the
first-in,
first-out method, except for image intensifier tubes and raw
materials, which are stated at average cost.
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS —
(Continued)
Property and Equipment — Property and equipment
are recorded at cost, which includes the cost of installations.
Depreciation of property and equipment is recorded using the
straight-line method over the assets’ estimated useful
lives as follows:
Years
Equipment, furniture and fixtures
3 to 7
Buildings and improvements
39
The Companies charge repair, maintenance, and minor renewal
expenditures and other purchases against earnings in the year
incurred, while major improvements are capitalized and
depreciated. When an item is sold or retired, the related asset
cost and accumulated depreciation are removed from the books and
gains or losses are recognized in the combined statements of
operations.
Depreciation expense recorded in cost of goods sold for 2005,
2006 and 2007 totaled $107,264, $102,355 and $106,922,
respectively. Depreciation expense recorded in selling, general
and administrative expenses for 2005, 2006 and 2007 totaled
$30,824, $32,516 and $40,853, respectively.
Long-Lived Assets — The Companies record
impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets may be
impaired and the undiscounted net cash flows estimated to be
generated by those assets are less than their carrying amounts.
When the undiscounted net cash flows are less than the carrying
amount, losses are recorded for the difference between the
discounted net cash flows of the assets and the carrying amount.
Deferred Revenue — Deferred revenue represents
customer deposits collected in advance under certain product
contracts. These deposits are considered to be deferred revenue
and revenue recognized as products are provided under the
respective contracts.
Shipping and Handling Costs — Customers
generally prepay their own freight or the Companies include
anticipated shipping costs into base selling prices. Amounts
incurred by the Companies for shipping and handling costs for
the years ended December 31, 2005, 2006 and 2007 amounted
to $15,283, $17,729 and $34,846, respectively and are included
in cost of sales in the accompanying combined statements of
operations.
Use of Estimates — The preparation of the
combined financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
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. Estimates are revised
as additional information becomes available. Actual results
could differ from those estimates.
Research and Development Costs — Research and
development costs are incurred each year in connection with
research, development, and engineering programs that are
expected to contribute to future earnings. Research and
development costs are charged to selling, general, and
administrative expenses as incurred and totaled approximately
$137,000, $119,000 and $114,000 for 2005, 2006 and 2007,
respectively.
Concentration of Credit Risk — Financial
instruments that potentially subject the Companies to
concentrations of credit risk consist primarily of trade
receivables. Sales to the U.S. government were
approximately $4,668,000, $2,715,000, and $10,610,000 for 2005,
2006, and 2007, respectively.
During the year ended December 31, 2005, the Companies had
69% of their revenues from two customers, one representing 40%
of sales and one representing 29% of sales.
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS —
(Continued)
During the year and at December 31, 2006, the Companies
received 46% of their revenues and 32% of their accounts
receivable, respectively, from two customers, one representing
33% of sales and 20% of accounts receivable and one representing
13% of sales and 12% of accounts receivable.
During the year and at December 31, 2007, the Companies
received 84% of their revenues and had 83% of their accounts
receivable, respectively, from one customer.
Income Taxes — Each of the Companies has
elected for federal and state income tax purposes to include its
taxable income with that of its shareholders (an
S-Corporation
election). Accordingly, net income reported by the Companies
does not include a provision for income taxes. Distributions to
shareholders are provided to fund, among others, tax obligations
of the shareholders attributable to the Companies’ net
income.
Recently Issued Accounting Pronouncements — In
July 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s
financial statements and prescribes a threshold of
more-likely-than-not for recognition of tax benefits of
uncertain tax positions taken or expected to be taken in a tax
return. FIN 48 also provides related guidance on
measurement, derecognition, classification, interest and
penalties, and disclosure. The FASB decided to defer the
effective date of FIN 48 for nonpublic entities for one
year for those nonpublic entities that have not already issued a
complete set of annual financial statements fully reflecting the
Interpretation’s requirements, which means that the
provisions of FIN 48 will be effective for the
Companies’ fiscal years beginning after December 15,2007, with any cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained
earnings. The Companies adopted this statement on
January 1, 2008 and the adoption did not have a material
impact on the Companies’ combined financial condition,
results of operations and cash flows.
In September 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value
Measurement (SFAS 157). SFAS 157 defines fair
value, establishes a framework for the measurement of fair
value, and enhances disclosures about fair value measurements.
It does not require any new fair value measures. The Statement
is effective for fair value measures already required or
permitted by other standards for fiscal years beginning after
November 15, 2007. The Companies are required to adopt
SFAS 157 beginning on January 1, 2008. SFAS 157
is required to be applied prospectively, except for certain
financial instruments. On February 12, 2008, the FASB
issued FSP
FAS 157-1
and FSP
FAS 157-2,
which remove leasing transactions accounted for under
SFAS No. 13, Accounting for Leases from the
scope of SFAS 157 and partially defer the effective date of
SFAS 157 as it relates all nonrecurring fair value
measurements of nonfinancial assets and nonfinancial liabilities
until fiscal years beginning after November 15, 2008. The
Companies adopted this statement on January 1, 2008 and the
adoption did not have a material impact on the Companies’
combined financial condition, results of operations and cash
flows.
In February 2007, the FASB issued SFAS No. 159, The Fair
Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. The objective of SFAS 159 is to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 is
effective for the first fiscal year that begins after
November 15, 2007. In adopting SFAS 159 on
January 1, 2008, the Companies did not elect the fair value
option for any financial assets or liabilities; as such, the
adoption did not have a material impact on the Companies’
combined financial condition, results of operations and cash
flows.
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS —
(Continued)
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51
(SFAS 160). SFAS 160 (a) amends ARB 51 to
establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and the deconsolidation
of a subsidiary; (b) changes the way the consolidated
income statement is presented; (c) establishes a single
method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation;
(d) requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated; and
(e) requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish
between the interests of the parent’s owners and the
interests of the noncontrolling owners of a subsidiary.
SFAS 160 must be applied prospectively, but the
presentation and disclosure requirements must be applied
retrospectively to provide comparability in the financial
statements. Early adoption is prohibited. SFAS 160 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
impact of this new accounting principle on the Companies’
combined financial condition, results of operations and cash
flows is dependant upon the level of future acquisitions.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations — a replacement of FASB
No. 141 (SFAS 141(R)). SFAS 141(R) requires
(a) a company to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree at fair value as of the acquisition date; and
(b) an acquirer in preacquisition periods to expense all
acquisition-related costs. SFAS 141(R) requires that any
adjustments to an acquired entity’s deferred tax asset and
liability balance that occur after the measurement period be
recorded as a component of income tax expense. This accounting
treatment is required for business combinations consummated
before the effective date of SFAS 141(R) (non-prospective),
otherwise SFAS 141(R) must be applied prospectively. The
presentation and disclosure requirements must be applied
retrospectively to provide comparability in the financial
statements. Early adoption is prohibited. SFAS 141(R) is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
impact of this new accounting principle on the Companies’
combined financial condition, results of operations and cash
flows is dependant upon the level of future acquisitions.
OSTI has a technology investment agreement with the
U.S. government under Title III of the Defense
Production Act to establish a certain manufacturing capability
at the Companies’ facility. The U.S. government
reimburses OSTI for costs incurred to study, plan and develop
the manufacturing capability and for the procurement of
manufacturing equipment. Title to all property and equipment
purchased under this agreement remains U.S. government
property. The U.S. government, at its discretion, may elect
to transfer title of the property and equipment to OSTI.
OSTI bills the U.S. government for a portion of the amounts
incurred on a monthly basis. For the years ended
December 31, 2005, 2006 and 2007, OSTI billed $212,872,
$386,781, and $1,358,208, respectively, for reimbursement of the
U.S. government’s share of costs incurred under the
agreement, including payment for property and equipment
purchases. The amounts billed offset the applicable expenses
incurred in the accompanying statements of operations or
reimburse OSTI for costs incurred to purchase property and
equipment on behalf of the U.S. government.
Total U.S. government owned property and equipment
purchased and maintained by OSTI, including advanced deposits
paid for property and equipment on behalf of the
U.S. government, but not reflected in the combined
financial statements as of December 31, 2006 and 2007 was
$247,878 and $1,266,918 respectively.
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS —
(Continued)
8.
SHORT-TERM
BORROWINGS
On March 27, 2006, OSTI executed a $750,000 line of credit
agreement with a bank, subject to borrowing base restrictions of
80% of eligible accounts receivable and 50% of eligible
inventories, and due on demand. Interest is variable and payable
monthly at the lender’s prime rate less 0.25%. As of
December 31, 2006 and 2007, the interest rate was 8.00% and
7.00%, respectively. The line of credit note is collateralized
by substantially all of the assets of OSTI. The Companies had
borrowings under the line of credit of $0 and $400,000 as of
December 31, 2006 and 2007, respectively. The credit
agreement contains financial covenants including a minimum
current ratio, maximum leverage ratio and limits on capital
expenditures and shareholder distributions. At December 31,2007, the Companies were in compliance with the financial
covenant under the credit agreement. The Companies were not in
compliance with a non-financial covenant, but a waiver was
obtained from the lender.
The line of credit agreement was amended in January 2008 to
increase the maximum borrowings under the line of credit to
$1,000,000.
The Companies also have a $100,000 line of credit agreement with
another bank due on demand and secured by certain assets of the
Companies. Interest is variable and payable monthly at the
lender’s prime rate plus 1%. As of December 31, 2006
and 2007, the interest rate was 9.25% and 8.25%, respectively.
Borrowings under this line of credit were $0 and $100,000 as of
December 31, 2006 and 2007, respectively.
On May 29, 2007, the Companies borrowed $180,000 from their
shareholders. Interest was payable at 4.7%, the applicable
federal rate, and the loan was repaid December 19, 2007.
9.
LONG-TERM
DEBT
Long-term notes payable outstanding at December 31, 2006
and 2007 consisted of the following:
2006
2007
Mortgages payable to the Pennsylvania Industrial Development
Authority, due June 2015 with monthly payments of principal and
interest of $909 at a fixed interest rate of 3.75%. Secured by
the Companies’ buildings and improvements
$
78,630
$
70,531
Term note payable to bank, due September 2009, payable over
60 months with escalating principal payments from $5,747 to
$6,031 with interest at the bank’s prime rate plus 0.25%
(7.50% at December 31, 2007)
The Companies sponsor a 401(k) plan that covers all eligible
full-time employees. Matching contributions for the Companies
for 2005, 2006 and 2007 amounted to $91,675, $81,557 and
$93,543, respectively. In addition, the Companies may make
discretionary profit-sharing contributions. The Companies did
not make discretionary profit sharing contributions in 2005,
2006 and 2007.
11.
COMMITMENT
AND CONTINGENCIES
Legal Matters — The Companies are from time to
time involved in legal proceedings that are incidental to the
operation of its business. The Companies establish accruals in
cases where the outcome of the matter is probable and can be
reasonably estimated. Although the ultimate outcome of any legal
matter cannot be predicted with certainty, based on present
information, including the Companies’ assessment of the
merits of the particular claims, as well as its current reserves
and insurance coverage, the Companies do not expect that such
legal proceedings to which it is a party will have any material
adverse impact on the cash flow, results of operations or
financial condition of the Companies on a combined basis in the
foreseeable future.
Product Warranties — Accruals for estimated
expenses related to warranties are made at the time products are
sold or services are rendered. These accruals are established
using historical information on the nature, frequency and
average cost of warranty claims. The Companies generally warrant
their products against defects and specific nonperformance for
one or two year period.
A reconciliation of warranty reserve activity for 2005, 2006 and
2007 is as follows:
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE COMBINED FINANCIAL STATEMENTS —
(Continued)
12.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Companies
in estimating fair value disclosures for financial instruments:
a. The carrying amounts of the following assets and
liabilities meeting the definition of a financial instrument
approximate their fair value due to the short period to maturity
of the instruments: cash and cash equivalents, accounts
receivable, accounts payable.
b. Long-term debt — The carrying amounts
reported in the combined balance sheets for long-term debt,
including the current portion, approximates their fair value.
The following transactions were treated as noncash activities on
the combining statements of cash flows for the Companies:
During 2007, the Companies authorized and accrued $645,000 in
shareholders’ distributions representing the
shareholders’ estimated tax liability on the
Companies’ 2007 net income.
Due from OmniTech Properties, LLC, a related party
285,286
289,133
Inventories
4,443,799
5,023,841
Prepaid expenses and other
30,816
76,816
Total current assets
8,507,490
8,593,636
PROPERTY AND EQUIPMENT — Net
965,123
903,676
OTHER LONG-TERM ASSETS
81,676
87,454
TOTAL
$
9,554,289
$
9,584,766
LIABILITIES AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES:
Short-term borrowings
$
500,000
$
100,000
Current maturities of long-term debt
78,220
74,337
Accounts payable
2,003,812
710,996
Deferred revenue
41,810
27,145
Accrued payroll and vacation
97,813
119,246
Accrued 401(k) company match
93,543
46,772
Accrued sales commissions
42,035
31,854
Accrued shareholders’ distributions
645,000
1,085,000
Accrued warranty reserve
57,500
82,986
Accrued liabilities and other
47,935
70,319
Total current liabilities
3,607,668
2,348,655
LONG-TERM LIABILITIES:
Long-term debt, less current portion
116,343
75,835
Other long-term liabilities
43,500
43,500
Total liabilities
3,767,511
2,467,990
SHAREHOLDERS’ EQUITY:
Optical Systems Technology, Inc. common stock, no par
value — 1,000 shares authorized, issued, and
outstanding at December 31, 2007 and June 30, 2008
Keystone Applied Technologies, Inc. common stock, no par
value — 1,000,000 shares authorized, issued, and
outstanding at December 31, 2007 and June 30, 2008
Omnitech Partners, Inc. common stock, no par value —
1,000,000 shares authorized, issued, and outstanding at
December 31, 2007 and June 30, 2008
Additional paid-in capital
847,572
847,572
Retained earnings
4,939,206
6,269,204
Total shareholders’ equity
5,786,778
7,116,776
TOTAL
$
9,554,289
$
9,584,766
See notes to the condensed combined financial statements
(unaudited).
Operations — These combined financial
statements include the accounts of Optical Systems Technology,
Inc., (OSTI), Keystone Applied Technologies, Inc., (KATI) and
OmniTech Partners, Inc. (OmniTech). OSTI was formed in 1995 to
develop multi-spectral optical systems and stabilized gimbaled
optical platforms for military and law enforcement applications.
On December 23, 1996, OSTI acquired the Star Tron Night
Vision product line and became a manufacturer of night vision
products.
KATI was formed in 2001 to design, develop and prototype new
electro-optical surveillance systems, small arms night vision
weapon sights and stabilized gimbaled products for use in
military, law enforcement and commercial purposes.
OmniTech was formed in 2002 to provide support to OSTI and KATI
as a central paymaster of payroll, payroll taxes and the related
employee benefits. OmniTech does not generate any revenue.
The combined financial statements and related notes are
presented as of December 31, 2007 and June 30, 2008
and for the six months ended June 30, 2007 and 2008 unless
otherwise noted. The six months ended June 30, 2007 and
2008 are referred to as 2007 and 2008, respectively.
2.
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Combined Presentation — The combined
financial statements include the accounts of OSTI, KATI,
and OmniTech (collectively the Companies), which are owned by
the same shareholders and are under common control since
inception. Intercompany balances and transactions have been
eliminated.
Revenue Recognition — For the goods and
services delivered under long-term contracts with the
U.S. government, the Companies follow Statement of
Position 81-1,
Accounting for Performance of Construction-Type and Certain
Production-Type Contracts, for revenue recognition. Under
these long-term contracts, the Companies recognize revenue and
anticipated profits based on the number of units delivered.
Revenue recognized under cost-reimbursement contracts is
recorded as allowable costs are incurred and include estimated
earned fees or profits calculated on the basis of the
relationship between costs incurred and total estimated costs.
Anticipated losses on contracts are recorded when first
identified by the Companies. For other sales, the Companies
recognize revenues when services are rendered and title
transfers to the customer for the products, subject to any
special terms and conditions of specific contracts.
Cash and Cash Equivalents — The Companies
consider all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful
Accounts — The Companies extend credit in the
normal course of business to agencies of the United States
government (U.S. Government) and other customers.
Management periodically reviews the listing of accounts
receivable to assess the probability of collection. No
allowances for doubtful accounts were deemed necessary as of
December 31, 2007 and June 30, 2008.
Inventories — Inventories are stated at the
lower of cost or market with cost being determined principally
on the
first-in,
first-out method, except for image intensifier tubes and raw
materials, which are stated at average cost.
Property and Equipment — Property and equipment
are recorded at cost, which includes the cost of installations.
Depreciation of property and equipment is recorded using the
straight-line method over the assets’ estimated useful
lives as follows:
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
The Companies charge repair, maintenance, and minor renewal
expenditures and other purchases against earnings in the year
incurred, while major improvements are capitalized and
depreciated. When an item is sold or retired, the related asset
cost and accumulated depreciation are removed from the books and
gains or losses are recognized in the combined statements of
operations.
Long-Lived Assets — The Companies record
impairment losses on long-lived assets used in operations when
events and circumstances indicate that the assets may be
impaired and the undiscounted net cash flows estimated to be
generated by those assets are less than their carrying amounts.
When the undiscounted net cash flows are less than the carrying
amount, losses are recorded for the difference between the
discounted net cash flows of the assets and the carrying amount.
Deferred Revenue — Deferred revenue represents
customer deposits collected in advance under certain product
contracts. These deposits are considered to be deferred revenue
and revenue recognized as products are provided under the
respective contracts.
Shipping and Handling Costs — Customers
generally prepay their own freight or the Companies include
anticipated shipping costs into base selling prices.
Use of Estimates — The preparation of the
combined financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the
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. Estimates are revised
as additional information becomes available. Actual results
could differ from those estimates.
Research and Development Costs — Research and
development costs are incurred each year in connection with
research, development, and engineering programs that are
expected to contribute to future earnings. Research and
development costs are charged to selling, general, and
administrative expenses as incurred.
Concentration of Credit Risk — Financial
instruments that potentially subject the Companies to
concentrations of credit risk consist primarily of trade
receivables.
Income Taxes — Each of the Companies has
elected for federal and state income tax purposes to include its
taxable income with that of its shareholders (an
S-Corporation
election) Accordingly, net income reported by the Company does
not include a provision for income taxes. Distributions to
shareholders are provided to fund, among others, tax obligations
of the shareholders attributable to Companies net income.
Recently Issued Accounting Pronouncements — In
July 2006, the Financial Accounting Standards Board (FASB)
issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement
109 (FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s
financial statements and prescribes a threshold of
more-likely-than-not for recognition of tax benefits of
uncertain tax positions taken or expected to be taken in a tax
return. FIN 48 also provides related guidance on
measurement, derecognition, classification, interest and
penalties, and disclosure. The FASB decided to defer the
effective date of FIN 48 for nonpublic entities for one
year for those nonpublic entities that have not already issued a
complete set of annual financial statements fully reflecting the
Interpretation’s requirements, which means that the
provisions of FIN 48 will be effective for the
Company’s fiscal years beginning after December 15,2007, with any cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained
earnings. The Companies adopted this statement on
January 1, 2008 and the adoption did not have a material
impact on the Companies’ combined financial condition,
results of operations and cash flows.
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
In September 2006, the FASB issued Statement of Financial
Accounting Standards (SFAS) No. 157, Fair Value
Measurements (SFAS 157). SFAS 157 defines fair
value, establishes a framework for the measurement of fair
value, and enhances disclosures about fair value measurements.
It does not require any new fair value measures. The Statement
is effective for fair value measures already required or
permitted by other standards for fiscal years beginning after
November 15, 2007. SFAS 157 is required to be applied
prospectively, except for certain financial instruments. On
February 12, 2008, the FASB issued FSP
FAS 157-1
and FSP
FAS 157-2,
which remove leasing transactions accounted for under
SFAS No. 13, Accounting for Leases from the
scope of SFAS 157 and partially defer the effective date of
SFAS 157 as it relates all nonrecurring fair value
measurements of nonfinancial assets and nonfinancial liabilities
until fiscal years beginning after November 15, 2008. The
Company adopted this statement on January 1, 2008 and the
adoption did not have a material impact on the Company’s
combined financial condition, results of operations and cash
flows.
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159 permits entities to choose to
measure many financial instruments and certain other items at
fair value that are not currently required to be measured at
fair value. The objective of SFAS 159 is to improve
financial reporting by providing entities with the opportunity
to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to
apply complex hedge accounting provisions. SFAS 159 is
effective for the first fiscal year that begins after
November 15, 2007. In adopting SFAS 159 on
January 1, 2008, the Companies did not elect the fair value
option for any financial assets or liabilities; as such, the
adoption did not have a material impact on the Companies’
combined financial condition, results of operations and cash
flows.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51
(SFAS 160). SFAS 160 (a) amends ARB 51 to
establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and the deconsolidation
of a subsidiary; (b) changes the way the consolidated
income statement is presented; (c) establishes a single
method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation;
(d) requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated; and
(e) requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish
between the interests of the parent’s owners and the
interests of the noncontrolling owners of a subsidiary.
SFAS 160 must be applied prospectively, but the
presentation and disclosure requirements must be applied
retrospectively to provide comparability in the financial
statements. Early adoption is prohibited. SFAS 160 is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15, 2008. The
impact of this new accounting principle on the Company’s
combined financial condition, results of operations and cash
flows is dependent upon the level of future acquisitions.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations — a replacement of FASB
No. 141 (SFAS 141(R)). SFAS 141(R) requires
(a) a company to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree at fair value as of the acquisition date; and
(b) an acquirer in preacquisition periods to expense all
acquisition-related costs. SFAS 141(R) requires that any
adjustments to an acquired entity’s deferred tax asset and
liability balance that occur after the measurement period be
recorded as a component of income tax expense. This accounting
treatment is required for business combinations consummated
before the effective date of SFAS 141(R) (non-prospective),
otherwise SFAS 141(R) must be applied prospectively. The
presentation and disclosure requirements must be applied
retrospectively to provide comparability in the financial
statements. Early adoption is prohibited. SFAS 141(R) is
effective for fiscal years, and interim periods within those
fiscal years, beginning on or after December 15,
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
2008. The impact of this new accounting principle on the
Company’s combined financial condition, results of
operations and cash flows is dependent upon the level of future
acquisitions.
OSTI has a technology investment agreement with the
U.S. government under Title III of the Defense
Production Act to establish a certain manufacturing capability
at the Companies’ facility. The U.S. government
reimburses OSTI for costs incurred to study, plan and develop
the manufacturing capability and for the procurement of
manufacturing equipment. Title to all property and equipment
purchased under this agreement remains U.S. government
property. The U.S. government, at its discretion, may elect
to transfer title of the property and equipment to OSTI.
OSTI bills the U.S. government for a portion of the amounts
incurred on a monthly basis. For the six months ended
June 30, 2007 and 2008, OSTI billed $185,624 and $96,441,
respectively, for reimbursement of
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
the U.S. government’s share of costs incurred under the
agreement, including payment for property and equipment
purchases. The amounts billed offset the applicable expenses
incurred in the accompanying statements of operations or
reimburse OSTI for costs incurred to purchase property and
equipment on behalf of the U.S. government
Total U.S. government owned property and equipment
purchased and maintained by OSTI, including advanced deposits
paid for property and equipment on behalf of the
U.S. government, but not reflected in the combined
financial statements as of December 31, 2007 and
June 30, 2008 was $1,266,918 and $1,337,194 respectively.
8.
SHORT-TERM
BORROWINGS
OSTI has a $1,000,000 line of credit agreement with a bank,
subject to borrowing base restrictions of 80% of eligible
accounts receivable and 50% of eligible inventories, and due on
demand. Interest is variable and payable monthly at the
lender’s prime rate less 0.25%. As of December 31,2007 and June 30, 2008, the interest rate was 7.00% and
4.75%, respectively. The line of credit note is collateralized
by substantially all of the assets of OSTI. The Companies had
borrowings under the line of credit of $400,000 and $0 as of
December 31, 2007 and June 30, 2008, respectively. The
credit agreement contains financial covenants including a
minimum current ratio, maximum leverage ratio and limits on
capital expenditures and shareholder distributions.
The Companies also have a $100,000 line of credit agreement with
another bank due on demand and secured by certain assets of the
Companies. Interest is variable and payable monthly at the
lender’s prime rate plus 1%. As of December 31, 2007
and June 30, 2008, the interest rate was 8.25% and 6.00%
respectively. Borrowings under this line of credit were $100,000
and $100,000 as of December 31, 2007 and June 30,2008, respectively.
On May 29, 2007, the Companies borrowed $180,000 from their
shareholders. Interest was payable at 4.75%, the applicable
federal rate, and the loan was repaid December 19, 2007.
Mortgages payable to the Pennsylvania Industrial Development
Authority, due June 15, 2015 with monthly payments of
principal and interest of $909 at a fixed interest rate of
3.75%. Secured by the Companies’ buildings and
improvements.
$
70,531
$
66,368
Term note payable to bank, due September 2009, payable over
60 months with escalating principal payments from $5,747 to
$6,031 with interest at the bank’s prime rate plus 0.25%
(5.25% at June 30, 2008) secured by certain assets of
the Companies
OPTICAL
SYSTEMS TECHNOLOGY, INC.,
KEYSTONE APPLIED TECHNOLOGIES, INC., AND
OMNITECH PARTNERS, INC.
NOTES TO THE CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
10.
COMMITMENT
AND CONTINGENCIES
Legal Matters — The Companies are from time to
time involved in legal proceedings that are incidental to the
operation of their businesses. The Companies establish accruals
in cases where the outcome of the matter is probable and can be
reasonably estimated. Although the ultimate outcome of any legal
matter cannot be predicted with certainty, based on present
information, including the Companies’ assessment of the
merits of the particular claims, as well as its current reserves
and insurance coverage, the Companies do not expect that such
legal proceedings to which they are a party will have any
material adverse impact on the cash flow, results of operations
or financial condition of the Companies on a combined basis in
the foreseeable future.
Product Warranties — Accruals for estimated
expenses related to warranties are made at the time products are
sold or services are rendered. These accruals are established
using historical information on the nature, frequency and
average cost of warranty claims. The Companies generally warrant
their products against defects and specific nonperformance for
one or two year period.
11.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Companies
in estimating fair value disclosures for financial instruments:
a. The carrying amounts of the following assets and
liabilities meeting the definition of a financial instrument
approximate their fair value due to the short period to maturity
of the instruments: cash and cash equivalents, accounts
receivable, and accounts payable.
b. Long-term debt — The carrying amounts
reported in the combined balance sheets for long-term debt,
including the current portion, approximates their fair value.
12.
SUPPLEMENTAL
CASH FLOW INFORMATION
Supplemental cash flow information for June 30, 2007 and
2008 is as follows:
2007
2008
Interest paid
$
12,743
$
18,438
The following transactions were treated as noncash activities on
the combining statements of cash flows for the Companies:
The Companies authorized and accrued $1,040,000 in
shareholders’ distributions representing the
shareholders’ estimated tax liability on the
Companies’ net income for the six month period ended
June 30, 2008.
Transportadora de Protección y Seguridad, S.A. de C.V.
Monterrey, N.L., Mexico
We have audited the accompanying balance sheets of
Transportadora de Protección y Seguridad, S.A. de C.V. (the
“Company”) as of December 31, 2006 and 2007, and
the related statements of income, changes in stockholders’
equity and comprehensive income, and cash flows for the years
then ended. 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 of America. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes consideration
of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, 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, such financial statements present fairly, in all
material respects, the financial position of Transportadora de
Protección y Seguridad, S.A. de C.V. as of
December 31, 2007 and 2006, and the results of its
operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the
United States of America.
Transportadora de Protección y Seguridad, S.A. de C.V. (the
Company) was founded in 1994 with its headquarters located in
Monterrey, Mexico. Its principal activity is the manufacturing
of armored vehicles as well as providing armoring related
services to its clients.
2.
BASIS OF
PRESENTATION
The Company maintains its books and records in Mexican pesos and
prepares financial statements in accordance with Mexican
Financial Reporting Standards (Mexican FRS) (previously known as
accounting principles generally accepted in Mexico or Mexican
GAAP ) issued by the Mexican Board for Research and Development
of Financial Reporting Standards (the CINIF). The accompanying
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP) and have been translated into
U.S. dollars as discussed below. The most significant
difference between Mexican FRS and U.S. GAAP, as it relates
to the Company, is that Mexican FRS recognizes the comprehensive
effects of inflation on financial statements, which effects have
been eliminated in the accompanying financial statements.
3.
SIGNIFICANT
ACCOUNTING POLICIES
Cash and Cash Equivalents — Cash and cash
equivalents consist of cash held in checking accounts and other
highly liquid instruments with maturities of less than
3 months.
Accounts Receivable and Allowance for Doubtful
Accounts — Trade accounts receivable are recorded
at the invoiced amount and do not bear interest due to their
short-term nature. Amounts collected on trade accounts
receivable are included in net cash used in operating activities
in the statements of cash flows. The Company maintains an
allowance for doubtful accounts for estimated losses inherent in
its accounts receivable portfolio. In establishing the required
allowance, management considers historical losses and current
receivables aging.
The Company sells products to customers primarily in Mexico. The
Company conducts periodic evaluations of its customers’
financial condition and generally does not require collateral.
The Company does not believe that significant risk of loss from
a concentration of credit risk exists given the large number of
customers that comprise its customer base. The Company also
believes that its potential credit risk is adequately covered by
the allowance for doubtful accounts. Management periodically
reviews the listing of accounts receivable to assess their
probability of collection. The total allowance for doubtful
accounts was $192,910 and $292,401 as of December 31, 2006
and 2007, respectively.
Inventories — Materials and parts, vehicles in
process and armored vehicles are stated at the lower of cost or
market, with cost being determined on the
first-in,
first-out method.
The Company records the necessary adjustments for inventory
impairment arising from damaged, obsolete, or slow-moving
inventory.
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
Property and Equipment — Property and equipment
are recorded at acquisition cost net of accumulated depreciation
and amortization. Depreciation of property and equipment is
provided using the straight-line method over the assets’
estimated useful lives as follows:
Years
Machinery and equipment
10.0
Vehicles
4.0
Furniture and fixtures
3.3
Computer equipment
3.3
Leasehold improvements
5.0
The Company charges repair, maintenance and minor renewal
expenditures and other purchases against earnings in the year
incurred, while major improvements are capitalized and
depreciated. When an item is sold or retired, the related asset
cost and accumulated depreciation and amortization are removed
from the books and gains or losses are recognized in the
statements of income. Leasehold improvements are depreciated
over the shorter of their estimated useful lives or the terms of
the respective leases. Depreciation and amortization expense
recorded in cost of sales totaled $95,158 and $169,260 in 2006
and 2007, respectively, and depreciation and amortization
expense recorded in selling, general and administrative expenses
for 2006 and 2007 totaled $68,835 and $122,568, respectively.
Long-Lived Assets — In accordance with
Statement of Financial Accounting Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets, long-lived assets, such as property and equipment,
are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may
not be recoverable. If circumstances require a long-lived asset
be tested for possible impairment, the Company first compares
undiscounted cash flows expected to be generated by the asset to
the carrying value of the asset. If the carrying value of the
long-lived asset is not recoverable on an undiscounted cash flow
basis, impairment is recognized to the extent that the carrying
value exceeds its fair value. Fair value is determined through
various valuation techniques including discounted cash flow
models, quoted market values and third-party independent
appraisals, as considered necessary.
Labor Obligations — In accordance with Mexican
Labor Law, the Company provides seniority premium benefits to
its employees under certain circumstances. These benefits
consist of a one-time payment equivalent to 12 days wages
for each year of service (at the employee’s most recent
salary, but not to exceed twice the legal minimum wage), payable
to all employees with 15 or more years of service, as well as to
certain employees terminated involuntarily prior to the vesting
of their seniority premium benefit. The Company also provides
statutorily mandated severance benefits to its employees
terminated under certain circumstances. Such benefits consist of
a one-time payment of three months wages plus 20 days wages
for each year of service payable upon involuntary termination
without cause.
The costs for benefits to which employees are entitled related
to seniority premiums and severance payments are recognized in
the statements of income, as services are rendered, based on
actuarial estimations of the benefits’ present value.
Effective December 31, 2007, the Company adopted the
recognition and disclosure provisions of Statement of Financial
Accounting Standards (SFAS) No. 158,
Employers’ Accounting for Defined Benefit Pension and
Other Postretirement Plans (SFAS 158). SFAS 158
requires companies to recognize the funded status of their
defined benefit pension and other postretirement plans as a net
asset or liability and to recognize changes in that funded
status in the year in which the changes occur through other
comprehensive income to the extent those changes are not
included in the net periodic cost. Additionally, upon adoption,
SFAS 158 requires that the unrecognized net actuarial gain
or loss and the unrecognized prior service cost be recognized in
accumulated other comprehensive income and that these amounts be
adjusted as they are subsequently recognized as a component of
net periodic benefit cost based upon the current amortization
and recognition
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
requirements of SFAS No. 87, Employers’
Accounting for Pensions and SFAS No. 106,
Employers’ Accounting for Postretirement Benefits Other
Than Pensions. The funded status reported on the balance
sheet as of December 31, 2007 under SFAS 158 was measured
as the difference between the fair value of plan assets (if any)
and the benefit obligations on a
plan-by-plan
basis. The adoption of the recognition provisions of
SFAS 158 did not impact the Company’s cash position.
The incremental effect of applying the recognition provisions of
SFAS 158 on the Company’s financial position as of
December 31, 2007 was as follows:
Before
After
Adoption of
Adoption of
SFAS 158
Adjustments
SFAS 158
Deferred income taxes
$
255,717
$
(5,767
)
$
249,950
Labor obligations
147,227
20,596
167,823
Total liabilities
6,681,322
14,829
6,696,151
Accumulated other comprehensive loss, net of tax
(189,971
)
(14,829
)
(204,800
)
Total stockholders’ equity
$
4,292,905
$
(14,829
)
$
4,278,076
The recognition provisions of SFAS 158 had no affect on the
statements of income for the periods presented. The Company will
adopt the measurement date provisions of SFAS 158 during
fiscal year 2008, which will require it to change its
measurement date for its labor obligations to December 31.
Use of Estimates — The preparation of the
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities, the 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. Significant items subject to such
estimates and assumptions include the carrying amount of
valuation allowances for receivables, inventories, warranties
and obligations related to employee benefits. Estimates are
revised as additional information becomes available. Actual
results could differ from those estimates.
Foreign Currency Translation — The functional
currency of the Company has been defined as the Mexican Peso in
accordance with the criteria established by
SFAS No. 52, Foreign Currency Translation.
Accordingly, the financial statements for the years ended
December 31, 2006 and 2007 have been translated from
Mexican pesos into U.S. dollars using (i) current
exchange rates for asset and liability accounts,
(ii) historical rates for paid-in capital, and
(iii) the weighted average exchange rate of the reporting
period for revenues and expenses. The result of translation is
recorded as a component of other accumulated comprehensive loss.
Foreign currency transaction gains (losses) resulting from
exchange rate fluctuations on transactions denominated in a
currency other than the Mexican Peso are included in the
statements of income.
Relevant exchange rates used in the preparation of the financial
statements were as follows (Mexican pesos per one
U.S. dollar):
2006
2007
Current exchange rate at December 31
Ps. 10.8755
Ps.10.9043
Weighted average exchange rate for the years ended December 31
Ps. 10.9227
Ps.10.9457
Income Taxes and Employee Statutory Profit Sharing
(ESPS) — The provision for income taxes includes
federal, state, and local income taxes currently payable and
deferred taxes arising from temporary differences between the
financial statement and tax basis of assets and liabilities.
Income taxes and ESPS are recorded under the liability method.
Under this method, deferred income taxes are recognized for the
estimated future tax effects of differences between the tax
basis of assets and liabilities and their financial statement
amounts as well as net operating loss carryforwards and tax
credits based on enacted tax laws. A valuation allowance is
applied to reduce deferred income tax assets to the amount of
future net benefits that are more likely than not
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
to be realized. Because the Company uses the Mexican Peso as the
functional currency, deferred income tax is calculated based on
the differences between the foreign currency and the indexed tax
basis of its assets and liabilities. ESPS is presented within
operating expenses and the current expense is computed by
applying the Mexican rate of 10% to pretax income from
continuing operations. At December 31, 2006 and 2007, the
deferred ESPS asset was $93,633 and $131,180, respectively. The
Company established a valuation allowance for the total balance
of the deferred ESPS asset.
Beginning on October 1, 2007, the Company must determine
whether it will incur corporate income tax or the new Business
Flat Tax (IETU) in the future and, accordingly, recognize
deferred taxes based on the tax it will pay. Deferred taxes are
calculated by applying the corresponding tax rate to the
applicable temporary differences resulting from comparing the
accounting and tax bases of assets and liabilities and
including, if any, future benefits from tax loss carryforwards
and certain tax credits (see Note 10).
Provisions — Provisions are recognized for
current obligations that result from a past event, are probable
to result in the future use of economic resources, and can be
reasonably estimated.
Product Warranties — The Company provides
various types of product warranties to its customers. Provisions
for estimated expenses related to product warranties are
recorded within accrued expenses at the time the product is
sold. The Company estimates its warranty expenses using
historical information on the nature, frequency, and average
cost of warranty claims.
Fair Value of Financial Instruments — The
carrying amounts of cash and cash equivalents, trade accounts
receivable, short term borrowings, trade accounts payable and
accrued expenses approximate their fair value because of the
short maturity of these instruments.
Sales and Revenue Recognition — The Company
recognizes revenues upon transfer of the risk and rewards of
ownership, when services are rendered, collection of the
relevant receivable is probable, persuasive evidence of an
arrangement exists and the sales price is fixed or determinable.
Prepayments are recorded as advances from customers.
Recently Issued Financial Accounting
Pronouncements — In July 2006, the Financial
Accounting Standards Board (FASB) issued FASB Interpretation
No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement 109 (FIN 48).
FIN 48 clarifies the accounting for uncertainty in income
taxes recognized in an enterprise’s financial statements
and prescribes a threshold of more-likely-than-not for
recognition of tax benefits of uncertain tax positions taken or
expected to be taken in a tax return. FIN 48 also provides
related guidance on measurement, derecognition, classification,
interest and penalties, and disclosure. The FASB decided to
defer the effective date of FIN 48 for nonpublic entities
for one year for those nonpublic entities that had not already
issued a complete set of annual financial statements fully
reflecting the Interpretation’s requirements. The Company
adopted FIN 48 on January 1, 2008 and it did not have
a material effect on its financial condition, results of
operations and cash flows.
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurement
(SFAS 157). SFAS 157 defines fair value,
establishes a framework for the measurement of fair value, and
enhances disclosures about fair value measurements. It does not
require any new fair value measures. The Statement is effective
for fair value measures already required or permitted by other
standards for fiscal years beginning after November 15,2007. Except as discussed below, the Company was required to
adopt SFAS 157 beginning on January 1, 2008.
SFAS 157 is required to be applied prospectively, except
for certain financial instruments. On February 12, 2008,
the FASB issued FSP FAS
157-1 and
FSP
FAS 157-2,
which remove leasing transactions accounted for under
SFAS No. 13, Accounting for Leases, from the
scope of SFAS 157 and partially defer the effective date of
SFAS No. 157 as it relates to all nonrecurring fair
value measurements of nonfinancial assets and nonfinancial
liabilities until fiscal years beginning after November 15,2008. The Company adopted the provisions of SFAS 157
effective January 1, 2008 and it did not have a material
effect on its financial condition, results of operations and
cash flows.
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
In February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial
Liabilities — including an amendment of FASB Statement
No. 115 (SFAS 159). SFAS 159 gives the
Company the irrevocable option to carry at fair value most
financial assets and liabilities that are not currently required
to be measured at fair value. If the fair value option is
elected, changes in fair value would be recorded in earnings at
each subsequent reporting date. SFAS 159 is effective for
the Company’s 2008 fiscal year. The Company’s adoption
of this statement will not have a material effect on its
financial condition, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 141(R),
Business Combinations — a replacement of FASB
No. 141 (SFAS 141(R)). SFAS 141(R) requires
(a) a company to recognize the assets acquired, the
liabilities assumed, and any noncontrolling interest in the
acquiree at fair value as of the acquisition date, and
(b) an acquirer in preacquisition periods to expense all
acquisition-related costs. SFAS 141(R) requires that any
adjustments to an acquired entity’s deferred tax asset and
liability balance that occur after the measurement period be
recorded as a component of income tax expense. SFAS 141(R)
must be applied prospectively. The presentation and disclosure
requirements must be applied retrospectively to provide
comparability in the financial statements. Early adoption is
prohibited. SFAS 141(R) is effective for fiscal years, and
interim periods within those fiscal years, beginning on or after
December 15, 2008. The impact of this standard is dependant
upon the level of future acquisitions.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interests in Consolidated Financial
Statements — an amendment of ARB No. 51
(SFAS 160). SFAS 160 (a) amends ARB 51 to
establish accounting and reporting standards for the
noncontrolling interest in a subsidiary and the deconsolidation
of a subsidiary; (b) changes the way the consolidated
income statement is presented; (c) establishes a single
method of accounting for changes in a parent’s ownership
interest in a subsidiary that do not result in deconsolidation;
(d) requires that a parent recognize a gain or loss in net
income when a subsidiary is deconsolidated; and
(e) requires expanded disclosures in the consolidated
financial statements that clearly identify and distinguish
between the interests of the parent’s owners and the
interests of the noncontrolling owners of a subsidiary.
SFAS 160 must be applied prospectively but the presentation
and disclosure requirements must be applied retrospectively to
provide comparability in the financial statements. Early
adoption is prohibited. SFAS 160 is effective for fiscal
years, and interim periods within those fiscal years, beginning
on or after December 15, 2008. The impact of this standard
is dependant upon the level of future acquisitions.
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
6. PROPERTY
AND EQUIPMENT
2006
2007
Machinery and equipment
$
410,449
$
460,815
Vehicles
803,195
1,360,161
Office furniture and fixtures
279,394
324,534
Computer equipment
86,851
188,575
Leasehold improvements
87,309
214,076
Total
1,667,198
2,548,161
Less accumulated depreciation and amortization
(824,016
)
(1,114,774
)
Total
$
843,182
$
1,433,387
7. SHORT-TERM
BORROWINGS
At December 31, 2007 and 2006, the Company had a revolving
line of credit from a banking institution. The interest rate was
TIIE (Interbank Equilibrium Interest Rate) plus 3 basis
points. The average interest rate for 2007 and 2006 was 10.13%
and 9.71%, respectively. At December 31, 2006 and 2007, the
outstanding obligations on this line of credit were $123,906 and
$506,665, respectively.
8.
ACCRUED
EXPENSES AND OTHER CURRENT LIABILITIES
2006
2007
Accrued expenses
$
463,138
$
20,128
Advances from customers
1,307,012
280,877
Other taxes payable
150,149
224,558
Warranty reserve and other provisions
92,616
395,950
$
2,012,915
$
921,513
9. RELATED
PARTIES
Transactions carried out with related parties for the years
ended December 31, 2006 and 2007 were as follows:
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
Balances receivable and payable to related parties as of
December 31, 2006 and 2007 are as follows:
Due from:
2006
2007
Servicios Técnicos y Administrativos de Seguridad, S.A. de
C.V.
$
6,456
$
—
Due to:
2006
2007
Transposeg, Inc.(1)
$
873,782
$
657,393
Shareholder(2)
818,202
367,825
Gruas Herrera(1)
43,558
43,827
Herrera Motors(1)
18,889
17,206
$
1,754,431
$
1,086,251
(1)
These balances correspond mainly to towing and car maintenance
services received by the Company from related parties.
(2)
Represents a loan received from the Company’s Chief
Executive Officer and principal shareholder.
10. INCOME
TAXES
In accordance with Mexican tax law, the Company is subject to
regular income tax (ISR) and, through 2007, to a tax on assets
(IMPAC). ISR is computed taking into consideration the taxable
and deductible effects of inflation, such as depreciation
calculated on restated asset values. Taxable income is increased
or reduced by the effects of inflation on certain monetary
assets and liabilities through the inflationary component, which
is similar to the gain or loss from monetary position. As of
2007, the tax rate is 28% and in 2006 it was 29%. Due to changes
in the tax legislation, effective January 1, 2007,
taxpayers who file tax reports and meet certain requirements may
obtain a tax credit equivalent to 0.5% or 0.25% of taxable
income. For ISR purposes, effective in 2005, cost of sales is
deducted instead of inventory purchases. Taxpayers had the
option, in 2005, to ratably increase taxable income over a 8
period by the tax basis of inventories as of December 31,2004, determined in conformity with the respective tax rules,
and taking into account inventory turnover. Accordingly, the
initial effect of the new regulation of no longer deducting
inventory purchases was deferred. In addition, ESPS paid is
fully deductible.
In 2007, IMPAC was calculated by applying 1.25% to the value of
the assets of the year, without deducting any debt amounts.
Through 2006, IMPAC was calculated by applying 1.8% on the net
average of the majority of restated assets less certain
liabilities, including liabilities payable to banks and foreign
entities. IMPAC is payable only to the extent that it exceeded
ISR payable for the same period.
On October 1, 2007, the Business Flat Tax Law (IETU) was
enacted and went into effect on January 1, 2008. In
addition, the Tax Benefits Decree and the Third Omnibus Tax Bill
were published on November 5 and December 31, 2007,
respectively, clarifying or expanding the transitory application
of the law regarding transactions carried out in 2007 that will
have an impact in 2008. IETU applies to the sale of goods, the
provision of independent services and the granting of use or
enjoyment of goods, according to the terms of the IETU Law, less
certain authorized deductions. IETU payable is calculated by
subtracting certain tax credits from the tax determined.
Revenues, as well as deductions and certain tax credits, are
determined based on cash flows generated beginning
January 1, 2008. The IETU Law establishes that the IETU
rate will be 16.5% in 2008, 17% in 2009, and 17.5% as of 2010.
The Asset Tax Law was repealed upon enactment of LIETU; however,
under certain circumstances, IMPAC paid in the ten years prior
to the year in which regular income tax (ISR) is paid, may be
refunded, according to the terms of the law.
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
Accordingly, beginning in 2008, companies will be required to
pay the greater of IETU or ISR. If, IETU results, the payment
will be considered final i.e. not subject to recovery in
subsequent years (with certain exceptions).
Because management estimates that the tax payable in future
years will be ISR, deferred tax effects as of December 31,2007 have been recorded on the ISR basis and related rates.
The income tax provision for the years ended December 31,2006 and 2007, is comprised of the following:
2006
2007
Current
$
285,980
$
1,677,805
Deferred
(100,489
)
(330,784
)
Total
$
185,491
$
1,347,021
The following table presents the difference between the actual
tax expense and the amounts obtained by applying the statutory
Mexican income tax rates of 29% and 28% for the years ended
December 31, 2006 and 2007, respectively to income before
income taxes.
2006
2007
Computed “expected” tax expense based on statutory rate
$
86,420
$
1,261,917
Non-deductible expenses
55,879
28,441
Effects of inflation
33,660
56,663
Change in statutory tax rate
9,532
—
Total
$
185,491
$
1,347,021
Significant components of the Company’s deferred income tax
assets and liabilities as of December 31, 2006 and 2007 are
summarized as follows:
2006
2007
Current deferred tax assets:
Allowance for doubtful accounts
$
54,015
$
81,872
Accrued expenses
169,330
369,267
223,345
451,139
Current deferred tax liabilities:
Inventories
(80,777
)
(73,850
)
Net current deferred tax assets
$
142,568
$
377,289
Non current deferred tax assets:
Property and equipment
$
26,747
$
38,741
Labor obligations
30,277
46,990
57,024
85,731
Non current deferred tax liabilities:
Inventories
(410,616
)
(335,681
)
Net long-term deferred tax liabilities
$
(353,592
)
$
(249,950
)
Statutory employee profit sharing was determined by applying the
statutory rate of 10% to the profit sharing base determined in
accordance with the applicable law.
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
11. LABOR
OBLIGATIONS
As discussed in Note 3(f), effective December 31,2007, the Company adopted the recognition and disclosure
provisions of SFAS 158, which requires companies to
recognize the funded status of defined benefit pension and other
postretirement plans as a net asset or liability on the balance
sheet. The Company does not fund its labor obligations.
The Company has used a November 30 measurement date for its
seniority premiums and severance benefits. It will be required
to change its measurement date to December 31 beginning in 2008.
Information related to the Company’s statutorily mandated
severance benefits and seniority premium benefits is as follows:
Unrecognized items recorded in accumulated other comprehensive
loss:
Transition obligation
$
—
(10,404
)
(10,404
)
Unrecognized net actuarial loss
—
(10,192
)
(10,192
)
$
—
$
(20,596
)
$
(20,596
)
For the year ended December 31, 2006, the periodic pension
costs of severance benefits and seniority premiums were $1,977
and $26,136, respectively, and are comprised as follows:
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
For the year ended December 31, 2007, the periodic pension
costs of severance benefits and seniority premiums were $8,518
and $30,713, respectively, and are comprised as follows:
Severance
Seniority
Benefits
Premiums
Total
Net periodic pension cost:
Service cost
$
922
$
17,291
$
18,213
Interest cost
395
8,406
8,801
Amortization of transition obligation
—
5,202
5,202
Amortization of actuarial loss (gain)
7,201
(186
)
7,015
$
8,518
$
30,713
$
39,231
Nominal interest rates are used by the Company in order to
determine the post retirement plan liability. The most important
assumptions used for pension plans, severance compensation and
seniority premiums for the periods presented were:
2006
2007
Discount rate:
8.0
%
8.0
%
Rate of compensation increase:
5.5
%
5.5
%
The Company estimates that the future benefit payments for each
of the five succeeding years are as follows:
The principal characteristics of stockholders’ equity are
described below:
(a)
Structure
of Capital Stock —
•
At the Company’s stockholders’ meeting held on
January 15, 2007, the stockholders agreed to increase the
variable portion of capital stock by $455,517, subscribed by
5,000 shares of common stock, with a par value of $93 per
share, through the capitalization of the Due to stockholders
balance.
•
At the Company’s stockholders’ meeting held on
November 30, 2005 the stockholders agreed to increase the
variable portion of capital stock by $627,370, subscribing 6,900
common shares, with a par value of $92 each. On
September 5, 2006, the Company’s stockholders paid for
the 6,900 shares with a contribution of cash of $627,370.
(b)
Restrictions
on Stockholders’ Equity —
Five percent of net income for the year must be appropriated to
the legal reserve, until it reaches one-fifth of capital stock.
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE FINANCIAL STATEMENTS — (Continued)
Stockholders’ contributions restated for inflation as
provided for by the Mexican Income Tax Law, amounting to
$1,192,776 as of December 31, 2007, may be refunded to
stockholders tax-free, to the extent that such contributions
equal or exceed stockholders’ equity.
Stockholders’ equity, except restated paid-in capital and
tax retained earnings amounting to $4,270,527, will be subject
to a dividend tax, payable by the Company, in the event of
distribution. In 2006 and 2007, the rate was 29% and 28%,
respectively. Any income tax paid on such distribution may be
credited against future income tax payable by the Company in the
year in which the dividend tax is paid and in the following two
years.
13. OPERATING
LEASES
The Company leases its office and manufacturing facilities.
Lease expense for 2006 and 2007 was $181,530 and $240,971,
respectively.
Minimum annual rentals for operating leases with non-cancelable
terms in excess of one year (excluding renewal options) are
approximately as follows:
The Company has the following commitments and contingencies:
(a) The Company is from time to time involved in legal
proceedings that are incidental to the operation of its
business. The Company establishes accruals in cases where the
outcome of the matter is probable and can be reasonably
estimated. Although the ultimate outcome of any legal matter
cannot be predicted with certainty, based on present
information, including the Company’s assessment of the
merits of the particular claim as well as its current reserves
and insurance coverage, the Company does not expect that any
currently pending legal proceedings to which it is a party will
have any material adverse impact on the cash flow, results of
operations or financial condition of the Company in the
foreseeable future.
(b) Accruals for estimated expenses related to warranties
are made at the time products are sold or services are rendered.
These accruals are established using historical information on
the nature, frequency, and average cost of warranty claims.
While the terms of the Company’s warranties vary widely, in
general, the Company guarantees its products against defects and
specific types of nonperformance. The accruals for warranties at
December 31, 2006 and 2007 were $84,419 and $349,927,
respectively. Warranty expenses for 2006 and 2007 were $40,214
and $265,538, respectively.
(c) In accordance with the Mexican Income Tax Law, the tax
authorities have the right to review the Company’s tax
returns filed during the past five years.
Transportadora de Protección y Seguridad, S.A. de C.V. (the
Company) was founded in 1994 with its headquarters located in
Monterrey, Mexico. Its principal activity is the manufacturing
of armored vehicles as well as providing armoring related
services to its clients.
2.
BASIS OF
PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
The Company maintains its books and records in Mexican pesos and
prepares financial statements in accordance with Mexican
Financial Reporting Standards (Mexican FRS) (previously known as
accounting principles generally accepted in Mexico or Mexican
GAAP) issued by the Mexican Board for Research and Development
of Financial Reporting Standards (the CINIF). The accompanying
financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of
America (U.S. GAAP) and have been translated into
U.S. dollars as discussed below in (a).
The accompanying condensed interim financial statements have
been prepared in conformity with U.S. GAAP, which require
that management make certain estimates and use certain
assumptions that affect the amounts reported in the financial
statements and their related disclosures; however, actual
results may differ from such estimates. The Company’s
management, upon applying professional judgment, considers that
estimates made and assumptions used were adequate under the
circumstances.
In the opinion of management, all adjustments (including normal
recurring accruals) considered necessary for a fair presentation
have been included in the accompanying unaudited condensed
interim financial statements.
These unaudited condensed interim financial statements should be
read in conjunction with the audited financial statements for
the years ended December 31, 2006 and 2007. The results of
operations for the interim periods presented are not necessarily
indicative of the annual results of operations.
Foreign Currency Translation — The functional
currency of the Company has been defined as the Mexican Peso in
accordance with the criteria established by
SFAS No. 52, Foreign Currency Translation.
Accordingly, the financial statements for the periods ended
June 30, 2007 and 2008 have been translated from Mexican
pesos into U.S. dollars using (i) current exchange
rates for asset and liability accounts, (ii) historical
rates for paid-in capital, and (iii) the weighted average
exchange rate of the reporting period for revenues and expenses.
The result of translation is recorded as a component of other
accumulated comprehensive loss. Foreign currency transaction
gains (losses) resulting from exchange rate fluctuations on
transactions denominated in a currency other than the Mexican
Peso are included in the statements of income.
Relevant exchange rates used in the preparation of the financial
statements were as follows (Mexican pesos per one
U.S. dollar):
Weighted average exchange rate for the six month periods ended
June 30
Ps.
10.9660
Ps.
10.6209
Recently Adopted Financial Accounting
Pronouncements — In July 2006, the FASB issued
FASB Interpretation No. 48, Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement 109
(FIN 48). FIN 48 clarifies the accounting for
uncertainty in income taxes recognized in an enterprise’s
financial statements and prescribes a threshold of
more-likely-than-not for recognition of tax benefits of
uncertain tax positions taken or expected to be taken in a tax
return. FIN 48 also provides related guidance on
measurement, derecognition, classification, interest and
penalties, and disclosure. The FASB decided to defer
TRANSPORTADORA
DE PROTECCIÓN Y SEGURIDAD, S.A. DE C.V.
NOTES TO
THE CONDENSED FINANCIAL STATEMENTS
(UNAUDITED) — (Continued)
the effective date of FIN 48 for nonpublic entities for one
year for those nonpublic entities that had not already issued a
complete set of annual financial statements fully reflecting the
Interpretation’s requirements. The Company adopted
FIN 48 on January 1, 2008. The adoption of this
standard did not have a material impact on the Company’s
financial position, results of operations or cash flows as
management did not identify any material uncertain tax positions.
At December 31, 2007 and June 30, 2008, the Company
had a revolving line of credit from a banking institution. The
interest rate was the Interbank Equilibrium Interest Rate (TIIE)
plus 3 basis points. The average interest rate for the six
months ended June 30, 2007 and 2008 was 9.71% and 10.13%,
respectively. At December 31, 2007 and June 30, 2008,
the outstanding obligations under this line of credit were
$506,665 and $1,414,683, respectively.
During June 2008, the Company obtained an additional
revolving line of credit from a different banking institution.
The interest rate was TIIE plus 2.5 basis points. The
average interest rate for the six months ended June 30,2008 was 5.50%. At June 30, 2008, the outstanding
obligation under this line of credit was $1,156,103.
6.
RELATED
PARTIES
Transactions carried out with related parties for the periods
ended June 30, 2007 and 2008 were as follows:
Servicios Técnicos y Administrativos de
Seguridad, S.A. de C.V.(2)
—
50,967
$
1,086,251
$
848,207
(1)
Represents an employee advance to the Company’s Chief
Executive Officer and principal shareholder.
(2)
These balances correspond mainly to towing and car maintenance
services received by the Company from related parties.
(3)
Represents a loan received from the Company’s Chief
Executive Officer and principal shareholder.
7.
STOCKHOLDERS’
EQUITY
On May 2, 2008, the shareholders of the Company approved
the declaration of a dividend for 35,000,000 Mexican pesos
(approximately $3,400,000) in cash.
8.
COMMITMENTS
AND CONTINGENCIES
The Company has the following commitments and contingencies:
(a) The Company is from time to time involved in legal
proceedings that are incidental to the operation of its
business. The Company establishes accruals in cases where the
outcome of the matter is probable and can be reasonably
estimated. Although the ultimate outcome of any legal matter
cannot be predicted with certainty, based on present
information, including the Company’s assessment of the
merits of the particular claim as well as its current reserves
and insurance coverage, the Company does not expect that any
currently pending legal proceedings to which it is a party will
have any material adverse impact on the cash flow, results of
operations or financial condition of the Company in the
foreseeable future.
(b) In accordance with the Mexican Income Tax Law, the tax
authorities have the right to review the Company’s tax
returns filed during the past five years. It is the
Company’s policy to classify interest and penalties related
to income tax related matters within income tax expense and
other expenses, respectively.
On May 2, 2008, the shareholders of the Company approved
the declaration of a dividend for 35,000,000 Mexican pesos
(approximately $3,400,000), which represents a non-cash
transaction for purposes of the Statement of Cash Flows.
Morgan
Keegan & Company, Inc. Sole
Book-running Manager
BB&T Capital
Markets
Oppenheimer &
Co.
Raymond James
Stifel Nicolaus
Until , 2008 (25 days after
the date of this prospectus) all dealers that effect
transactions in these securities, whether or not participating
in this offering, may be required to deliver a prospectus. This
is in addition to the dealers’ obligation to deliver a
prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
The following table sets forth the costs and expenses, other
than underwriting discounts and commissions, payable by us in
connection with the sale of the common stock being registered.
All amounts shown are estimates except for the SEC registration
fee, the FINRA filing fee and The NASDAQ Global Market filing
fee.
Amount to be Paid
SEC registration fee
$
FINRA filing fee
NASDAQ Global Market filing fee
Blue sky qualification fees and expenses
Printing and engraving expenses
Legal fees and expenses
Accounting fees and expenses
Transfer agent and registrar fees and expenses
Miscellaneous expenses
Total
$
Item 14.
Indemnification
of Directors and Officers
The registrant’s amended and restated Code of Regulations
provides that, to the fullest extent not prohibited by Ohio law,
the registrant (a) shall indemnify its directors and
officers against all liability, loss and expense incurred by
them in connection with actions, suits, proceedings or claims
arising out of their service to the registrant and, upon receipt
of certain undertakings, shall advance expenses to them in
connection with those matters and (b) may maintain
insurance or make other financial arrangements on behalf of its
directors and officers for any liability and expense incurred by
them, whether or not the registrant has authority to indemnify
them against such liability and expense. No indemnification may
be made by the registrant for willful misconduct or conduct
judged by a court to have been knowingly fraudulent or
deliberately dishonest or if the indemnification is judged by a
court to be a violation of applicable law.
The registrant intends to maintain directors’ and
officers’ liability insurance insuring its directors and
executive officers against certain liabilities arising out of
their service as such to the registrant.
Item 15.
Recent
Sales of Unregistered Securities.
The information presented below describes the sales and
issuances of securities by the registrant since August 1,2005 that were not registered under the Securities Act. It does
not give effect to the one-for-one conversion to common stock of
all outstanding shares of the registrant’s preferred stock,
or
the -for-one
common stock split, both of which will occur prior to the
effectiveness of this registration statement. Unless otherwise
indicated, the consideration for all sales and issuances, other
than the issuances of stock options, was cash. There were no
underwriting discounts or commissions in connection with any of
the transactions.
Except as otherwise indicated, each sale or issuance below was
made in reliance on (1) Section 4(2) of the Securities
Act (including, in certain cases, Rule 506 of
Regulation D thereunder) or (2) in the case of stock
options, Rule 701 under the Securities Act. No transaction
was effected using any form of general advertising or
solicitation. The recipients of the securities in each
transaction represented their intention to acquire the
securities for investment only and not with a view to or for
sale in connection with any distribution, and appropriate
legends were affixed to the share certificates issued. All
recipients either received
adequate information about the registrant or had access, through
employment or other relationships, to such information.
On December 16, 2005, the registrant issued
25,243 shares of Series F 5% Cumulative Participating
Preferred Stock for an aggregate of approximately
$3.0 million to eight accredited investors, all of whom
were existing shareholders.
On January 3, 2006, the registrant issued 2,296 shares
of Series G 3% Cumulative Participating Preferred Stock
valued at approximately $0.3 million to the two
shareholders of Tracor Inc. in connection with the merger of
Tracor into one of the registrant’s subsidiaries.
On April 4, 2006, the registrant issued 25,242 shares
of Series G 3% Cumulative Participating Preferred Stock
valued at approximately $3 million to VIR Rally, LLC in
connection with the purchase of substantially all of the assets
of VIR Rally’s driver training business.
On June 30, 2006, the registrant issued 1,565 shares
of Series G 3% Cumulative Participating Preferred Stock
valued at approximately $0.2 million to one person in
connection with the purchase of certain software assets
developed under the name Dynamic Labyrinth.
On July 14, 2006, the registrant and its existing
shareholders entered into an Investment and Recapitalization
Agreement pursuant to which each outstanding share of
Series A, B, D, E and F 5% Cumulative Participating
Preferred Stock was exchanged for one share of New Class B
5% Cumulative Participating Preferred Stock and each outstanding
share of Series C and G 3% Cumulative Participating
Preferred Stock was exchanged for one share of New Class A
3% Cumulative Participating Preferred Stock. The exchanged
securities were exempt securities pursuant to
Section 3(a)(9) of the Securities Act.
The agreement also provided for a two tranche investment (closed
on July 14, 2006 and December 28, 2006) by seven
existing holders of preferred stock of an aggregate
$10.2 million for 86,119 shares of
New Class B 5% Cumulative Participating Preferred
Stock.
On November 13, 2006, the registrant issued
61,843 shares of New Class A 3% Cumulative
Participating Preferred Stock valued at approximately
$7.3 million to the sole shareholder of Homeland Defense
Solutions, Inc. (HDS) in connection with the acquisition of all
of the stock of that company. The purchase price was subject to
upward or downward adjustment based on the earnings of HDS from
November 1, 2006 to October 31, 2007 and subsequently
was reduced by the cancellation of 22,226 shares.
On April 1, 2007, the registrant issued 1,158 shares
of New Class A 3% Cumulative Participating Preferred Stock
as directed by the former owner of Dynamic Labyrinth in
satisfaction of a $0.1 million deferred purchase price
obligation related to the Dynamic Labyrinth transaction.
On June 29, 2007, the registrant issued 18,722 shares
of New Class A 3% Cumulative Participating Preferred Stock
valued at approximately $2.2 million to the three
stockholders of Security Support Solutions Limited (3S) in
connection with the acquisition of 3S. The purchase price is
subject to upward or downward adjustment based on subsequent
earnings of 3S over a two-year period. All of the shares issued
are escrowed until the purchase price adjustment is complete.
On December 20, 2007, the registrant issued
24,000 shares of New Class B 5% Cumulative
Participating Preferred Stock for an aggregate of
$3.0 million to twelve existing holders of preferred stock
or their affiliates.
Since August 1, 2005, the registrant has granted options to
purchase 78,530 shares of its common stock to employees,
consultants and advisors pursuant to its 2005 Stock Option Plan.
Of these, options for 3,325 shares have been cancelled
without being exercised; options for 20,480 shares with
exercise prices from $50.00 to $60.68 per share have been
exercised, for aggregate consideration of approximately
$1.0 million; and options for 54,725 shares, at
exercise prices from $50.00 to $60.68 per share, remain
outstanding.
A list of exhibits fled with this registration statement on
Form S-1
is set forth in the Exhibit Index and is incorporated in
this Item 16(a) by reference.
(b) Financial Statement Schedules
All financial statement schedules have been omitted because the
required disclosures appear in the audited financial statements
included in this registration statement.
Item 17.
Undertakings
*(f) The undersigned registrant hereby undertakes to provide to
the underwriter at the closing specified in the underwriting
agreements, certificates in such denominations and registered in
such names as required by the underwriter to permit prompt
delivery to each purchaser.
*(h) Insofar as indemnification for liabilities arising under
the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment
by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant
will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final
adjudication of such issue.
*(i) The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(2) For purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offering
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
* Paragraph references correspond to those of
Items 512 of
Regulation S-K.
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in Cincinnati, Ohio on August 22, 2008.
THE O’GARA GROUP, INC.
By:
/s/ Wilfred
T. O’Gara
Wilfred T. O’Gara
President and Chief Executive Officer
POWER OF
ATTORNEY
We, the undersigned directors and officers of The O’Gara
Group, Inc., do hereby constitute and appoint Wilfred T.
O’Gara and Steven P. Ratterman, or either of them, our true
and lawful attorneys and agents, to do any and all acts and
things in our name and on our behalf in our capacities as
directors and officers and to execute any and all instruments
for us and in our names in the capacities indicated below, which
said attorneys and agents, or either of them, may deem necessary
or advisable to enable said registrant to comply with the
Securities Act of 1933 and any rules, regulations and
requirements of the Securities and Exchange Commission, in
connection with this registration statement, including
specifically, but without limitation, power and authority to
sign for us or any of us in our names in the capacities
indicated below, any and all amendments (including
post-effective amendments and any related registration statement
pursuant to Rule 462(b) under the Securities Act of
1933) hereto and we do hereby ratify and confirm all that
said attorneys and agents, or any of them, shall do or cause to
be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement and power of attorney have been signed by
the following persons in the capacities indicated on
August 22, 2008.
Signature
Title
/s/ Wilfred
T. O’Gara
Wilfred
T. O’Gara
President and Chief Executive Officer,
Director (Principal Executive Officer)
/s/ Steven
P. Ratterman
Steven
P. Ratterman
Chief Financial Officer
(Principal Financial Officer and
Principal Accounting Officer)
Stock Purchase Agreement by and among The O’Gara Group,
Inc., Alberto Bertolini, Augusto Gasparetto and Maria Formignani
dated as of June 24, 2008
2
.2
Option Agreement by and among The O’Gara Group, Inc.,
Enrique Homero
Herrera-Martínez
and Maria de Lourdes
Suárez-Peña
dated as of January 14, 2008 (as amended and supplemented
through August 19, 2008)
2
.3
Stock Purchase Agreement by and among The O’Gara Group,
Inc., OmniTech Partners, Inc., Optical Systems Technology, Inc.,
Keystone Applied Technologies, Inc., Paul Maxin and Eugene
Pochapsky dated as of January 10, 2008 (as amended and
supplemented through August 19, 2008)