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Subject: Kroll: The Risk Consulting Company Date: 4/18/2004 5:47 PM
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Kroll: The Risk Consulting Company
Insurgency is targeting humanitarian and reconstruction organizations in Iraq and Afghanistan. Security issues are still of the highest concern. Private security firms are now the third largest international contributor of forces to the war effort in Iraq -- after the U.S. and British troops.

The great flaw in the reconstruction of Iraq, as it turns out, is this nebulous word "security." Apparently that meant the inability of the United States to guarantee safety to civilian contractors and everyday Iraqis from insurrectionists who killed and bombed and then melted away into an apparently friendly mosque, police uniform, or civilian population. Thousands of armed private security contractors are operating in Iraq in a wide variety of missions and exchanging fire with Iraqis every day. Simply put, we don't have enough troops on the ground to do the things we have to do.

Iraq is much like the Alaskan Gold Rush and the O.K. Corral for private security firms, experts say. Someone needs to protect the thousands of civilians who are rebuilding the country, and the U.S. military is trying to get out of that business. So security companies - some decades old and others only months new - are rushing in. Civilian security forces can earn more than 15,000 dollars a month, the US government has awarded hundreds of millions of dollars in contracts to private firms.

The security industry is enormous and growing, concern over terrorism is driving the industry. Terrorism has morphed in that insurgents envision it a way to destroy the West. The private war-zone security industry used to be worth about $500 million. Companies want to protect their buildings, workers and other physical assets, estimates of the industry's annual sales range from $55 billion to $100 billion. Chris Boyd of Kroll-Crucible Security, 'There's a lot of contracts that pay anywhere from US$350 a day to US$1,500 a day.'

"Now, security is a major line item, the first consideration in contract negotiations," said Alastair Morrison, chairman and CEO of Kroll Security International. The cost of protecting foreigners in Iraq was rising well before the Fallujah killings.

Kroll is a company that looks promising for continued growth, Kroll just may be continue to roll.

Kroll May Roll
Kroll is the industry leader in global-risk consultation, specializing in security service. Kroll's global clientele extends from law firms to corporations to governments to real estate firms to non-profit institutions to high net-worth individuals. Kroll works for 350 of the Fortune 500 companies and 238 of the largest 250 law firms.

Market Cap 1.09B, current share price 27.66, PE 25.38, ROE 8.29%, ROA 7.59%, Debt/Equity 0.06, one year income growth 94.4%, one year revenue growth 67.9%, one year operating margin 16.17%, one year EPS growth 40.6%. (Morningstar)

Founded by Jules Kroll, this small shop has grown into a global provider of investigative and risk-consulting services. It now has five separate units with 60 offices on six continents with 2,400 employees. Consulting offers business investigations and forensic accounting. The corporate advisory and restructuring unit advises troubled companies. Technology covers electronic discovery and data recovery for legal cases. Background screening offers employee checks and other due diligence on key personnel or partners. Finally, the security unit provides corporate-security consulting and secure facility design services. Effective January 1, 2004, Kroll integrated its Security Services group into its Consulting Services group as a result of a change in the management structure of these businesses.

In the age of terrorism, corporate security has become a growth industry. It takes more than bodyguards and metal detectors to put employees at ease.

Summary of Turnaround at Kroll
Execution of a growth strategy implemented in 2001
 Consolidated fragmented mitigation industries worldwide believing in cross-selling
 Vision of one-stop global shopping for mitigation services validated in 2002 spurred by economic, political, and social trends, the company focused on government initiatives aimed at fighting terrorism and fraud (background screening for recruits from any country, drug testing)
 Kroll's ability to integrate worldwide strong branding drove growth
 Integration of acquisitions bought at right price added to substantial growth
 Entered 2003 with a better-integrated organization, top-notch management team, strong balance sheet and clear set of objectives with a goal to create value for shareholders, customers, and employees
 Tactics of operational efficiencies and tight cost controls

A Few Executive/Director Government Connections
President and CEO Michael G. Cherkasky was chief of the Investigations Division for the New York County District Attorney's Office, investigating mafia chieftain John Gotti and the 1993 bombing of the World Trade Center. From 1978 to 1993, he served in the district attorney's office in New York County in various capacities, save for a few months in 1985 when he ran the re-election campaign of Manhattan district attorney Robert Morgenthau. In 1995 Cherkasky served as the adviser to an Orange County, Calif., grand jury charged with examining allegations of derivatives fraud that brought the well-heeled county to near-bankruptcy. In 1997, he helped monitor a hotly contested Teamsters Union election. In May 2001, he accepted the top job at Kroll Inc., in 2002,Cherkasky managed to bring in Kroll's first net profit since 1998.

James R. Bucknam, Kroll's executive vice president for operations, served as senior adviser to former FBI Director Louis J. Freeh for three years and was an assistant United States Attorney in the Southern District of New York from 1987 to 1993.

Board member Raymond E. Mabus served as U.S. ambassador to Saudi Arabia from 1994 until 1996. He was governor of Mississippi from 1988 until 1992.

Board member Judith C. Areen, who is dean of the Georgetown University Law Center, served as general counsel to President Carter's Reorganization Project and as special counsel for the Task Force on Regulatory Reform in the Carter White House.

A Few Highlights of Business-1992 to present (most assignments are confidential)
Iraq will be the biggest initial market for new corporate-security division specializing in the world's most dangerous regions, according to the Financial Times, Kroll Inc. has a contract with USAID to provide security for the agency in Iraq.
Kroll Retained by U.S. Customs & Border Protection to Conduct Background Investigations
Kroll to hunt for Parmalat assets.
Kroll was given the monumental challenge of restructuring Enron.

Other names that have had an affilitation with Kroll's consultation include:
Ryder System, pre-employment screening.
Ford's expansion in China, due diligence on all prospective auto dealers.
SMG, world's largest sports/entertainment manager makes security a priority.
Petrobras, Brazililan energy company and 2 U.S. insurance company cost overruns on construction, forensic accounting ended with award to Petrobras mmore than $340 million in damages.
Federal Mogul, a global automotive parts manufacturer, filed for Chapter 11 and Administration protection in the U.S. and the U.K., Kroll was appointed the administrator of its 133 U.K. companies.
Sears Tower Security
Los Angeles Police Department Monitorship
Banorte Anti-Money Laundering Program
Texas A&M University Bonfire Tradgedy
Educational Testing Service (ETS) Audit (admission exams)
World Trade Center Security
Saddam Hussein's Financial Network

Corporate Renovation: Acquisitions and Dispositions
Following the August 2001 sale of its Security Products and Services (O'Gara) group to Armor Holdings, the company changed its name to Kroll Inc., from Kroll-O'Gara Co. The sale was for $37.8 million in cash and $15 million in Armor Holdings common stock.


In 2002, Kroll acquired Ontrack Data International, Inc. (price, approximately 6.9 million shares of common stock) and Zolfo Cooper LLC (price, $100 million in cash, 2.9 million shares of common stock issued January, 2003). These acquisitions resulted in the creation of Kroll's Technology Services Group and Corporate Advisory and Restructuring Services Group, which have significantly diversified its businesses.

In addition, in 2002, Kroll raised approximately $111 million of net proceeds in a public offering of 6.3 million shares of its common stock. The proceeds were used to repay debt incurred to acquire Zolfo Cooper and for working capital and other general corporate purposes. In July 2002, KROL purchased Crucible Inc., which provides elite training and protective services, for $1 million in cash, plus a note payable of $1 million.

Other acquisitions:
March, 2003, Personnel Risk Management, $1.4M cash, additional $2.1M if achieve profit levels
March 2003, Invex Partners Limited, $1.2M in cash
July, 2003, Intellifacts Corporation, $2.2M in cash
August 2003, MIE Resources Services , $0.5M cash, additional $0.3M if profit levels achieved
December, 2003, Oyez Legal Technologies, $18.9M cash
March 2004, The Credit Network Trust, mortgage credit reporting compeny, $1.5M

Despite two acquisitions that powered much of this growth, in 2002 Kroll's cost of sales increased by only $22.3 million, less than half of the additional revenue coming from the acquisitions. Cherkasaksy says, “We're organically growing at more than 15%, not including growth due to acquisitions. . . . Our business is 70% domestic and 30% international.”

Net sales in 2003 were $485.5 million, an increase of 70.8% over 2002. In 2003, as the U.S. economy began to improve, merger and acquisition activity became more active, which resulted in increases in demand for Kroll's U.S. consulting services.

Cost of sales increased $79.9 million, or 55.1%, primarily due to the inclusion of a full year of operating expenses of Kroll Ontrack and Kroll Zolfo Cooper, which were acquired on June 13, 2002 and September 5, 2002, respectively, as well as the inclusion of the operating expenses of Kroll Factual Data, which was acquired on August 21, 2003.

Gross margin in 2003, as a percentage of net sales, was 53.7%, an increase of 4.7 percentage points over 2002, primarily because of increases in gross margins in Kroll's Corporate Advisory and Restructuring Services and Technology Services businesses.

Income from continuing operations in 2003 was $46.2 million, an increase of 180.2% over 2002. Kroll's 2003 results were impacted by the closing of some of Kroll's offices worldwide and related elimination of employees, which resulted in a restructuring charge. Kroll also reported a loss of $8.3 million during 2003 associated with the sale of its InPhoto Surveillance subsidiary.

Continuing operations provided $83.1 million and $28.0 million of net cash in 2003 and 2002, respectively, and used $1.0 million of net cash in 2001. The year-to-year increase is due to the improvement in Kroll's income from continuing operations. In 2003, funds were also provided by a $9.9 million decrease in working capital and a $3.1 million decrease in long-term net assets. In 2002, the funds provided by income from continuing operations were partially offset by an $8.0 million increase in working capital and a decrease of $0.8 million in long term net assets, most of which related to deferred taxes. In 2001, the funds provided by income from continuing operations were partially offset by a $7.6 million increase in working capital and an increase of $0.9 million in long-term net assets.

In addition to its U.S. facilities, Kroll has operations and assets in Argentina, Australia, Brazil, Canada, China, France, Germany, Hong Kong, India, Italy, Japan, Mexico, the Philippines, Russia, South Africa, Spain, Switzerland and the United Kingdom. Kroll also offers its services in other countries and seeks to increase its level of international business activity. Kroll's international business exposes it to various risks.

The most significant events for Kroll in the two year period ended December 31, 2002 were the sales of the O'Gara armored car business and the voice and data group in 2001. These sales allowed Kroll to redefine itself as a risk response, prevention and solutions company and concentrate on developing the lines of business that are complementary to its core risk consulting services.

After December 31, 2003, Kroll purchased 2,527,477 shares of its common stock.

New Company
March, 2004, Kroll formed a new company dedicated to addressing the security needs of corporate and government clients operating in high risk areas. Alastair Morrison, a British Special Air Service (SAS) veteran and recognized leader in the global security industry, has joined Kroll as chairman and chief executive of its new London-based subsidiary, Kroll Security International Ltd.

"The intense hostility that corporations and government agencies face in diverse world regions has created an unprecedented demand for services to ensure the security of people, property and operations," said Michael Cherkasky, Kroll president and chief executive officer. "Kroll's global infrastructure, reputation in security, and success on Iraqi assignments positions us to play a key role in this vital area. With Alastair Morrison leading the charge, we are confident that we will provide special value to clients and serious competition to the niche players in high risk security. Joining him is Jerome J. Pomerance, who served as executive managing director and vice chairman of Kroll from 1983 to 1991 and who will focus on business and product development in the North American market. Morrison and Pomerance together hold a 12 percent equity interest in the new Kroll subsidiary.

Future Business Trends
Corporate Advisory and Restructuring Services
Kroll expects its European recovery and turnaround division to grow because it believes that the number of bankruptcies and restructurings in Europe will increase. This, however, is expected to be offset by slower growth in Kroll's U.S. restructuring operations as the opportunities for large restructuring assignments decrease and competition for those assignments increases. This competition may cause operating margins of its U.S. restructuring business to decrease over the next few years.

Consulting Services
Kroll believes that, as the U.S. economy improves, merger and acquisition activity in the U.S. will grow, which should result in an increase in demand for its U.S. forensic accounting, financial and valuation services. This may be partially offset by increased costs of additional professional staff. In addition, as of January 1, 2004, this segment includes the Security Services group. Since the situation in Iraq does not seem to be improving, Kroll expects the demand for its security services in the Middle East, Africa and Europe to increase.

Background Screening Services
Kroll has recently obtained several new U.S. government screening contracts, including background screening contracts with the Transportation Services Authority and the Customs and Border Patrol, and a drug screening contract with the Administrative Office of the United States Courts, which should result in increases in sales of its U.S. background checking services. If interest rates increase, the demand for mortgages is likely to decrease, which should result in a decrease in sales of Kroll's credit screening services.

Technology Services
Kroll believes that the legal discovery process is becoming more dependent on the collection and storage of documents electronically rather than the use of paper filing systems, which should result in greater demand for its electronic discovery services.

CEO, Michael Cherkasky, expects his security business to double in the next year, in part because of all the companies operating in Iraq. "It used to be this business was driven by Colombian type of kidnapping," he says. "It's being driven by terrorism now." That's why Kroll is expanding its secluded 88-acre Crucible training center in northern Virginia. Crucible's seminars aim to teach business executives how to stay safe on the road, including such skills as detecting surveillance and blending in while away from home. "If you wait until an attack has begun, you're too late," notes Jack Stradley, a former Marine who runs the Crucible site. All the planning in the world won't help a traveler in the event of another intelligence and security catastrophe like 9/11. But in the more common scenarios abroad, a little preparation can go a long way.

Cherkasky, “We will continue to drive organic growth by capitalizing on our strong client relationships and corss-selling our full fange of complementary products and services. We will also leverage our strong current cash position and our free cash flow to further expand our businesses, with a particular focus on our sclable businesses.”

One of the centerpieces of Kroll's operation these days is "The Crucible," an 88-acre site in Northern Virginia that the company acquired in July. At The Crucible, former military types teach business executives how to detect surveillance and avoid abduction, during courses that can last several days. If that seems like overkill, the company has a four-hour version of the course that it will teach just about anywhere. Other offerings on the company's syllabus include "the family plan," which teaches families how to establish a security zone around their new overseas home and how to vet household help. Fees for the different courses vary; a couple of days at The Crucible can cost $3,000-$5,000 per person.

Kroll has also partnered with iJET Travel Intelligence Inc., an Annapolis, Md., consultant, to provide "real-time destination intelligence" to companies that send their employees out of the country. For fees that start at $5,000, companies can access iJET's database to check conditions around the globe. iJET will send updates directly to the employee on the road by e-mail, phone, fax or pager for an additional fee. The updates cover everything from traffic jams to suicide bombings.

Competitors
Hoover's lists competitors as Avert, Inc., Choicepoint, Inc., and FTI Consulting, Inc.
Kroll 10-K states Corporate Advisory and Restructuring Group faces competition from national and international accouinting firms and specialist recovery firms, such as FTI Consulting, Inc., Crossroads LLC, Alvarez & Marsal, LLC and Alix Partners LLC.

Consulting Services Group faces competition from specialist consulting firms including the “Big Four”, Navigant Consulting, Inc., Huron Consulting Group LLC, Standard & Poor's, and Control Risks Group Limited.

Technology Services Group faces competition from Applied Discovery Inc., Electronic Evidence Discovery, Inc., Daticon, Inc., Fios, Inc., IKON Office Solutions and Merrill.

Background Screening Group faces competition from ChoicePoint, Inc., Total Information Services, Inc., ADREM Profiles, inc., TransUnion LLC, Verifcations, Inc., Yale Associates, Inc., First Advantage Corporation, Equifax Inc. and First American Corporation.

This list is even longer than this on their competition, must be because they know how to assess who their competition is, I have never seen any company with this amount of detail. I view this as a result of the business they are in, risk consulting. Of course they know their competition.

Watchlist
I have put this stock on my watch list. The founder is Chairman of the Board and should maintain an interest in his company although he is not a big shareholder. The turnaround steps have worked well up to this point. Kroll will announce its first quarter 2004 financial results on the morning of Thursday, April 29, 2004. The management team, led by President and CEO Michael G. Cherkasky, will hold a conference call at 9:00 a.m. (EDT) to discuss the financial results and other corporate events.

To access the call dial 800-299-7635 (for domestic callers), or 617-786-2901 (for international callers), and enter passcode 70335961. Please call 10-15 minutes in advance. The call will also be webcast and can be accessed online via Kroll's web site, www.krollworldwide.com. A replay of the call will be available from April 29 at 12:00 p.m. until 12:00 a.m. on May 7. To access the replay go to www.krollworldwide.com.

Kroll's Cherkasky, when asked if he'd been to Iraq, where he has more than 100 employees, answered: "Are you kidding? I will fly into Kuwait. I will fly into Jordan. I will not fly into Iraq."

Also, did anyone notice I have no reference to a Proxy. It seems not to exist. Will be calling the company tomorrow on that one.!

Ro

Selected References:
Kroll Annual Report 2003 http://tinyurl.com/2mogp
Morningstar http://tinyurl.com/3yjmc
“Private Security Firms Take Big Pay, Big Risks in Iraq
http://www.gazettetimes.com/articles/2004/04/02/news/nation/frinat01.txt
“As insurgent attacks increase, so do the contractors' costs”
http://www.boston.com/news/nation/articles/2004/04/02/as_insurgent_attacks_increase_so_do_contractors_costs/
Ontrack opens new offices http://biz.yahoo.com/bw/040413/135118_1.html
Kroll Highlights http://www.krollworldwide.com/about/history/notable/
Kroll Launches High Risk Security Business
http://tinyurl.com/3f9xu
“How to stay safe in a dangerous world.” http://msnbc.msn.com/id/4486824/
Special ops lured by cvilian employers http://www.azstarnet.com/sn/mideast/15851.php
Haliburton http://www.halliburton.com/careers/careers_kbr.jsp
Blackwater Security http://www.blackwatersecurity.com/.

Peter Beare, chief executive officer of B&B ARMR Corp., says he sees the company doing about $25 million next year as it carves out a niche in homeland security products. B&B has an advantage over other security companies because its products are among the least expensive available. This company's products are recommended by Kroll. http://www.bb-armr.com/,
Stock IZZI.OB is B&B /ARMR Corp. http://finance.yahoo.com/q/bs?s=IZZI.OB






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