<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 28, 1997
REGISTRATION NO. 333-29463
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
------------------
INTERNATIONAL TOTAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
<TABLE>
<S> <C> <C>
Ohio 4551 34-1264201
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
Crown Centre
5005 Rockside Road
Independence, Ohio 44131
(216) 642-4522
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------
ROBERT A. WEITZEL
International Total Services, Inc.
Crown Centre
5005 Rockside Road
Independence, Ohio 44131
(216) 642-4522
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------
COPIES TO:
<TABLE>
<S> <C>
ALBERT T. ADAMS, ESQ. THOMAS F. MCKEE, ESQ.
Baker & Hostetler LLP Calfee, Halter & Griswold LLP
3200 National City Center 1400 McDonald Investment Center
1900 East Ninth Street 800 Superior Avenue
Cleveland, Ohio 44114 Cleveland, Ohio 44114
(216) 621-0200 (216) 622-8200
</TABLE>
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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, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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 THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED AUGUST 28, 1997
2,825,000 SHARES
[ITS LOGO]
INTERNATIONAL TOTAL SERVICES, INC.
COMMON SHARES
Of the 2,825,000 common shares, without par value (the "Common Shares"),
offered hereby, 2,597,727 shares are being offered by International Total
Services, Inc. ("ITS" or the "Company") and 227,273 shares are being offered by
Robert A. Weitzel, the Company's Chief Executive Officer (the "Selling
Shareholder"). See "Principal and Selling Shareholders."
Prior to the Offering, there has been no public market for the Common
Shares. It is currently anticipated that the initial public offering price per
Common Share will be between $10.00 and $12.00. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. The Common Shares have been approved for inclusion in the Nasdaq
National Market, subject to official notice of issuance, under the symbol
"ITSW."
Upon completion of the Offering, the Selling Shareholder and certain
officers of the Company will collectively own approximately 53% of the
outstanding Common Shares of the Company (approximately 49% if the Underwriters
exercise the over-allotment option in full). Consequently, these persons will be
able to determine the outcome of any matter subject to a vote of a majority of
the Company's shareholders, including elections of directors.
------------------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON SHARES.
------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
===============================================================================================
PROCEEDS
PRICE UNDERWRITING PROCEEDS TO THE
TO THE DISCOUNTS AND TO THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2)(3) SHAREHOLDER
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.............. $ $ $ $
- -----------------------------------------------------------------------------------------------
Total(3)............... $ $ $ $
===============================================================================================
</TABLE>
(1) The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, as amended. See "Underwriting."
(2) Before deducting expenses, estimated at $1,200,000, payable by the Company.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
423,750 additional Common Shares solely to cover over-allotments, if any. If
that option is exercised in full, the Price to the Public, Underwriting
Discounts and Commissions and proceeds to the Company will be $ ,
$ , and $ , respectively.
The Common Shares are offered by the Underwriters subject to receipt and
acceptance of the shares by them. The Underwriters reserve the right to reject
any orders, in whole or in part. It is expected that delivery of the Common
Shares will be made against payment therefor at the offices of McDonald &
Company Securities, Inc. or through the facilities of The Depository Trust
Company, on or about , 1997.
MCDONALD & COMPANY MORGAN KEEGAN & COMPANY, INC.
SECURITIES, INC.
The date of this Prospectus is , 1997.
<PAGE> 3
Photographs depicting ITS employees performing various services. Under the
caption "Passenger Services," there is a photograph of an ITS employee driving
an airport passenger cart with passengers aboard. Under the caption "Cabin
Appearance," there is a photograph of an ITS employee inspecting an aircraft
passenger compartment. Under the caption "Preboard Screening," there is a
photograph of ITS employees manning a screening checkpoint. Under the caption
"Gate/Underwing Operations," there is a photograph of ITS employees loading
baggage onto a conveyor belt.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON SHARES,
INCLUDING BY ENTERING STABILIZING BIDS, EFFECTING SYNDICATE COVERING
TRANSACTIONS OR IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Except when otherwise indicated, information in this Prospectus assumes a
12,892.62-for-1 share split of the Company's Common Shares effected immediately
prior to the commencement of the Offering, and assumes no exercise of the
Underwriters' over-allotment option. The Company's fiscal year ends on March 31,
and its fiscal years are identified by reference to the calendar year in which
they begin. For example, the fiscal year ended March 31, 1997 is referred to as
"fiscal 1996."
THE COMPANY
ITS is a leading domestic provider of aviation security and other aviation
services. The Company provides predeparture screening services for more than 60
U.S. and international carriers at more than 120 U.S. airports. ITS has used its
predeparture screening business to establish a growing presence in the broader
aviation services market and believes that it offers a wider array of services
than its competitors in this market. Aviation services offered by ITS include
skycap, baggage handling and aircraft cleaning services, and wheelchair and
electric cart operations. The Company's security services extend beyond aviation
security, and include the provision of commercial security services to
government and business clients, hospitals, arenas and museums.
ITS's revenues have grown at a compounded annual rate of 14.2% over the
past five years, driven by growth in both aviation security and other aviation
services as well as growth resulting from acquisitions. The Company has
experienced significant revenue growth in its predeparture screening business,
attributable primarily to the trend toward consolidation in this market and the
Company's historic ability to pass on wage increases to customers. The Company's
predeparture screening revenues have grown from $47 million to $58 million from
1994 through 1996, representing a 23% increase during that period. Aviation
services have also accounted for substantial growth, as airlines have outsourced
noncore services and have begun to consolidate their vendor base to a few
leading vendors such as ITS. ITS believes that these consolidation and
outsourcing trends will continue and that it can realize additional revenue
growth by leveraging its established business presence and relationships to
deliver a wide array of services to its clients at a very competitive overall
cost. The Company's use of debt to finance this growth has resulted in
significant increases in interest expense over the past three years. In light of
the Company's debt service obligations, as well as the labor intensive nature of
its business, the Company has historically operated with a working capital
deficit. See "Business -- Growth Strategy -- Growth Through Acquisitions."
ITS's growth strategy is premised on using its experience in recruiting,
training, motivating and managing the large numbers of personnel needed to
perform the labor-intensive, task-repetitive functions that its services
require. The Company believes that it is well-positioned to realize significant
growth for the following reasons:
- Favorable growth prospects exist in the markets for aviation services and
commercial security services.
- The Company enjoys strong market position and administrative support from
its significant aviation and security experience, extensive market
breadth and competitive cost structure.
- Management is able to exploit the Company's aviation and security
experience to capture revenue in related service segments such as general
aviation services and commercial security.
- The economies of scale resulting from the Company's use of its existing
administrative resources support internal growth and acquisitions.
The Company intends to grow internally and through acquisitions. The
Company expects internal growth will be generated by using the Company's
established business base as a platform for expanding the services it provides
at existing airport and commercial security locations and for developing new
service locations. The Company intends to target acquisition candidates that
will add geographic scope to its existing businesses, broaden its service
offerings and expand its client base. ITS made two acquisitions of aviation
security contracts and four acquisitions of commercial security contracts in
fiscal 1996 that have contributed an aggregate of approximately $11.9 million in
annual revenues and have improved profitability. In addition, in April 1997, the
Company acquired service contracts from Intex Aviation Services, Inc. ("Intex").
Intex provided a variety of aviation services, including baggage handling,
lavatory and water services, de-icing
3
<PAGE> 5
services and aircraft cleaning and ground support services. On a pro forma basis
for the year ended December 31, 1996, the contracts acquired from Intex
generated revenues of approximately $32.3 million. See "Pro Forma Financial
Data" and "Management's Discussion and Analysis of Results of Operations and
Financial Condition."
The Company's executive offices are located at Crown Centre, 5005 Rockside
Road, Independence, Ohio 44131, and its telephone number is (216) 642-4522.
THE OFFERING
Common Shares offered...... 2,825,000
By the Company(1)........ 2,597,727
By the Selling
Shareholder.............. 227,273
Common Shares outstanding
after the
Offering(1)(2)........... 6,238,744
Use of Proceeds............ The Company intends to use the net proceeds from
the Offering: (i) to pay approximately $14.0
million of outstanding indebtedness, consisting of
(a) approximately $11.0 million outstanding under a
revolving line of credit with the Company's senior
lender, which matures on March 31, 1999 and bears
interest at the lender's prime rate plus 1 1/2% per
annum; and (b) $3 million of subordinated notes
payable to an unrelated lender, which mature on
November 25, 2001 and bear interest at an annual
rate of 20%; and (ii) for general corporate
purposes, including working capital to support the
Company's growth, and for possible acquisitions.
Nasdaq National
Market Symbol............ ITSW
- ---------------
(1) Does not include 423,750 Common Shares that may be sold by the Company if
the over-allotment option granted by the Company to the Underwriters is
exercised in full.
(2) Does not include 267,015 Common Shares reserved for issuance under the
Company's Long Term Incentive Plan or the 15,000 Common Shares reserved for
issuance to the Company's Independent Directors upon completion of the
Offering. See "Management -- Long Term Incentive Plan" and "-- Compensation
of Directors."
4
<PAGE> 6
SUMMARY FINANCIAL AND OPERATING DATA
(AMOUNTS IN THOUSANDS, EXCEPT SHARES, PER-SHARE AMOUNTS AND OPERATING DATA)
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,
-------------------------------------------------------------------------- THREE MONTHS ENDED
1997 JUNE 30,
---------------------- ----------------------
1993 1994 1995 1996 ACTUAL PRO FORMA 1996 1997
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues.................. $ 68,230 $ 78,173 $ 92,654 $ 95,463 $ 115,242 $156,404 $ 24,106 $ 38,364
Cost of revenues.......... 56,180 66,103 79,981 81,341 98,338 132,417 20,475 31,824
Gross profit.............. 12,050 12,070 12,673 14,122 16,904 23,987 3,631 6,540
General and administrative
expenses................ 11,916 11,075 12,655 11,603 13,334 16,449 2,772 4,639
Operating income.......... 134 995 18 2,519 3,570 7,538 859 1,901
Interest expense (income)
net..................... 22 34 188 523 637 637 99 414
Income (loss) before
income taxes............ 112 961 (170) 1,996 2,933 6,901 760 1,487
Income taxes(2)........... 109 1,035 548 958 1,237 2,898 318 634
Net income (loss)......... $ 3 $ (74) $ (718) $ 1,038 $ 1,696 $ 4,003 $ 442 $ 853
Net income (loss) per
share................... $ 0 $ (0.01) $ (0.12) $ 0.18 $ 0.33 $ 0.79 $ 0.07 $ 0.23
Supplemental pro forma net
income(3)............... $ 2,136 $ 4,443 $ 1,098
Supplemental pro forma net
income per share(3)..... $ 0.35 $ 0.73 $ 0.22
Weighted average common
and common equivalent
shares.................. 6,446,310 6,446,310 6,292,976 5,775,880 5,089,480 5,089,480 5,945,022 3,654,985
OPERATING DATA (AT PERIOD
END):
Number of employees....... 8,121 9,006 9,863 9,914 10,690 12,690 9,984 12,618
</TABLE>
<TABLE>
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JUNE 30, 1997
AT MARCH 31, ------------------------
------------------------------------------------------------- AS
1993 1994 1995 1996 1997 ACTUAL ADJUSTED(5)
--------- --------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......... $ 1,108 $ 769 $ 1,267 $ 1,873 $ 1,452 $ 1,711 $14,781
Working capital (deficit)......... (2,004) (1,351) (4,425) (2,951) 324 1,338 16,808
Total assets...................... 12,222 14,843 20,295 20,892 27,001 34,470 47,540
Short-term bank debt and current
maturities of long-term
obligations..................... 236 875 5,658 4,806 2,521 2,464 64
Long-term obligations, net of
current maturities(4)........... 0 0 152 164 7,556 10,755 87
Retained earnings................. 3,752 3,678 2,961 3,998 2,784 3,637 3,637
Shareholders' equity.............. 4,347 4,273 3,139 3,978 3,195 4,025 29,424
</TABLE>
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(1) Pro forma statement of operations data give effect to the Intex acquisition
as if it had occurred on April 1, 1996. See "Pro Forma Financial Data."
(2) No provision (benefit) has been provided for the portion of operating income
resulting from the profit (loss) of International Transport Security, Inc.
("Transport"), a corporation under common ownership with the Company, which
had operated as an "S" corporation prior to its dissolution in March 1996.
See Note A to Consolidated Financial Statements explaining the relationship
of Transport with the Company.
(3) The supplemental pro forma net income and net income per share data reflect
the issuance of shares necessary to repay certain indebtedness and the
related reduction in interest expense and increase in net income. See Note A
of Notes to the Consolidated Financial Statements.
(4) Includes amounts due under revolving credit facility, subordinated debt,
capital lease obligations and other long-term debt.
(5) As adjusted to give effect to the Offering and the application of the
estimated net proceeds therefrom at an assumed initial public offering price
of $11.00 per share (the midpoint of the estimated initial public offering
price range). See "Use of Proceeds."
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should consider carefully the following factors in evaluating an
investment in the Common Shares offered by this Prospectus.
DEPENDENCE ON AVIATION INDUSTRY
The Company's success is largely dependent on continuing demand for the
Company's services to passenger airlines. That demand is driven by domestic air
travel volume and by the travel volume experienced by, and the financial
condition of, the particular air carriers that choose ITS as a service provider.
Although the volume of air travel has grown significantly in the past ten years,
the aviation industry historically has been highly cyclical. Because the
Company's typical billing arrangements are based on the number of hours of
service provided or flights serviced by the Company, a significant industry
downturn or financial difficulties experienced by particular airline clients
could have a material adverse effect on the volume of services provided.
Additionally, the financial condition of particular airline clients can have a
material impact on the prices that they are willing to pay for the Company's
services. Consolidation in the airline industry also could result in the Company
losing contracts. Outsourcing by U.S. airlines of an increasing number of
nonflight services has increased the demand for the Company's services, but
there can be no assurance that this trend will continue or not be reversed. In
addition, the trend by airlines to select a limited number of vendors to provide
all or a large part of their predeparture screening and other services may not
continue and, if it does continue, there can be no assurance that the Company
will continue to provide the same volume of services which it currently
provides. See "Business -- Aviation Services."
DEPENDENCE ON KEY PERSONNEL
The Company's success will depend in part on the continued service of its
key employees, including, among others, Robert A. Weitzel, its Chief Executive
Officer, James O. Singer, President and Chief Operating Officer, Robert A.
Swartz, Vice President and Chief Financial Officer, and Scott E. Brewer, Vice
President and General Counsel. The loss of one or more of the Company's key
employees could have a material adverse effect on the Company. As the Company
continues to grow, it will need to recruit and retain additional qualified
management personnel, and there can be no assurance that the Company will be
able to do so. See "Management."
RISKS ASSOCIATED WITH MANAGING A GROWING BUSINESS
ITS has rapidly expanded its operations in the past several years. This
growth has placed demands on its management, administrative, operating and
financial resources. The Company's planned continued growth may place a
significant strain on the Company's resources and the Company's future success
may be dependent on its ability to augment its senior management team with
talented people. Several members of the Company's senior management team have
assumed their current positions since the beginning of fiscal 1996. There can be
no assurance that the Company will continue to attract and retain adequate
management personnel or be able to implement enhancements to its management
systems and adapt those systems to respond to changes in its business. See
"Business -- Management and Reporting Systems."
RISKS ASSOCIATED WITH ACQUISITION STRATEGY
An important element of the Company's growth strategy is the pursuit of
acquisitions. Acquisitions involve a number of risks, including potentially
adverse short-term effects on the Company's reported operating results,
potentially dilutive issuances of equity securities, the incurrence of debt and
contingent liabilities, diversion of management's attention, dependence on
retention, hiring and training of key personnel, and risks associated with
unanticipated problems or liabilities and amortization of goodwill and an
acquired company's intangible assets, some or all of which could have a material
adverse effect on the Company's business, results of operations and financial
condition. There can be no assurance that the Company will be able to identify,
acquire, integrate or profitably manage acquisitions without substantial costs,
delays or other problems. In addition, there can be no assurance that acquired
businesses will achieve or maintain revenue and
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<PAGE> 8
profitability levels that justify the investment therein. In addition, the
Company's use of debt to finance its growth has resulted in significant
increases in interest expense over the past three years. In light of the
Company's debt service obligations, as well as the labor intensive nature of its
business, the Company has historically operated with a working capital deficit.
See "Business -- Growth Strategy -- Growth Through Acquisitions."
POTENTIAL LOSS OF INTEX CONTRACTS
The Company acquired substantially all of the contracts and goodwill of
Intex in April 1997. Prior to the acquisition, Intex lost a number of contracts
to provide cargo and mail services to Delta Airlines. The Company believes that
negative publicity relating to an alleged mail theft operation at Atlanta's
Hartsfield International Airport, which included certain former Intex employees,
may have contributed to the loss of these contracts. Since the date of the
acquisition, Intex has lost contracts that generated approximately $2.5 million
in annual revenue. The Intex asset purchase agreement provides for a purchase
price adjustment based upon a multiple of monthly revenues on the acquired
contracts for the period from April 1, 1997 to June 30, 1997. There can be no
assurance that additional contracts held by Intex prior to the acquisition and
assumed by the Company will not be terminated subsequent to the end of the
purchase price adjustment period. The loss of significant additional contracts
related to Intex's business could have a material adverse effect on the
Company's business, results of operations and financial condition. See "Pro
Forma Financial Data" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
RELATIONSHIPS WITH CUSTOMERS
ITS derives a significant portion of its revenues from relatively few
clients. In fiscal 1996, Continental Airlines, Inc., United Air Lines, Inc.,
Delta Air Lines, Inc., Southwest Airlines Co., US Airways, Inc. and Trans World
Airlines, Inc. together accounted for approximately 56% of the Company's
revenues. During fiscal 1994, 1995 and 1996, the Company's ten largest clients
accounted for an aggregate of approximately 80%, 71% and 69%, respectively, of
the Company's revenues. The Company's contracts with its clients, consistent
with general industry practice, are generally for one to three year terms but
are terminable by either party on 30 to 90 days' notice. The Company has
provided services to each of its five largest clients during each of the past
five years. While the Company believes that relationships with its customers are
generally satisfactory, it believes that its relationships with certain major
airlines are unsatisfactory. The quality of relationships with particular
customers varies from time to time as a result of customer perceptions of the
relative quality of the Company's services, the presence or absence of
performance problems and changes in personnel at the Company and at its major
customers. There can be no assurance that one or more major clients will not
terminate, elect to renegotiate or decide not to renew a Company contract or
that the Company will not lose the opportunity to provide services at one or
more client locations.
LOSS OF CONTRACTS
Over the past two fiscal years, the Company has lost contracts to provide
screening services at a number of major airports, including Los Angeles, San
Francisco, Phoenix, Minneapolis, Detroit, Boston and Ontario, California,
because of customer dissatisfaction with the Company's services at these
locations. The Company believes that the factors contributing to the lost
contracts varied from location to location, and included problems with
responsiveness and the quality of local management, as well as security breaches
at several of the Company's predeparture screening checkpoints. The Company
continues to provide services including, in some cases, screening services, at
each of these locations. Most of the contracts lost by the Company were
controlled by two airline customers who together represented approximately
16.7%, 23.7% and 23.2% of the Company's revenues in 1996, 1995 and 1994,
respectively. The lost contracts accounted for an aggregate of $232,000 in
pre-tax earnings. The Company recognizes the need to improve its relationships
with these customers, and is making efforts to accomplish this objective. These
efforts include the addition of a new Chief Operating Officer with established
relationships with several major airlines, and efforts to improve the quality of
local and district management personnel. The loss of one or more major clients
or of significant service sites may have a material adverse effect on the
Company. See "Business -- Customers and Contract Terms."
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IMPACT OF NEGATIVE PUBLICITY
The Company's business is subject to public scrutiny and, consequently, can
be materially affected by negative publicity or negative public reaction with
respect to the Company's policies or operations or the actions of its employees.
The Company has experienced negative publicity from time to time, including
publicity arising from security breaches at predeparture screening checkpoints
in Albany, New York and San Jose, California (as a consequence of which the
Company lost several predeparture screening contracts); an incident involving
theft by a former employee in Tampa, Florida; and a checkpoint security test
failure at an airport in Islip, New York. Future negative publicity could have a
material adverse effect on the Company's business, results of operations and
financial condition.
PROBLEMS WITH LOCAL MANAGEMENT SYSTEMS AND CONTROLS
The nature of the Company's operations requires it to maintain local
management systems and controls sufficient to identify and prevent regulatory
violations, theft or other illegal activities by employees and billing
irregularities at its locations. The Company's large, low-wage workforce and
high turnover rates increase the difficulties associated with establishing and
maintaining effective management controls at the local level. The Company has
experienced control-related problems at various locations involving employees'
compliance with regulatory requirements regarding training records and
background checks, and involving employee theft. Some of these incidents have
had a material adverse effect on customer relationships and have led to the
termination of client contracts. For example, the failure of a local manager to
conduct proper background checks led to the loss of contracts, which had
generated annual revenue of $1.3 million, to provide predeparture screening
services at the airport in Ontario, California. Because of the nature of the
Company's business, there can be no assurance that control-related problems will
not arise in the future. See "Business -- Workforce Management."
LIMITED HISTORY OF PROFITABLE OPERATIONS
Although ITS had net income of $1.7 million and $1.0 million for fiscal
1996 and fiscal 1995, respectively, the Company had net losses of $718,000 and
$74,000 for fiscal 1994 and 1993, respectively. There can be no assurance that
the Company's business strategies will be successful or that the Company will be
able to achieve consistent revenue growth or profitability on a quarterly or
annual basis. The Company may experience significant fluctuations in future
operating results as a result of a number of factors, including the costs
associated with future acquisitions, the profitability of acquired operations,
changes in the regulatory environment, and increased competition in the
industries the Company serves.
COMPETITION
The Company believes that its aviation security, other aviation services
and commercial security clients view price as the overriding consideration in
vendor selection and retention. Other important considerations include the
quality of services provided, the geographic availability of services and the
range of services available. The Company competes with outsourcing companies,
specialized contract service providers and its clients' and potential clients'
internal service staffs. While substantial consolidation is occurring in the
predeparture screening market, the markets for other aviation services and
commercial security services remain highly fragmented, with limited barriers to
entry.
Certain of the Company's competitors and potential competitors have
significantly greater financial resources and larger operations than the
Company, and may therefore be better situated to take advantage of expansion
opportunities arising from industry consolidation trends. The Company expects
that the level of competition that it faces will remain high or increase in the
future, and there can be no assurance that the Company will continue to compete
successfully. See "Business -- Competition and Marketing."
EMPLOYEE TURNOVER
The Company's business is very labor intensive and is characterized by high
rates of personnel turnover, continuous training requirements and periodic
shortages of personnel in some markets. During each of the past
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<PAGE> 10
three fiscal years, the Company's employee turnover rate has been approximately
100%. A higher turnover rate among the Company's employees would increase the
Company's recruiting and training costs and may adversely affect productivity.
If the Company were unable to recruit and retain sufficient personnel, it would
be forced to limit its growth or possibly reduce the scope of its operations.
Because employee turnover is inherent in the nature of its business, ITS
allocates significant resources to recruiting potential employees. Each
applicant must complete an interview and a written application that includes
inquiry concerning prior criminal convictions. In addition, FAA regulations
require that each applicant provide proof of citizenship or resident alien
status, and each applicant is subject to a five- or ten-year background
verification, depending upon the position, and pre-employment drug screen. For
persons with unescorted access to secured areas, a criminal background
verification procedure, which is conducted by the Federal Bureau of
Investigation, is triggered by any 12-month gap in employment history that can
not be explained through independent verification. The Company's policy is not
to hire applicants whose criminal background checks reveal prior criminal
convictions. The Company believes that it operates its business in substantial
compliance with applicable FAA regulatory requirements, including those relating
to background verification. The Company from time to time must increase its wage
rates and employee benefits in order to attract and retain sufficient qualified
employees. Because the Company may not always be able to have its clients absorb
the attendant additional costs, these increases can adversely affect the
Company's financial performance. See "Business -- Workforce Management."
FAILURE TO MEET PERFORMANCE REQUIREMENTS
The Company's success will depend on its ability to continue to meet the
performance requirements set by its clients and the government agencies that
regulate them. The Company is subject to random periodic testing by the Federal
Aviation Administration (the "FAA") with regard to adherence to regulations
relating to predeparture screening and passenger profiling, hiring practices
(including background checks, drug testing, training and employee file
maintenance), baggage handling, aircraft security, and document verification.
The services provided by the Company require it to train and manage effectively
low wage workforces with high turnover rates. From time to time, the Company has
failed to meet test standards or a client's service expectations at a particular
location, and, like its competitors, has had contracts terminated because of
customer dissatisfaction with various aspects of its performance. The risk of
contract termination as a result of actual or perceived service failures is
enhanced by the substantial publicity that, because of public concern over
airline security issues, often attends errors in the provision of screening
services. Failure to meet test or other performance standards may result in the
loss of a contract or service location or the Company's license to perform
services, and any such loss could have a material adverse effect on the
Company's reputation, business, results of operations and financial condition.
See "Business -- Aviation Services" and "-- Government Regulation."
EMPLOYEE-RELATED COSTS AND CLAIMS EXPOSURE
The Company is required to pay unemployment insurance premiums and workers'
compensation benefits for its employees in the United States. Any increase in
the cost of unemployment insurance or workers' compensation benefits could
adversely affect the Company's profitability. The Company is self-insured for
the first $250,000 of each workers' compensation claim and the first $200,000 of
each liability claim and, accordingly, establishes reserves for future claims
and payments. During fiscal 1996, the Company also implemented a medical
insurance program covering substantially all of its hourly workers. That program
provides medical benefits to eligible employees with minimal employee
contribution. The program provides employees with maximum annual benefits of
$10,000, for which the Company is self-insured and, accordingly, establishes
reserves for future claims and payments. The Company has only recently
established this program, and has less experience on which to base its judgments
concerning reserve levels than it does with respect to its workers' compensation
and liability self-insurance programs. There can be no assurance that the
Company's actual workers' compensation, liability or medical insurance claims
will not exceed the amount of the Company's reserves. Furthermore, there can be
no assurance that the Company will be able to pass along to its clients any
increased costs related to unemployment, workers' compensation and medical
claims. See "Business -- Workforce Management."
9
<PAGE> 11
GOVERNMENT REGULATION
Aviation security matters affecting airports and passenger airlines are
subject to regulation by the FAA and foreign governmental agencies. Demand for
the Company's predeparture screening, passenger profiling and various other
services is significantly affected by applicable regulatory requirements and
security directives issued by governmental authorities. Typically, these
authorities react to terrorist or other criminal activity, or threats of such
activity, in a manner that increases the demand for the Company's aviation
security services. That demand can thereafter diminish as the perceived threat
diminishes. In addition, there can be no assurance that applicable regulations
will not be changed generally in a manner that would affect adversely the demand
for the Company's services. In the Federal Aviation Reauthorization Act of 1996,
Congress directed the FAA, among other things, to develop and implement
certification procedures for providers of predeparture screening services. The
FAA has issued an Advance Notice of Proposed Rulemaking, soliciting comment on a
number of issues relating to the certification of screening companies, but has
not promulgated any proposed rules concerning implementation of the
certification directive. The Company is unable to predict the nature and extent
of any such regulations or their potential impact on its business. Major U.S.
airlines have considered the creation of a nationwide nonprofit security
corporation, funded by the airlines, to handle airport security. Any trend
toward the relaxation of aviation security measures or a shift in responsibility
for aviation security functions could have a material adverse effect on the
Company's business, results of operations or financial condition. In addition,
the Company currently has licenses to operate in several of the major
international airports in Western Europe where licenses are required. The loss
of or failure to obtain a license to operate in one or more airports is likely
to result in the loss of, or the inability to compete for, a major contract. See
"Business -- Government Regulation."
LIABILITIES FOR CLIENT AND EMPLOYEE ACTIONS AND OTHER CLAIMS
Because the Company's employees function in public facilities and in the
workplaces of other businesses, the Company is exposed to possible claims by its
clients' customers and employees of discrimination, harassment, negligence, and
similar claims. The Company is subject to liability for the acts or negligence
of its employees while on assignment that cause personal injury or damages and
to claims of misuse of client proprietary information or theft of client
property. As a provider of security services, the Company faces potential
liability for claims that may arise from any terrorist activity occurring in
circumstances associated with the Company. Although the Company maintains
insurance coverage against such potential liabilities, any such claim against
the Company might exceed the amount of such insurance coverage or fall outside
the type of activities covered by such insurance. Any of these situations could
have a material adverse effect on the Company's business, results of operations
or financial condition. See "Business -- Workforce Management" and "-- Legal
Proceedings."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company experiences quarterly variations in revenues and operating
income as a result of various factors, including the timing of commencement of
new contracts, changes in its revenue mix, the timing of additional selling,
general and administrative expenses incurred to support new business, the
seasonality of air travel and the effect of acquisitions. The Company's revenues
are typically based on the number of hours of service provided by the Company or
the number of flights serviced. Thus, decreases in air travel generally result
in lower revenues for the Company. While the effects of seasonality on ITS's
business often are obscured by the timing of the addition of new clients and the
performance of new services for existing clients, revenues and operating income
typically are at their lowest levels in the first and fourth quarters of the
fiscal year. During fiscal 1996, operating income for the first and fourth
quarters amounted to $865,000 and $436,000, respectively, or 24.2% and 12.2% of
total operating income for the fiscal year. During fiscal 1995, operating income
for the first and fourth quarters amounted to $593,000 and $414,000,
respectively, or 23.5% and 16.4% of total operating income for the fiscal year.
This reflects lower levels of air travel during these periods and certain
additional expenses, such as annual unemployment insurance premiums, that become
payable with the commencement of a new calendar year. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results and Seasonality."
10
<PAGE> 12
LACK OF CASH DIVIDENDS
The Company does not expect to pay any cash dividends on the Common Shares
in the foreseeable future. Any cash otherwise available for such dividends will
be reinvested in the Company's business. In addition, the Company's ability to
pay cash dividends is limited by the terms of its revolving line of credit from
its senior lender. See "Dividend Policy."
GRANT OF SECURITY INTERESTS
The Company has granted security interests in substantially all of its
assets to its senior lender under a revolving line of credit. In the event of a
default on the secured indebtedness (whether as a result of the failure to
comply with a payment or other covenant, a cross-default, or otherwise), the
lender could attempt to foreclose on the Company's assets. Any such attempt
would be likely to have a material adverse effect on the Company's financial
condition and on the value of the Common Shares.
CONTROL BY PRINCIPAL SHAREHOLDER
Immediately following the Offering, Robert A. Weitzel will beneficially own
approximately 51% of the outstanding Common Shares (approximately 48% if the
Underwriters' over-allotment option is exercised in full). As a result, Mr.
Weitzel will continue to exercise substantial influence over the election of the
Board of Directors and over other matters requiring shareholder approval. This
concentration of voting power may also have the effect of delaying or preventing
a change in control of the Company. See "Management," "Principal and Selling
Shareholders" and "Description of Capital Shares."
NO PRIOR PUBLIC MARKET FOR COMMON SHARES; POTENTIAL VOLATILITY OF SHARE PRICE
Prior to the Offering, there has been no public market for the Common
Shares, and there can be no assurance that an active trading market will develop
or be sustained after the Offering. The initial public offering price will be
determined through negotiation between the Company and the Representatives of
the Underwriters based on various considerations and may not be indicative of
the price at which the Common Shares will trade after the Offering. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The market price of the Common Shares may be
volatile and may be significantly affected by factors such as actual or
anticipated fluctuations in the Company's operating results, announcements of
new services offered by the Company or its competitors, developments with
respect to conditions and trends in the industries served by the Company,
governmental regulation, changes in estimates by securities analysts of the
Company's future financial performance, general market conditions and other
factors. In addition, the stock markets have from time to time experienced
significant price and volume fluctuations that have adversely affected the
market prices of securities of companies for reasons often unrelated to their
operating performance.
SHARES ELIGIBLE FOR FUTURE SALE
No prediction can be made as to the effect, if any, that future sales, or
the availability of Common Shares for future sale, by the Company or by its
executive officers, directors and current shareholders will have on the market
price of the Common Shares prevailing from time to time. Sales of substantial
amounts of Common Shares (including shares issued on the exercise of options),
or the perception that such sales could occur, could adversely affect prevailing
market prices for the Common Shares. The Company and its directors, officers and
current shareholders have agreed not to sell, offer for sale, or otherwise
dispose of any Common Shares for a period of 180 days from the date of this
Prospectus without the prior written consent of McDonald & Company Securities,
Inc. Upon expiration of this period, an aggregate of 64,462 Common Shares will
be eligible for sale in the public market without restriction. An additional
3,276,180 Common Shares will be eligible for resale by existing shareholders,
subject to the volume and manner of sale limitations imposed by Rule 144 under
the Securities Act of 1933, as amended (the "Securities Act"). The Company
expects to file, within 180 days after the Offering, a registration statement
covering the issuance of shares
11
<PAGE> 13
underlying share options granted under the Company's Long Term Incentive Plan.
See "Shares Eligible for Future Sale."
CERTAIN ANTI-TAKEOVER PROVISIONS
Chapter 1704 of the Ohio Revised Code prohibits certain transactions,
including mergers, sales of assets and similar corporate transactions involving
Ohio corporations and holders of 10% or more of their voting shares, unless
certain advance approvals are obtained or certain other conditions are met.
Section 1701.831 of the Ohio Revised Code imposes certain advance notice and
shareholder approval requirements with respect to voting share acquisitions that
cross the 20%, 33 1/3% and 50% of voting shares thresholds. Section 1707.041 of
the Ohio Revised Code imposes advance filing and notice requirements with
respect to certain tender offers and invitations for tenders for more than 10%
of the outstanding common shares of certain Ohio corporations. The Company's
Articles of Incorporation authorize the Company's Board of Directors, without
action by the shareholders, to specify the terms of and to issue preferred
shares of the Company. These restraints, requirements and authorizations, and
the substantial percentage of Common Shares that Mr. Weitzel will hold following
the Offering, could discourage potential acquisition proposals and could delay
or prevent a change in control of the Company. See "Description of Capital
Shares."
IMMEDIATE AND SUBSTANTIAL DILUTION
At June 30, 1997, the Company had a net tangible book value deficit of
$(1.60) per share. Purchasers of Common Shares in the Offering will incur
immediate and substantial dilution of $7.90 in the net tangible book value per
Common Share, assuming an initial public offering price of $11.00 per share (the
midpoint of the estimated initial offering price range). The net tangible book
value deficit before the offering approximated $5.8 million, and the net
tangible book value following the offering is expected to approximate $19.3
million. Accordingly, investors will have paid 100% of the Company's total net
tangible book value after the offering and will have an ownership interest in
the Company, at June 30, 1997, of approximately 41.6%. See "Dilution."
FORWARD-LOOKING STATEMENTS
This Prospectus contains statements that constitute forward-looking
statements. Those statements appear in a number of places in this Prospectus and
include statements regarding the intent, belief or current expectations of the
Company, its directors or its officers with respect to: (i) the declaration or
payment of dividends; (ii) potential acquisitions by the Company; (iii) the use
of the proceeds of the Offering; (iv) the Company's financing plans; and (v)
trends affecting the Company's financial condition or results of operations.
Prospective investors are cautioned that any such forward-looking statement
is not a guarantee of future performance and involves risks and uncertainties,
and that actual results may differ materially from those in the forward-looking
statement as a result of various factors. The accompanying information contained
in this Prospectus, including, without limitation, the information set forth
above and the information under the headings "Management's Discussion and
Analysis of Financial Condition and Results of Operations," identifies important
factors that could cause such differences. With respect to any such
forward-looking statement that includes a statement of its underlying
assumptions or bases, the Company cautions that, while it believes such
assumptions or bases to be reasonable and has formed them in good faith, assumed
facts or bases almost always vary from actual results, and the differences
between assumed facts or bases and actual results can be material depending on
the circumstances. When, in any forward-looking statement, the Company, or its
management, expresses an expectation or belief as to future results, that
expectation or belief is expressed in good faith and is believed to have a
reasonable basis, but there can be no assurance that the stated expectation or
belief will result or be achieved or accomplished.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to be received by the Company from the sale of the
2,597,727 Common Shares offered by the Company are estimated to be approximately
$25.4 million, after deducting underwriting discounts and commissions and
estimated offering expenses payable by the Company, assuming an initial public
offering price of $11.00 per share (the midpoint of the estimated initial
offering price range).
The Company intends to use the net proceeds from the Offering: (i) to pay
approximately $14.0 million of outstanding indebtedness, consisting of (a)
approximately $11.0 million outstanding under a revolving line of credit with
the Company's senior lender, which matures on March 31, 1999 and bears interest
at the lender's prime rate plus 1 1/2% per annum, and (b) $3.0 million of
subordinated notes payable to an unrelated lender, which mature on November 25,
2001 and bear interest at an annual rate of 20%; and (ii) for general corporate
purposes, including working capital to support the Company's growth and for
possible acquisitions. The Company used approximately $1.2 million of the
proceeds of the subordinated notes to purchase 2,002,727 of the Company's Common
Shares from a former shareholder and approximately $1.4 million of the
subordinated notes to acquire certain security contracts from JJ Protective
Services, Inc. in November 1996. The remainder of the proceeds of the
subordinated notes was used for working capital.
Although the Company regularly evaluates possible acquisition
opportunities, it is not currently engaged in any negotiations and is not a
party to any agreement, letter of intent or other arrangement regarding any
material acquisition. Pending the use of proceeds as described above, the net
proceeds will be invested in short-term, interest-bearing, investment grade
securities. See "Business -- Growth Strategy -- Growth Through Acquisitions."
DIVIDEND POLICY
The Company has never paid cash dividends on its Common Shares. The Company
does not anticipate paying cash dividends on its Common Shares in the
foreseeable future because it intends to retain its earnings to finance the
expansion of its business and for general corporate purposes. The declaration
and payment of any dividends will be at the discretion of the Company's Board
and will depend on, among other things, the Company's earnings, financial
condition, capital requirements, level of indebtedness, contractual restrictions
with respect to payment of dividends and other factors considered relevant by
the Board. The Company's current credit arrangements prohibit the payment of
dividends. The credit arrangements anticipated to be entered into after the
Offering will permit the payment of dividends, subject to certain restrictions.
See "Management's Discussion and Analysis of Financial Condition and Result of
Operations -- Liquidity and Capital Resources."
13
<PAGE> 15
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
was a deficit of $(5,834,162) or $(1.60) per share. The net tangible book value
per Common Share represents the amount of the Company's shareholders' equity,
less intangible assets, divided by the 3,653,910 Common Shares outstanding at
that date.
Net tangible book value dilution per Common Share represents the difference
between the amount per share paid by purchasers of the 2,825,000 Common Shares
in the Offering and the pro forma net tangible book value per Common Share
immediately after completion of the Offering. After giving effect to the sale by
the Company of the 2,597,727 Common Shares offered hereby, at an assumed initial
public offering price of $11.00 per share (the midpoint of the estimated initial
offering price range) and after deduction of underwriting discounts and
commissions and estimated offering expenses, the pro forma net tangible book
value of the Company as of June 30, 1997 would have been approximately
$19,366,000 or $3.10 per share. This represents an immediate increase in pro
forma net tangible book value of $4.70 per share to existing shareholders and an
immediate dilution in pro forma net tangible book value of $7.90 per share to
purchasers of Common Shares in the Offering, as illustrated in the following
table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $11.00
Pro forma net tangible book value per share at June 30,
1997......................................................... $(1.60)
Increase per share attributable to new investors.............. $ 4.70
------
Pro forma net tangible book value per share after the Offering..... $ 3.10
------
Net tangible book value dilution per share to new investors........ $ 7.90
======
</TABLE>
The following table sets forth, on a pro forma basis as of June 30, 1997,
the differences between the number of Common Shares purchased from the Company,
the effective cash contributed and the average price per share paid by existing
shareholders and by new investors purchasing Common Shares in the Offering at
the assumed initial public offering price of $11.00 per share (the midpoint of
the estimated initial offering price range):
<TABLE>
<CAPTION>
TOTAL CONSIDERATION
SHARES PURCHASED --------------------------------------------
------------------------ AVERAGE PRICE
NUMBER PERCENTAGE AMOUNT PERCENTAGE PER SHARE
--------- ---------- ----------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)....... 3,653,910 58.4% $ 44,000 0.2% $ 0.01
New investors.................. 2,597,727 41.6% $28,575,000 99.8% $ 11.00
--------- -----
6,251,637 100.0%
</TABLE>
- ---------------
(1) The number of shares shown excludes an aggregate of 282,015 Common Shares
reserved for issuance under the Company's option plans, 215,262 of which are
expected to be subject to options to be awarded in connection with the
Offering. See "Management -- Compensation of Directors" and "-- Long Term
Incentive Plan." Sales of Common Shares by the Selling Shareholder in the
Offering will reduce the number of Common Shares held by existing
shareholders to approximately 3,426,637 shares, or 54.8% of the total shares
outstanding, and will increase the number of shares held by new investors to
2,825,000, or 45.2% of the total shares outstanding.
14
<PAGE> 16
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, as adjusted to give effect to the sale by the Company of the 2,597,727
Common Shares offered by the Company, assuming an initial public offering price
of $11.00 per share (the midpoint of the estimated initial public offering price
range) and the application of the estimated net proceeds therefrom as set forth
under "Use of Proceeds." This table should be read in conjunction with the Pro
Forma Financial Data and the Consolidated Financial Statements of the Company
and the notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Short-term debt and current maturities of long-term debt............. $ 2,464 $ 64
======= =======
Long-term debt, net of current maturities(1)......................... 10,755 87
------- -------
Shareholders' equity
Preferred shares, without par value; 5,000,000 shares authorized;
none issued or outstanding......................................
Common shares, without par value, 20,000,000 shares authorized;
3,653,910 shares issued and outstanding and 6,251,637 issued and
outstanding as adjusted(2)...................................... 37 63
Additional paid-in capital(2)...................................... 450 25,823
Retained earnings.................................................. 3,637 3,637
Cumulative translation adjustments................................. (99) (99)
------- -------
Total shareholders' equity................................. 4,025 29,424
------- -------
Total capitalization....................................... $14,780 $29,511
======= =======
</TABLE>
- ---------------
(1) Consists of a revolving bank debt of $7,668 and subordinated debt of $3,000,
all of which is being repaid from the proceeds of the Offering, and $87 of
capital lease obligations and other long-term debt.
(2) Excludes an aggregate of 282,015 Common Shares issuable pursuant to options
to be awarded to certain officers under the Company's Long Term Incentive
Plan and to certain directors in connection with the Offering. See
"Management -- Employment Contracts" and "-- Compensation of Directors."
15
<PAGE> 17
PRO FORMA FINANCIAL DATA
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following sets forth an Unaudited Pro Forma Combined Income Statement
giving effect to the Intex acquisition (as described under "Business -- Growth
Strategy -- Growth Through Acquisitions"). The historical information in this
pro forma statement for the Company is for the year ended March 31, 1997;
historical information for Intex is for the year ended December 31, 1996. The
Company's Unaudited Pro Forma Combined Income Statement presents the effects of
the acquisition as if it had been consummated at the beginning of the periods
presented. The Unaudited Pro Forma Combined Income Statement of the Company is
presented for illustrative purposes only and does not purport to present the
results of operations of the Company had the Intex acquisition occurred on the
dates indicated, nor is it necessarily indicative of results of operations that
may be expected in the future.
The pro forma adjustments relating to the acquisition represent the
Company's preliminary determinations of purchase accounting adjustments based
upon available information and certain assumptions the Company considers
reasonable under the circumstances.
An Unaudited Pro Forma Combined Balance Sheet is not presented since the
acquisition is reflected in the Company's consolidated historical balance sheet
as of June 30, 1997 included in this filing.
The following unaudited pro forma combined financial information should be
read in conjunction with the more detailed information, including the Financial
Statements and Notes thereto, included elsewhere in this Prospectus.
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
YEAR ENDED
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
ITS INTEX ADJUSTMENTS FOR ADJUSTED
MARCH 31, 1997 DECEMBER 31, 1996 ACQUISITION PRO FORMA
-------------- ----------------- --------------- ---------
<S> <C> <C> <C> <C>
Operating Revenues................. $ 115,242 $41,162 (1) $ 156,404
(1)
Cost of Operating Revenues......... 98,338 35,877 (1,798)(2) 132,417
--------- ------- ------ ---------
Gross Profit....................... 16,904 5,285 1,798 23,987
General and Administrative
Expenses......................... 13,334 3,192 (377)(3) 16,449
384(4a)
(84)(4b)
--------- ------- ------ ---------
Operating Profit................... 3,570 2,093 1,875 7,538
Interest Expense -- net............ 637 533 (533)(5) 637
--------- ------- ------ ---------
Earnings Before Income Taxes....... 2,933 1,560 2,408 6,901
Income Taxes....................... 1,237 40 1,621(6) 2,898
--------- ------- ------ ---------
Net Earnings....................... $ 1,696 $ 1,520 $ 787 $ 4,003
========= ======= ====== =========
Weighted Average Number Of
Shares Outstanding............... 5,089,480 11,250 n/a 5,089,480
--------- ------- ------ ---------
Earnings Per Share(7).............. $ 0.33 $135.07 n/a $ 0.79
========= ======= ====== =========
</TABLE>
16
<PAGE> 18
- ---------------
1. Adjustments have not been made to reflect operating revenues and cost of
operating revenues associated with contracts lost by Intex during 1996,
amounting to $9.6 million and $8.7 million, respectively, or for contracts
representing $2.5 million in annual revenues lost since April 1997.
2. Represents a reduction in Intex's historical costs for workers'
compensation, liability insurance, medical insurance and personnel relations
to conform them to the cost structure associated with the Company's
programs.
3. Represents a reduction in compensation expense associated with the
elimination of certain salaries paid to Intex officers not employed by the
Company subsequent to the acquisition.
4a. Represents the additional depreciation and amortization costs to be charged
to expense after allocation of the purchase price in the Intex acquisition
as follows:
<TABLE>
<S> <C>
- amortization of service contracts (5 years)........................... $ 115
- depreciation of furniture and fixtures (5 years)...................... 10
- amortization of goodwill (20 years)................................... $ 259
------
$ 384
======
4b. Elimination of Intex's historical depreciation................................ $ 84
======
</TABLE>
5. Represents the reduction of interest expense for interest on Intex debt not
assumed with the contract acquisition.
6. Represents an adjustment to the historical provision for income taxes to
reflect the application of the Company's estimated effective tax rate of 42%
after giving effect to the foregoing adjustments and to make a provision for
income taxes of Intex, which had previously operated as an S corporation.
7. Earnings per share are computed by dividing net earnings, after giving
effect to preferred dividend requirements, by the weighted average number of
shares outstanding.
17
<PAGE> 19
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(AMOUNTS IN THOUSANDS, EXCEPT SHARES, PER SHARE AMOUNTS AND OPERATING DATA)
The selected financial data of the Company for the years ended March 31,
1995, March 31, 1996 and March 31, 1997 are derived from audited financial
statements. These financial statements and the notes thereto appear elsewhere in
this Prospectus. The selected financial data of the Company for the three months
ended June 30, 1997, the three months ended June 30, 1996 and the years ended
March 31, 1993 and March 31, 1994 have been derived from unaudited financial
statements. Those unaudited financial statements include all adjustments,
consisting only of normal recurring accruals, which the Company considers
necessary for a fair presentation of its financial position and results of
operations for those periods. The data should be read in conjunction with
Management's Discussion and Analysis of Financial Condition and Results of
Operations, Use of Proceeds, Pro Forma Financial Data and the Consolidated
Financial Statements and the notes thereto, and the other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, THREE MONTHS THREE MONTHS
--------------------------------------------------------- ENDED ENDED
1993 1994 1995 1996 1997 JUNE 30, 1996 JUNE 30, 1997
--------- --------- --------- --------- --------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues................. $ 68,230 $ 78,173 $ 92,654 $ 95,463 $ 115,242 $ 24,106 $ 38,364
Cost of revenues......... 56,180 66,103 79,981 81,341 98,338 20,475 31,824
-------- -------- -------- -------- -------- -------- --------
Gross profit............. 12,050 12,070 12,673 14,122 16,904 3,631 6,540
General and
administrative
expenses............... 11,916 11,075 12,655 11,603 13,334 2,772 4,639
-------- -------- -------- -------- -------- -------- --------
Operating income......... 134 995 18 2,519 3,570 859 1,901
Interest expense (income)
net.................... 22 34 188 523 637 99 414
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes........... 112 961 (170) 1,996 2,933 760 1,487
Income taxes(2).......... 109 1,035 548 958 1,237 318 634
-------- -------- -------- -------- -------- -------- --------
Net income (loss)...... $ 3 $ (74) $ (718) $ 1,038 $ 1,696 $ 442 $ 853
======== ======== ======== ======== ======== ======== ========
Net income (loss) per
share.................. $ 0.00 $ (0.01) $ (0.11) $ 0.18 $ 0.33 $ .07 $ 0.23
Supplemental Pro Forma
Net Income............. $ 2,136 $ 1,098
Supplemental Pro Forma
Net Income Per Share... $ 0.35 $ 0.22
Weighted average common
and common equivalent
shares................. 6,446,310 6,446,310 6,292,976 5,775,880 5,089,480 5,945,022 3,654,985
OPERATING DATA (AT PERIOD
END):
Number of employees...... 8,121 9,006 9,863 9,914 10,690 9,984 12,618
</TABLE>
18
<PAGE> 20
<TABLE>
<CAPTION>
MARCH 31, THREE MONTHS
--------------------------------------------------------- ENDED
1993 1994 1995 1996 1997 JUNE 30, 1997
--------- --------- --------- --------- --------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 1,108 $ 769 $ 1,267 $ 1,873 $ 1,452 $ 1,711
Working capital (deficit)............ (2,004) (1,351) (4,425) (2,951) 324 1,338
Total assets......................... 12,222 14,843 20,295 20,892 27,001 34,470
Short-term bank debt and current
maturities of long-term debt....... 236 875 5,658 4,806 2,521 2,464
Long-term obligations, net of current
maturities(3)...................... 0 0 152 164 7,556 10,755
Retained earnings.................... 3,752 3,678 2,961 3,998 2,784 3,637
Shareholder's equity................. 4,347 4,273 3,139 3,978 3,195 4,025
</TABLE>
- ---------------
(1) The supplemental pro forma net income and net income per share reflect the
issuance of shares necessary to repay certain indebtedness and the related
reduction in interest expense and increase in net income. See Note A of
Notes to the Consolidated Financial Statements.
(2) No provision (benefit) has been provided for the portion of operating income
resulting from the profit (loss) of International Transport Security, Inc.,
a corporation under common ownership with the Company, which had operated as
an "S" corporation. See Note A to Consolidated Financial Statements
explaining the relationship of Transport with the Company.
(3) Includes amounts due under revolving credit facility, subordinated debt,
capital lease obligations and other long-term debt.
19
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITS provides aviation security, ramp and ground handling and passenger
services, and commercial security services. The Company's revenues have grown
from $68.2 million in fiscal 1992 to $115.2 million in fiscal 1996, reflecting a
compound annual growth rate of 14.2%. The growth for fiscal 1993, 1994, 1995 and
1996 was 15.3%, 17.8%, 3.0% and 20.7%, respectively.
The gross margins associated with airline security services typically have
been lower than the gross margins associated with other airline services,
reflecting the maturity of the market for airline security services and the
intensity of price competition in that market. While airline security services
have long been outsourced, airlines have only recently begun to outsource many
other services. Consequently, the market for these other services is more
fragmented and less mature than the market for airline security services. The
Company anticipates that, as the airline services market matures, gross margins
will experience compression as a result of increasing competition in the market
and the increasing importance of cost considerations to the airlines that
outsource these services.
The Company's services are provided under contracts that typically have
terms of from one to three years but are cancelable by either party on 30 to 90
days' notice. Although contract terms vary significantly, clients generally pay
at an hourly rate for services provided. Certain services, such as aircraft
lavatory cleaning, are billed on a flat fee for service basis, and certain
others are billed at a fixed monthly rate. The Company recognizes revenues as
the related services are performed.
Prior to fiscal 1995, ITS's strategy included using technological
innovation to drive the growth of its business, and the Company made research
and development expenditures of approximately $500,000 in support of this
strategy. In recognition of the importance of cost considerations in customer
purchasing decisions, the Company in fiscal 1995 determined to reduce its cost
structure in order to enhance its competitive position. As a consequence of this
decision, ITS made several important operational changes that contributed to a
significant improvement in its financial results. These changes included
reductions in corporate headquarters staff and executive compensation of
approximately $500,000, the development of divisional budgeting systems and the
implementation of compensation programs tied to the achievement of budgeted
performance levels. The Company also made efforts to enhance its management and
control systems in order to improve accounts receivable collection and
streamline its purchasing arrangements.
Acquisitions played an important role in the Company's revenue and earnings
growth during fiscal 1996, and they are expected to remain an important
component of ITS's growth strategy during future periods. ITS seeks acquisition
candidates that will add geographic coverage to the Company's existing
businesses, broaden its service offerings and expand its customer base. The
Company's recent acquisitions have involved the purchase of service contracts
and property and equipment related to those contracts, but not the liabilities
associated with the sellers' businesses. Management believes that the
acquisition of service contracts, rather than of stock or of assets unrelated to
those contracts, significantly reduces the cost of integrating acquired
operations.
In fiscal 1996, ITS completed six acquisitions of service contracts, all of
which were accounted for under the purchase method, and their operations are
reflected in ITS's consolidated financial statements for all periods subsequent
to the date of the acquisition. All of these acquisitions involved providers of
airline security or commercial security services. These acquisitions contributed
approximately $11.9 million in total revenues during fiscal 1996. In addition,
in April 1997, the Company acquired service contracts from Intex Aviation
Services. Intex did not provide security services; instead, it provided a
variety of other aviation services, including baggage handling, lavatory and
water services, de-icing services and aircraft cleaning and ground support
services. For the year ended December 31, 1996, Intex recognized revenues of
approximately $32.3 million from the contracts acquired by ITS. Intex's
operations are not reflected in the Company's consolidated financial statements
for fiscal 1996. See "Pro Forma Financial Data."
20
<PAGE> 22
RESULTS OF OPERATIONS
The following table sets forth Statement of Operations data as a percentage
of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, MARCH 31, MARCH 31, JUNE 30,
1995 1996 1997 1997
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
Revenues..................................... 100.0% 100.0% 100.0% 100.0%
Gross profit................................. 13.7 14.8 14.7 17.0
Selling, general and administrative
expenses................................... 13.7 12.2 11.6 12.1
----- ----- ----- -----
Operating income (loss)...................... 0.0 2.6 3.1 4.9
Interest expense............................. 0.2 0.5 0.5 1.0
----- ----- ----- -----
Income (loss) before income taxes............ (0.2) 2.1 2.6 3.9
Income taxes................................. 0.6 1.0 1.1 1.7
----- ----- ----- -----
Net income (loss)............................ (0.8)% 1.1% 1.5% 2.2
===== ===== ===== =====
</TABLE>
Three Months Ended June 30, 1997 Compared to Three Months Ended June 30, 1996
Revenues. Revenues for the three months ended June 30, 1997 increased by
$14.4 million, or 60.0%, as compared to the three months ended June 30, 1996.
This increase is attributable to an increase in revenues from the six
acquisitions that were completed during fiscal 1996 and the Intex acquisition,
and from the addition of continuous bag search that was implemented by the FAA
during fiscal 1996 as well as increased revenues from passing along to customers
the U.S. minimum wage increase commencing October 1, 1996 and an increase in
revenues from existing customers for aircraft cleaning and ground handling. Of
the $14.4 million increase in revenues, $10.4 million was attributable to the
acquisitions, $1.5 million to continuous bag search, $1.5 million to the minimum
wage increase and $1.0 million from aircraft cleaning and ground handling.
Gross profit. Gross profit was $6.5 million for the three months ended
June 30, 1997 compared to $3.6 million in the three months ended June 30, 1996,
an increase of $2.9 million, or 80.2%. Measured as a percentage of net sales,
gross profit margins increased to 17.0% in 1997 from 15.1% in 1996.
Approximately $2.6 million of the increase reflects the impact of higher margin
contracts (primarily resulting from the Intex acquisition). Decreases in
worker's compensation and liability insurance rates based on cost reduction
measures and a favorable claims history also contributed to the gross profit
margin increase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the three months ended June 30, 1997 were $4.6
million compared to $2.7 million in the prior year, an increase of $1.8 million,
or 67.2%, primarily in connection with the acquisitions referred to above.
Measured as a percentage of net sales, these expenses were 12.7% in 1997 and
11.5% in 1996, an increase of only 5.2%, because of the Company's focus on
increasing revenues without a proportionate increase in corporate expenses.
Interest Expenses. Interest expenses increased in the three months ended
June 30, 1997 to $414,000 from $98,000 in the prior year because of an increase
in the amount of debt outstanding exclusively as a result of the acquisitions.
Income Taxes. The Company's consolidated effective income tax rate in the
three months ended June 30, 1997 was 42.6% as compared to 41.8% in the prior
year. The Company's effective tax rate will vary from period to period depending
on the breakdown of earnings among the various operating subsidiaries and the
treatment of such items by the relevant tax authorities and income tax effects
deferred from prior periods.
Net Income. As a result of the foregoing, the Company's net income
increased to $853,000 in the three months ended June 30, 1997 compared to
$442,000 in the prior year, an increase of $411,000, or 93%.
21
<PAGE> 23
Year Ended March 31, 1997 Compared to Year Ended March 31, 1996
Revenues. Revenues in fiscal 1996 increased by $19.8 million, or 20.7%, as
compared to fiscal 1995. This increase is attributable to an increase in
revenues from the six acquisitions that were completed during the year, and from
the addition of continuous bag search services that were required by the FAA
during the year, as well as increased revenues from passing along to customers
the U.S. minimum wage increase commencing October 1, 1996 and an increase in
revenues from existing customers for aircraft cleaning and ground handling. Of
the $19.8 million increase in revenues, $11.9 million was attributable to the
acquisitions ($9.1 million in predeparture screening and $2.8 million in
industrial security), $4.2 million to continuous bag search, $2.3 million to the
minimum wage increase and $1.4 million to aircraft cleaning and ground handling.
Gross Profit. Gross profit was $16.9 million in fiscal 1996 compared to
$14.1 million in fiscal 1995, an increase of $2.8 million, or 19.9%.
Approximately $1.4 million of the increase resulted from higher margin contracts
of acquired businesses. Approximately $1.0 million of the increase resulted from
an increase in hourly rates under certain contracts and higher utilization of
personnel and improved operating efficiencies. Company-wide cost reduction
measures, including decreases in worker's compensation and liability insurance
rates contributed approximately $500,000 to the increase in gross profit.
For its fiscal year ended December 31, 1996, Intex had gross profit of $5.3
million, or 12.8% of total revenues. The Company had gross profit of $16.9
million, or 14.7% of total revenues. On a pro forma basis, after giving effect
to the Intex acquisition, the Company's gross profit percentage for fiscal 1996
would have increased to 15.7%. This increase reflects savings resulting from the
elimination of certain lower-margin contracts that Intex lost prior to the
acquisition, as well as a reduction in certain workers' compensation and
insurance costs attributable to the lower cost of comparable Company programs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1996 were $13.3 million compared to $11.6
million in the prior year, an increase of $1.7 million, or 14.7%. The increase
primarily reflects expenses associated with the operations of acquired
businesses. Measured as a percentage of net sales, these expenses were 11.6% in
fiscal 1996 and 12.2% in fiscal 1995, a decrease of 4.9% attributable to
improved overhead absorption resulting from the growth of revenues over the
prior year. On a pro forma basis, after giving effect to the Intex acquisition,
the Company's selling, general and administrative expenses for fiscal 1996 would
have been 11.3% of total revenues, primarily as a result of improved overhead
absorption resulting from the larger pro forma revenue base.
Interest Expense. Interest expense increased in fiscal 1996 to $637,000
from $523,000 in fiscal 1995 because of an increase in the amount of debt
outstanding. The debt was incurred primarily in connection with the
acquisitions.
Income Taxes. The Company's consolidated effective income tax rate in
fiscal 1996 was 42.2% as compared to 42.4% in fiscal 1995. The Company's
effective tax rate will vary from period to period depending on the breakdown of
earnings among the various operating subsidiaries and the treatment of earnings
items by the relevant tax authorities and income tax effects deferred from prior
periods.
Net Income. As a result of the foregoing, the Company's net income
increased to $1.7 million in fiscal 1996 from $1.0 million in fiscal 1995, an
increase of 63.4%.
The Company anticipates that the Intex acquisition will have a significant
effect on the mix of its revenues. During each of the past three fiscal years,
predeparture screening services have represented approximately 50% of the
Company's revenues. Intex historically did not provide these services, but
instead focused on other aviation services. In light of Intex's significant
historical revenue from these other aviation services, the Company believes
that, as a percentage of revenue, predeparture screening services will decrease
and other aviation services will increase during future periods.
Year Ended March 31, 1996 Compared to Year Ended March 31, 1995
Revenues. Revenues in fiscal 1995 increased by $2.8 million, or 3.0%, as
compared to fiscal 1994. This increase is exclusively attributable to an
increase in revenues from the sale of high efficiency screening systems to
airline customers. Service revenues remained relatively constant as compared to
fiscal 1994. Revenues from new business were offset by revenues lost as a result
of an airline customer's decision to terminate a discount passenger service
operating at a number of airports served by the Company.
22
<PAGE> 24
Gross Profit. Gross profit was $14.1 million in fiscal 1995 compared to
$12.7 million in fiscal 1994, an increase of $1.4 million, or 11.0%. Measured as
a percentage of net sales, gross profit margins increased to 14.8% in fiscal
1995 from 13.7% in fiscal 1994. The improvement in fiscal 1995 was attributable
primarily to cost reduction measures implemented Company-wide of $1.4 million,
including $500,000 related to research and development expenditures and a
$900,000 decrease in worker's compensation and liability insurance rates based
on cost reduction measures and a favorable claims history.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1995 were $11.6 million compared to $12.7
million in the prior year, a decrease of $900,000, or 8.7%. Measured as a
percentage of net sales, these expenses were 12.2% in fiscal 1995 and 13.7% in
fiscal 1994, a decrease of 10.9%. The improvement was primarily attributable to
cost reduction measures implemented Company-wide, including a decrease in
workers' compensation and liability insurance rates for administrative employees
of $400,000 and reductions in headquarters staff and executive compensation of
$500,000.
Interest Expense. Interest expense increased in fiscal 1995 to $523,000
from $188,000 in fiscal 1994 because of an increase in the amount of debt
outstanding. The debt was incurred in connection with normal operations.
Income Taxes. The Company's consolidated effective income tax rate in
fiscal 1995 was 42.4%.
Net Income. As a result of the foregoing, the Company's net income
increased from a loss of $718,000 in fiscal 1994 to net income of $1.0 million
in fiscal 1995.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is labor intensive. Consequently, it has substantial
needs for cash throughout its fiscal year. During fiscal 1996, the Company's
cash requirements were heightened by its acquisition program and the need to
support the higher levels of revenue resulting from those acquisitions.
Operating activities generated cash of approximately $1.9 million in both fiscal
1996 and 1995 and $627,000 for the three months ended June 30, 1997. Financing
activities generated net cash of $3.9 million during fiscal 1996, primarily as a
result of borrowings under various credit arrangements, offset by $1.2 million
in purchases of treasury shares and $52,000 in principal payments on long-term
indebtedness, and $3.1 million for the three months ended June 30, 1997,
primarily as a result of borrowings under credit arrangements for the Intex
acquisition.
Principal uses of funds, in addition to working capital requirements,
included expenditures associated with the Company's acquisition program. During
fiscal 1996, these included $2.7 million in acquisitions of service contracts
and related goodwill and noncompete agreements, a $2.6 million purchase price
deposit in connection with the Intex acquisition, and $1.1 million in purchases
of property and equipment. The Company also used approximately $1.2 million
during fiscal 1996 to acquire outstanding Common Shares from certain current and
former shareholders. In the three months ended June 30, 1997, the Company used
$2.0 million as the final payment for the Intex acquisition and $280,000 for
purchases of property and equipment.
In April 1997, the Company acquired substantially all of Intex's aviation
services business through the assumption of various existing contracts. Under
the terms of the purchase agreement, the Company's $2.6 million deposit was
credited toward the purchase price. The total purchase price payable to the
former owner of Intex was determined on the basis of a multiple of monthly
revenues on the acquired contracts for the period from April 1, 1997 to June 30,
1997. The balance of the purchase price was paid on July 15, 1997. Subsequent to
the date of the acquisition, the Company lost contracts worth $2.5 million in
annual revenue which was deducted from the purchase price.
The Company currently has a credit facility with its senior lender. The
credit facility includes a revolving credit facility providing maximum
availability of $10.5 million, a $2.0 million term loan and a $900,000 term
loan. Borrowings under the credit facility are secured by all of the Company's
domestic accounts receivable, equipment and other assets. Amounts outstanding
under the revolving line of credit bear interest at 1.25% over the bank's prime
rate, and availability under the line is limited to an amount equal to 80% of
qualifying domestic and 50% of qualifying foreign accounts receivable. The
revolving line of credit matures on March 31, 1999. At July 31, 1997,
approximately $1.0 million was available for borrowing under the revolving line
of credit. The $2.0 million term loan provided under the facility bears interest
at a fixed rate of 9.832% and is subject to monthly amortization of principal at
the rate of $41,667 beginning in May 1997, with a final payment of $1.7 million
on November 1, 1997. The $900,000 term loan bears interest at 2.00% over the
bank's prime rate and will mature on December 31, 1997.
23
<PAGE> 25
The Company also has outstanding $3.0 million principal amount of a
subordinated promissory note issued to an institutional lender. Amounts
outstanding under this note are subordinated to all borrowings under the credit
facility described above. Interest on the note is payable quarterly at a fixed
rate of 20% per annum. The principal amount of the note is to be paid in equal
quarterly installments of $250,000 over a period of 12 quarters beginning
February 1999.
As of July 31, 1997, the Company had approximately $13.0 million
outstanding under the various credit arrangements described above. The Company
intends to repay this indebtedness in full with the proceeds of this Offering.
In connection with this Offering, the Company intends to replace its
existing credit facility with a new revolving credit facility with its senior
lender. The Company has received a commitment letter with respect to the new
facility. The commitment letter provides and the Company currently anticipates
that, subject to the completion of the Offering, the negotiation and execution
of definitive documentation and other customary conditions, the lender will
provide a two-year revolving credit facility providing maximum availability of
$30 million. The Company anticipates that amounts borrowed under the new credit
facility will bear interest at rates varying from LIBOR plus 1.5% to the bank's
prime rate plus 2%, and will mature in September 1999. Amounts outstanding under
the new credit facility will be secured by substantially all of the Company's
assets. It is anticipated that the new credit facility will limit the Company's
ability to incur additional indebtedness and pay dividends, and will require the
Company to maintain prescribed debt-to-equity and fixed charge coverage ratios
and minimum net worth levels and to satisfy other financial covenants. Although
the Company believes that financing on the terms outlined above will be
available subsequent to the completion of the Offering, there can be no
assurance thereof.
The Company's capital expenditure budget for fiscal 1997 is approximately
$2.0 million. Capital expenditures for the current fiscal year are expected to
relate to facility and equipment improvements.
The Company believes that the net proceeds from the Offering, together with
its available cash, cash generated from operating activities and amounts
anticipated to be available under its new credit facility will be sufficient to
meet its anticipated cash requirements through the end of fiscal 1998.
QUARTERLY RESULTS OF OPERATIONS AND SEASONALITY
The Company's operations are subject to seasonal fluctuations. The
Company's revenues and operating income typically reach their highest levels
during the third quarter of the fiscal year, reflecting the higher level of air
travel during the holiday season. Revenues and net income typically are at their
lowest levels in the first and fourth quarters of the fiscal year, as a result
of lower levels of air travel during these periods and certain additional
expenses, such as annual unemployment insurance premiums, that become payable
with the commencement of a new calendar year.
The following chart shows results of operations by quarter for fiscal 1995
and fiscal 1996 and for the first quarter of fiscal 1997 (in thousands).
<TABLE>
<CAPTION>
JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
1995 1995 1995 1996 1996 1996 1996 1997 1997
------- -------- ------- -------- ------- -------- ------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................ $23,230 $23,984 $23,949 $24,300 $23,980 $29,071 $31,741 $30,449 $38,364
Cost of Revenues................ 19,375 20,402 20,235 21,329 20,419 24,596 26,933 26,390 31,824
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross Profit.................... 3,855 3,582 3,714 2,971 3,561 4,475 4,808 4,059 6,540
General and Administrative
Expenses...................... 3,263 2,933 2,851 2,557 2,696 3,391 3,624 3,623 4,639
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating Income (Loss)......... 592 649 863 414 865 1,084 1,184 436 1,901
Interest Expense................ 115 126 121 160 105 141 235 155 414
------- ------- ------- ------- ------- ------- ------- ------- -------
Income (Loss) Before Income
Taxes......................... 477 523 742 254 760 943 949 281 1,487
Income Taxes.................... 229 251 356 122 318 394 397 128 634
------- ------- ------- ------- ------- ------- ------- ------- -------
Net Income (Loss)............... 248 272 386 132 442 549 552 153 853
======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
24
<PAGE> 26
BUSINESS
COMPANY OVERVIEW
ITS is a leading domestic provider of aviation security and other aviation
services. The Company provides predeparture screening services for more than 60
U.S. and international carriers at more than 120 U.S. airports. ITS has used its
predeparture screening business to establish a growing presence in the broader
aviation services market and believes that it offers a wider array of services
than its competitors in this market. Aviation services offered by ITS include
skycap, baggage handling and aircraft cleaning services, and wheelchair and
electric cart operations. The Company's security services extend beyond aviation
security, and include the provision of commercial security services to
government and business clients, hospitals, arenas and museums.
ITS's revenues have grown at a compounded annual rate of 14.2% over the
past five years, driven by growth in both aviation security and other aviation
services as well as growth resulting from acquisitions. The Company has
experienced significant revenue growth in its predeparture screening business,
attributable primarily to the trend toward consolidation in this market and the
Company's historic ability to pass on wage increases to customers. The Company's
predeparture screening revenues have grown from $47 million to $58 from 1994
through 1996, representing a 23% increase during that period. Aviation services
have also accounted for substantial growth, as airlines have outsourced noncore
services and have begun to consolidate their vendor base to a few leading
vendors such as ITS. ITS believes that these consolidation and outsourcing
trends will continue and that it can realize additional revenue growth by
leveraging its established business presence and relationships to deliver a wide
array of services to its clients at a very competitive overall cost. The
Company's use of debt to finance this growth has resulted in significant
increases in interest expense over the past three years. In light of the
Company's debt service obligations, as well as the labor intensive nature of its
business, the Company has historically operated with a working capital deficit.
See "Growth Strategy -- Growth Through Acquisitions."
ITS's growth strategy is premised on using its experience in recruiting,
training, motivating and managing the large numbers of personnel needed to
perform the labor-intensive, task-repetitive functions that its services
require. The Company believes that it is well-positioned to realize significant
growth for the following reasons:
- Favorable growth prospects exist in the markets for aviation services and
commercial security services.
- The Company enjoys strong market position and administrative support from
its significant aviation and security experience, extensive market
breadth and competitive cost structure.
- Management is able to exploit the Company's aviation and security
experience to capture revenue in related service segments such as general
aviation services and commercial security.
- The economies of scale resulting from the Company's use of its existing
administrative resources support internal growth and acquisitions.
The Company intends to grow internally and through acquisitions. The
Company expects internal growth will be generated by using the Company's
established business base as a platform for expanding the services it provides
at existing airport and commercial security locations and for developing new
service locations. The Company intends to target acquisition candidates that
will add geographic scope to its existing businesses, broaden its service
offerings and expand its client base. ITS made two acquisitions of aviation
security contracts and four acquisitions of commercial security contracts in
fiscal 1996 that have contributed an aggregate of approximately $11.9 million in
annual revenues and have improved profitability. In addition, in April 1997, the
Company acquired service contracts from Intex. Intex provided a variety of
aviation services, including baggage handling, lavatory and water services,
de-icing services and aircraft cleaning and ground support services. On a pro
forma basis for the year ended December 31, 1996, the contracts acquired from
Intex generated revenues of approximately $32.3 million. See "Pro Forma
Financial Data" and "Management's Discussion and Analysis of Results of
Operations and Financial Condition."
25
<PAGE> 27
AVIATION SERVICES
General.
In 1973, the FAA mandated that airlines conduct predeparture screening of
all passengers at most airports in the U.S. Because the labor-intensive nature
of predeparture screening imposed substantial administrative burdens, most
airlines opted to contract out predeparture screening and other security
services to third party contractors. Certain other airline services, such as
food service and fueling, historically have also been contracted out by the
airlines. In the past several years, market forces have driven airlines to
outsource a number of other labor-intensive aviation services in order to permit
airline management to focus on the essential aspects of its businesses and to
reduce labor and benefit costs and administrative overhead.
As the costs of labor have increased, airlines now frequently outsource
baggage claim and check services, skycap, baggage handling, aircraft cleaning
and wheelchair assistance services, and inter-gate cart services. Ticketing and
check-in services are also beginning to be outsourced. Many small, regional
carriers still provide their own ground handling and cleaning services, offering
additional growth opportunities for contractors such as the Company.
Aviation Security Services.
Predeparture Screening. The Company is a leading provider of domestic
airline predeparture screening services. ITS currently employs approximately
4,400 predeparture screeners in more than 120 U.S. airports in 38 states. The
Company's predeparture screening services include conducting x-ray or
electro-magnetic inspection of all carry-on baggage, manual searches of
suspicious baggage and metal-detector searches of all passengers. The Company
derived approximately 50% of its revenues from predeparture screening services
in each of the last three fiscal years.
Other Airline Security Services. ITS provides passenger profiling services
and document verification agents, primarily in Europe and Asia, where airlines
and airports have been obliged by regulatory agencies and the political climate
to devote significant resources to the prevention of terrorist activity.
Airlines contract with ITS to provide document verification (customs) agents who
interview passengers as they enter or leave a country via an international
flight. In the domestic market, ITS also provides guarding and control of
airport entrances, checking of employee identification cards and baggage,
guarding and control of employee parking lots and under-the-wing guarding of
parked aircraft. Airline security services other than predeparture screening
accounted for less than 5% of the Company's revenues in each of the last three
fiscal years.
Other Aviation Services.
The Company provides nonsecurity aviation services, attempting to take
advantage of its existing base of operations and overhead costs in its airport
security operations. It also provides these services for airlines with which it
does not have security contracts.
Ramp and Ground Handling Services. The ramp and ground handling services
provided by ITS are described in the chart below.
<TABLE>
<CAPTION>
SERVICE DESCRIPTION
- -------------------------------------------- --------------------------------------------
<S> <C>
Baggage Handling............................ Conveyance of checked baggage from terminal
to baggage compartment of plane and from
plane to baggage carousel
Aircraft Cleaning........................... Interior: cleaning interior parts of the
aircraft between flights and at end of the
aircraft's flight day.
Exterior: washing exterior of aircraft.
Lavatory and Water Services................. Use of equipment to empty lavatory and
replace the water source with potable water.
De-icing.................................... Spraying ice-melting substance on aircraft
prior to departure from gate, in accordance
with customer specifications.
</TABLE>
The Company derived approximately 12.2%, 12.7% and 14.2% of its revenues
from ramp and ground handling services in fiscal 1994, 1995 and 1996,
respectively.
26
<PAGE> 28
Passenger Services. The Company's passenger services include providing
skycaps for curbside check-in, baggage assistance and help with routine
passenger problems, wheelchair operators to transport disabled or elderly
passengers to and from the check-in area and the plane, and electric cart
drivers to provide inter-gate transport for passengers who need to board flights
at distant gates. Passenger services are a growing source of revenue for ITS,
representing approximately 23.8%, 22.7% and 19.6% of the Company's revenues in
fiscal 1994, 1995 and 1996, respectively.
COMMERCIAL SECURITY SERVICES
ITS provides uniformed security officer services, business and facility
access control, security consulting, special event security and security
assessment to a broad range of commercial clients, including in office and
government buildings, airports, hospitals, malls, distribution centers, sports
arenas, museums and other facilities. The Company recently acquired the service
contracts of several regional commercial security providers, including JJ
Protective Services, Inc., which had approximately $7.7 million in sales in 1996
in Minnesota, Wisconsin, Michigan and Colorado, and Maximum Protective Services
of Texas, Inc., which had $1.5 million in annual sales in Texas.
The Company entered the commercial security market in the early 1990s,
attracted by the market's favorable fundamentals and the opportunity to further
capitalize on its aviation security experience. Industrial security is a $100
billion per year industry that employed approximately 2 million people in 1996,
according to the American Society for Industrial Security in Arlington, Virginia
("ASIS"). ASIS data indicates that the industry is highly fragmented, with
approximately 160,000 companies registered as protection companies. Commercial
security accounted for approximately 9.7%, 11.0% and 11.7% of the Company's
revenue in fiscal 1994, 1995, and 1996, respectively.
SECURITY PRODUCTS DISTRIBUTION
In addition to its service offerings, the Company distributes a line of
security products through its Crown Technical Services, Inc. subsidiary. These
products are sold with or without airline security services and offer
significantly better margins than many of the services that ITS provides. In
1992, the Company introduced its High Efficiency Screening System ("HESS"), an
ITS-designed integrated security system that physically replaces the standard
checkpoint configuration found in most U.S. airports. The Company also offers,
either with the entire HESS system or alone, an exit aisle motion detector,
which replaces the guard who stands at most terminals, to ensure that boarding
passengers do not pass through the departing passenger aisle. The Company also
offers a separate line of hand-held and walk-through metal detectors, which it
sells to banks, schools, the federal government, and large businesses.
The Company derived approximately 1.5%, 2.2% and 3.0% of its revenues from
sales of security products in fiscal 1994, 1995 and 1996, respectively.
GROWTH STRATEGY
The Company's growth strategy emphasizes both internal growth and growth
through acquisitions. The Company focuses on using its experience in recruiting,
training, motivating and managing the large numbers of personnel needed to
handle labor-intensive, task-repetitive jobs to capitalize on the trend toward
outsourcing labor-intensive services. The Company believes that its strong
position in the airline security business provides an effective platform from
which to take advantage of opportunities in other elements of the airline
services businesses. The Company also believes that its experience in managing
the personnel requirements of its airline security business provides
opportunities to expand into related labor-intensive service businesses, such as
commercial security services.
Growth Through Expansion of Existing Businesses.
Airline security services currently represent approximately 50% of the
Company's revenue. The Company believes a handful of large companies serve most
of the domestic airline security market, in part because increasing federal
regulation has made the cost of doing business prohibitive for smaller
contractors. Airline
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security contracts tend to be very cost competitive: prevailing bids often offer
only slightly lower costs. ITS believes that because of its size and ability to
leverage its overhead costs, it is well positioned to increase its revenues, as
airlines seek to consolidate their third party contracts and minimize the costs
associated with these functions. In addition, the Company believes it can
increase the revenue and profitability associated with its other airline
security offerings.
ITS believes that its ability to use its "installed base" of airline
security business to increase the range of other services that it provides to
its airline customers is an equally important element of its growth strategy.
The administrative base supporting the Company's airline security services at an
airport can be used to support other services without significant additional
costs, which can give ITS an important advantage in competing with other
providers of airline services on the basis of price. The Company's division and
field management teams actively seek these opportunities and are experienced in
exploiting them. ITS has experienced recent growth in the demand for its ramp
and ground handling and passenger services and expects these services to provide
opportunities for continued growth. The Company intends to identify new business
opportunities and to use its existing marketing, management and administrative
systems, as well as its strong airline relationships, to expand its reach in
these areas. ITS currently performs these services primarily in the United
States but intends to package these services with its security services in
international markets. Because all carriers, regardless of location, need
airplane cleaning, baggage handling and passenger related services, ITS believes
that the potential market for these services is as large as, if not larger than,
the airline security market.
The Company believes that the management and administrative resources it
has developed to manage its aviation-related operations in 44 states provide it
with the capacity to expand its commercial security business in a number of
geographic areas without significant additional overhead costs. By leveraging
its existing administrative base, the Company seeks to increase its share of the
highly fragmented commercial security market.
Growth Through Acquisitions.
The Company generally acquires existing service contracts and the goodwill,
property and equipment related to those contracts and does not assume
liabilities associated with the seller's business. It targets acquisition
candidates that will add geographic coverage to its existing businesses, broaden
its service offerings and expand its client base. ITS generally seeks
acquisitions that it believes can make an immediate contribution to
profitability, although it also pursues opportunities that have strategic value
to its business even if the returns appear less immediate. ITS is willing to
retain members of an acquired company's management team that it believes can
contribute expertise. Management believes the Company has certain advantages
that may enable it to implement its acquisition strategy more successfully than
its competition. Specifically, management believes that its self-insurance and
risk management practices and its centralized administration of payroll and
billing functions have resulted in a lower cost structure than many of its
competitors have. This cost structure generally enables ITS to improve margins
of acquired businesses. The Company will seek to implement its operating
strategies at acquired companies while retaining existing management talent of
those companies.
The Company has completed seven acquisitions since July 1996. The largest
of these acquisitions was the purchase in April 1997 of the airline service
contracts and related goodwill of Intex, based in Greenville, South Carolina.
Intex contracts cover ramp and ground handling services, including baggage
handling, and lavatory and water services for clients in 27 locations across the
United States. The Intex contracts also include aircraft cleaning and ground
support and facility services at some of these locations. Delta Air Lines, with
whom Intex held its largest ramp and ground handling contract, has become ITS's
biggest aviation services customer as a result of the purchase. In connection
with the Intex acquisition, ITS intends to develop its ramp and ground handling
services with existing customers.
Other acquisitions in the aviation services industry include the contracts
and related goodwill of Andy Frain Services, Inc., acquired in July 1996, which
produced $7.5 million in annual sales in Salt Lake City, Anchorage, Oakland,
Phoenix and Seattle, and of Airport Terminal Services, Inc. ("ATS"), purchased
in July 1996, which produced $4.5 million in annual predeparture screening sales
in St. Louis, Kansas City,
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Dallas and Los Angeles. As a result of the ATS acquisition, the Company acquired
significant market share in St. Louis, which is TWA's hub.
In the commercial security area, the Company acquired the contracts and
goodwill of four companies with varied geographic coverage in fiscal 1996. In
November 1996, the Company acquired security contracts from JJ Protective
Services, Inc. that generated $7.7 million in annual revenue in Minnesota,
Wisconsin, Michigan and Colorado. In January 1997, the Company acquired security
contracts from Maximum Protective Services, Inc. that generated $1.5 million in
annual revenue in Texas. In March 1997, the Company purchased contracts that
provided $298,000 in annual revenue from City Security Services, Inc. in San
Antonio, Texas, and in August 1996, it purchased contracts that provided
$175,000 in annual revenue from ABC Security Guard Services, Inc. in Columbus,
Ohio.
The Company's use of debt to finance its growth has resulted in significant
increases in interest expense over the past three years. In light of the
Company's debt service obligations, as well as the labor intensive nature of its
business, the Company has historically operated with a working capital deficit.
COMPETITION AND MARKETING
The Company competes in international, national, regional and local markets
with specialized contract service providers, outsourcing companies, and its
clients' and potential clients' internal service staffs. While substantial
consolidation is occurring in the Company's markets, portions of these markets
remain extremely competitive and highly fragmented, with limited barriers to
entry. Industry participants compete mainly on the basis of price, as well as
the quality of service provided, their ability to provide national and
international services, and the range of services offered. ITS believes its
primary competitive advantage is its low administrative overhead, which enables
it to offer competitive costs for large contracts. The Company has been
successful in minimizing its workers' compensation and liability insurance costs
and in leveraging its administrative base to add new contracts with minimal
increase in overhead cost. In addition, ITS believes that it offers a broader
range of services than its competitors.
Airline Security Services. Contracts for predeparture screening services
tend to be highly competitive among a handful of experienced providers and are
generally awarded to the low-cost provider. At the same time, the airlines are
sensitive about security lapses and may cancel a contract based on even minor
security breaches. While ITS believes it has an advantage because of its size
and overhead in underbidding other companies, the Company faces the same
challenge as its competitors in providing consistent service at the minimum wage
rates offered by the airlines for screeners. The Company's principal competitors
in domestic predeparture screening include Globe Aviation Securities
Corporation, AHL Services, Inc. and Huntleigh, Inc.
In the international security arena, where training and service generally
are more important, the Company strives to distinguish itself by developing
training programs and screening methods that meet the demands of its customers.
The Company's passenger profilers are trained in questioning techniques that are
designed to elicit cooperation and to avoid offense to innocent travelers. In
addition, because the Company's method of profiling is less intrusive than other
security methods, ITS considers it to be more cost-effective and
passenger-friendly than other systems. Currently, the Company has a small number
of contracts to provide these services in Europe and Asia. The Company's main
competitors for international profiling and screening services are Aviation
Defense International, Inc., ICTS International, N.V., AHL Services, Inc. and
International Aviation Security, Inc.
Ramp and Ground Handling Services. Airlines have found it cost effective
to outsource ramp and ground handling functions because they often require an
investment in hard equipment, which can be expensive for carriers with few
flights. ITS has taken advantage of the opportunity to offer a package of new or
refurbished equipment, maintenance and the required manpower, all for a per-hour
labor charge. In addition, ITS considers potential revenue gains from ground
handling and passenger business when negotiating new security business, and is
sometimes able to package combinations of services to clients at a lower overall
cost than it could offer for one type of service alone. The Company has
typically offered ground handling or passenger services as "add on" services to
its screening business. It also offers these services on a stand-alone
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basis at certain locations. In this area, the Company competes with the
airlines, Signature Flight Support Services, AMR Services, Ogden Allied Support
Services, Hudson General, and Service Master Co.
ITS has sought to increase the volume of its cleaning business by focusing
on providing fast, reliable service. The Company conducts an Aircraft Appearance
and Facility Audit Program through which it continually monitors its own
performance. Under this program, ITS supervisors and managers conduct a pre-
determined number of audits based on the number of planes serviced for a
particular client. The Company provides the results of the audit to the client
regularly, emphasizing areas requiring improvement. ITS believes that its
clients appreciate the continuous and honest feedback the audit program provides
and that this approach enables the Company to correct problems that might not
otherwise come to its attention until the client became dissatisfied. The
Company believes, based on discussions with its customers, that it is the only
cleaning service provider that has such a program. The Company's competitors in
aircraft cleaning are the airlines, Signature Flight Support Services, AMR
Services, Ogden Allied Support Services, Hudson General, and Service Master Co.
Passenger Services. Unlike predeparture screening services, customer
service is as important as cost in the awarding of domestic passenger service
contracts. Because passenger service providers such as skycaps, wheelchair
operators and cart drivers have a high level of interaction with passengers, ITS
has developed specialized training programs that emphasize customer service and
empathy. In 1996, the Company was awarded a contract to provide Continental
Airlines, Inc. skycaps nationwide. The Company's main competitors for passenger
services include the airlines, AHL, Globe Aviation Securities Corporation, and
Huntleigh, Inc.
Commercial Security. The commercial security field is highly fragmented.
There are as many as 160,000 separate providers of commercial and industrial
security services, and the Company does not believe that any participant has a
significant share of the market. While ITS has made only minor inroads into this
market, the Company's competitive strength in this area comes from its low
overhead costs and its ability to assimilate acquired commercial security
businesses into its existing administrative structure. In the commercial
security field, the major providers include Borg-Warner Security Corporation,
Guardsmark, Inc. and The Wackenhut Corporation.
MANAGEMENT AND REPORTING SYSTEMS
ITS is headquartered in Cleveland, Ohio and conducts its domestic
operations through an Eastern, a Central and a Western division. International
operations are conducted through the International Division. Each domestic
division has a President, who reports to the Company's Chief Operating Officer,
and a Controller. Each division has two or more district offices. Each district
has two or more recruiters and trainers who are responsible for ensuring that
the Company has adequate personnel to staff service contracts in that district.
The district managers report to their respective division presidents. Each
service site has a manager who reports to the applicable district manager.
All payroll and billing information is entered at the service sites and
transmitted to the Company's headquarters. Headquarters administrative personnel
verify the information, issue all client invoices for services, and authorize
the issuance of payroll checks from the division offices. The Company believes
that its payroll system facilitates on-time personnel payment and Company
control over unwarranted overtime costs.
The large number and geographic dispersion of the Company's employees, and
the volume of the Company's business that is documented on a chargeable hours
basis, create substantial administrative burdens. The Company believes that its
IBM mainframe computer system, implemented in February 1990 and upgraded in June
1993, enables it to manage efficiently its current and reasonably foreseeable
administrative requirements. The Company uses the system to, among other things,
monitor all company finance functions, audit training records, manage and
monitor payroll and billing, report on field irregularities, maintain
accountability of weapons detection, and manage client database information.
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WORKFORCE MANAGEMENT
As of June 30, 1997, the Company had approximately 12,600 full and
part-time employees engaged in performing its client services. The Company's
services are characterized by task-repetitive, low wage functions, and the
Company, like its competitors, experiences high turnover and incurs substantial
hiring and training costs estimated at approximately $111 per employee. The
Company experiences annual turnover of approximately 100%, and believes that
maximizing employee retention is important to reducing operating costs and
providing high quality service to its clients. Accordingly, the Company places
significant emphasis on motivating its employees and reducing turnover. In
January 1997, the Company instituted an employee medical benefit plan, which
provides medical benefits to eligible employees with minimal employee
contribution. In addition, the Company grants various bonuses and awards to
exceptional employees, in part to further enhance retention.
Because employee turnover is inherent in the nature of its business, ITS
allocates significant resources to recruiting potential employees. Each
applicant must complete an interview and a written application that includes
inquiry concerning prior criminal convictions. In addition, FAA regulations
require that each applicant provide proof of citizenship or resident alien
status, and each applicant is subject to a five- or ten-year background
verification, depending upon the position, and a pre-employment drug screen. For
persons with unescorted access to secured areas, a criminal background
verification procedure, which is conducted by the Federal Bureau of
Investigation, is triggered by any 12-month gap in employment history that can
not be explained through independent verification. The Company's policy is not
to hire applicants whose criminal background verification checks reveal prior
criminal convictions. The Company believes that it operates its business in
substantial compliance with applicable FAA regulatory requirements, including
those relating to background verification.
The Company has experienced control-related problems at various locations
involving employees' compliance with regulatory requirements. Some of these
incidents have had a material adverse effect on customer relationships and have
led to the termination of client contracts. Because of the nature of the
Company's business, there can be no assurance that control-related problems will
not arise in the future.
Approximately 380 skycap employees at Newark International Airport, 65
predeparture screeners at Logan International Airport in Boston and 55
predeparture screeners in Anchorage, Alaska are covered by collective bargaining
agreements. Each of these agreements was assumed by the Company in connection
with an acquisition of a contract previously held by another vendor. In fiscal
1996, unions initiated three efforts to organize Company employees in various
locations, each of which failed. The Company considers its relations with its
employees to be good.
CUSTOMERS AND CONTRACT TERMS
The Company derives a significant portion of its revenues from a few
clients. In fiscal 1996, Continental Airlines, Inc. (18.9%), United Air Lines,
Inc. (11.8%), Delta Air Lines, Inc. (7.0%), Southwest Airlines Co. (6.7%), U.S.
Airways, Inc. (6.5%) and Trans World Airlines, Inc. (5.3%) accounted for 56.2%
of the Company's revenues. During fiscal 1996, 1995 and 1994, the Company's ten
largest clients accounted for an aggregate of 68.6%, 79.9%, and 78.5%,
respectively, of the Company's revenues.
While the Company believes that relations with its customers are generally
satisfactory, it believes that relations with certain major airlines are
unsatisfactory. Over the past two fiscal years, the Company has lost contracts
to provide screening services at a number of major airports, including Los
Angeles, San Francisco, Phoenix, Minneapolis, Detroit, Boston and Ontario,
California, because of customer dissatisfaction with the Company's services at
these locations. The Company believes that the factors contributing to the lost
contracts varied from location to location, and included problems with
responsiveness and the quality of local management, as well as security breaches
at several of the Company's predeparture screening checkpoints. Most of the
contracts lost by the Company were controlled by two airline customers who
together represented approximately 16.7%, 23.7% and 23.2% of the Company's
revenues in 1996, 1995 and 1994, respectively. The lost contracts accounted for
an aggregate of $232,000 in pre-tax earnings. The Company recognizes the need to
improve its relationships with these customers, and is making efforts to
accomplish this objective. These efforts include the addition of a new Chief
Operating Officer with established relationships with several major
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airlines and efforts to improve the quality of local and district management
personnel. The Company continues to provide services, including, in some cases,
screening services, at each of these locations.
The services provided by the Company require it to train and manage
effectively low wage workforces with high turnover rates. From time to time, the
Company has failed to meet test standards or a client's service expectations at
a particular location, and, like its competitors, has had contracts terminated
because of customer dissatisfaction with various aspects of its performance. The
Company's predeparture screening services are tested daily at numerous
locations, both internally and by the FAA, to determine the Company's ability to
detect weapons passing through checkpoints. The FAA conducted 938 weapons
detection tests at the Company's checkpoints during the period July 1996 through
June 1997. The Company passed 881, or approximately 94%, of those tests. Failure
to pass FAA tests may result in fines to the airline responsible for the
checkpoint, which the Company reimburses pursuant to its contracts in amounts up
to $10,000 per test failure. These reimbursements have not had a material impact
on the Company.
The risk of contract termination as a result of actual or perceived service
failures is enhanced by the substantial publicity that, because of public
concern over airline security issues, often attends errors in the provision of
screening services. Failure to meet test or other performance standards may
result in fines, or the loss of a contract or service location or the Company's
license to perform services, and any such loss could have a material adverse
effect on the Company's reputation, business, results of operations and
financial condition. The Company does not believe that any test failure, or
series of test failures, without other performance deficiences, has resulted in
the loss of a contract or service location.
The Company's contracts with clients, including those that it obtains
through acquisitions, generally have one to three year terms but are cancelable
by either party on 30 to 90 days notice. The Company invoices its aviation
services clients weekly or biweekly. The Company invoices its commercial
security clients weekly, which is typical in that field.
The Company's contracts with airlines typically provide that the Company
will indemnify the client against claims for property damage, or death of or
personal injury to any person, arising out of the negligent acts or omissions of
ITS, unless the claim results from a negligent act of the client. In addition,
these contracts provide that the Company will pay FAA fines of up to $10,000 per
incident if it is responsible for the actions that give rise to the fine.
LEGAL PROCEEDINGS
Because the Company's employees function in public facilities and in the
workplaces of other businesses, the Company is exposed to possible claims by its
clients' customers and employees of discrimination, harassment and negligence,
and similar claims. The Company is subject to liability for the acts or
negligence of its employees while on assignment that cause personal injury or
damages, and to claims of misuse of client proprietary information or theft of
client property. As a provider of security services, the Company faces potential
liability for claims that may arise from any terrorist activity occurring in
circumstances associated with the Company. Although the Company maintains
insurance coverage against such potential liabilities, any such claim against
the Company might exceed the amount of such insurance coverage or fall outside
the type of activities covered by such insurance.
In May 1997, a United States District Court in Philadelphia, Pennsylvania,
rendered a judgment in the amount of $900,000 against the Company in connection
with an employment discrimination lawsuit. The Company believes that it has
accrued adequate reserves to cover the judgment and plans to contest the
judgment on appeal. The Company has moved for a judgment notwithstanding the
verdict and for a new trial. The court has not acted on these motions.
On December 2, 1996, the United States Equal Employment Opportunity
Commission (the "EEOC") filed suit against the Company in the United States
District Court for the Southern District of Indiana on behalf of two named
plaintiffs and a class of similarly situated female employees of the Company.
The EEOC's complaint alleges that the Company engaged in sexual harassment of
the plaintiffs in violation of federal law. The EEOC seeks to force the Company
to refrain from the alleged sexual harassment in the future, and to compensate
the plaintiffs for pecuniary and nonpecuniary losses claimed to have resulted
from the alleged harassment. The Company's potential liability is limited by
federal statute to $300,000, plus
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punitive damages in unspecified amounts if the Company is found to have engaged
in intentionally discriminatory conduct. The Company plans to contest the suit
vigorously.
The Company is also involved in various legal proceedings, including
routine civil actions instituted by the FAA with respect to test failures,
background check and recordkeeping matters, that arise in the ordinary course of
its business. The Company does not believe that the ultimate outcome of these
proceedings will have a material adverse effect on the Company's business,
assets, financial condition or results of operations.
GOVERNMENT REGULATION
Certain of the Company's clients are subject to various regulations and
directives issued by the FAA. Under current regulations, independent
contractors, such as the Company, that perform services for air carriers and
airport authorities share responsibility for aviation security with air
carriers, airport authorities, the FAA and various other federal, state and
local agencies. At airports throughout the United States, the FAA tests security
systems and conducts threat and vulnerability assessments. Through the use of
its regulatory powers, the FAA directs the aviation industry to implement
measures that address existing and anticipated threat situations.
FAA regulations require each air carrier and airport authority to implement
an FAA-approved security program. Airport authorities are responsible for
maintaining a secure environment on airport grounds and for providing law
enforcement support and training. Air carriers are responsible for the security
of all people and items connected to their aircraft, including passengers,
baggage, and maintenance and flight crews. The FAA has promulgated regulations
requiring air carriers to conduct predeparture screening of all passengers and
property that will be carried in an aircraft cabin. These regulations also
provide basic standards for the screeners, and equipment and procedures to be
used in predeparture screening activities. FAA regulations also mandate
pre-employment background checks of persons hired to serve as screeners.
Although an air carrier is permitted to outsource its screening function, FAA
regulations require the air carrier to provide oversight in order to assure that
all requirements are met. For example, FAA regulations require an air carrier's
ground security coordinator to review security-related functions and initiate
corrective action for noncompliance, and to conduct an annual evaluation of each
person assigned screening duties. In addition to the oversight responsibilities
imposed on air carriers, the FAA itself regularly conducts tests of predeparture
screening checkpoints at U.S. airports. Failure to meet requirements imposed by
the FAA or the air carrier or the failure of various tests administered by the
FAA can result in fines and other penalties to the responsible air carrier,
which are in turn passed on to the screening company under the terms of the
contract between the provider and the carrier. Regulatory compliance problems
and test failures may also result in the termination of a security contract or
of services at the affected site.
Historically, entities providing predeparture screening services have not
been subject to certification or direct regulation by the FAA. However, recent
events, including the April 1995 bombing of the Alfred P. Murrah Federal
Building in Oklahoma City and the explosion of TWA Flight 800 in July 1996, have
focused intense governmental scrutiny on issues relating to the deterrence of
domestic terrorism and aviation security. As a result, at least three separate
governmental authorities have recommended changes in laws relating to aviation
security and have authorized studies of new regulations designed to increase
airport safety. These governmental initiatives have focused on, among other
things, the need for standards to apply to providers of predeparture screening
services.
The first new mandates resulting from this increased focus were issued in
October 1996, when the United States Congress approved the Federal Aviation
Reauthorization Act of 1996 (the "1996 Act"). Among the directives in the 1996
Act are requirements that airlines and airports periodically assess their
security systems, that background checks be conducted for all predeparture
screeners and other employees associated with baggage or cargo, and that the FAA
"certify" companies that provide predeparture screening services. The 1996 Act
also directed the FAA and the United States Department of Transportation to
assist airlines in developing computer-assisted and other appropriate passenger
profiling programs, authorized a study of the practicality of transferring
security responsibilities from airlines to airports or to the government, and
granted funds to the National Academy of Sciences for a study of systems to
detect weapons and explosives. Other
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areas being investigated by Congress include the feasibility of requiring a
match of all checked bags with a boarded passenger and increased inspection of
air cargo.
The White House Commission on Aviation Safety and Security (the "Gore
Commission"), which was formed following the explosion of TWA Flight 800,
included the heads of various federal agencies and was charged with making
recommendations on how a partnership between the U.S. government and industry
participants can achieve improved aviation security. The Gore Commission issued
its final report on February 12, 1997, and recommended: (i) development of
uniform performance standards for selection, training and certification of
predeparture screening companies; (ii) implementation of procedures for matching
of passengers and checked baggage on a nationwide basis no later than December
31, 1997; (iii) the continued development and implementation of an automated
passenger profiling system; and (iv) utilization of U.S. Customs Service
personnel and computer systems to complement the efforts of the FAA and other
federal agencies. The FAA has initiated rulemaking procedures that would
implement certain of these recommendations.
The Aviation Security Advisory Committee ("ASAC"), a committee of
government and industry participants, was formed following the crash of Pan Am
flight 103 in 1989 and is charged with coordinating the flow of aviation
security information and countermeasures within the United States. In July 1996,
ASAC began an effort to strengthen the domestic aviation security "baseline" and
formed a working group to recommend specific measures. In its report issued on
December 12, 1996, ASAC recommended that no change be made in the current
structure or assignment of responsibilities for aviation security. ASAC did
recommend, however, that the FAA initiate rulemaking procedures for
"certification" of security contractors and made numerous recommendations with
respect to specific aviation security measures, which are generally consistent
with those proposed by the Gore Commission.
Subsequent to the issuance of the Gore Commission and ASAC recommendations,
the FAA issued an Advanced Notice of Proposed Rulemaking (the "APRM") relating
to the certification directive contained in the 1996 Act. In the APRM, the FAA
solicited public comment on a number of issues relating to the certification of
companies providing predeparture screening services. Issues upon which comment
was solicited include the information to be collected by an air carrier prior to
contracting with a screening company, the nature and scope of air carriers'
oversight responsibilities for screening companies, methods for evaluating
screener performance and improving screener training, the qualification of
screening companies and the appropriate nature of the certification process and
the constraints that should be imposed on new screening companies. The comment
period associated with the APRM expired on May 1, 1997. To date, the FAA has not
promulgated any proposed rules concerning the implementation of the 1996 Act's
certification directive, and the Company is unable to predict the nature and
extent of such regulations or their potential impact on the Company's business.
In addition to the certification directive contained in the 1996 Act,
executives of certain major air carriers have proposed the transfer of security
responsibilities from third party contractors to a nationwide nonprofit security
corporation, funded by the air carriers. Any shift in responsibility for
aviation security to such an entity or to the government could have a material
adverse effect on the Company's results of operations and financial condition.
Risk analysis through profiling has been utilized in various forms by U.S.
carriers since 1986. In 1995, the FAA mandated that all U.S. carriers adopt a
uniform methodology of risk analysis through profiling at their "high-risk"
stations. In April 1996, the United States enacted a new anti-terrorism law,
which, among other things, mandates that foreign air carriers flying to and from
airports in the United States use security measures identical to those required
of U.S. airlines serving the same airports. In July 1996, as an initial response
to the explosion of TWA Flight 800, the FAA issued a "security directive"
applicable to all international flights originating from the United States,
which requires the implementation of certain passenger and cargo classifications
similar to some of the profiling procedures included in the Company's profiling
method.
The Company's aviation and commercial security services are subject to
regulation by various state and local authorities. The Company is also required
to obtain and maintain various licenses and permits from state and local
authorities to provide aviation and commercial security services, as well as
certain other services.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Board of Directors of the Company currently consists of two members,
Robert A. Weitzel and his spouse. The Company will expand the Board of
Directors, on or prior to completion of the Offering, to five persons, including
three independent Directors. Directors will be elected at each annual meeting of
shareholders and will serve until their successors are duly elected and
qualified.
The Company's Articles of Incorporation provide that the Board of Directors
must consist of a majority of Independent Directors. (An "Independent Director"
is a person who is (i) independent of management of the Company, (ii) not
employed by or an officer of the Company, (iii) not an "affiliate" (as defined
in Rule 405 under the Securities Act) of the Company or any subsidiary of the
Company, and (iv) not a person who acts on a regular basis as an individual or
representative of an organization serving as a professional advisor, legal
counsel or consultant to management if, in the opinion of the Board of
Directors, the relationship is material to the Company, that person, or the
organization represented.) In the event of the resignation or removal of an
Independent Director, the resulting vacancy will be filled by the remaining
Independent Directors.
Executive officers of the Company are elected and serve at the discretion
of the Board of Directors until their successors are duly chosen and qualified.
The following table sets forth certain information concerning the
individuals who will be directors and officers of the Company on the completion
of the Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- ----------------------------------------------------
<S> <C> <C>
Robert A. Weitzel.................. 62 Director and Chief Executive Officer
James O. Singer.................... 53 Director, President and Chief Operating Officer
Robert A. Swartz................... 34 Vice President and Chief Financial Officer
Scott E. Brewer.................... 35 Vice President and General Counsel
Daniel J. Richards................. 39 Eastern Division President
Stephen Metzler.................... 39 Central Division President
Gene Empey......................... 53 Western Division President
Dillard Woodson.................... 49 International Division President
Lee C. Howley...................... 49 Proposed Director
Ivan J. Winfield................... 62 Proposed Director
Jerry V. Jarrett................... 66 Proposed Director
</TABLE>
The following is a biographical summary of the business experience of the
current and proposed directors and officers of the Company.
Robert A. Weitzel, a Director since 1987, is the Chief Executive Officer of
the Company. He has served as the Chief Executive Officer of the Company since
1987 and was President from 1987 to April 1997. He served as Senior Vice
President from 1982 to 1987 and Vice President from 1978 to 1982.
James O. Singer, a Director since June 1997, has been President and Chief
Operating Officer since joining the Company in April 1997. Mr. Singer was
employed by AMR Services Corporation, an aviation services company, as
President-Airline Services Division from May 1989 to June 1995. From 1995 until
April 1997, Mr. Singer worked as a consultant in the aviation industry.
Robert A. Swartz is the Vice President and Chief Financial Officer of the
Company. He has served in this capacity since October 1995. From April 1989 to
October 1995, he was Chief Financial Officer for ASM International, a service
company. From August 1987 to April 1989, he was a senior auditor with Grant
Thornton LLP.
35
<PAGE> 37
Scott E. Brewer is the Vice President and General Counsel of the Company.
He has served as Vice President since April 1995 and General Counsel since
September 1993. Mr. Brewer was in the private practice of law from October 1988
to August 1993.
Daniel J. Richards is the Eastern Division President of the Company. He has
served in this position since December 1996. From March 1994 to December 1996 he
was Director Ground Handling/Director Field Operations for American
International Freight, an air cargo service company. He served as a Field
Service Supervisor for Airborne Express, an air cargo service company, from
January 1993 to March 1994. He served as Vice President of Operations for
Evergreen Aviation, an air cargo service company, from June 1991 to December
1992.
Stephen Metzler is the Central Division President of the Company. He has
served in this capacity since April 1996. He served as Vice President Eastern
Division from May 1995 to April 1996 and District Manager from May 1994 to May
1995. He served as Aircraft Appearance Manager from December 1991 to May 1994.
Gene Empey is the Western Division President of the Company. He has served
in this capacity since December 1988.
Dillard Woodson is the International Division President of the Company. He
has served in this capacity since February 1997. He served as the Vice President
of Systems and Training from February 1996 to February 1997. He served as the
Technical Management Consultant to CSA Airlines in Prague from January 1994 to
February 1996. He served as the General Manager for Liberia for Intercon
Security Ltd., a commercial security company, from April 1993 to June 1993. Mr.
Woodson was an artillery officer in the United States Marine Corps from 1968 to
June 1993.
Ivan Winfield is currently Associate Professor and Chairholder of the
Herzog Chair in Free Enterprise at Baldwin Wallace College, in Berea, Ohio. Mr.
Winfield retired in 1994 from Coopers & Lybrand, L.L.P. From 1978 to 1990 he was
managing partner of the firm's Oklahoma practice and from 1990 to 1994 he was
managing partner of the firm's Northeast Ohio practice. Mr. Winfield is a
Trustee of The Fairport Funds and is Chairman of its audit committee. Mr.
Winfield is also a Director of HMI Industries, Inc. and is Chairman of its
finance committee. Mr. Winfield also serves as a Director of Boykin Lodging
Company, a publicly held real estate investment trust.
Lee C. Howley, Jr. has been the sole owner and president of Howley &
Company, a real estate brokerage and development company, since 1981, and has
been the sole owner and Chairman of Coast Management Company, a cleaning and
real estate management company, since 1987. Since January 1992 Mr. Howley has
served as the Chairman of the Convention and Visitors Bureau of Greater
Cleveland. Mr. Howley serves on the Boards of Directors of LESCO, Inc., a
publicly held manufacturer and supplier of lawn care products, and Boykin
Lodging Company.
Jerry V. Jarrett joined Ameritrust Company National Association, a national
banking association, in 1974, and served as its Chairman and Chief Executive
Officer from 1983 until 1990. Mr. Jarrett serves as a director of Forest City
Enterprises Inc., a real estate leasing company, and United Way International.
He is a member of the Distribution Committee of the Cleveland Foundation and
Treasurer of The Musical Arts Association (The Cleveland Orchestra). Mr. Jarrett
is also a trustee of The Cleveland Clinic Foundation and of The Greater
Cleveland Advisory Board of the Salvation Army, of which he is past Chairman.
COMMITTEES
In connection with the Offering, the Board will establish an Audit
Committee and a Compensation Committee. Messrs. Winfield, Howley and Jarrett
will serve as the members of both committees.
The Audit Committee will have responsibility for reviewing and making
recommendations regarding the Company's employment of independent accountants,
the annual audit of the Company's financial statements and the Company's
internal controls, accounting practices and policies. The Compensation Committee
will be responsible for determining the nature and amount of compensation of the
executive officers of the Company and administering the Company's employee
benefit plans.
36
<PAGE> 38
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Ohio Revised Code provides that a director may be held liable in
damages for his act or omission as a director only if it is proved by clear and
convincing evidence that he undertook the act or omission with deliberate intent
to cause injury to the corporation or with reckless disregard for its best
interest. This limitation of director liability does not apply to transactions
between directors and the corporation or to the unlawful payment of dividends,
distribution of assets to shareholders or making of loans to officers or
directors. Further, this limitation does not apply to any liability of a
director arising under the federal securities laws.
The Ohio Revised Code authorizes Ohio corporations to indemnify officers
and directors from liability if the officer or director acted in good faith and
in a manner reasonably believed by the officer or director to be in or not
opposed to the best interest of the corporation, and, with respect to any
criminal actions, if the officer or director has no reason to believe his action
was unlawful. In the case of an action by or on behalf of corporation,
indemnification may not be made (i) if the person seeking indemnification is
adjudged liable for negligence or misconduct, unless the court in which such
action was brought determines such person is fairly and reasonably entitled to
indemnification or (ii) if liability asserted against such person concerns
certain unlawful distributions. The indemnification provisions of the Ohio Code
require indemnification if a director or officer has been successful on the
merits or otherwise in defense of any action, suit or proceeding that he was a
party to by reason of the fact that he is or was a director or officer of the
corporation. The indemnification authorized under Ohio law is not exclusive and
is in addition to any other rights granted to officers and directors under the
articles of incorporation or code of regulations of the corporation or any
agreement between officers and directors and the corporation. A corporation may
purchase and maintain insurance or furnish similar protection on behalf of any
officer or director against any liability asserted against him and incurred by
him in his capacity, or arising out of the status, as an officer or director,
whether or not the corporation would have the power to indemnify him against
such liability under the Ohio Code.
The Company's Code of Regulations provides for the indemnification of a
director or officer of the Company to the maximum extent permitted by Ohio law
as authorized by the Board of Directors of the Company, and for the advancement
of expenses incurred in connection with the defense of any action, suit or
proceeding to which he was a party by reason of the fact that he is or was a
director or officer of the Company upon the receipt of an undertaking to repay
such amount unless it is ultimately determined that he is entitled to
indemnification.
The Company is seeking an insurance policy that will provide coverage in
the amount of $5,000,000 for the officers and directors of the Company against
claims arising out of alleged wrongful acts by such persons in their respective
capacities as officers and directors of the Company.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth information
regarding the compensation of the Chief Executive Officer and certain
individuals serving as executive officers during the last fiscal year
37
<PAGE> 39
(collectively, the "Named Executive Officers"), for services rendered in all
capacities to the Company during fiscal 1996.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION FY(1) SALARY($) BONUS($) COMPENSATION($)(2) COMPENSATION($)(3)
- ----------------------------------- ---- -------- -------- ------------------ ------------------
<S> <C> <C> <C> <C> <C>
Robert A. Weitzel.................. 1996 $312,250 $200,244 $447
President and Chief Executive
Officer(4)
Robert A. Swartz................... 1996 $ 67,600 $ 38,848 $159,142(5)
Vice President and Chief
Financial Officer
Scott Dennison(6).................. 1996 $ 68,658 $ 48,137
President, Crown Technical
Services
Scott Brewer....................... 1996 $ 50,000 $ 38,239 $ 43,402(5)
Vice President and General
Counsel
Steven Metzler..................... 1996 $ 69,999 $ 28,895 $216
Central Division President
Gene Empey......................... 1996 $ 82,515 $ 11,562
Western Division President
</TABLE>
- ---------------
(1) Includes compensation earned, awarded or paid for the fiscal year ended
March 31, 1997.
(2) No Named Executive Officer received perquisites or other personal benefits
in excess of the lesser of $50,000 or 10% of such individual's salary plus
annual bonus.
(3) Represents amounts contributed by the Company to the Company's 401(k) Plan,
as matching contributions relating to before-tax contributions made by such
individual.
(4) Effective October 1, 1997, Mr. Weitzel's annual salary will be reduced to
$300,000. Mr. Weitzel will also be entitled to a $100,000 bonus, payable
within 90 days after the end of fiscal 1997, if the Company achieves its
budgeted net income for fiscal 1997.
(5) Amounts reported under the caption "Other Annual Compensation" reflect the
cash value of Common Shares awarded to the Named Executive Officers on
November 1, 1996 as determined by an independent appraisal. The Common
Shares awarded to such persons are subject to shareholder agreements, to
which the Company is a party. See "-- Shareholder Agreements."
(6) Mr. Dennison resigned from the Company in February 1997.
There were no options outstanding or granted in fiscal 1996.
EMPLOYMENT CONTRACTS
Robert A. Weitzel, James O. Singer, Robert A. Swartz and Scott E. Brewer
have entered into employment contracts with the Company. Mr. Weitzel's agreement
provides for an initial term expiring December 31, 2000, which is automatically
extended for an additional calendar year at the end of each
calendar year of the agreement, subject to the right of either party to
terminate the agreement by giving six months' prior written notice. The
agreement for Mr. Singer provides that he is responsible for the day-to-day
operations of the Company. The agreement also provides for an initial term
expiring December 31, 1999, which is automatically extended for an additional
calendar year at the end of each calendar year of the agreement, subject to the
right of either party to terminate the agreement by giving six months' prior
written notice. The agreements for Messrs. Swartz and Brewer provide for an
initial term expiring December 31, 1999, which is automatically extended for an
additional calendar year at the end of each calendar year of the agreement,
subject to the right of either party to terminate the agreement by giving six
months' prior written notice.
Mr. Weitzel will also be entitled to annual base compensation of $300,000,
and a bonus of up to $100,000 if the Company achieves its budgeted net income
for fiscal 1997. Mr. Singer will receive a salary of $150,000 and a bonus of
$12,500 for each quarter in which the Company achieves its quarterly operating
budget goals and a bonus of $12,500 for each quarter in which the Company
achieves a 15% annualized internal sales
38
<PAGE> 40
growth rate. Mr. Swartz will receive a salary of $71,500 and a bonus of 0.75% of
monthly operating income for each month in which the Company achieves its
monthly operating budget goals. Mr. Brewer will receive a salary of $50,000 and
a bonus on the same basis as Mr. Swartz. Messrs. Weitzel, Singer, Swartz and
Brewer will also be granted an aggregate of 200,262 options to purchase Common
Shares in connection with the Offering. See "Long Term Incentive Plan."
Each agreement provides that the employee will not compete with the Company
in the aviation services or commercial security business during his employment
or at any time during a period of up to two years immediately following the
termination of his employment. Further, each agreement provides that upon the
termination of the employee's employment (i) by the Company other than for
"cause" (as defined in the employment contracts) or by the employee for certain
actions of the Company, such as effecting a material adverse change in the
employee's duties and responsibilities, or (ii) by the employee on a "change of
control" of the Company (as defined in the employment contracts), the employee
will be entitled to all of the compensation and benefits payable to him under
the employment contract for the remainder of the stated term of the agreement.
SHAREHOLDER AGREEMENTS
Robert A. Swartz, Scott E. Brewer and Gene Empey have each entered into a
Shareholder Agreement with the Company (each a "Shareholder Agreement"). Each
Shareholder Agreement provides certain rights of first refusal to the Company
and the other shareholders of the Company to purchase any Common Shares proposed
to be transferred by the shareholder, at a price equal to the lesser of (i) the
price proposed to be paid by the transferee or (ii) a price determined on an
annual basis by the Company and the Company's majority shareholder (which price
will not exceed the net book value of the Common Shares) (the "Agreement
Price"). In addition, each Shareholder Agreement provides that, upon the death
of the shareholder or the termination of his employment, the Company will
purchase all of the Common Shares owned by him at the Agreement Price. Each
Shareholder Agreement also gives the Company the right to purchase, at its
election, all of the Common Shares at the Agreement Price if the Company
Division for which the shareholder is responsible fails to achieve budgeted
levels of profitability, and gives the other shareholders an option to purchase
the Common Shares at the Agreement Price in the event of the disability of the
shareholder. The Shareholder Agreements will be terminated on the closing of the
Offering.
COMPENSATION COMMITTEE INTERLOCKS
The Company does not currently have a board committee performing the
function of a compensation committee. Mr. Weitzel made decisions with regard to
the compensation of the Company's executive officers for fiscal 1996. After the
consummation of the Offering, the Board of Directors will create a Compensation
Committee consisting of the Independent Directors. See "Certain Transactions"
for information concerning transactions between the Company and Mr. Weitzel.
COMPENSATION OF DIRECTORS
The Company intends to pay its Independent Directors an annual fee of
$12,000 and a fee of $1,000 for each directors' meeting and each committee
meeting attended. Each director may elect to receive his compensation in the
form of grants of Common Shares. No other directors will receive directors'
fees. Upon completion of the Offering, each Independent Director will receive an
option for 5,000 Common Shares exercisable at the initial public offering price
of the Common Shares, which option will vest fully within the first two years of
issuance and will have a term of ten years.
DIRECTORS' DEFERRED COMPENSATION PLAN
The purpose of the Company's Directors' Deferred Compensation Plan (the
"Deferred Plan") is to assist it in attracting and retaining persons of
competence and stature to serve as outside directors by giving them the option
to defer receipt of the fees payable to them by the Company for their services
as directors. A director is eligible to participate in the Deferred Plan if he
or she receives fees for services as a director and is not employed by the
Company. The Deferred Plan is administered by Company officers and directors who
are
39
<PAGE> 41
(i) appointed by the Board of Directors of the Company and (ii) not eligible to
participate in the Deferred Plan. The Deferred Plan is applicable to all
director's fees payable with respect to periods commencing on or after the
consummation of the Offering. The value of amounts credited to a director in the
Deferred Plan increases or decreases based on the market value of the Company's
Common Shares plus the value of dividends or other distributions on the
Company's Common Shares. Distribution of amounts credited to a director in the
Deferred Plan commences (i) on a date elected by the director, so long as that
the date is not earlier than the January 1 following the year in which the
director attains age 72, or (ii) within ninety (90) days after the date of the
director's death or disability.
LONG TERM INCENTIVE PLAN
The purpose of the Company's Long Term Incentive Plan (the "Plan") is to
promote the long-term growth and profitability of the Company by enabling it to
attract, retain and reward key employees of the Company and its affiliates and
to strengthen the mutuality of interest between such key employees and the
Company's shareholders. Grants of incentive or nonqualified share options,
restricted shares, deferred shares, share purchase rights, share appreciation
rights in tandem with options ("SARs"), other share-based awards, or any
combination thereof, may be made under the Plan. Officers and key employees who
are responsible for or contribute to the management, growth or profitability of
the business of the Company and its affiliates are eligible for grants and
awards under the Plan. The Compensation Committee will administer the Plan and
determine the type, amount and timing of grants and awards. The members of the
Compensation Committee are not eligible to participate in the Plan. The Company
has reserved 267,015 Common Shares for issuance under the Plan. No Participant
in the Plan may be granted share options or other share awards in any calendar
year for more than 100,000 shares. Upon the Closing, Messrs. Weitzel, Singer,
Swartz and Brewer will be granted options to purchase, at the initial public
offering price, 66,760, 33,362, 50,070, and 50,070 shares, respectively, under
the Plan. The options will vest in varying periods from four to eight years. The
share limitations, shares reserved and the terms of outstanding awards will be
adjusted, as the Compensation Committee deems appropriate, in the event of a
share dividend, split or other change in the corporate structure of the Company
affecting the shares.
Share Options and Tandem SARs. The term of each option granted under the
Plan will not exceed 10 years from the date of grant, and the exercise price of
share options may not be less than 100% of the fair market value (as defined in
the Plan) of the shares on the date the option is granted. The Compensation
Committee may grant tandem SARs to any person granted an option under the Plan.
Each tandem SAR will represent the right to receive, in cash or shares as the
Compensation Committee determines, a distribution in an amount equal to the
excess of the fair market value of the option shares (to which the SAR
corresponds) on the date of exercise over the exercise price for those shares.
Each tandem SAR expires at the same time as its corresponding option. The
exercise of an option will result in an immediate forfeiture of its
corresponding SAR, and the exercise of an SAR will cause an immediate forfeiture
of its corresponding option. The Plan provides that all options and tandem SARs
will vest on a change in control (as defined in the Plan) of the Company.
Share Awards. The Compensation Committee may award Common Shares under the
Plan and may place restrictions on the transfer or defer the date of receipt of
those shares. Each award will specify any applicable restrictions or deferral
date, the duration of those restrictions, and the time at which the restrictions
lapse. Participants will be required to deposit shares with the Company during
the period of any restrictions. The Compensation Committee may also grant share
purchase rights for which the purchase price may not be less than 100% of the
fair market value (as defined in the Plan) on the date of grant.
Other Share-Based Awards. The Compensation Committee may grant other
awards of shares and other awards that are valued or otherwise based on the
Company's Common Shares.
Miscellaneous. The Plan provides for vesting, exercise or forfeiture of
rights granted under the Plan on retirement, death, disability, termination of
employment or a change of control. The Board of Directors may modify, suspend or
terminate the Plan as long as it does not impair the rights thereunder of any
participant. Under applicable law, the holders of Common Shares must approve any
increase in the maximum number of shares reserved for issuance under the Plan,
any change in the classes of employees eligible to participate in the Plan and
any material increase in the benefits accruing to participants.
40
<PAGE> 42
CERTAIN TRANSACTIONS
Company Purchases of Shares. In February 1994, Robert A. Weitzel borrowed
$200,000 from the Company, evidenced by a promissory note bearing interest at
the rate of 8.0% per annum (the "Note"). Mr. Weitzel utilized the $200,000 to
purchase 200 of the Company's Class E Preferred Shares, par value $1,000 per
share (the "Class E Preferred"), from a former officer of the Company. The
Company acquired the Class E preferred from Mr. Weitzel in March 1997 in
exchange for cancellation of the Note, with accrued and unpaid cumulative
dividends offset against accrued interest on the Note, resulting in
approximately $8,000 of interest remaining to be paid by Mr. Weitzel.
In December 1996, the Company exercised its right to purchase 2,002,727
Common Shares from a former officer of the Company for $1,200,000.
Indebtedness of Principal Shareholder. In May 1993, Robert A. Weitzel,
President and Chief Executive Officer of the Company, borrowed $252,720 from the
Company at an annual rate of interest of 8.15%, evidenced by a promissory note
and secured by a mortgage on Mr. Weitzel's home. Mr. Weitzel also borrowed
$70,000 from the Company in January 1994, at an annual interest rate of 10%,
evidenced by a promissory note. The largest aggregate amount of indebtedness Mr.
Weitzel had outstanding in favor of the Company was $1,978,000, $1,866,000 and
$1,763,000 in fiscal 1996, 1995 and 1994, respectively. The current amount of
Mr. Weitzel's indebtedness to the Company is $445,119, including the interest
referred to above and approximately $100,000 that is delinquent. Mr. Weitzel
will repay all of his indebtedness to the Company at the time of consummation of
the Offering. The Company does not intend to make or guarantee loans to its
officers, directors, or shareholders after the consummation of the Offering.
Acquisition of NBC Leasing, Inc. NBC Leasing, Inc. ("NBC") was merged into
the Company in March 1997. NBC had leased certain machinery and equipment to the
Company prior to the merger. The Company paid $50,000 in management fees to NBC
in each of fiscal 1996, 1995 and 1994. NBC was owned by certain shareholders and
employees of the Company, including Robert A. Weitzel, who was issued 4,126
Common Shares in exchange for his 75% interest in NBC in connection with the
merger. In connection with the merger, the Company cancelled $1,694,000 in notes
and accrued interest receivable from the shareholders of NBC and $1,694,000 in
notes payable to the NBC shareholders by NBC were contributed to capital.
International Transport Security, Inc. International Transport Security,
Inc. ("Transport") was a corporation under common ownership with the Company
until it was dissolved in March 1996. Prior to March 31, 1996, Transport
provided management services to the Company. Transport incurred $4.3 million,
$4.6 million and $959,000 in payroll costs in fiscal 1994, 1995 and 1996 and
received from the Company $4.1 million, $3.8 million and $696,000 in management
fees in fiscal 1994, 1995 and 1996. See "Consolidated Financial Statements."
Agreement with Norman H. Wood. On September 22, 1987, shareholders holding
substantially all of the outstanding shares of ITS executed a written consent in
which they agreed to distribute to Norman H. Wood, who was at that time the
Company's Chief Operating Officer, 6.546% of the net proceeds received by them
upon any sale of the Company. Messrs. Weitzel and Wood have agreed that any
claims that Mr. Wood may have with respect to that instrument will be settled by
Mr. Weitzel transferring to Mr. Wood 73,101 of Mr. Weitzel's Common Shares of
the Company prior to the consummation of the Offering.
41
<PAGE> 43
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Shares on a fully diluted basis as of August
27, 1997, and as adjusted to reflect the sale of the Common Shares offered
hereby, for: (a) each of the Company's directors; (b) each person known by the
Company to own beneficially more than 5% of the outstanding Common Shares on a
fully diluted basis; (c) each Named Executive Officer; and (d) the Company's
executive officers and directors as a group. All information with respect to
beneficial ownership by the Company's directors, officers or beneficial owners
has been furnished by the respective director, officer or beneficial owner, as
the case may be. Except as otherwise described in the notes below, the following
beneficial owners have sole voting power and sole investment power with respect
to all Common Shares set forth opposite their names.
<TABLE>
<CAPTION>
COMPANY COMMON SHARES BENEFICIALLY OWNED
-----------------------------------------------------------
BEFORE THE AFTER THE
OFFERING SHARES OFFERING
-------------------- BEING --------------------
NAME AND ADDRESS(1) NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------------ ---------- ------ ---------- ---------- ------
<S> <C> <C> <C> <C> <C>
Robert A. Weitzel(2).......... 3,438,990 94.45% 227,273 3,211,717 51.48%
James O. Singer(2)............ 0 0 0 0
Robert A. Swartz(2)........... 41,901 1.15 41,901 0.67
Scott E. Brewer(2)............ 16,116 0.44 16,116 0.26
Stephen Metzler............... 0 0 0 0
Scott Dennison................ 0 0 0 0
Gene Empey.................... 6,446 0.18 6,446 0.10
Ivan J. Winfield(2)........... 0 0 0 0
3901 Insworth
Pepper Pike, Ohio 44124
Lee C. Howley, Jr.(2)......... 0 0 0 0
5430 Portage Drive
Vermillion, Ohio 44089
Jerry V. Jarrett(2)........... 0 0 0 0
2614 Fairwood Drive
Pepper Pike, Ohio 44124
All directors and executive
officers
as a group (11 persons)..... 3,503,453 96.22% 3,276,180 52.51%
</TABLE>
- ---------------
(1) Unless otherwise indicated, the address of each beneficial owner is Crown
Centre, 5005 Rockside Road, Independence, Ohio 44031.
(2) Each of these individuals will receive options to purchase Common Shares in
the following amounts in connection with the Offering: Mr. Weitzel (66,760
shares); Mr. Singer (33,362 shares); Mr. Swartz (50,070 shares); Mr. Brewer
(50,070 shares); Mr. Winfield (5,000 shares); Mr. Howley (5,000 shares); and
Mr. Jarrett (5,000 shares).
42
<PAGE> 44
DESCRIPTION OF CAPITAL SHARES
The following summary description of the Company's capital shares does not
purport to be complete and is qualified in its entirety by reference to the
Amended and Restated Articles of Incorporation of the Company (the "Articles")
and the Code of Regulations of the Company, the material provisions of which are
accurately set forth in the following summary description and which are included
as exhibits to the Registration Statement of which this Prospectus forms a part.
The Articles authorize (a) 20 million Common Shares, without par value, of
which 3,653,909 were issued and outstanding immediately prior to the Offering
and (b) five million Serial Preferred Shares, without par value ("Serial
Preferred Shares"), none of which is issued and outstanding. After completion of
the Offering, a total of 6,238,744 Common Shares will be issued and outstanding.
COMMON SHARES
Subject to the rights of the holders of any outstanding Preferred Shares,
the holders of Common Shares are entitled to receive such dividends as may be
declared by the Board and to share ratably in assets available for distribution
upon liquidation. There are no pre-emptive rights, conversion rights, redemption
provisions or sinking fund provisions with respect to Common Shares under the
Articles. Holders of Common Shares are entitled to one vote per share. All
Common Shares offered hereby, upon completion of the Offering, will be fully
paid and nonassessable.
PREFERRED SHARES
The Board is empowered to authorize the issuance of Serial Preferred Shares
which may be issued in one or more series. All series of Serial Preferred Shares
will rank equally and will be identical in all respects, except that the Board
may fix with respect to each such series without further action by the
shareholders, prior to issuance thereof, the following terms: (a) the
designation of the series; (b) the authorized number of shares of the series,
subject to certain increases and decreases as determined by the Board from time
to time; (c) the dividend rate or rates of the series; (d) the date or dates
from which dividends shall accrue and (if applicable) will be cumulative and the
dates on which and the period or periods for which dividends, if declared, shall
be payable, including the means by which such dates and periods may be
established; (e) any redemption rights and redemption prices; (f) the terms and
amounts of any sinking fund; (g) the amounts payable on shares of the series on
any voluntary or involuntary liquidation, dissolution or winding up of the
affairs of the Company; (h) whether the shares of the series are convertible
into Common Shares or shares of any other class and, if so, the conversion rate
or rates or price or prices, any adjustments thereof and all other terms and
conditions upon which such conversion may be made; and (i) any restrictions on
the issuance of shares of the same or any other class or series. The holders of
Serial Preferred Shares will have no voting rights, except as otherwise provided
by law as specifically provided in the Articles with respect to certain matters,
such as the election of two members of the Board upon default by the Company in
the payment of dividends for a 540-day period and amendments to the Articles
that would adversely affect the rights of holders of Serial Preferred Shares.
All series of Preferred Shares would rank, as to dividend and liquidation
rights, senior to Common Shares. The Board has no present intention to issue
Preferred Shares.
Because of its discretion with respect to the creation and issuance of any
series of Preferred Shares without shareholder approval, the Board could
adversely affect the voting power and other rights of the holders of Common
Shares. The ability of the Board to issue Preferred Shares, while providing
flexibility in connection with financings, acquisitions and other corporate
purposes, could have the effect of discouraging an attempt by another person or
entity, through the acquisition of a substantial number of Common Shares, to
acquire control of the Company with a view to effecting a merger, sale of the
Company's assets or similar transaction, since the issuance of Preferred Shares
could be used to dilute the share ownership of a person or entity seeking to
obtain control of the Company with a view to effecting a merger, sale of the
Company's assets or similar transaction. Additionally, issuance of Preferred
Shares could result in there being a class of shares with conversion features
and preference over Common Shares with respect to dividends and distributions in
liquidation and could also result in the dilution of net income and book value
per share of the Company.
43
<PAGE> 45
CERTAIN ANTI-TAKEOVER PROVISIONS
Chapter 1704 of the Ohio Revised Code prohibits certain transactions,
including mergers, sales of assets and similar corporate transactions, involving
Ohio corporations and holders of 10% or more of their voting shares, unless
certain advance approvals are obtained or certain other conditions are met.
Section 1701.831 of the Ohio Revised Code imposes certain advance notice and
shareholder approval requirements with respect to voting share acquisitions that
cross the 20%, 33 1/3% and 50% of voting shares thresholds. Section 1707.041 of
the Ohio Revised Code imposes advance filing and notice requirements with
respect to certain tender offers and invitations for tenders for more than 10%
of certain Ohio corporations. These restraints could discourage potential
acquisition proposals and could delay or prevent a change in control of the
Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Shares is First Chicago
Trust Company, Inc. of New York, located in New York, New York.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Shares in the public market, or the
perception that those sales could occur, could adversely affect the prevailing
market price of Common Shares and make it more difficult for the Company to sell
equity securities in the future at a time and price that it considers
appropriate.
Immediately following completion of the Offering, the Company will have
6,238,744 Common Shares outstanding. All of the 2,825,000 Common Shares being
sold in the Offering (or 3,248,750 shares if the Underwriters' over-allotment
option is exercised in full) will be freely tradeable (other than by an
"affiliate" of the Company as such term is defined in the Securities Act)
without restriction or registration under the Securities Act. Of the Common
Shares owned by executive officers and directors of the Company, 3,276,180
shares will be eligible for public sale only if registered under the Securities
Act or an exemption from registration is available, including under Rule 144
thereunder, and only following release from or expiration of a 180 day lockup
agreement with the Underwriters.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned restricted Common Shares
for at least one year but less than two years will be entitled to sell in any
three-month period a number of such shares that does not exceed the greater of
(i) 1.0% of the then outstanding Common Shares (approximately 62,387 shares
immediately after the Offering) or (ii) the average weekly trading volume of
Common Shares on the Nasdaq National Market during the four calendar weeks
immediately preceding the date on which notice of the sale is filed with the
Commission. Sales pursuant to Rule 144 are also subject to certain other
requirements relating to manner of sale, notice and availability of current
public information about the Company. A person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the three months immediately preceding the sale is entitled to sell
restricted shares pursuant to Rule 144(k) without regard to the limitations
described above, if two years have expired since the later of the date on which
those restricted shares were acquired from the Company or the date they were
acquired from an affiliate of the Company.
The Company and all of its directors, executive officers and current
shareholders who will hold, upon completion of the Offering, 3,413,744 Common
Shares, have agreed that they will not, directly or indirectly, without the
prior written consent of the Underwriters, and except for any grant of options
under the Long-Term Incentive Plan, as described herein, offer, sell, grant any
option to purchase or otherwise dispose (or announce any offer, sale, grant of
any option to purchase or other disposition) of any Common Shares, or any
securities convertible into, or exchangeable or exercisable for, Common Shares,
for a period of 180 days after the Closing Date of the Offering.
44
<PAGE> 46
UNDERWRITING
In the Underwriting Agreement, the Underwriters, represented by McDonald &
Company Securities, Inc. and Morgan Keegan & Company, Inc. (the
"Representatives"), have agreed, severally, subject to the terms and conditions
therein set forth, to purchase from the Company and the Selling Shareholder, and
the Company and the Selling Shareholder have agreed to sell to them, the number
of Common Shares totaling 2,825,000 shares, set forth opposite their respective
names below. The Underwriters are committed to take and pay for all shares if
any shares are purchased.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
-------------------------------------------------------------------------- ---------
<S> <C>
McDonald & Company Securities, Inc........................................
Morgan Keegan & Company, Inc..............................................
-------
Total................................................................ 2,825,000
=======
</TABLE>
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Shares to the public at the public offering price
set forth on the cover page of this Prospectus. The Underwriters may allow to
certain selected dealers who are members of the National Association of
Securities Dealers, Inc. (the "NASD") a discount not exceeding $ per share,
and the Underwriters may allow, and such selected dealers may re-allow, a
discount not exceeding $ per share to other dealers who are members of the
NASD. After the Offering, the public offering price and the discount to dealers
may be changed by the Representatives.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a maximum
of 423,750 Common Shares at the public offering price, less the underwriting
discount, as set forth on the cover page of this Prospectus. The Underwriters
may exercise that option only to cover over-allotments in the sale of the Common
Shares that the Underwriters have agreed to purchase. To the extent that the
Underwriters exercise such option, each of the Underwriters will have a firm
commitment, subject to certain conditions, to purchase the same percentage of
the option shares as the number of shares to be purchased and offered by that
Underwriter in the table above bears to the total.
The Company and the Selling Shareholder have agreed to indemnify the
Underwriters against certain liabilities which may be incurred in connection
with the Offering, including liabilities under the Securities Act of 1933.
The Company, the Selling Shareholder and the directors, executive officers
and current shareholders of the Company have agreed that they will not offer,
sell, transfer or otherwise dispose of any Common Shares, or any securities
convertible into or exchangeable for Common Shares, for a period of 180 days
from the date of this Prospectus, without the prior written consent of McDonald
& Company Securities, Inc.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales of Common Shares offered by this Prospectus to any
accounts over which they exercise discretionary authority.
At the request of the Company, up to 100,000 Common Shares offered in the
Offering have been reserved for sale to employees of the Company and certain
members of their families. The price of those shares to those persons will be
equal to the public offering price set forth on the cover page of this
Prospectus. The number of shares available to the general public will be reduced
to the extent those persons purchase reserved shares. Any shares not so
purchased will be offered in the Offering at the public offering price set forth
on the cover page of this Prospectus.
45
<PAGE> 47
In connection with the Offering and in compliance with applicable law, the
Underwriters may overallot or effect transactions that stabilize, maintain, or
otherwise affect the market price of the Common Shares at levels above those
that might otherwise prevail in the open market, including by entering
stabilizing bids, effecting syndicate covering transactions or imposing penalty
bids. A stabilizing bid means the placing of any bid, or the effecting of any
purchase, for the purpose of pegging, fixing or maintaining the price of a
security. A syndicate covering transaction means the placing of any bid on
behalf of the underwriting syndicate or the effecting of any purchase to reduce
a short position created in connection with the Offering. A penalty bid means an
arrangement that permits McDonald & Company Securities, Inc., as managing
underwriter, to reclaim a selling concession from a syndicate member in
connection with the Offering when securities originally sold by the syndicate
member are purchased in stabilizing or syndicate covering transactions. These
transactions may be effected on the Nasdaq National Market or otherwise. The
Underwriters are not required to engage in any of these activities. Any such
activities, if commenced, may be discontinued at any time.
Prior to the Offering, there has not been any public market for the Common
Shares. Consequently, the initial public offering price for the Common Shares
included in the Offering will be determined by negotiations between the Company
and the Representatives. Among the factors considered in determining that price
will be the history of and prospects for the Company's business and the industry
in which it competes, an assessment of the Company's management and the present
state of the Company's development, the past and present revenues and earnings
of the Company, the prospects for growth of the Company's revenues and earnings,
the current state of the economy in the United States and the current level of
economic activity in the industry in which the Company competes and in related
or comparable industries, and currently prevailing conditions in the securities
markets, including current market valuations of publicly traded companies that
are comparable to the Company.
LEGAL MATTERS
The validity of the Common Shares offered hereby will be passed upon for
the Company by Baker & Hostetler LLP, Cleveland, Ohio and certain legal matters
will be passed upon for the Underwriters by Calfee, Halter & Griswold LLP,
Cleveland, Ohio.
EXPERTS
The financial statements included in this Prospectus, except as they relate
to the unaudited periods, have been so included in reliance on the reports of
Grant Thornton LLP, independent accountants, given on the authority of said firm
as experts in auditing and accounting.
Effective October 20, 1995, the Company replaced Ernst & Young LLP as its
independent accountants. The decision to change accountants was approved by the
Board of Directors. There were no disagreements with the former accountants on
any matter of accounting principles or practices, or auditing scope or
procedure. Ernst & Young LLP has not audited or otherwise expressed an opinion
on any of the financial statements included in this Registration Statement.
46
<PAGE> 48
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (of which this Prospectus is a part) on
Form S-1 under the Securities Act with respect to the securities offered hereby.
This Prospectus does not contain all the information set forth in the
Registration Statement, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. Statements contained in this
Prospectus as to the content of any contract or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference and the
exhibits and schedules thereto. The Company affirms that the material terms of
such contracts and other documents are accurately described in this Prospectus.
The Registration Statement and those exhibits and schedules can be inspected and
copied at the public reference facilities maintained by the Commission at its
principal office at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549 and at the Commission's regional offices located at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 66061 and 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies of that material can also
be obtained from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 29549, at prescribed rates. The
Commission also maintains a Web site (address http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that filed electronically with the Commission.
The Company intends to furnish its shareholders with annual reports
containing consolidated financial statements audited by its independent
certified public accountants and with quarterly reports containing unaudited
condensed consolidated financial statements for each of the first three quarters
of each fiscal year.
47
<PAGE> 49
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
International Total Services, Inc. and Subsidiaries
Report of Independent Certified Public Accountants.................................. F-2
Consolidated Balance Sheets at March 31, 1997 and 1996 and June 30, 1997............ F-3
Consolidated Statements of Earnings for the years ended March 31, 1997, 1996 and
1995 and for the three months ended June 30, 1997 and 1996....................... F-4
Consolidated Statements of Shareholders' Equity for the years ended March 31, 1997,
1996 and 1995 and for the three months ended June 30, 1997....................... F-5
Consolidated Statements of Cash Flows for the years ended March 31, 1997, 1996 and
1995 and for the three months ended June 30, 1997 and 1996....................... F-6
Notes to Consolidated Financial Statements.......................................... F-7
Intex Aviation Services, Inc.
Report of Independent Certified Public Accountants.................................. F-16
Balance Sheets at December 31, 1996 and 1995 and March 31, 1997..................... F-17
Statements of Earnings for the years ended December 31, 1996, 1995 and 1994 and for
the three months ended March 31, 1997 and 1996................................... F-18
Statements of Shareholders' Equity for the years ended December 31, 1996, 1995 and
1994 and for the three month period ended March 31, 1997......................... F-19
Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 and
for the three months ended March 31, 1997 and 1996............................... F-20
Notes to Financial Statements....................................................... F-21
</TABLE>
F-1
<PAGE> 50
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
SHAREHOLDERS AND BOARD OF DIRECTORS
INTERNATIONAL TOTAL SERVICES, INC.
We have audited the accompanying consolidated balance sheets of International
Total Services, Inc. and subsidiaries as of March 31, 1997 and 1996, and the
related consolidated statements of earnings, shareholders' equity, and cash
flows for each of the three years in the period ended March 31, 1997. 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Total Services, Inc. and subsidiaries as of March 31, 1997 and
1996, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended March 31, 1997 in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Cleveland, Ohio
May 9, 1997, except for the first paragraph of
Note A and the second and third paragraphs
of Note J for which the date is June 17, 1997
F-2
<PAGE> 51
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
JUNE 30, ---------------------------
1997 1997 1996
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................... $ 1,711,160 $ 1,452,028 $ 1,872,787
Accounts receivable -- net of allowance for doubtful
accounts of $100,000 in each year......................... 14,998,628 11,784,252 9,075,726
Deferred taxes.............................................. 1,493,521 1,493,521 1,284,901
Other current assets........................................ 2,536,279 1,555,988 1,175,646
----------- ----------- -----------
Total current assets................................. 20,739,588 16,285,789 13,409,060
Notes Receivable from Officers................................ 462,782 445,119 2,271,949
Property and Equipment
Security equipment.......................................... 2,873,029 2,758,716 2,385,900
Service equipment........................................... 1,720,457 1,657,055 1,565,135
Computer equipment.......................................... 1,769,686 1,758,405 1,320,141
Furniture and fixtures...................................... 941,615 859,933 547,761
Leasehold improvements...................................... -- 56,387 56,387
Autos....................................................... 502,710 499,835 203,581
----------- ----------- -----------
7,807,497 7,590,331 6,078,905
Less accumulated depreciation and amortization.............. 4,498,442 4,335,864 2,740,118
----------- ----------- -----------
3,309,055 3,254,467 3,338,787
Intangibles, less accumulated amortization of $648,480 and
$440,783 in 1997 and 1996, respectively..................... 9,859,568 4,345,518 1,792,973
Security Deposits and Other................................... 99,359 2,670,244 79,329
----------- ----------- -----------
9,958,927 7,015,762 1,872,302
----------- ----------- -----------
$34,470,352 $27,001,137 $20,892,098
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to bank....................................... $ 2,400,000 $ 2,400,000 $ 4,753,424
Current maturities of long-term obligations................. 63,790 120,536 52,281
Trade accounts payable...................................... 5,943,240 2,747,803 2,784,346
Accrued payroll and payroll taxes........................... 8,203,564 8,702,819 7,337,828
Other accrued expenses...................................... 1,793,965 1,417,662 1,030,259
Income taxes payable........................................ 996,622 572,875 401,704
----------- ----------- -----------
Total current liabilities............................ 19,401,181 15,961,695 16,359,842
Deferred Tax Liability........................................ 288,827 288,827 390,207
Long-Term Obligations......................................... 10,754,938 7,555,649 164,140
Commitments and Contingencies................................. -- -- --
STOCKHOLDERS' EQUITY
Class A preferred stock, $2,000 par value -- authorized 50
shares, issued 10 shares in 1996........................ -- -- 20,000
Class E preferred stock, $1,000 par value -- authorized
300 shares, issued and outstanding 200 shares in 1996... -- -- 200,000
Common stock, without par value, stated at $.01 per
share -- authorized 20,000,000 shares, issued 3,660,357
and 6,446,310 shares in 1997 and 1996, respectively..... 36,540 36,604 64,463
Additional paid-in capital................................ 450,456 472,892 362,193
Cumulative translation adjustment......................... (98,854) (98,854) (78,174)
Retained earnings......................................... 3,637,264 2,784,324 3,998,377
----------- ----------- -----------
4,025,406 3,194,966 4,566,859
Less treasury stock, 10 shares Class A preferred stock and
806,727 shares of common stock in 1996.................. -- -- 588,950
----------- ----------- -----------
4,025,406 3,194,966 3,977,909
----------- ----------- -----------
$34,470,352 $27,001,137 $20,892,098
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 52
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED MARCH 31,
--------------------------- ------------------------------------------
1997 1996 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues......... $ 38,363,508 $ 24,106,130 $115,241,516 $ 95,462,891 $ 92,654,181
Cost of operating
revenues................. 31,823,578 20,474,630 98,337,729 81,340,962 79,981,094
------------ ------------ ------------ ------------ ------------
Gross profit.......... 6,539,930 (3,631,500) 16,903,787 14,121,929 12,673,087
Selling, general and
administrative
expenses................. 4,639,249 2,772,825 13,333,545 11,603,393 12,654,456
------------ ------------ ------------ ------------ ------------
Operating profit...... 1,900,681 853,675 3,570,242 2,518,536 18,631
Other expense (income)
Interest expense......... 421,949 133,044 764,845 654,057 332,772
Interest income.......... (7,948) (34,509) (127,510) (131,531) (144,361)
------------ ------------ ------------ ------------ ------------
414,001 98,535 637,335 522,526 188,411
------------ ------------ ------------ ------------ ------------
Earnings (loss) before
income taxes........ 1,486,680 760,140 2,932,907 1,996,010 (169,780)
Income taxes............... 633,740 318,020 1,237,117 958,427 547,852
------------ ------------ ------------ ------------ ------------
NET EARNINGS (LOSS)... $ 852,940 $ 442,120 $ 1,695,790 $ 1,037,583 $ (717,632)
------------ ------------ ------------ ------------ ------------
Earnings (loss) per
share.................... $ 0.23 $ 0.07 $ 0.33 $ 0.18 $ (0.12)
============ ============ ============ ============ ============
Weighted average number of
shares................... 3,654,985 5,945,022 5,089,480 5,775,880 6,292,976
============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 53
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1997, 1996 AND 1995 AND THE THREE MONTHS ENDED
JUNE 30, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
UNREALIZED
CLASS A CLASS E ADDITIONAL LOSS ON CUMULATIVE
PREFERRED PREFERRED COMMON PAID-IN MARKETABLE TRANSLATION
STOCK STOCK STOCK CAPITAL SECURITIES ADJUSTMENT
--------- --------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1, 1994......................... $20,000 $ 200,000 $64,463 $362,193 $(27,893) $ (24,480)
Translation adjustment........................... -- -- -- -- -- 15,002
Unrealized loss on securities.................... -- -- -- -- (23,624) --
Purchase of 10 shares of Class A Preferred Stock
and 572,198 shares of common stock for
treasury....................................... -- -- -- -- -- --
Issuance of 25,785 common shares from treasury... -- -- -- -- -- --
Net loss......................................... -- -- -- -- -- --
------- -------- ------- -------- -------- --------
BALANCE AT MARCH 31, 1995........................ 20,000 200,000 64,463 362,193 (51,517) (9,478)
Translation adjustment........................... -- -- -- -- -- (68,696)
Sale of marketable securities.................... -- -- -- -- 51,517 --
Purchase of 286,099 shares of common stock for
treasury....................................... -- -- -- -- -- --
Issuance of 25,785 common shares from treasury... -- -- -- -- -- --
Net earnings..................................... -- -- -- -- -- --
------- -------- ------- -------- -------- --------
BALANCE AT MARCH 31, 1996........................ 20,000 200,000 64,463 362,193 -- (78,174)
Purchase of 2,028,477 shares of common stock for
treasury....................................... -- -- -- -- -- --
Issuance of 45,124 common shares from treasury... -- -- -- 171,000 -- --
Translation adjustment........................... -- -- -- -- -- (20,680)
Dividends declared -- Class E Preferred Stock.... -- -- -- -- -- --
Redemption Class E Preferred Stock............... -- (200,000) -- -- -- --
Merger of NBC Leasing............................ -- -- -- 34,862 -- --
Retirement of Treasury Stock..................... (20,000) -- (27,859) (95,163) -- --
Net earnings..................................... -- -- -- -- -- --
------- -------- ------- -------- -------- --------
BALANCE AT MARCH 31, 1997........................ $ -- $ -- $36,604 $472,892 $ -- $ (98,854)
Purchase of 6,446 shares......................... -- -- (64) (22,436) -- --
Net earnings..................................... -- -- -- -- -- --
------- -------- ------- -------- -------- --------
BALANCE AT JUNE 30, 1997 (UNAUDITED)............. $ -- $ -- $36,540 $450,456 $ -- $ (98,854)
======= ======== ======= ======== ======== ========
<CAPTION>
TOTAL
RETAINED TREASURY STOCKHOLDERS'
EARNINGS STOCK EQUITY
---------- ---------- ------------
<S> <C> <C> <C>
BALANCE AT APRIL 1, 1994......................... $3,678,426 $ -- $4,272,709
Translation adjustment........................... -- -- 15,002
Unrealized loss on securities.................... -- -- (23,624)
Purchase of 10 shares of Class A Preferred Stock
and 572,198 shares of common stock for
treasury....................................... -- (425,000) (425,000)
Issuance of 25,785 common shares from treasury... -- 18,025 18,025
Net loss......................................... (717,632) -- (717,632)
---------- ---------- ----------
BALANCE AT MARCH 31, 1995........................ 2,960,794 (406,975) 3,139,480
Translation adjustment........................... -- -- (68,696)
Sale of marketable securities.................... -- -- 51,517
Purchase of 286,099 shares of common stock for
treasury....................................... -- (200,000) (200,000)
Issuance of 25,785 common shares from treasury... -- 18,025 18,025
Net earnings..................................... 1,037,583 -- 1,037,583
---------- ---------- ----------
BALANCE AT MARCH 31, 1996........................ 3,998,377 (588,950) 3,977,909
Purchase of 2,028,477 shares of common stock for
treasury....................................... -- (1,226,584) (1,226,584)
Issuance of 45,124 common shares from treasury... -- 31,544 202,544
Translation adjustment........................... -- -- (20,680)
Dividends declared -- Class E Preferred Stock.... (52,000) -- (52,000)
Redemption Class E Preferred Stock............... -- -- (200,000)
Merger of NBC Leasing............................ (1,219,513) 2,638 (1,182,013)
Retirement of Treasury Stock..................... (1,638,330) 1,781,352 --
Net earnings..................................... 1,695,790 -- 1,695,790
---------- ---------- ----------
BALANCE AT MARCH 31, 1997........................ $2,784,324 $ -- $3,194,966
Purchase of 6,446 shares......................... -- -- (22,500)
Net earnings..................................... 852,940 -- 852,940
---------- ---------- ----------
BALANCE AT JUNE 30, 1997 (UNAUDITED)............. $3,637,264 $ -- $4,025,406
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 54
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
JUNE 30, FOR THE YEARS ENDED MARCH 31,
-------------------------- -----------------------------------------
1997 1996 1997 1996 1995
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net earnings........................ $ 852,940 $ 442,120 $ 1,695,790 $ 1,037,583 $ (717,632)
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Depreciation...................... 243,513 206,171 837,466 897,291 771,950
Amortization...................... 241,436 83,129 207,697 268,321 166,812
Loss (gain) on disposal of
equipment....................... 3,321 137,822 297,719 (113,998) (14,583)
Gain on sale of marketable
securities...................... -- -- -- (27,251) --
Deferred income taxes............. -- -- (310,000) (294,785) (313,914)
Stock compensation................ -- -- 202,544 18,025 18,025
Changes in operating assets and
liabilities:
Accounts receivable............. (3,214,376) 16,731 (2,708,526) (500,940) (1,322,894)
Other current and noncurrent
assets....................... (551,798) 85,916 (518,417) 11,827 (880,673)
Trade accounts payable.......... 151,929 (308,111) 314,826 404,191 430,293
Accrued expenses................ (300,796) 346,431 1,923,565 263,658 1,704,441
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) operating activities... (2,573,831) 1,010,209 1,942,664 1,963,922 (158,175)
INVESTING ACTIVITIES:
Additions to property and
equipment......................... (298,100) (246,039) (1,051,649) (900,599) (1,518,057)
Proceeds received from sale of
equipment......................... 11,020 20,009 160,278 542,844 220,200
Proceeds from sale of marketable
securities........................ -- -- -- 109,185 --
Payments for acquisitions of
businesses, primarily by purchase
of security contracts............. -- -- (2,760,242) -- (2,838,365)
Deposit on acquisition of business
of Intex Aviation Services,
Inc............................... -- -- (2,570,886) -- --
----------- ----------- ----------- ----------- -----------
Net cash (used in) investing
activities................. (287,080) (226,030) (6,222,499) (248,570) (4,136,222)
FINANCING ACTIVITIES:
Net borrowings (payments) on note
payable to bank................... 3,218,676 (109,932) 2,005,072 (819,021) 5,108,880
Borrowings on subordinated debt..... -- -- 3,000,000 -- --
Borrowings on long-term debt........ -- -- 153,550 77,763 343,200
Principal payments on long-term
debt.............................. (76,133) (18,713) (52,282) (99,364) (135,922)
Purchase of treasury stock.......... (22,500) -- (1,226,584) (200,000) (425,000)
----------- ----------- ----------- ----------- -----------
Net cash provided by (used
in) financing activities... 3,120,043 (128,645) 3,879,756 (1,040,622) 4,891,158
Effect of exchange rates on cash...... -- -- (20,680) (68,696) 15,002
----------- ----------- ----------- ----------- -----------
NET (DECREASE) INCREASE IN
CASH....................... 259,132 655,534 (420,759) 606,034 611,763
Cash and cash equivalents at beginning
of year............................. 1,452,028 1,872,787 1,872,787 1,266,753 654,990
----------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of
year................................ $ 1,711,160 $ 2,528,321 $ 1,452,028 $ 1,872,787 $ 1,266,753
=========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for:
Interest.......................... $ 421,949 $ 142,218 $ 782,382 $ 610,333 $ 331,474
=========== =========== =========== =========== ===========
Income taxes...................... $ 188,502 $ 214,758 $ 1,230,953 $ 1,137,953 $ 1,312,282
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 55
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1997, 1996 AND 1995 AND JUNE 30, 1997 AND 1996 (UNAUDITED)
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in
the preparation of the combined financial statements follows. All share and per
share amounts have been adjusted for the 12,892.62 for 1 stock split declared on
June 17, 1997.
Presentation
The interim financial statements as of June 30, 1997 and 1996 and the three
months then ended as included herein are unaudited. However, in the opinion of
management, such information reflects all adjustments, consisting only of normal
recurring accruals necessary for a fair presentation of the information shown.
The interim financial statements for the periods stated and notes presented
herein do not contain certain information included in the Company's annual
financial statements and notes as also herein presented. Results for interim
periods are not necessarily indicative of results expected for the full year.
Revenue Recognition
The Company recognizes revenues from services provided under contracts as
those services are performed; revenues from sales of screening systems and other
products are recognized when those products are shipped to customers.
Business
International Total Services, Inc. (the Company) is a provider of
commercial security and aviation services, providing personnel and management
support to airlines at airports primarily in the United States and Europe. One
airline customer accounted for 18.9%, 18.4% and 27.6% of operating revenues for
the years ended March 31, 1997, 1996 and 1995, respectively. Another airline
customer accounted for 11.8%, 15% and 13.6% of operating revenues for the same
periods. Furthermore, five airline customers, including the two noted above,
accounted for approximately 51%, 51% and 56% of operating revenues for the years
ended March 31, 1997, 1996 and 1995, respectively, and 35%, 39% and 42%,
respectively, of accounts receivable at those dates.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned foreign and domestic subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
International Transport Security, Inc. (Transport) was a corporation under
common ownership with the Company until it was dissolved in March 1996. The sole
function of Transport was to pay compensation to the officers and other
corporate personnel of the Company for which Transport received a management
fee. Accordingly, Transport's accounts have been included in the consolidated
financial statements through the date of dissolution. Upon dissolution of
Transport, the Company began paying all compensation directly.
NBC Leasing, Inc. (NBC) was a corporation under common ownership until it
was acquired by and merged into the Company on March 31, 1997. The acquisition
was accounted for in a manner similar to a pooling; as such, NBC's assets and
liabilities were recorded at historical cost as of the date of acquisition.
NBC leased machinery and equipment to the Company on a month-to-month
basis. Lease payments for the years ended March 31, 1997, 1996 and 1995 amounted
to $138,384, $205,297 and $260,862, respectively. The Company provided
management and financial consulting services to NBC and recognized management
fee income in the amount of $60,000 in all three years.
F-7
<PAGE> 56
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Cash Flow Statement
For purposes of the Statement of Cash Flows, the Company considers all
short-term, highly liquid debt instruments purchased with a maturity of three
months or less to be cash equivalents.
During the year ended March 31, 1997, the Company entered into the
following noncash transactions:
(1) The Company redeemed 200 shares of Class E preferred stock from
its principal shareholder in exchange for a $200,000 note receivable from
the shareholder. In addition, the Company declared $52,000 in dividends,
including all dividend arrearages, on the preferred shares and paid the
dividends by reducing the accrued interest receivable due on the note.
(2) The Company acquired NBC by issuing from treasury 4,126 shares of
common stock to its principal shareholder, paying $12,500 to the other NBC
shareholders and by offsetting $1,695,414 in notes and accrued interest
receivable due from the shareholders of NBC against corresponding
obligations of NBC to the shareholders. The notes and interest receivable
included $1,271,560 due from the Company's principal shareholder. The
shareholders of NBC were also officers of the Company.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, Disclosures About Fair
Value of Financial Instruments (SFAS 107), requires disclosure of the following
information about the fair value of certain financial instruments for which it
is practicable to estimate that value. For purposes of the following disclosure,
the fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties, other than
in a forced sale or liquidation. These amounts represent management's best
estimates of fair value.
The carrying value of cash and cash equivalents, net trade receivables and
payables approximate fair value due to the relatively short period to maturity
of these instruments. The carrying value of long-term debt approximates fair
value based on borrowing rates currently available to the Company for debt with
comparable maturities. The carrying value of notes receivable from officers
approximates fair value based on the interest rates on the notes compared to
rates available to the Company for comparable investments.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the respective assets, principally five or seven
years, using the straight-line method.
Intangibles
During fiscal years ended March 31, 1997 and 1995, the Company acquired
various aviation service businesses, primarily through the assumption of certain
security service contracts for approximately $2,795,000 and $2,838,000,
respectively. A substantial portion of the purchase price was allocated to
intangibles, the balance of which are noted below:
<TABLE>
<CAPTION>
MARCH 31,
---------------------------
1997 1996
----------- ----------
<S> <C> <C>
Goodwill................................................ $ 2,309,000 $1,678,000
Service contracts....................................... 251,000 187,000
Covenant not to compete................................. 200,000 200,000
----------- ----------
$ 2,760,000 $2,065,000
=========== ==========
</TABLE>
F-8
<PAGE> 57
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
In fiscal 1997, the Company changed its estimate of the useful life of
acquired goodwill from 5 and 10 years to 20 years based upon what management
believes is a better approximation of the life of the contracts, including
renewals, based on the Company's retention rate and the additional business
obtained as a result of entering new markets through the acquisition of existing
contracts. As a result, amortization expense for 1997 was approximately $140,000
less than what it would have been under the previous methods. The service
contracts and covenants not to compete are being amortized over their remaining
lives of up to five years. Amortization of intangibles was $207,697, $268,321
and $166,812 for the fiscal years ended March 31, 1997, 1996 and 1995,
respectively.
Management of the Company assesses the recoverability of its long-lived
assets by using projected undiscounted future cash flows to determine whether
the carrying amount of the asset can be recovered over its remaining life. The
evaluation of long-lived assets also takes into consideration operating results
and trends and prospects of the Company. Based on the assessments made,
management believes no impairment of the Company's intangible and tangible
assets has occurred.
The Company's methodology is consistent with the provisions of Statement of
Financial Accounting Standards No. 121 (SFAS 121), Accounting for the Impairment
of Long-Lived Assets and Assets To Be Disposed Of.
Research and Development
During the fiscal year ended March 31, 1995, the Company incurred and
charged to expense approximately $500,000 in research and development costs. No
such costs were incurred in the fiscal years ended March 31, 1997 or 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Earnings per Share
Earnings (loss) per share ("EPS") are determined by dividing net earnings
(loss) by the weighted average number of common shares outstanding during each
period, after giving effect to preferred dividend requirements. In November
1996, the Company granted 45,124 common shares to certain officers. These shares
were granted within a one-year period from the initial filing of the
Registration Statement referred to in Note J. Accordingly, these shares have
been treated as outstanding in the computation of EPS throughout all reported
periods. In February 1997, the Financial Accounting Standards Board issued SFAS
No. 128 "Earnings per Share". This statement simplifies the standards for
computing earnings per share and makes them comparable to international EPS
standards. This statement is effective for financial statements issued for
periods ending after December 15, 1997. The Company does not believe adoption of
this standard will have a significant impact on reported EPS.
Supplemental Pro Forma Net Earnings and Net Earnings Per Share
The Company's supplemental pro forma net earnings and net earnings per
share for the year ended March 31, 1997 and the three months ended June 30, 1997
are $2,136,000 and $1,098,000 and $.35 and $.22, respectively.
F-9
<PAGE> 58
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The supplemental pro forma net earnings and net earnings per share reflect
the issuance of shares necessary to retire $13,068,000 and $9,758,000 of notes
payable and the resulting increase in net earnings in the amount of $440,000 and
$245,000 for the year ended March 31, 1997 and the three months ended June 30,
1996, respectively. The calculation is based on the weighted average shares
outstanding used in the calculation of net earnings per share, adjusted for the
estimated shares at each date that would be issued by the Company, i.e. 998,016
and 1,336,552 shares, respectively, at $11.00 per share to retire these
obligations.
NOTE B -- CAPITAL STOCK
Through March 31, 1997 the Company had authorized five classes of preferred
stock (A through E), at which date there were 50 authorized shares of Class A
preferred. Ten of the Class A preferred had been issued, all of which were
reacquired for $25,000 in 1995 and retired in 1997. Class A shares had 6%
cumulative dividend rights and were redeemable at the Company's option. There
also were 300 authorized shares of Class E preferred. The 200 shares issued and
outstanding at March 31, 1996 and 1995 were redeemed and retired in 1997. Class
E shares had 8% cumulative dividend rights. In March 1997, the Company declared
and paid dividends on Class E preferred shares in the amount of $52,000 which
included all dividends in arrears at that date. Additionally there were 100
authorized shares each of Class B, C and D nonvoting preferred stock, none of
which were issued.
During 1995, 1996 and 1997, the Company reacquired 572,198 shares, 286,099
shares and 2,028,477 shares of its common stock. During the three years, the
Company reissued 96,694 of those shares, including 45,124 shares valued at
$202,544 granted to certain officers in November 1996. The Company retired all
treasury shares as of March 31, 1997. In April 1997 the Company reacquired and
retired 6,446 shares from a former employee for $9,000.
NOTE C -- FINANCING ARRANGEMENTS
The Company has a committed credit facility secured by all domestic
accounts receivable, equipment, and other assets. The facility consists of a
revolving promissory note of $10,500,000, a $2,000,000 term loan and a $900,000
term loan. The revolving promissory note bears interest at 1.25% over the bank's
prime rate (8 1/2% at March 31, 1997). The credit facility provides the Company
with a credit line based upon 80% of domestic and 50% of foreign outstanding
accounts receivable less than 90 days past due and carries an annual commitment
fee of .2% on the daily average unused amount of the commitments. Effective
March 31, 1997, the revolving promissory note was amended and the maturity date
was extended until March 31, 1999. Accordingly, the note has been classified as
long-term debt and excluded from the table below at March 31, 1997.
The $2,000,000 term loan bears interest at a fixed rate of 9.832% and
requires monthly principal payments of $41,667 beginning May 1997 with a final
lump sum payment of $1,749,998 due November 1, 1997. The $900,000 term loan
bears interest at 2% over the bank's prime rate. The unpaid balance on the
$900,000 term loan is due December 31, 1997.
Notes payable to bank consists of the following:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Revolving promissory note................................ $ -- $3,853,424
$2,000,000 term loan..................................... 2,000,000 --
$900,000 term loan....................................... 400,000 900,000
---------- ----------
$2,400,000 $4,753,424
========== ==========
</TABLE>
F-10
<PAGE> 59
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE D -- INCOME TAXES
The provision for income taxes consists of the following for the years
ended March 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Pretax Income
Domestic................................ $ 2,497,259 $ 1,898,242 $ 481,855
Foreign................................. 435,648 361,078 227,002
----------- ----------- -----------
Total (A)............................ $ 2,932,907 $ 2,259,320 $ 708,857
=========== =========== ===========
Current
Federal................................. $ 1,095,000 $ 883,738 $ 460,128
State................................... 253,000 232,702 145,704
Foreign................................. 199,117 136,772 67,863
Settlement of federal liability......... -- -- 188,071
----------- ----------- -----------
Total current........................ 1,547,117 1,253,212 861,766
Deferred
Federal................................. (260,000) (250,567) (263,632)
State................................... (50,000) (44,218) (50,282)
----------- ----------- -----------
Total deferred....................... (310,000) (294,785) (313,914)
----------- ----------- -----------
Total Provision...................... $ 1,237,117 $ 958,427 $ 547,852
=========== =========== ===========
</TABLE>
- ---------------
(A) Excludes Transport's loss as an "S-Corporation", $263,310 in 1996 and
$878,637 in 1995.
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of deferred tax
assets and liabilities relate to the following at March 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets:
Deferred compensation................... $ 428,000 $ 360,000 $ 360,000
Accrued workers' compensation........... 359,950 400,283 209,818
Accrued legal expenses.................. 535,762 324,078 293,577
Other accruals not currently
deductible........................... 179,738 163,864 70,872
Amortization of intangibles............. 51,470 21,798 7,765
Allowance for doubtful accounts......... 40,000 40,000 40,498
State income taxes...................... 45,866 30,578 25,820
Other................................... 50,045 54,630 40,280
----------- ----------- -----------
Total deferred tax assets............ $ 1,690,831 $ 1,395,231 $ 1,048,630
=========== =========== ===========
Deferred tax liabilities:
Depreciation............................ $ 340,297 $ 412,005 $ 446,333
Deferred expenses....................... 111,514 57,144 --
Other................................... 34,326 31,388 2,388
----------- ----------- -----------
Total deferred tax liabilities....... $ 486,137 $ 500,537 $ 448,721
=========== =========== ===========
Net deferred tax assets.............. $ 1,204,694 $ 894,694 $ 599,909
=========== =========== ===========
</TABLE>
F-11
<PAGE> 60
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A reconciliation of the provision for income taxes with the U.S. Federal
Statutory tax rate is as follows:
<TABLE>
<CAPTION>
1997 PERCENT 1996 PERCENT 1995 PERCENT
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Statutory tax rates
Federal rate............................ $ 997,188 34.0% $ 768,169 34.0% $ 241,011 34.0%
State income tax -- net of federal
tax................................... 128,460 4.4% 124,399 5.5% 62,979 8.9%
Effective rates of foreign tax.......... 50,997 1.8% 14,005 0.6% (9,318) (1.3%)
Non deductible items.................... 59,848 2.0% 64,988 2.9% 69,842 9.9%
Settlement of income tax liability for
years ended March 31, 1990-1992
resulting from an Internal Revenue
Service examination................... -- -- -- -- 188,071 26.5%
Other -- net............................ 624 0.0% (13,134) (0.6%) (4,733) (0.7%)
---------- ----- ---------- ----- ---------- -----
$1,237,117 42.2% $ 958,427 42.4% $ 547,852 77.3%
========== ===== ========== ===== ========== =====
</TABLE>
NOTE E -- LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at March 31:
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- ----------
<S> <C> <C> <C>
Revolving bank note........................ $ 4,358,496 $ -- $ --
Subordinated debt.......................... 3,000,000 -- --
Capital lease obligations.................. 164,140 216,421 186,836
Other...................................... 153,549 -- 51,186
---------- ---------- ----------
7,676,185 216,421 238,022
Less current portion..................... 120,536 52,281 85,942
---------- ---------- ----------
$ 7,555,649 $ 164,140 $ 152,080
========== ========== ==========
</TABLE>
The revolving bank note represents borrowings under the Company's domestic
credit facility as described in Note C. The note matures March 31, 1999.
The subordinated debt consists of a note payable, due in twelve quarterly
principal installments of $250,000, beginning February 1999. Quarterly interest
payments are made on a current basis at a fixed rate of 20%. The note is
subordinated to all borrowings provided under the bank credit facility contained
in Note C.
The capital lease obligations relate to equipment used in the Company's
operations. The cost of property and equipment at March 31, 1997, 1996 and 1995
includes $280,963, $280,963 and $203,200, respectively, related to these capital
leases, while accumulated depreciation includes $86,265, $48,649 and $8,711,
respectively.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of the net minimum lease payments
as of March 31, 1997:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
--------------------------------------------------------------------
<S> <C>
1998................................................................ $ 71,642
1999................................................................ 71,642
2000................................................................ 44,285
--------
Total minimum lease payments........................................ 187,569
Less amount representing interest................................... 23,429
--------
Present value of net minimum lease payments......................... $164,140
========
</TABLE>
F-12
<PAGE> 61
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Aggregate maturities for all long-term obligations at March 31, 1997 are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------------------------
<S> <C>
1998.............................................................. $ 120,536
1999.............................................................. 4,726,773
2000.............................................................. 1,078,876
2001.............................................................. 1,000,000
2002.............................................................. 750,000
----------
$7,676,185
==========
</TABLE>
NOTE F -- LEASE OBLIGATIONS
The Company leases certain equipment and facilities under operating leases
which expire at various dates through December 31, 2001. The future minimum
lease commitments under these operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------------------------------------
<S> <C>
1998.............................................................. $1,036,576
1999.............................................................. 708,338
2000.............................................................. 559,247
2001.............................................................. 520,718
2002.............................................................. 363,239
----------
$3,188,118
==========
</TABLE>
Rent expense incurred under operating leases was $1,440,274, $1,721,867 and
$1,653,709 for the years ended March 31, 1997, 1996 and 1995, respectively.
NOTE G -- RELATED PARTY TRANSACTIONS
The notes receivable from officers at March 31, 1997 consist of two notes
from the Company's principal shareholder, plus accrued interest thereon. One
note, in the amount of $252,720, bears interest at the rate of 8.15% and is
secured by a mortgage on the shareholder's home. The other note, in the amount
of $70,000, is unsecured and bears interest at the rate of 10%. Both notes
provide for monthly payments of principal and interest, which payments were
delinquent at March 31, 1997. The shareholder will repay his indebtedness to the
Company at the time of consummation of the Offering referred to in Note J.
Interest income on shareholder notes amounted to $119,285, $136,737 and $136,105
in the years ended March 31, 1997, 1996 and 1995, respectively.
NOTE H -- LITIGATION
The Company is subject to on-going legal proceedings and claims which arise
in the ordinary course of its business. While the ultimate outcome of these
matters cannot be reasonably estimated at this time, these actions, when
ultimately settled or adjudicated, will not, in the opinion of management, have
a material adverse effect on the financial condition or results of operations of
the Company. The Company has accrued for matters where management has determined
that it is probable a liability for which a loss or range of loss can be
reasonably estimated has been incurred.
F-13
<PAGE> 62
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
NOTE I -- COMMITMENT
The Company carries high deductible workers' compensation insurance that
provides coverage to all employees except for those in states that require
coverage under the state's workers' compensation funds. The coverage has a
deductible of $250,000 per occurrence and an aggregate deductible of $950,000
per policy. Under the terms of the insurance agreements, the Company has $90,000
in cash on deposit with insurance carriers and an outstanding letter of credit
in the amount of $922,000 on deposit with one carrier at March 31, 1997 under an
old policy. These funds and letter of credit serve as collateral for any claims
incurred but not reported. The Company has an accrued liability for unpaid
claims and claims incurred but not reported of $861,402, $714,124 and $558,149
at March 31, 1997, 1996 and 1995, respectively.
NOTE J -- SUBSEQUENT EVENTS
Effective April 1, 1997, the Company, through the assumption of various
contracts, acquired substantially all of the aviation service business of Intex
Aviation Services, Inc. for approximately $5,805,000, which amount included the
assumption of $663,000 of liabilities related to the contracts. A deposit of
approximately $2,571,000 was paid prior to that date and has been recorded in
"Other Assets" on the March 31, 1997 balance sheet. The remaining amount due of
$2,571,000 is payable in 105 days and is subject to adjustments based upon
billings during that period on the contracts acquired.
On June 17 1997, the Company's Board of Directors approved the filing of a
Registration Statement under the Securities Act of 1933 for a public offering of
up to 3,248,750 shares of common stock. Net proceeds from the sale of common
stock are estimated to be approximately $25.4 million. The Company will use a
portion of the proceeds to reduce its outstanding borrowings. The remainder of
the proceeds will be used for general corporate purposes, including working
capital to support the Company's growth and possible acquisitions.
Also on June 17, 1997, the shareholders of the Company approved an
amendment to the Company's Articles of Incorporation increasing the authorized
shares of stock to 20,000,000 common shares and 5,000,000 serial preferred
shares.
NOTE K -- ACQUISTIONS OF OPERATING CONTRACTS
During the fiscal year ended March 31,1997, the Company acquired security
operating contracts from six entities for an aggregate purchase price of
approximately $2.8 million. The Company believes the purchase of these contracts
to be substantially equivalent to the purchase of a business. Accordingly, the
acquisitions have been accounted for under the Purchase method of accounting.
The purchase prices have been allocated to the contracts based upon their
estimated fair market values; the excess of the purchase prices over the
contract values have been allocated to goodwill, which is being charged to
operations on a straight-line basis over 20 years (see Note A). Revenues from
the acquired contracts have been included in operations from the respective
dates of acquisition.
The following unaudited pro forma results of operations give effect to the
above acquisitions as though they had been made at the beginning of the fiscal
years shown below.
<TABLE>
<CAPTION>
MARCH 31,
----------------------
1997 1996
--------- ---------
(IN THOUSANDS, EXCEPT
FOR PER SHARE AMOUNTS)
<S> <C> <C>
Revenue........................................................ $124,133 $116,246
Net earnings................................................... $2,159 $2,341
Earnings per share............................................. $0.42 $0.41
</TABLE>
F-14
<PAGE> 63
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
- --------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The pro forma results of operations have been prepared for comparative
purposes only and do not purport to present actual operating results had the
acquisitions been made at the beginning of each year, or of results which may
occur in the future.
F-15
<PAGE> 64
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
- --------------------------------------------------------------------------------
SHAREHOLDERS AND BOARD OF DIRECTORS
INTEX AVIATION SERVICES, INC.
We have audited the accompanying balance sheets of Intex Aviation Services, Inc.
as of December 31, 1996 and 1995, and the related statements of earnings,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1996. 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 audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Intex Aviation Services, Inc.
as of December 31, 1996 and 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1996, in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Cleveland, Ohio
April 18, 1997
F-16
<PAGE> 65
INTEX AVIATION SERVICES, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................... $ 974,500 $ 733,214 $ 290,898
Accounts receivable............................... 5,850,500 5,692,734 9,546,396
Prepaid expenses.................................. 364,500 749,372 420,470
----------- ----------- -----------
Total current assets...................... 7,189,500 7,175,320 10,257,764
PROPERTY AND EQUIPMENT
Furniture and fixtures............................ 42,400 42,370 51,394
Machinery and equipment........................... 481,500 481,567 381,931
----------- ----------- -----------
523,900 523,937 433,325
Less accumulated depreciation..................... 362,000 338,023 311,662
----------- ----------- -----------
161,900 185,914 121,663
----------- ----------- -----------
$ 7,351,400 $ 7,361,234 $10,379,427
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Notes payable to bank............................. $ 5,687,000 $ 5,562,000 $ 8,280,000
Current portion of long-term debt................. 49,200 48,982 47,832
Deposit on sale of contracts...................... 2,570,900 -- --
Trade accounts payable............................ 200,300 120,825 190,782
Accrued liabilities............................... 749,800 956,040 1,110,782
State income taxes payable........................ -- 4,160 75,852
----------- ----------- -----------
Total current liabilities................. 9,257,200 6,692,007 9,705,248
LONG-TERM DEBT...................................... 89,000 101,411 150,394
SHAREHOLDER'S EQUITY
Common stock, par value $1 per
share -- authorized -- 100,000 shares, issued
and outstanding 11,250 shares.................. 11,250 11,250 11,250
Retained earnings (deficit)....................... (2,006,050) 556,566 512,535
----------- ----------- -----------
(1,994,800) 567,816 523,785
----------- ----------- -----------
$ 7,351,400 $ 7,361,234 $10,379,427
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-17
<PAGE> 66
INTEX AVIATION SERVICES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------------------ ---------------------------------------
1997 1996 1996 1995 1994
---------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Operating revenues............... $8,789,000 $12,490,000 $41,161,899 $48,552,512 $22,714,733
Cost of operating revenues....... 7,882,000 11,169,000 35,877,280 42,393,448 18,595,731
---------- ----------- ----------- ----------- -----------
Gross profit........... 907,000 1,321,000 5,284,619 6,159,064 4,119,002
Selling, general and
administrative expenses........ 995,000 656,000 3,247,915 2,875,072 1,482,154
---------- ----------- ----------- ----------- -----------
Operating profit
(loss)............... (88,000) 665,000 2,036,704 3,283,992 2,636,848
Other expense (income):
Interest expense............... 114,000 170,000 532,717 504,910 58,299
Other.......................... -- -- (55,850) (21,194) 826
---------- ----------- ----------- ----------- -----------
114,000 170,000 476,867 483,716 59,125
---------- ----------- ----------- ----------- -----------
Earnings (loss) before
income taxes......... (202,000) 495,000 1,559,837 2,800,276 2,577,723
Provision for state income
taxes.......................... 20,000 64,000 40,280 95,589 97,674
---------- ----------- ----------- ----------- -----------
NET EARNINGS (LOSS).... $ (222,000) $ 431,000 $ 1,519,557 $ 2,704,687 $ 2,480,049
========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-18
<PAGE> 67
INTEX AVIATION SERVICES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND THE THREE MONTH PERIOD ENDED MARCH 31, 1997 (UNAUDITED)
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
BALANCE AT JANUARY 1, 1994.......................... $ 11,250 $ 426,915 $ 438,165
Net earnings...................................... -- 2,480,049 2,480,049
Distributions paid to shareholder................. -- (2,208,120) (2,208,120)
----------- ----------- -----------
BALANCE AT DECEMBER 31, 1994........................ 11,250 698,844 710,094
Net earnings...................................... -- 2,704,687 2,704,687
Distributions paid to shareholder................. -- (2,890,996) (2,890,996)
----------- ----------- -----------
BALANCE AT DECEMBER 31, 1995........................ 11,250 512,535 523,785
Net earnings...................................... -- 1,519,557 1,519,557
Distributions paid to shareholder................. -- (1,475,526) (1,475,526)
----------- ----------- -----------
BALANCE AT DECEMBER 31, 1996........................ $ 11,250 $ 556,566 $ 567,816
Net loss.......................................... -- (222,000) (222,000)
Distributions paid to shareholder................. -- (2,340,616) (2,340,616)
----------- ----------- -----------
BALANCE AT MARCH 31, 1997 (UNAUDITED)............... $ 11,250 $(2,006,050) $(1,994,800)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-19
<PAGE> 68
INTEX AVIATION SERVICES, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
ENDED MARCH 31, FOR THE YEARS ENDED DECEMBER 31,
------------------------- -----------------------------------------
1997 1996 1996 1995 1994
----------- ---------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings (loss)................. $ (222,000) $ 431,000 $ 1,519,557 $ 2,704,687 $ 2,480,049
Adjustments to reconcile net
earnings (loss) to net cash
provided by (used in) operating
activities:
Depreciation...................... 24,014 23,650 83,784 80,255 73,122
Changes in operating assets and
liabilities:
Accounts receivable............ (157,766) 1,560,911 3,853,662 (4,672,996) (3,550,519)
Prepaid expenses............... 384,872 297,634 (328,902) (216,403) (172,372)
Accounts payable............... 79,475 (125,859) (69,957) (19,469) 157,686
Accrued liabilities............ (206,240) (239,796) (154,742) 346,954 522,242
Accrued state taxes............ (4,160) (75,852) (71,692) 4,639 (22,922)
---------- --------- ---------- ---------- ----------
Net cash provided by (used
in) operating activities... (101,805) 1,871,688 4,831,710 (1,772,333) (512,714)
INVESTING ACTIVITIES
Purchases of property and
equipment -- net.................. -- (449) (148,035) (76,580) (69,515)
FINANCING ACTIVITIES
Principal payments on long-term
debt.............................. (12,193) (13,000) (47,833) (46,682) (45,536)
Proceeds (payments) on note payable
to bank -- net.................... 125,000 (315,000) (2,718,000) 4,655,000 3,125,000
Deposit on sale of contracts........ 2,570,900 -- -- -- --
Distributions paid to shareholder... (2,340,616) (531,087) (1,475,526) (2,890,996) (2,208,120)
---------- --------- ---------- ---------- ----------
Net cash (used in) provided
by financing activities.... 343,091 (859,087) (4,241,359) 1,717,322 871,344
---------- --------- ---------- ---------- ----------
INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS....... 241,286 1,012,152 442,316 (131,591) 289,115
Cash and cash equivalents at beginning
of year............................. 733,214 290,898 290,898 422,489 133,374
---------- --------- ---------- ---------- ----------
Cash and cash equivalents at end of
year................................ $ 974,500 $1,303,050 $ 733,214 $ 290,898 $ 422,489
========== ========= ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-20
<PAGE> 69
INTEX AVIATION SERVICES, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
AND MARCH 31, 1997 AND 1996 (UNAUDITED)
NOTE A -- BACKGROUND AND SIGNIFICANT ACCOUNTING POLICIES
Presentation
The interim financial statements as of March 31, 1997 and 1996 and the
three months then ended as included herein are unaudited. However, in the
opinion of management, such information reflects all adjustments, consisting
only of normal recurring accruals necessary for a fair presentation of the
information shown. The interim financial statements for the periods stated and
notes presented herein do not contain certain information included in the
Company's annual financial statements and notes as also herein presented.
Results for interim periods are not necessarily indicative of results expected
for the full year.
Revenue Recognition
The Company recognizes revenues from services provided under contracts as
those services are performed; revenues from sales of screening systems and other
products are recognized when those products are shipped to customers.
Background
Intex Aviation Services, Inc. (the "Company"), which was incorporated as a
South Carolina corporation on December 7, 1988, cleans and services airplanes
and airport terminals under contracts with airlines at various locations in the
United States. Approximately 92% of revenues are earned through services for a
single airline. Substantially all trade accounts receivable at December 31, 1996
and 1995 were due from this customer. The Company does not generally require
collateral.
Subsequent to December 31, 1996, the Company sold to International Total
Services, Inc. ("ITS") approximately 50 contracts which represented
approximately 98% of sales in 1996 and 1995 and 100% of sales in 1994. The
selling price of the contracts was $5,805,000, which included the assumption by
ITS of $663,000 of liabilities related to the contracts. The Company received
$2,571,000 cash as a down payment on March 31, 1997. The remaining amount due of
$2,571,000 is payable in 105 days and is subject to adjustments based upon
billings on the contracts sold during that period.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided over
the estimated useful lives of the respective assets, principally five to seven
years, using accelerated methods.
Income Taxes
The Company's sole shareholder has elected under Subchapter S of the
Internal Revenue Code and under Section 12-7-235 of the South Carolina Code of
laws to include the Company's income in his own income for income tax purposes.
The Company is still subject to income taxes in certain states.
Income tax payments totaled approximately $41,000, $96,000 and $121,000 in
1996, 1995 and 1994, respectively.
Cash Flow Statement
For purposes of the Statement of Cash Flows, the Company considers all
short-term, highly liquid investments with a maturity of three months or less to
be cash equivalents.
F-21
<PAGE> 70
INTEX AVIATION SERVICES, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Fair Values of Financial Instruments
The carrying amounts of cash and cash equivalents, notes payable to banks
and long-term debt approximate their fair value. Interest rates on notes payable
to banks adjust monthly to market rates. The fair value of long-term debt was
estimated based on the Company's current incremental borrowing rates for a
similar type of arrangement.
NOTE B -- NOTES PAYABLE TO BANKS
The Company is party to a revolving loan agreement with a bank under which
it may borrow $6,000,000. Interest is payable monthly on the principal amount of
advances outstanding at the bank's prime rate. The agreement is guaranteed by
the Company's sole shareholder. Under the agreement, the Company has pledged
substantially all of its accounts receivable and property and equipment as
collateral.
The Company is also party to a line of credit with another bank under which
it may borrow up to $5,000,000. Interest is payable monthly on the principal
outstanding at the bank's prime rate. The agreement is guaranteed by the
Company's sole shareholder.
Interest paid was approximately $533,000, $505,000 and $59,000 in 1996,
1995 and 1994, respectively.
NOTE C -- LONG-TERM DEBT
Long-term debt consists of the following at December 31:
<TABLE>
<CAPTION>
1996 1995
-------- --------
<S> <C> <C>
Note payable to former shareholder.......................... $ 49,285 $ 65,714
Due to former shareholder under non-compete agreement....... 101,108 132,512
-------- --------
150,393 198,226
Less current maturities..................................... 48,982 47,832
-------- --------
$101,411 $150,394
======== ========
</TABLE>
The note payable to former shareholder is payable in quarterly installments
of $4,107 plus interest at 7% per annum. The obligation arose in connection with
the purchase and retirement of the Company's common stock held by the former
shareholder.
The non-compete obligation was incurred in connection with the buy-back of
shares noted above and is payable in quarterly installments ranging from $8,023
to $8,817 over the non-compete period which ends on November 3, 1999.
F-22
<PAGE> 71
INTEX AVIATION SERVICES, INC.
- --------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS -- CONTINUED
Principal maturities of long-term debt subsequent to December 31, 1996 are
as follows:
<TABLE>
<S> <C>
1997................................................................ $ 48,982
1998................................................................ 50,133
1999................................................................ 51,278
--------
150,393
Less current portion................................................ 48,982
--------
$101,411
========
</TABLE>
NOTE D -- RELATED PARTY TRANSACTIONS
The Company leases its corporate office from its principal shareholder
under a month-to-month agreement for $2,500 per month. Rent expense under this
lease totaled $30,000 in 1996, 1995 and 1994.
NOTE E -- COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in various lawsuits filed by
certain former employees. The lawsuits include claims of race discrimination and
worker's compensation. The Company believes the suits are completely without
merit and intends to vigorously defend its position in each case; however, the
ultimate outcome of the lawsuits cannot presently be determined. Accordingly, no
provision for any liability that may result has been made in the accompanying
financial statements.
F-23
<PAGE> 72
A map depicting ITS's locations in the United States and its territories, and a
caption indicating the number of domestic locations and the foreign countries in
which the Company conducts operations.
<PAGE> 73
============================================================
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY COMMON SHARES BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER TO SELL OR
SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVER OF THIS PROSPECTUS OR
ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO
THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................... 3
Risk Factors..................................... 6
Use of Proceeds.................................. 13
Dividend Policy.................................. 13
Dilution......................................... 14
Capitalization................................... 15
Pro Forma Financial Data......................... 16
Selected Consolidated Financial Information...... 18
Management's Discussion and Analysis of Financial
Condition and Results of Operations............ 20
Business......................................... 25
Management....................................... 35
Certain Transactions............................. 41
Principal and Selling Shareholders............... 42
Description of Capital Shares.................... 43
Shares Eligible for Future Sale.................. 44
Underwriting..................................... 45
Legal Matters.................................... 46
Experts.......................................... 46
Additional Information........................... 47
Index to Financial Statements.................... F-1
</TABLE>
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS),
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON SHARES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
============================================================
============================================================
2,825,000 SHARES
[ITS LOGO]
INTERNATIONAL TOTAL SERVICES, INC.
COMMON SHARES
------------------------
PROSPECTUS
------------------------
MCDONALD & COMPANY
SECURITIES, INC.
MORGAN KEEGAN
& COMPANY, INC.
, 1997
============================================================
<PAGE> 74
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities offered hereby. Except for the
Securities and Exchange Commission registration fee, the NASD filing fee and the
Nasdaq National Market listing fee, all amounts are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee...................... $ 11,814
The Nasdaq Stock Market Listing Fee...................................... 33,130
National Association of Securities Dealers, Inc. Filing Fee.............. 4,399
Blue Sky Fees and Expenses (including counsel)........................... 10,000
Printing and Engraving Expenses.......................................... 250,000
Accounting Fees and Expenses............................................. 250,000
Legal Fees and Expenses.................................................. 325,000
Director and Officer Liability Insurance................................. 250,000
Transfer Agent's and Registrar's Fees and Expenses....................... 5,000
Miscellaneous............................................................ 60,657
----------
Total............................................................... $1,200,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Code of Regulations of the Company provides for indemnification of any
director, officer or employee in certain instances, as permitted under Section
1701.13(E) of the Ohio Revised Code, against expenses, judgments, decrees,
fines, penalties or amounts paid in settlement in connection with the defense of
any action, suit or proceeding, criminal or civil, to which he was, is or may be
a party by reason of his status as such director, officer or employee.
A director, officer or employee is entitled to indemnification only if a
determination is made (i) by the directors of the Company acting at a meeting at
which a quorum consisting of directors who neither were nor are parties to or
threatened with any such action, suit or proceeding is present, (ii) if such a
quorum is not obtainable or if a majority vote of a quorum of disinterested
directors so directs, in a written opinion by independent legal counsel, (iii)
by the shareholders or (iv) by the Court of Common Pleas or the court in which
such action, suit or proceeding was brought, that such director, officer or
employee (a) was not, and has not been adjudicated to have been, negligent or
guilty of misconduct in the performance of his duty to the Company, (b) acted in
good faith and in a manner he reasonably believed to be in the best interest of
the Company and (c) in any matter the subject of a criminal action, suit or
proceeding, had no reasonable cause to believe that his conduct was unlawful.
Additionally, Section 1701.13(E)(5)(a) of the Ohio Revised Code provides
that, unless prohibited by specific reference in a corporation's articles of
incorporation or code of regulations, a corporation shall pay a director's
expenses, including attorneys' fees, incurred in defending an action, suit or
proceeding brought against a director in such capacity, whether such action,
suit or proceeding is brought by a third party or by or in the right of the
corporation, provided the director delivers to the corporation an undertaking to
(a) repay such amount if it is proved in a court of competent jurisdiction that
his action or failure to act was undertaken with deliberate intent to injure the
corporation or with reckless disregard for the best interests of the corporation
and (b) reasonably cooperate with the corporation in such action, suit or
proceeding.
Section 1701.13(E)(7) of the Ohio Revised Code provides that a corporation
may purchase insurance or furnish similar protection for any director, officer
or employee against any liability asserted against him in any such capacity,
whether or not the corporation would have power to indemnify him under Ohio law.
Such
II-1
<PAGE> 75
insurance may be purchased from or maintained with a person in which the
corporation has a financial interest.
ITEM 15. SALES OF UNREGISTERED SECURITIES
The Company issued 0.50 Common Shares to each of four employees on March
31, 1995 and 0.50 Common Shares to each of four employees on March 31, 1996. The
Company also issued 2.00 Common Shares to one employee and 0.75 Common Shares to
two employees on November 27, 1996. Each issuance was made in consideration of
services rendered to the Company, was valued at $57,870 per Common Share, and
was made in reliance on the exemption from registration set forth in Section
4(2) of the Securities Act of 1933. The Company issued 0.32 Common Shares to
Robert A. Weitzel, its Chief Executive Officer, in a merger transaction
effective March 31, 1997, in exchange for his 75% interest in NBC Leasing, Inc.,
a former provider of leasing services to the Company. This issuance was valued
at $117,000 per Common Share and was made in reliance on the exemption from
registration set forth in Section 4(2) of the Securities Act of 1933.
The numbers and per share values of Common Shares set forth above do not
give effect to the 12,892.62 for 1 share split described in the Prospectus
included in this registration statement.
II-2
<PAGE> 76
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. The following is a list of exhibits in this Registration
Statement.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------------------
<C> <S>
* 1 Form of Underwriting Agreement.
3.1(i) Amended and Restated Articles of Incorporation of the Registrant.
3.1(ii) Code of Regulations of the Registrant.
3.2 Form of Amended and Restated Code of Regulations of the Registrant.
* 4 Specimen Certificate representing Common Shares.
* 5 Opinion of Counsel to the Registrant.
10.1 Asset Purchase Agreement dated as of March 7, 1997, between the Company and
Intex Aviation Services, Inc.
10.2 Third Amended And Restated Consolidated Replacement Credit Facility And
Security Agreement, dated as of March 31, 1997, by and between Bank One,
Cleveland, N.A., and the Company.
10.3 Term Promissory Note, dated March 31, 1997, by the Company to Bank One,
Cleveland, N.A.
10.4 Revolving Promissory Note, dated March 31, 1997 by the Company to Bank One,
Cleveland, N.A.
10.5 Note Purchase Agreement, dated as of November 25, 1996, by and among Seidler
Capital Partners L.P. and the Company.
10.6 First Amendment to Note Purchase Agreement, dated as of March 31, 1997, by and
among the Company and Seidler Capital Partners L.P.
10.7 Promissory Note, dated November 25, 1996, by the Company to Seidler Capital
Partners L.P.
10.8 Employment Agreement between the Company and Robert A. Weitzel.
10.9 Employment Agreement between the Company and James D. Singer.
* 10.10 Employment Agreement between the Company and Robert A. Swartz.
* 10.11 Employment Agreement between the Company and Scott E. Brewer.
10.12 Buy/Sell Agreement dated as of March 1, 1995 between the Company and Gene
Empey.
10.13 Buy/Sell Agreement dated as of January 26, 1996 between the Company and Scott
Brewer.
10.14 Buy/Sell Agreement dated as of January 26, 1996 between the Company and Bob
Swartz.
10.15 Buy/Sell Agreement dated as of November 27, 1996 between the Company and Bob
Swartz.
10.16 Buy/Sell Agreement dated as of February 27, 1997 between the Company and Scott
Brewer.
10.17 Buy/Sell Agreement dated as of February 27, 1997 between the Company and Bob
Swartz.
10.18 International Total Services, Inc. Directors' Deferred Compensation Plan.
10.19 International Total Services, Inc. Long Term Incentive Plan.
10.20 Form of Agreement for Airport Security Services, dated October 1, 1996, by and
between the Company and Delta Air Lines, Inc.
10.21 Form of Agreement for Skycap Services, dated October 1, 1996, by and between
the Company and Delta Airlines, Inc.
10.22 Form of Ground Services Agreement, dated December 1, 1996, by and between the
Company and Delta Airlines, Inc.
10.23 Passenger Screening and Airport Security Agreement, dated January 1, 1982, by
and between USAir, Inc. and the Company.
10.24 Agreement for Preboard Screening Services, dated October 1, 1990, by and
between the Company and Continental Airlines, Inc.
10.25 Core Agreement for Skycap and Wheelchair Services, dated October 1, 1990, by
and between the Company and Continental Airlines, Inc.
</TABLE>
II-3
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------------------------
<C> <S>
10.26 Form of Agreement for Skycap and Baggage Handling Services by and between the
Company and United Airlines.
10.27 Form of Agreement for Preboard Screening Services by and between the Company
and United Airlines.
10.28 Form of Agreement for Airport Security and Screening Services by and between
the Company and Southwest Airlines Co.
10.29 Form of Aircraft Cleaning Services Agreement by and between the Company and
Southwest Airlines Co.
10.30 Form of Agreement to Provide Skycap Services by and between the Company and
Southwest Airlines Co.
10.31 Form of Contract for Pre-Departure Screening Services by and between the
Company and US Airways, Inc.
10.32 Agreement, dated December 1, 1984, by and between the Company and USAir, Inc.
10.33 Core Agreement for Baggage Search and Passenger Inspection, dated March 15,
1990, by and between the Company and Trans World Airlines, Inc.
11.1 Statement Regarding Computation of Per Share Earnings of International Total
Services, Inc.
11.2 Statement Regarding Computation of Per Share Earnings of Intex Aviation
System, Inc.
16 Letter from Ernst & Young LLP Regarding Change in Certifying Accountant.
21 Subsidiaries of the Registrant.
*23.1 Consent of Grant Thornton LLP.
23.2 Consent of Counsel to the Registrant (included in Exhibit 5).
24 Powers of Attorney (included on page II-5).
27 Financial Data Schedule.
99.1 Consent of Ivan J. Winfield.
99.2 Consent of Lee C. Howley, Jr.
99.3 Consent of Jerry V. Jarrett.
</TABLE>
(b) Financial Statement Schedule:
<TABLE>
<CAPTION>
SCHEDULE
NUMBER DESCRIPTION OF DOCUMENT PAGE
-------- ----------------------------------------------------------------------- ----
<C> <S> <C>
Auditors Report on Financial Statement Schedule S-1
II Valuation and Qualifying Accounts S-2
</TABLE>
- ---------------
* Filed herewith.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
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 Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933 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 that 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 of 1933 and will be governed by the final adjudication of such
issue.
II-4
<PAGE> 78
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 that time it was declared effective.
(2) For the purpose 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 offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Cleveland, State of Ohio, on the 28th day of August, 1997.
INTERNATIONAL TOTAL SERVICES, INC.
By: /s/ ROBERT A. WEITZEL
------------------------------------
Robert A. Weitzel, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------- --------------------------------------- ---------------
<C> <S> <C>
/s/ ROBERT A. WEITZEL Chairman of the Board, Chief Executive August 28, 1997
- ----------------------------------- Officer and Director (Principal
Robert A. Weitzel Executive Officer)
/s/ ROBERT A. SWARTZ Chief Financial Officer (Principal August 28, 1997
- ----------------------------------- Financial Officer and Principal
Robert A. Swartz Accounting Officer)
* Director August 28, 1997
- -----------------------------------
Jean Weitzel
/s/ JAMES O. SINGER Director August 28, 1997
- -----------------------------------
James O. Singer
</TABLE>
/s/ ROBERT A. WEITZEL
- ---------------------------------
* By Robert A. Weitzel, as
attorney-in-fact
II-6
<PAGE> 80
EXHIBIT LIST
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
* 1 Form of Underwriting Agreement.
3.1(i) Amended and Restated Articles of Incorporation of the Registrant.
3.1(ii) Code of Regulations of the Registrant.
3.2 Form of Amended and Restated Code of Regulations of the Registrant.
* 4 Specimen Certificate representing Common Shares.
* 5 Opinion of Counsel to the Registrant.
10.1 Asset Purchase Agreement dated as of March 7, 1997, between the Company and Intex
Aviation Services, Inc.
10.2 Third Amended And Restated Consolidated Replacement Credit Facility And Security
Agreement, dated as of March 31, 1997, by and between Bank One, Cleveland, N.A.,
and the Company.
10.3 Term Promissory Note, dated March 31, 1997, by the Company to Bank One, Cleveland,
N.A.
10.4 Revolving Promissory Note, dated March 31, 1997 by the Company to Bank One,
Cleveland, N.A.
10.5 Note Purchase Agreement, dated as of November 25, 1996, by and among Seidler
Capital Partners L.P. and the Company.
10.6 First Amendment to Note Purchase Agreement, dated as of March 31, 1997, by and
among the Company and Seidler Capital Partners L.P.
10.7 Promissory Note, dated November 25, 1996, by the Company to Seidler Capital
Partners L.P.
10.8 Employment Agreement between the Company and Robert A. Weitzel.
10.9 Employment Agreement between the Company and James D. Singer.
* 10.10 Employment Agreement between the Company and Robert A. Swartz.
* 10.11 Employment Agreement between the Company and Scott E. Brewer.
10.12 Buy/Sell Agreement dated as of March 1, 1995 between the Company and Gene Empey.
10.13 Buy/Sell Agreement dated as of January 26, 1996 between the Company and Scott
Brewer.
10.14 Buy/Sell Agreement dated as of January 26, 1996 between the Company and Bob
Swartz.
10.15 Buy/Sell Agreement dated as of November 27, 1996 between the Company and Bob
Swartz.
10.16 Buy/Sell Agreement dated as of February 27, 1997 between the Company and Scott
Brewer.
10.17 Buy/Sell Agreement dated as of February 27, 1997 between the Company and Bob
Swartz.
10.18 International Total Services, Inc. Directors' Deferred Compensation Plan.
10.19 International Total Services, Inc. Long Term Incentive Plan.
10.20 Form of Agreement for Airport Security Services, dated October 1, 1996, by and
between the Company and Delta Air Lines, Inc.
10.21 Form of Agreement for Skycap Services, dated October 1, 1996, by and between the
Company and Delta Airlines, Inc.
10.22 Form of Ground Services Agreement, dated December 1, 1996, by and between the
Company and Delta Airlines, Inc.
10.23 Passenger Screening and Airport Security Agreement, dated January 1, 1982, by and
between USAir, Inc. and the Company.
10.24 Agreement for Preboard Screening Services, dated October 1, 1990, by and between
the Company and Continental Airlines, Inc.
10.25 Core Agreement for Skycap and Wheelchair Services, dated October 1, 1990, by and
between the Company and Continental Airlines, Inc.
10.26 Form of Agreement for Skycap and Baggage Handling Services by and between the
Company and United Airlines.
10.27 Form of Agreement for Preboard Screening Services by and between the Company and
United Airlines.
10.28 Form of Agreement for Airport Security and Screening Services by and between the
Company and Southwest Airlines Co.
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------------------------
<C> <S>
10.29 Form of Aircraft Cleaning Services Agreement by and between the Company and
Southwest Airlines Co.
10.30 Form of Agreement to Provide Skycap Services by and between the Company and
Southwest Airlines Co.
10.31 Form of Contract for Pre-Departure Screening Services by and between the Company
and US Airways, Inc.
10.32 Agreement, dated December 1, 1984, by and between the Company and USAir, Inc.
10.33 Core Agreement for Baggage Search and Passenger Inspection, dated March 15, 1990,
by and between the Company and Trans World Airlines, Inc.
11.1 Statement Regarding Computation of Per Share Earnings of International Total
Services, Inc.
11.2 Statement Regarding Computation of Per Share Earnings of Intex Aviation Systems,
Inc.
16 Letter from Ernst & Young LLP Regarding Change in Certifying Accountant.
21 Subsidiaries of the Registrant.
*23.1 Consent of Grant Thornton LLP.
23.2 Consent of Counsel to the Registrant (included in Exhibit 5).
24 Powers of Attorney (included on page II-5).
27 Financial Data Schedule.
99.1 Consent of Ivan J. Winfield.
99.2 Consent of Lee C. Howley, Jr.
99.3 Consent of Jerry V. Jarrett.
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 82
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON SCHEDULES
Shareholders and Board of Directors
International Total Services, Inc. and Subsidiaries
In connection with our audit of the financial statements of International Total
Services, Inc. referred to in our report dated May 9, 1997, we have also audited
Schedule II for each of the three years in the period ended March 31, 1997. In
our opinion, this schedule presents fairly, in all material respects, the
information required to be set forth therein.
GRANT THORNTON LLP
Cleveland, Ohio
May 9, 1997
S-1
<PAGE> 83
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
For the years ended March 31, 1995, 1996 and 1997
<TABLE>
<CAPTION>
COLUMN C
----------------------
ADDITIONS
COLUMN B ------------------------
BALANCE COLUMN E
AT (1) (2) BALANCE
BEGINNING CHARGED TO CHARGED TO AT END
COLUMN A OF COSTS AND OTHER COLUMN D OF
YEAR DESCRIPTION PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
- ----- -------------------------------- -------- ---------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1995 Allowance for doubtful accounts $100,000 $ 89,000 $ 89,000 $100,000
1996 Allowance for doubtful accounts $100,000 $111,000 $111,000 $100,000
1997 Allowance for doubtful accounts $100,000 $ 57,000 $ 57,000 $100,000
</TABLE>
S-2
<PAGE> 1
Exhibit 1
INTERNATIONAL TOTAL SERVICES, INC.
2,825,000 Common Shares*
UNDERWRITING AGREEMENT
----------------------
_______________, 1997
McDonald & Company Securities, Inc.
Morgan Keegan & Company, Inc.
As Representatives of the Several Underwriters
c/o McDonald & Company Securities, Inc.
McDonald Investment Center
800 Superior Avenue
Cleveland, Ohio 44114
Dear Sirs:
1. INTRODUCTORY. International Total Services, Inc., an Ohio
corporation (the "Company"), proposes to issue and sell 2,597,727 of its common
shares, without par value (the "Common Shares"), which are authorized but
unissued, and Robert A. Weitzel (the "Selling Shareholder") proposes to sell
227,273 outstanding Common Shares, to the public through the underwriters named
in Schedule A annexed hereto (the "Underwriters") for whom you are acting as the
Representatives. The 2,825,000 Common Shares to be purchased from the Company
and Selling Shareholder are hereinafter referred to as the "Firm Stock." The
Company also proposes to sell to the Underwriters, at their option, an aggregate
of not more than 423,750 additional Common Shares solely to cover
over-allotments, which are hereinafter referred to as the "Option Stock." The
Firm Stock and the Option Stock are hereinafter collectively referred to as the
"Stock" and are more fully described in the Registration Statement and the
Prospectus (as hereinafter defined). The Company and the Selling Shareholder
hereby confirm its and his several agreements, as set forth herein, with you,
acting as the Representatives of the Underwriters.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
represents and warrants to each of the Underwriters that:
- ----------------
* Plus an option to purchase up to 423,750 additional shares to cover
over-allotments.
<PAGE> 2
(a) The Company does not own or control, directly or
indirectly, any corporation, association or other entity other than those listed
in Exhibit 21 to the Registration Statement (as hereinafter defined). The
Company has been duly organized and is validly existing as a corporation in good
standing under the laws of Ohio with power and authority to own and lease its
properties and conduct its business as described in the Prospectus (as
hereinafter defined). Each of the Company's subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of its respective jurisdiction of incorporation, with corporate power and
authority to own and lease its properties and conduct its respective business.
The Company and each of its subsidiaries is duly qualified to do business as a
foreign corporation and is in good standing in all jurisdictions (i) in which
the conduct of business, as presently being conducted, requires such
qualification and (ii) in which the Company or such subsidiary owns or leases
real property (except for those jurisdictions in which the failure to so qualify
will not in the aggregate have a material adverse effect on the Company and such
subsidiaries, taken as a whole). Except as disclosed in the Registration
Statement and except for the shares of stock of each subsidiary owned by the
Company, neither the Company nor any subsidiary owns, directly or indirectly,
any equity securities or securities convertible into or exchangeable for equity
securities of any other corporation, partnership, joint venture, Massachusetts
or other business trust or any other business enterprise.
(b) This Agreement has been duly and validly
authorized, executed and delivered on behalf of the Company.
(c) The Company has prepared and filed with the
Securities and Exchange Commission (the "Commission"), in conformity with the
requirements of the Securities Act of 1933, as amended (the "Act"), and the
Rules and Regulations of the Commission thereunder (as hereinafter defined), a
registration statement on Form S-1 (Registration No. 333-29463) including a
preliminary prospectus relating to the Company's Stock. The registration
statement as amended at the time when it becomes effective (the "Effective
Date"), and including information (if any) contained in a prospectus
subsequently filed with the Commission pursuant to Rule 424(b) under the Act,
and deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Act is hereinafter referred to as the
"Registration Statement"; the prospectus in the form first used to confirm sales
of Stock, whether or not filed with the Commission pursuant to Rule 424(b) under
the Act is hereinafter referred to as the "Prospectus." If an abbreviated
registration statement is prepared and filed with the Commission in accordance
with Rule 462(b) under the Act (an "Abbreviated Registration Statement"), the
term "Registration Statement" as used in this Agreement includes the Abbreviated
Registration Statement.
(d) As of the Effective Date, and at all times
subsequent thereto up to and including the respective Closing Dates (as
hereinafter defined) of the offering, the Registration Statement and the
Prospectus, and any amendments thereof or supplements thereto, will contain all
statements of material facts which are required to be stated therein in
accordance with the Act and the applicable rules, regulations and interpretive
releases of the Commission thereunder (the "Rules and Regulations"), and will in
all material respects conform to the requirements of the Act and the Rules and
Regulations; and neither the Registration Statement nor the Prospectus, nor any
amendment thereof or supplement thereto, will include any untrue
-2-
<PAGE> 3
statement of a material fact or omit to state any material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that the Company makes no representations, warranties or
agreements as to information contained in the Registration Statement or the
Prospectus or any such amendment or supplement thereto in reliance upon and in
conformity with written information furnished to the Company through you as the
Representatives specifically for use in the preparation thereof.
(e) The Company's duly authorized, issued and
outstanding capital stock is as set forth under "Capitalization" in the
Prospectus, the outstanding Common Shares are duly authorized and validly
issued, fully paid and nonassessable, are free of any preemptive rights, rights
of first refusal or similar rights, were issued and sold in compliance in all
material respects with the applicable Federal and state securities laws and
conform in all material respects to the description thereof in the Prospectus;
except as described in the Prospectus, there are no outstanding options,
warrants or other rights calling for the issuance of, and there are no
commitments, plans or arrangements to issue any shares of capital stock of the
Company or any security convertible or exchangeable or exercisable for capital
stock of the Company. There are no holders of securities of the Company who, by
reason of the filing of the Registration Statement have the right (and have
not waived such right) to request the Company to include in the Registration
Statement securities owned by them, other than such rights as have been
satisfied by the inclusion of securities in the Registration Statement.
(f) The Common Shares of the Company conform in
substance to all statements in relation thereto contained in the Registration
Statement and the Prospectus; the Stock to be sold by the Company hereunder has
been duly authorized and, when issued and delivered pursuant to this Agreement,
will be validly issued, fully paid and nonassessable and will conform to the
description thereof contained in the Prospectus; and the Stock to be sold by the
Selling Shareholder has been duly authorized and validly issued and is fully
paid and nonassessable. All corporate action required to be taken for the
issuance of the Stock by the Company has been validly taken. No preemptive
rights of security holders of the Company exist with respect to the issuance and
sale of the Stock by the Company pursuant hereto.
(g) All the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and issued, are
fully paid and non-assessable and are owned by the Company free and clear of all
liens, encumbrances, equities, security interests, or claims; and there are no
outstanding options, warrants or other rights calling for the issuance of, and
there are no commitments, plans or arrangements to issue, any shares of capital
stock of any subsidiary or any security convertible or exchangeable or
exercisable for capital stock of any subsidiary.
(h) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus up to and
including the respective Closing Dates (as hereinafter defined), except as set
forth or contemplated in the Prospectus, (i) neither the Company nor any of its
subsidiaries has incurred any material liabilities or obligations, direct or
contingent, nor have any of them entered into any material transaction, (ii)
there has not been
-3-
<PAGE> 4
and will not have been any change on a pro forma basis or otherwise in the
capital stock or funded debt of the Company and its subsidiaries which is
material or any material adverse change in the business or the financial
position or results of operations of the Company and its subsidiaries and (iii)
no loss or damage (whether or not insured) to the property of the Company and
its subsidiaries has been sustained which materially and adversely affects the
operations of the Company and its subsidiaries taken as a whole.
(i) The consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict with or
result in a breach of any of the terms and provisions of, or constitute a
default under, the Articles of Incorporation or the Code of Regulations of the
Company, or the organizational documents of any of its subsidiaries, or any
indenture, mortgage, deed of trust or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which the Company or any of
its subsidiaries is bound, or any order, rule or regulation applicable to the
Company or any of its subsidiaries of any court or of any federal or state
regulatory body or administrative agency or other governmental body having
jurisdiction over the Company or any of its subsidiaries or any of their
properties.
(j) The financial statements of the Company and Intex
Aviation Services, Inc. ("Intex") included in the Registration Statement and the
Prospectus fairly present the financial position and results of operations of
the Company and Intex at the respective dates and for the respective periods to
which they apply, and such financial statements have been prepared in conformity
with generally accepted accounting principles consistently applied throughout
the periods involved. The pro forma financial statements of the Company included
in the Prospectus fairly present the pro forma financial position and results of
operations of the Company at the dates and for the periods to which they apply,
and have been prepared to give effect to certain assumptions and proposed
transactions made on reasonable bases which are fully and accurately described
in the Prospectus, and the pro forma adjustments have been properly applied on
the bases described therein.
(k) Grant Thornton LLP, who have examined and
expressed their opinion on the financial statements of the Company and Intex
referenced in their opinions set forth in the Prospectus, are independent
accountants within the meaning of the Act and the Rules and Regulations.
(l) The Company and its subsidiaries hold all
necessary material authorizations, approvals, orders, licenses, certificates and
permits of and from all governmental regulatory officials and bodies
(collectively the "licenses") required for the conduct of its business as
described in the Prospectus, and all such licenses are valid and in full force
and effect, and the Company and its subsidiaries are operating in compliance in
all material respects with the terms and provisions of such licenses and with
all material laws, regulations, orders and decrees applicable to the Company and
its subsidiaries, and their respective businesses and assets.
(m) Neither the Company nor any of its subsidiaries
is in violation of any applicable Federal, state or local laws, statutes, rules,
regulations or ordinances relating to
-4-
<PAGE> 5
public health, safety or the environment, including, without limitation,
relating to releases, discharges, emissions or disposal to air, water, land or
groundwater, to the withdrawal or use of groundwater, to the use, handling or
disposal of polychlorinated biphenyls (PCBs), asbestos or urea formaldehyde, to
the treatment, storage, disposal or management of hazardous substances
(including, without limitation, petroleum, crude oil or any fraction thereof, or
other hydrocarbons), pollutants or contaminants, to exposure to toxic, hazardous
or other controlled, prohibited or regulated substances, which violation would
have a material adverse effect on the business, condition (financial or other)
or results of operations of the Company and its subsidiaries, taken as a whole,
or which might materially and adversely affect the consummation of the
transactions contemplated by this Agreement. In addition, and irrespective of
such compliance, to the Company's knowledge, neither the Company nor any of its
subsidiaries is subject to any liabilities for environmental remediation or
clean-up, including any liability or class of liability of the lessee under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, or the Resource Conservation and Recovery Act of 1976, as amended,
which liability would have a material adverse effect on the business, condition
(financial or other) or results of operations of the Company and its
subsidiaries, or which might materially and adversely affect the consummation of
the transactions contemplated by this Agreement.
(n) There are no legal or governmental actions, suits
or proceedings pending or, to the knowledge of the Company, threatened to which
the Company or any of its subsidiaries, or any of their executive officers or
directors is a party or of which the business or property (including, without
limitation, any of the licenses referred to in (l) above) of the Company or any
of its subsidiaries or any of the Company's or any of its subsidiaries'
employees is the subject which could have a material adverse effect on the
business, condition (financial or other) or results of operations of the Company
and its subsidiaries, except as set forth in the Prospectus.
(o) Neither the Company nor any of its subsidiaries
is in violation of its Articles of Incorporation or its Code of Regulations or
other organizational documents, and no material default exists by the Company or
any of its subsidiaries in the due performance and observance of any term,
covenant or condition of any agreement material to the Company and its
subsidiaries to which the Company or any of its subsidiaries is a party or by
which the Company or any of its subsidiaries is bound.
(p) The Company and its subsidiaries have good title
to, or valid and enforceable leasehold estates in, all properties and assets
used for their businesses (including the property described in the Prospectus as
being owned or leased by the Company), in each case free and clear of all liens,
encumbrances and defects other than those set forth or referred to in the
Registration Statement or Prospectus or those which do not materially affect the
value of such property or leasehold and do not materially interfere with the use
made or proposed to be made of such property or leasehold by the Company and its
subsidiaries; and all of the leases and subleases under which the Company and
its subsidiaries hold such properties are in full force and effect.
-5-
<PAGE> 6
(q) Other than as set forth in the Prospectus, the
Company and its subsidiaries own or possess, or can acquire on reasonable terms,
the patents, patent rights, licenses, inventions, copyrights, know-how
(including trade secrets, applications and other unpatented or unpatentable
proprietary or confidential information, systems or procedures), trademarks,
service marks, and trade names (collectively, "Proprietary Rights") used in or
necessary for the conduct of their businesses as now conducted and as proposed
to be conducted as described in the Prospectus; the Company and its subsidiaries
have the right to use all Proprietary Rights used in or necessary for the
conduct of their businesses without infringing the rights of any person or
violating the terms of any licensing or other agreement to which the Company or
any of its subsidiaries is a party, and to the knowledge of the Company no
person is infringing upon any Proprietary Right which the Company or any of its
subsidiaries has the sole and exclusive right to use; no charges, claims or
litigation have been asserted or to the knowledge of the Company threatened
against the Company or any of its subsidiaries contesting the right of the
Company or any of its subsidiaries to use, or the validity of, any Proprietary
Right or challenging or questioning the validity or effectiveness of any
license or agreement pertaining thereto or asserting the misuse thereof, and,
to the Company's knowledge, no valid basis exists for the assertion of any such
charge, claim or litigation; all licenses and other agreements to which the
Company or any of its subsidiaries is a party relating to Proprietary Rights
are in full force and effect and constitute valid, binding and enforceable
obligations of the Company or such subsidiary, and, to the Company's knowledge,
the other respective parties thereto, and, to the Company's knowledge, there
have not been and there currently are not any defaults thereunder which would
have a material adverse effect on the Company and its subsidiaries, and no
event has occurred which (whether by notice or lapse of time or both) would
constitute such a default under any license or other agreement affecting
Proprietary Rights used in or necessary for the conduct of the businesses of
the Company and its subsidiaries by any party; and except as set forth in the
Prospectus, the validity, continuation and effectiveness of all such licenses
and other agreements and the current terms thereof will not be affected by the
transactions contemplated by this Agreement.
(r) No approval, authorization, consent or other
order of any public board or body (other than in connection with or in
compliance with the provisions of the Act and the securities or Blue Sky laws of
various jurisdictions) is legally required for the sale of the Stock by the
Company.
(s) The Common Shares have been registered under
Section 12(g) of the Securities Exchange Act of 1934, as amended, and have been
authorized for trading over-the-counter on the National Association of
Securities Dealers Automated Quotation National Market ("NASDAQ/NM") subject to
notice of issuance or sale, as the case may be.
(t) The outstanding debt, the properties and the
business of the Company and its subsidiaries conform in all material respects to
the description thereof contained in the Registration Statement and the
Prospectus.
(u) The Company and its subsidiaries have filed on a
timely basis all necessary federal, state, local and foreign income and
franchise tax returns required to be filed
-6-
<PAGE> 7
through the date hereof and have paid all taxes shown as due thereon; and no tax
deficiency has been asserted against the Company or any of its subsidiaries that
has not been satisfied, nor does the Company know of any tax deficiency which is
likely to be asserted against the Company or any of its subsidiaries which if
determined adversely to the Company or such subsidiary could materially
adversely affect the business, prospects, properties, assets, results of
operations or condition (financial or otherwise) of the Company and its
subsidiaries. All tax liabilities are adequately provided for on the books of
the Company.
(v) The Company and each of its subsidiaries maintain
insurance of the types and in the amounts generally deemed adequate for their
businesses, including, but not limited to, insurance covering (i) personal
injury claims and (ii) real and personal property owned or leased by the Company
and its subsidiaries against theft, damage, destruction, acts of vandalism and
all other risks customarily insured against, all of which insurance is in full
force and effect.
(w) To the best of the Company's knowledge, no labor
problem exists with its employees or is threatened or imminent that could
materially adversely affect the Company and its subsidiaries, taken as a whole,
and the Company is not aware of any existing, threatened or imminent labor
disturbance by the employees of any of its principal suppliers, contractors or
customers that could be expected to materially adversely affect the business,
prospects, properties, assets, results of operation or condition (financial or
other) of the Company and its subsidiaries, taken as a whole.
(x) The Company has obtained the agreement of each of
its executive officers, directors and shareholders that, for a period of 180
days from the date of the final prospectus, such persons will not, without the
prior written consent of McDonald & Company Securities, Inc., directly or
indirectly sell, offer to sell, grant any option for the sale of, or otherwise
dispose of any shares of the Company's Common Stock (including, without
limitation, shares of Common Stock which may be deemed to be beneficially owned
by such persons in accordance with the 1934 Act Regulations) or any securities
convertible into Common Stock.
(y) Neither the Company nor any of its officers,
directors or affiliates (as defined in the Act and the Rules and Regulations),
has taken or will take, directly or indirectly, any action designed to stabilize
or manipulate, or which has constituted, or might in the future reasonably be
expected to cause or result in, stabilization or manipulation of, the price of
the Stock of the Company in order to facilitate the sale or resale of the Stock
or otherwise.
(z) The Company's system of internal accounting
controls is sufficient to meet the broad objectives of internal accounting
control insofar as those objectives pertain to the prevention or detection of
errors or irregularities in amounts that would be material in relation to the
Company's financial statements; and, to the best of the Company's knowledge,
neither the Company nor any employee or agent of the Company or any of its
subsidiaries has made any payment of funds of the Company or any of its
subsidiaries or received or retained any funds and no funds of the Company or
any of its subsidiaries have been set aside to be used for any payment in
violation of any law, rule or regulation.
-7-
<PAGE> 8
(aa) Neither the Company nor any of its subsidiaries
is or intends to conduct its business in a manner in which it would become, an
"investment company" as defined in Section 3(a) of the Investment Company Act of
1940, as amended.
(bb) All contracts and documents which are required
to be filed as exhibits to the Registration Statement have been so filed.
3. REPRESENTATIONS AND WARRANTIES OF THE SELLING SHAREHOLDER.
The Selling Shareholder represents and warrants to each of the Underwriters
that:
(a) The Selling Shareholder now has and on the
Closing Date (as hereinafter defined) will have good and valid title to all the
shares of the Stock to be sold by the Selling Shareholder hereunder, free and
clear of all liens, encumbrances, equities, security interests and claims
whatsoever, with full legal right, power and authority to enter into this
Agreement and that upon the delivery of and payment for such shares of the Stock
hereunder, the several Underwriters will receive good and valid title to the
shares of the Stock to be sold by the Selling Shareholder, free and clear of all
liens, encumbrances, equities, security interests and claims whatsoever,
assuming that the several Underwriters purchase the stock in good faith without
notice of any adverse claims.
(b) The Selling Shareholder has not taken and will
not take, directly or indirectly, any action designed to stabilize or
manipulate, or which has constituted or which might in the future reasonably be
expected to cause or result in stabilization or manipulation of, the price of
the Stock of the Company in order to facilitate the sale or resale of the Stock
or otherwise.
(c) The Selling Shareholder is disposing of such
shares of the Stock for his own account. The Selling Shareholder is not selling
such shares of the Stock, directly or indirectly, for the benefit of the Company
or the Underwriters, and, no part of the proceeds of such sale to be received by
the Selling Shareholder will inure, either directly or indirectly, to the
benefit of the Company. Notwithstanding the foregoing, the Selling Shareholder
will repay all of his outstanding indebtedness to the Company upon the
consummation of the offering.
(d) This Agreement has been duly authorized, executed
and delivered by or on behalf of the Selling Shareholder and this Agreement is a
valid and binding obligation of the Selling Shareholder enforceable in
accordance with its terms.
(e) The Selling Shareholder has reviewed the
Registration Statement and the Prospectus, and neither the Registration
Statement nor the Prospectus nor any amendment or supplement thereto, will
include any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading. All information furnished in writing to the Company or the
Underwriters by the Selling Shareholder specifically for use in the preparation
of the Registration Statement and the Prospectus and other documents to be filed
with the National Association of Securities Dealers,
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<PAGE> 9
Inc. or state securities or Blue Sky authorities is true and correct and does
not contain an untrue statement of a material fact nor does it omit to state any
material fact required to be stated therein or necessary to make such
information not misleading.
(f) The execution and performance of this Agreement
and the consummation of the transactions herein and therein contemplated and the
fulfillment of the terms hereof and thereof will not conflict with, result in a
breach of, or constitute a default under any will, trust (constructive or
other), agreement, indenture, mortgage, note, deed, rule, regulation, order,
injunction, judgment, decree or other instrument to which the Selling
Shareholder is a party or by which he is bound.
(g) All consents, approvals, authorizations and
orders necessary for the execution and delivery by the Selling Shareholder of
this Agreement and for the sale and delivery of the Stock to be sold by the
Selling Shareholder hereunder, have been obtained, except such as may be
necessary to qualify the Stock for public offering by you under state securities
or "blue sky" laws.
(h) The Selling Shareholder is not aware that any of
the representations and warranties of the Company, set forth in Section 2
hereof, is untrue or inaccurate in any material respect.
4. SALE, PURCHASE AND DELIVERY OF STOCK. (a) On the basis of
the representations and warranties herein contained, but subject to the terms
and conditions herein set forth, the Company and the Selling Shareholder,
severally and no jointly, hereby agree to sell to each Underwriter, and each
Underwriter, severally and not jointly, agrees to purchase from the Company and
the Selling Shareholder the respective number of shares of the Firm Stock set
forth opposite the Underwriter's name in Schedule A hereto, at a price of
$______ per share. It is agreed (i) that the number of shares of Firm Stock to
be sold by the Company to each Underwriter and purchased by such Underwriter
from the Company shall be the percentage of 2,597,727 shares (Firm Shares sold
by the Company) of the Stock that the total number of shares of the Firm Stock
to be purchased by such Underwriter from the Company and the Selling Shareholder
is of 2,825,000 (total number of Firm Shares) and (ii) that the number of shares
of Firm Stock to be sold by the Selling Shareholder to each Underwriter and
purchased by such Underwriter from the Selling Shareholder shall be the
percentage of 227,273 shares (Firm Shares sold by the Selling Shareholder) of
the Stock that the total number of shares of Firm Stock to be purchased by such
Underwriter from the Company and the Selling Shareholder is of 2,825,000 shares
(total number of Firm Shares), in each instance adjusted by the Representatives
to avoid fractions and to reflect any adjustment required by Section 13 hereof.
(b) The Company and the Selling Shareholder will deliver the
Firm Stock to you for the respective accounts of the several Underwriters at the
office of McDonald & Company Securities, Inc., McDonald Investment Center, 800
Superior Avenue, Cleveland, Ohio 44114, at 10:00 A.M., Cleveland time, or to
your designee at a specified place at the same time, against payment of the
purchase price at the place of such Closing, by certified or official bank
checks in next day funds drawn in the case of shares of the Firm Stock sold by
the Company to
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the order of the Company and in the case of shares of the Firm Stock sold by the
Selling Shareholder to the order of the Selling Shareholder on the third full
business day after the effective date of the Registration Statement (or, if the
Firm Stock is priced after 4:30 p.m., Cleveland time on the effective date of
the Registration Statement, the fourth full business day after the effective
date of the Registration Statement), or at such other time not later than seven
full business days after such initial public offering as you shall determine,
such time and place being herein referred to as the "Closing Date." The
certificates for the Firm Stock so to be delivered will be in such denominations
and registered in such names as you may specify to the Company and the Selling
Shareholder at or before 3:00 P.M., Cleveland time, on the second full business
day prior to the Closing Date. Such certificates will be made available for
checking and packaging at least 24 hours prior to the Closing Date.
(c) On the basis of the representations and warranties herein
contained, but subject to the terms and conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase, severally and
not jointly, up to 423,750 additional shares in the aggregate of the Option
Stock at the purchase price set forth in Section 4(a) hereof, for use solely in
covering any over-allotments made by the Underwriters in the sale and
distribution of the Firm Stock. The option granted hereunder may be exercised at
any time (but not more than once) within 30 days after the date the Registration
Statement becomes effective, upon written or telegraphic notice by the
Representatives to the Company setting forth the aggregate number of shares of
the Option Stock as to which the Underwriters are exercising the option and the
time and place at which certificates will be delivered, such time (which, unless
otherwise determined by you and the Company, shall not be earlier than three nor
later than seven full business days after the exercise of said option) being
herein called the "Second Closing Date." The number of shares of the Option
Stock to be sold by the Company to each Underwriter and purchased by such
Underwriter from the Company shall be the same percentage of the total number of
shares of the Option Stock to be purchased by the several Underwriters on the
Second Closing Date as such Underwriter purchased of the total number of shares
of the Firm Stock, as adjusted by the Representatives to avoid fractions and to
reflect any adjustment required by Section 13 hereof. The Company will deliver
certificates for the shares of the Option Stock being purchased by the several
Underwriters to you on the Second Closing Date at the place and time of such
Closing, or to your designee at a specified place at the same time, against
payment of the purchase price at the place of such Closing, by certified or
official bank checks in next day funds drawn to the order of the Company. The
certificates for the Option Stock so to be delivered will be in such
denominations and registered in such names as you may specify to the Company at
or before 3:00 P.M., Cleveland time, on the second full business day prior to
the Second Closing Date. Such certificates will be made available for checking
and packaging at least 24 hours prior to the Second Closing Date. The option
granted hereby may be cancelled by you as the Representatives of the several
Underwriters, as to the shares of the Option Stock for which the option is
unexercised, at any time prior to the expiration of the 30-day period, upon
notice to the Company.
5. OFFERING BY UNDERWRITERS. Subject to the terms and
conditions hereof, the several Underwriters agree that (i) they will offer the
Stock to the public as set forth in the Prospectus as soon after the
Registration Statement becomes effective as may be practicable, but
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in no event later than 5:00 p.m., Cleveland time, on the 15th business day
subsequent to the date that the Registration Statement becomes effective, and
(ii) they will offer and sell the Stock to the public only in those
jurisdictions, and in such amounts, where due qualification and/or registration
has been effected or an exemption from such qualification and/or registration is
available under the applicable securities or Blue Sky laws of such jurisdiction;
it being understood, however, that such agreement only covers the initial sale
of the Stock by the Underwriters and not any subsequent sale of such Stock in
any trading market which may develop after the public offering.
6. COVENANTS OF THE COMPANY. The Company covenants and agrees
with each of the Underwriters that:
(a) The Company will make every reasonable effort to
cause the Registration Statement to become effective and will advise you when it
is effective under the Act. The Company will not file any amendment to the
Registration Statement, or supplement to the Prospectus, of which you have not
been previously advised and furnished with a copy, or to which you have
reasonably objected in writing.
(b) The Company will advise you promptly of any
request of the Commission for amendment of the Registration Statement or
Prospectus or for additional information and of the issuance by the Commission
of any stop order suspending the effectiveness of the Registration Statement or
of the institution of any proceedings for that purpose of which it has
knowledge, and the Company will make every reasonable effort to prevent the
issuance of any such stop order and to obtain as soon as possible the lifting
thereof, if issued.
(c) The Company will comply, to the best of its
ability, with the Act so as to permit the continuance of sales of and dealings
in the Stock under the Act for such period as may be required by the Act;
whenever it is necessary to amend or supplement the Prospectus to make the
statements therein not misleading, furnish, without charge to you as the
Representatives, either amendments to the Prospectus or supplemental
information, so that the statements in the Prospectus as so amended or
supplemented will not be misleading; and file a post-effective amendment to the
Registration Statement whenever such an amendment may be required and furnish,
without charge to you, a reasonable number of copies of any such amendment and
related Prospectus.
(d) Not later than the 45th day following the end of
the fiscal quarter first occurring after the first anniversary of the Effective
Date, the Company will make generally available to its security holders and
deliver to you an earnings statement (which need not be audited) covering a
period of at least 12 months beginning not earlier than the Effective Date which
shall satisfy the provisions of Section 11(a) of the Act and/or Rule 158
promulgated under the Act.
(e) The Company will furnish to you copies of the
Registration Statement (two of which will be signed and will include all
exhibits thereto), each preliminary
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prospectus, the Prospectus, all amendments of and supplements to such documents,
and all correspondence between the Commission and the Company or its counsel or
accountants relating thereto, in each case as soon as available and in such
quantities as you may reasonably request.
(f) For a period of three years from the date of the
Prospectus, the Company will deliver to you (i) within 90 days after the end of
each fiscal year, consolidated balance sheets, statements of income, statements
of cash flow and statements of changes in stockholders' equity of the Company
and its consolidated subsidiaries, if any, as at the end of and for such year
and the last preceding year, all in reasonable detail and certified by
independent accountants, (ii) within 45 days after the end of each of the first
three quarterly periods in each fiscal year, unaudited consolidated balance
sheets and statements of income, statements of cash flow and statements of
changes in stockholders' equity of the Company and its consolidated
subsidiaries, if any, as at the end of and for such period, all in reasonable
detail, (iii) as soon as available, all such proxy statements, financial
statements and reports as the Company shall send or make available to its
stockholders or the stockholders of any subsidiary any of whose stock is owned
by any person other than the Company or any subsidiary, and (iv) copies of all
annual or periodic reports as the Company or any subsidiary shall file with the
Commission as required by the Act, the Exchange Act and any rules or regulations
thereunder, which are available for public inspection at the Commission, or any
material reports filed in connection with the Company's listing on any stock
exchange.
(g) The Company will apply the net proceeds from the
sale of the Stock sold by it in the manner set forth in the Prospectus and will
timely file with the Commission such reports on Form SR as may be required
pursuant to Rule 463 under the Act.
(h) If, at the time that the Registration Statement
becomes effective, any information shall have been omitted therefrom in reliance
upon Rule 430A promulgated under the Act, then promptly following the execution
of this Agreement, the Company will prepare, and file or transmit for filing
with the Commission in accordance with Rule 430A and Rule 424(b) promulgated
under the Act, copies of an amended Prospectus or, if required by such Rule
430A, a post-effective amendment (including an amended Prospectus), containing
all information so omitted.
(i) The Company will file with the NASD all documents
and notices required of companies that have issued securities that are traded in
the over-the-counter market and quotations for which are reported by the
NASDAQ/NM.
(j) The Company will cooperate with you and your
counsel to qualify the Stock for sale under the securities or Blue Sky laws of
such jurisdictions within the United States as you designate, including
furnishing such information and executing such instruments as may be required,
and will continue such qualifications in effect for a period of at least three
months from the date hereof; provided, however, the Company shall not be
required to register or qualify as a foreign corporation or as a dealer in
securities nor, except as to matters and transactions relating to the offer and
sale of the Stock, consent to a service of process in any jurisdiction.
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<PAGE> 13
(k) For a period of 180 days from the time of the
initial public offering of the Stock by the Underwriters, the Company will not
publicly sell, except with your prior written consent, any Common Shares or
securities convertible into Common Shares for cash, except pursuant to the
exercise of any outstanding stock options of the Company that are described in
the Prospectus.
(l) After the Closing Dates, the Company and the
Subsidiaries will be in compliance with the financial record-keeping
requirements and internal accounting control requirements of Section 13(b)(2) of
the Exchange Act.
7. COVENANTS OF THE SELLING SHAREHOLDER. The Selling
Shareholder covenants and agrees with each Underwriter that the Selling
Shareholder will not sell or transfer, without your prior written consent, any
Common Shares of the Company now held by the Selling Shareholder, alone or with
any other person, for a period of 180 days from the time of the initial offering
of the Stock by the Underwriters, except for any transfer by gift upon the
condition that the donee shall agree in writing, with a copy to be delivered to
you, to be bound by the foregoing restriction in the same manner as it applies
to the donor. However, the giving of your written consent with respect to any
such sale or transfer by the Selling Shareholder shall not constitute a waiver
of this covenant with respect to any other request by the Selling Shareholder,
it being understood that you may, in your absolute discretion, consent to
certain proposed sales and transfers and refuse to consent to others during such
180-day period. Any request from the Selling Shareholder to permit a sale or
transfer of Common Shares of the Company shall be in writing and addressed to
you and shall set forth in reasonable detail the reasons for the proposed sale
or transfer. In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Internal Revenue Code of 1986, as
amended, with respect to the transactions herein contemplated, the Selling
Shareholder agrees to deliver to you prior to or on the Closing Date a properly
completed and executed United States Treasury Department Form W-9 (or other
applicable form or statement specified by Treasury Department regulations in
lieu thereof).
8. PAYMENT OF EXPENSES. The Company will pay or cause to be
paid (and the Selling Shareholder shall reimburse the Company in such amounts
and in such proportions as may be agreed upon between the Company and the
Selling Shareholder, subject, however, to any limitations imposed by applicable
state securities or Blue Sky laws) all costs and expenses incident to the
performance of the obligations of the Company and the Selling Shareholder
hereunder, including, but not limited to, the reasonable fees and disbursements
of its counsel; the reasonable fees, costs and expenses of preparing, printing
and delivering the certificates for the Stock; the reasonable fees, costs and
expenses of the transfer agent and registrar for the Common Shares; the
reasonable fees and disbursements of its accountants; the filing fees and
reasonable expenses incurred in connection with the qualification, registration
or exemption of the Stock under state securities or Blue Sky laws and the fees
and disbursements of counsel for the Underwriters in connection with such
qualification, registration or exemption and the preparation and printing of the
preliminary and final Blue Sky Surveys; the filing fees and reasonable expenses
paid and incurred by the Underwriters, including fees and disbursements of
counsel for
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<PAGE> 14
Underwriters, in connection with the review of the terms of the underwriting
arrangements by the NASD; the costs and expenses in connection with the
preparation, printing and filing of the Registration Statement (including
exhibits thereto) and the Prospectus and the furnishing to the Underwriters of
such copies of each preliminary and final Prospectus as the Underwriters may
reasonably require; and the costs and expenses in connection with the printing
of this Agreement, the Agreement Among Underwriters, the Selected Dealers
Agreement and other documents distributed to the Underwriters.
9. CONDITIONS OF THE OBLIGATION OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Firm Stock
on the Closing Date and the Option Stock on the Second Closing Date shall be
subject to the condition that the representations and warranties made by the
Company and the Selling Shareholder herein are true and correct as of the date
hereof and as of the respective Closing Dates, to the condition that the written
statements of Company officers and the Selling Shareholder made pursuant to the
provisions hereof are true and correct, and to the performance by the Company
and the Selling Shareholder of their respective obligations hereunder and to the
following additional conditions:
(a) The Registration Statement shall have become
effective not later than 5:00 P.M., Cleveland time, on the date of this
Agreement, or at such later time as shall have been consented to by you, and
prior to each Closing Date no stop order suspending the effectiveness of the
Registration Statement shall have been issued and no proceedings for that
purpose shall have been instituted or shall be pending, or to the knowledge of
the Company or you, shall be contemplated by the Commission.
(b) You shall not have advised the Company and the
Selling Shareholder that the Registration Statement or Prospectus or any
amendment thereof or supplement thereto contains an untrue statement of fact
which, in the reasonable opinion of Calfee, Halter & Griswold LLP, counsel for
the Underwriters, is material, or omits to state a fact which, in the opinion of
such counsel, is material and is required to be stated therein or is necessary
to make the statements therein not misleading.
(c) You shall have received as of each Closing Date
(or prior thereto as indicated) the following:
(i) An opinion of Baker & Hostetler LLP,
dated the respective Closing Dates, to the effect that:
(aa) The Company has been duly
organized and is validly existing as a corporation in good standing under the
laws of Ohio with corporate power and authority to own its properties and
conduct its business as described in the Prospectus. Each of the Company's
subsidiaries has been duly incorporated and is validly existing as a corporation
in good standing under the laws of its respective jurisdiction of incorporation,
with power and authority to own and lease its properties and conduct its
respective business.
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<PAGE> 15
(bb) The authorized capital stock of
the Company is as set forth under "Capitalization" in the Prospectus; all
issued and outstanding Common Shares of the Company (including the Stock to be
sold by the Selling Shareholder hereunder) have been duly authorized and
validly issued and are fully paid and nonassessable, and, to the best of the
knowledge of such counsel, are free of preemptive rights of stockholders,
rights of first refusal or similar rights. To the best of the knowledge of such
counsel, except as described in the Prospectus, there are no outstanding
options, warrants or other rights calling for the issuance of and there are no
commitments, plans or arrangements to issue any shares of capital stock of the
Company or any security convertible or exchangeable or exercisable for capital
stock of the Company, and there are no holders of securities of the Company
who, by reason of the filing of the Registration Statement, have the right (and
have not waived such right) to request the Company to include in the
Registration Statement securities owned by them, other than such rights as have
been satisfied by the inclusion of securities in the Registration Statement.
(cc) The Common Shares of the
Company to be issued and sold by the Company hereunder have been duly
authorized, and, when issued, delivered and paid for pursuant to this Agreement,
will be validly issued, fully paid and nonassessable. No preemptive rights of
security holders of the Company exist with respect to the issuance and sale of
the stock by the Company pursuant to this Agreement. The Common Shares of the
Company conform to the description thereof contained in the Prospectus and the
certificates for the Common Shares of the Company (including the Stock) are in
due and legal form under Ohio law.
(dd) The Company has the corporate
power and authority to enter into and perform this Agreement, and to issue and
deliver the Stock as provided herein. The execution, delivery and performance of
this Agreement by the Company and the Selling Shareholder have been duly
authorized by all necessary action of the Company and the Selling Shareholder.
This Agreement constitutes the legal, valid and binding obligation of the
Company and the Selling Shareholder, enforceable in accordance with its terms,
except as rights to indemnity may be limited by public policy and applicable
federal or state securities laws and except as enforcement thereof may be
limited by bankruptcy, insolvency or other laws of general application affecting
the enforcement of creditors' rights or by general principles of equity.
(ee) The Registration Statement has
become effective under the Act and, to the best of the knowledge of such
counsel, no stop order suspending the effectiveness of the Registration
Statement has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the Act. The Registration
Statement and the Prospectus, and each amendment thereof or supplement thereto
(except for the financial statements and schedules and financial and statistical
information included therein as to which such counsel need express no opinion)
comply as to form in all material respects with the requirements of the Act and
the Rules and Regulations (except for the financial statements and schedules and
financial and statistical information included therein as to which such counsel
need express no opinion); the descriptions in the Registration Statement and the
Prospectus of the Common Shares, statutes, regulations, leases, employee benefit
plans, contracts and other documents are materially accurate and fairly present
the information required to be shown; and such counsel does not know of any
legal or governmental proceedings which are required by the Act and the Rules
and Regulations to be described in the Prospectus and which are not described
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<PAGE> 16
as so required, or of any leases, contracts or other documents of a character
which are required by the Act and the Rules and Regulations to be described in
the Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement and which are not described and/or filed as so required.
(ff) The consummation of the
transactions herein contemplated and the fulfillment of the terms hereof will
not result in a breach of any of the terms and provisions of, or constitute a
default under, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any of its subsidiaries is a party and of
which such counsel has knowledge after reasonable investigation, or any will,
trust (constructive or other), agreement, judgment, decree, or other instrument
to which the Selling Shareholder is a party or by which the Selling Shareholder
is bound and of which such counsel has knowledge, or the Articles of
Incorporation or By-laws of the Company, or the organizational documents of any
of its subsidiaries, or, to the knowledge of such counsel, any order, rule or
regulation applicable to the Company or any of its subsidiaries or the Selling
Shareholder of any court or of any federal or state regulatory body or
administrative agency or other governmental body having jurisdiction over the
Company or any of its subsidiaries or the Selling Shareholder or the properties
of any of them, except for such breaches or defaults as will not have a material
adverse effect on the consummation of the transactions herein contemplated and
the fulfillment of the terms hereof by the Company or the Selling Shareholder.
(gg) All approvals, consents and
orders of all governmental bodies required in connection with the valid
authorization, issuance and sale of the Stock as contemplated by this Agreement
have been obtained, except such as may be required under the securities or Blue
Sky laws of any jurisdiction as to which such counsel need express no opinion.
(hh) To such counsel's knowledge,
neither the Company nor any of its subsidiaries is in violation of its Articles
of Incorporation or its Code of Regulations or other organizational documents,
and, to the best of the knowledge of such counsel, no default exists by the
Company or any of its subsidiaries in the due performance and observance of any
term, covenant or condition of any indenture, mortgage, deed of trust, loan
agreement or other agreement filed as an exhibit to the Registration Statement
and by which the Company or any of its subsidiaries is a party or by which the
Company or any of its subsidiaries is bound.
(ii) Based solely on such counsel's
examination of the share records of the Company, the Selling Shareholder is, as
of the Closing Date, the owner of the shares of the Stock sold by the Selling
Shareholder pursuant to this Agreement and full legal right and power and all
authorization and approval (if any), required by law to sell, transfer and
deliver such shares in accordance with this Agreement, and delivery of such
shares against payment therefor as provided in this Agreement will vest good
title to such shares in the purchasers thereof, free and clear of any liens,
claims, equities or encumbrances, assuming that such purchasers purchase the
same in good faith without notice of any adverse claims.
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<PAGE> 17
(jj) The Company is not an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended.
(kk) No facts have come to the
attention of such counsel which would lead such counsel to believe that either
the Registration Statement at the time it became effective and at the Closing
Date or the Second Closing Date, as the case may be, contained an untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein not misleading or
that the Prospectus as of the date thereof and as of the Closing Date or the
Second Closing Date, as the case may be, contained an untrue statement of a
material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that such counsel need express no belief or opinion with respect to the
financial statements and schedules and other financial and statistical
information data included therein).
In rendering such opinion, such
counsel may rely (A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which they are admitted, to
the extent specified in such opinion, if at all, upon an opinion or opinions of
other counsel, familiar with the applicable laws; (B) as to matters of fact on
certificates of officers of the Company and of the Selling Shareholder and
certificates or other written statements of officers of departments of various
jurisdictions having custody of documents respecting the corporate existence or
good standing of the Company and its subsidiaries. The opinion of such counsel
for the Company and the Selling Shareholder shall state that the opinion of any
such other counsel is in form satisfactory to such counsel and, in their
opinion, you and they are justified in relying thereon.
(ii) An opinion of Scott E. Brewer, Esq.,
General Counsel of the Company, dated the respective Closing Dates, to the
effect that:
(aa) To the best of his knowledge,
the Company and its subsidiaries hold and are in compliance with all necessary
material authorizations, approvals, orders, licenses, certificates and permits
of and from all governmental regulatory officials and bodies (collectively, the
"licenses") required for the conduct of its business as described in the
Prospectus, except where the failure to so hold or comply with any license would
not have, individually or in the aggregate, a material adverse effect on the
business, condition (financial or other) or results of operations of the Company
and its subsidiaries, taken as a whole.
(bb) To the best of his knowledge,
the Company and its subsidiaries are not in violation of any Federal or Ohio
laws and regulations that are of general application to corporations in the
conduct of their business, except where the failure so to comply or conform
would not have a material adverse effect on the business, condition (financial
or other) or results of operations of the Company and its subsidiaries, taken as
a whole.
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(cc) Except as set forth in the
Prospectus, such counsel does not know of any past, pending or threatened
action, suit, proceeding, inquiry or investigation before any court or before or
by any public, regulatory or governmental body or board against or involving the
business or property of the Company or any of its subsidiaries which, if
successful, could reasonably be expected to have a material adverse effect on
the business, condition (financial or other) or results of operations of the
Company and its subsidiaries, taken as a whole.
(dd) The Company and each of its
subsidiaries are duly qualified to do business as a foreign corporation and are
in good standing in all jurisdictions (i) in which the conduct of business, as
presently being conducted requires such qualification (except for those
jurisdictions in which the failure to so qualify will not in the aggregate have
a material adverse effect on the Company and its subsidiaries) and (ii) in which
the Company or such subsidiary owns or leases real property.
(ee) All the issued shares of
capital stock of each subsidiary of the Company have been duly and validly
authorized and issued, are fully paid and non-assessable and are owned by the
Company free and clear of all liens, encumbrances, equities, security interests,
or claim; and there are no outstanding options, warrants or other rights
calling for the issuance of, and there are no commitments, plans or arrangements
to issue, any shares of capital stock of any subsidiary or any security
convertible or exchangeable or exercisable for capital stock of any subsidiary;
except as disclosed in the Registration Statement and except for the shares of
stock of each subsidiary owned by the Company, neither the Company nor any
subsidiary owns, directly or indirectly, any shares of capital stock of any
corporation or has any equity interest in any firm, partnership, joint venture,
association or other entity.
In rendering such opinion, such
counsel may rely (A) as to matters involving the application of laws other than
the laws of the United States and jurisdictions in which he is admitted, to the
extent specified in such opinion, if at all, upon an opinion or opinions of
other counsel, familiar with the applicable laws; (B) as to matters of fact on
certificates of officers of the Company. The opinion of Mr. Brewer shall state
that the opinion of any such other counsel is in form satisfactory to him and,
in his opinion, you and they are justified in relying thereon.
(iii) Such opinion or opinions of Calfee,
Halter & Griswold LLP, counsel for the Underwriters, dated the respective
Closing Dates, with respect to the sufficiency of all corporate proceedings and
other legal matters relating to this Agreement, the validity of the Stock, the
Registration Statement, the Prospectus, and other related matters as you
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<PAGE> 19
may reasonably request, and the Company and the Selling Shareholder shall have
furnished to such counsel such documents as they may request for the purpose of
enabling them to pass upon such matters. In connection with such opinions, such
counsel may rely on representations or certificates of officers of the Company
and of the Selling Shareholder; and in rendering an opinion with respect to the
Selling Shareholder, such counsel may rely on the opinion of Baker & Hostetler
LLP.
(iv) A certificate of the Company executed
by the principal executive officer and the principal financial and accounting
officer of the Company, dated each respective Closing Date, to the effect that:
(aa) The representations and
warranties of the Company in Section 2 of this Agreement are true and correct as
of each respective Closing Date, and the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to each respective Closing Date.
(bb) No stop order suspending the
effectiveness of the Registration Statement has been issued and, to the
knowledge of the respective signers of the certificate, no proceedings for that
purpose have been instituted or are pending or, are contemplated under the Act.
(cc) The signers of the certificate
have carefully examined the Registration Statement and the Prospectus; no facts
have come to their attention which would lead them to believe that either the
Registration Statement at the time it became effective (or any amendment thereof
or supplement thereto made prior to the Closing Date or the Second Closing Date,
as the case may be, as of the date of such amendment or supplement) contained an
untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus as of the date thereof (or any amendment
thereof or supplement thereto made prior to the Closing Date or the Second
Closing Date, as the case may be, as of the date of such amendment or
supplement) contained an untrue statement of a material fact or omitted to state
any material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading; since the latest respective dates as of which information is
given in the Registration Statement, there has been no material adverse change
in the financial position, business or results of operations of the Company and
its subsidiaries, except as set forth in or contemplated by the Prospectus; and
since the Effective Date of the Registration Statement there has occurred no
event required to be set forth in an amended or supplemented Prospectus which
has not been set forth.
(v) A certificate of the Selling
Shareholder, dated the Closing Date, to the effect that the representations and
warranties of the Selling Shareholder in Section 3 of this Agreement are true
and correct as of the Closing Date, and the Selling Shareholder has complied
with all the agreements and satisfied all the conditions on his part to be
performed or satisfied at or prior to the Closing Date.
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<PAGE> 20
(vi) Letters from Grant Thornton LLP dated
respectively the date of this Agreement and each respective Closing Date,
addressed to you and in form and substance previously approved by you, with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and the Prospectus.
(d) At or prior to the Closing Date (as indicated in
the Closing Memorandum prepared by counsel for the Underwriters), the Company
and the Selling Shareholder shall have furnished to you such further
certificates and documents provided for in such Closing Memorandum.
(e) Prior to each Closing Date no stop orders
suspending the qualification of the Stock under the securities or Blue Sky laws
of the states in which the Stock is to be offered and sold shall have been
issued and no proceedings for that purpose shall have been instituted or shall
be pending, or to the knowledge of the Company or you, shall be contemplated by
the applicable state securities administrators.
If any condition of the Underwriters' obligations hereunder to
be satisfied prior to any Closing Date is not so satisfied, this Agreement may
be terminated by you prior to such Closing Date, by notice in writing or by
telegram confirmed in writing to the Company and the Selling Shareholder.
All such opinions, certificates, letters and documents
furnished to you pursuant to this Section 9 will be in compliance with the
provisions hereof only if they are in all material respects satisfactory to you
and to Calfee, Halter & Griswold LLP, counsel for the Underwriters, as to which
both you and such counsel shall act reasonably. The Company will furnish you
with such executed and conformed copies of such opinions, certificates, letters
and documents as you may request.
You, on behalf of the Underwriters, may waive in writing the
compliance by the Company or the Selling Shareholder of any one or more of the
foregoing conditions or extend the time for their performance.
10. REPRESENTATIONS OF THE UNDERWRITERS. Each of the
Underwriters severally represents and warrants to the Company and the Selling
Shareholder that the information furnished to the Company in writing by such
Underwriters or by you expressly for use in the preparation of the Registration
Statement or the Prospectus does not, and any amendments thereof or supplements
thereto thus furnished will not, contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading. Through you each Underwriter has
only furnished to the Company expressly for such use, the statements made in the
last paragraph of the cover page of the Prospectus and the statements relating
to the terms of the offering by the several Underwriters set forth under the
caption "Underwriting" in the Prospectus.
11. TERMINATION OF AGREEMENT. This Agreement shall become
effective at the time the Stock is released by you for sale. At any time before
the happening of such
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<PAGE> 21
occurrence, the Company or the Selling Shareholder may, by notice to you,
terminate this Agreement; and at any time prior to such time, you, as the
Representatives of the several Underwriters, may, by notice to the Company and
the Selling Shareholder, terminate this Agreement.
This Agreement may also be terminated by you, as the
Representatives of the several Underwriters, by notice to the Company and the
Selling Shareholder, on or after the Effective Date of the Registration
Statement and prior to each respective Closing Date, if at any time during such
period any of the following has occurred: (i) except as disclosed in or
contemplated by the Registration Statement, since the respective dates as of
which information is given in the Registration Statement and the Prospectus, any
material adverse change or any development involving a prospective material
adverse change in or affecting the condition, financial or otherwise, of the
Company and its subsidiaries taken as a whole or the earnings, business affairs,
management or business prospects of the Company and its subsidiaries taken as a
whole, whether or not arising in the ordinary course of business; (ii) any
outbreak of hostilities or escalation in existing hostilities anywhere in the
world or other national or international calamity or crisis or change in
economic or political conditions, if the effect of such outbreak, escalation,
calamity, crisis or change on the financial markets in the United States would,
in your reasonable judgment, make it impracticable to offer for sale or to
enforce contracts made by the Underwriters for the resale of the Stock agreed to
be purchased hereunder; (iii) any general suspension of trading in securities on
the New York Stock Exchange or the American Stock Exchange or the NASDAQ/NM or
any general limitation on prices for such trading or any general restrictions on
the distribution of securities, all to such a degree as would in your reasonable
judgment materially adversely affect the market for the Stock; or (iv) a banking
moratorium shall have been declared by either Federal, Ohio or New York State
authorities.
This Agreement may also be terminated as provided in Sections
9 and 13 hereof.
If this Agreement shall be terminated by you because of any
failure on the part of the Company or the Selling Shareholder to comply with any
of the terms or to fulfill any of the conditions of this Agreement, or if for
any reason the Company or the Selling Shareholder shall be unable to perform its
or his obligations under this Agreement, the Company shall pay, in addition to
the costs and expenses referred to in Section 8, all reasonable out-of-pocket
expenses incurred by the Underwriters in contemplation of the performance by
them of their obligations hereunder, including but not limited to the reasonable
fees and disbursements of counsel for the Underwriters, the Underwriters'
reasonable printing and traveling expenses and postage, telegraph and telephone
charges relating directly to the offering contemplated by the Prospectus, and
also including reasonable advertising expenses of the Representatives incurred
after the Effective Date of the Registration Statement and so relating, it being
understood that such out-of-pocket expenses shall not include any compensation,
salaries or wages of the officers, partners or employees of any of the
Underwriters, subject to such right of contribution, if any, as the Company may
have against the Selling Shareholder in the event of the failure of the Selling
Shareholder to comply with any of the terms or to fulfill any of the conditions
of this Agreement. Only such out-of-pocket expenses as shall be accounted for by
the Underwriters shall be paid to the Underwriters by the Company.
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<PAGE> 22
The Company and the Selling Shareholder shall not in any event
be liable to the several Underwriters for damages on account of loss of
anticipated profits arising out of the transactions contemplated by this
Agreement.
12. INDEMNIFICATION. (a) The Company will indemnify and hold
harmless each Underwriter, and each person, if any, who controls each
Underwriter within the meaning of the Act, against any losses, claims, damages
or liabilities, joint or several, to which such Underwriter or such controlling
person may become subject, under the Act or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based in whole or in part on any inaccuracy in the representations and
warranties of the Company contained herein or any failure of the Company to
perform its obligations hereunder, or arise out of or are based upon any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any related preliminary prospectus (if used prior to the
Effective Date), the Prospectus or any amendment thereof or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, and, subject to the provisions of Section
12(d), will reimburse each Underwriter and each such controlling person for any
legal or other expenses reasonably incurred by such Underwriter or such
controlling person in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this Section 12(a) with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter or to the benefit
of any person controlling such Underwriter in respect of any loss, claim,
damage, liability or action asserted by a person who purchases shares of the
Stock from such Underwriter, if such Underwriter failed to send or give a copy
of the Prospectus (as the same may then be amended or supplemented) to such
person with or prior to written confirmation of the sale to such person; and
provided, further, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon any untrue statement or omission or alleged omission made in the
Registration Statement, any preliminary prospectus, the Prospectus or any
amendment thereof or supplement thereto in reliance upon or in conformity with
written information furnished to the Company by an Underwriter specifically for
use in the preparation thereof, as referred to in the last sentence of Section
10 hereof. This indemnity agreement will be in addition to any liability which
the Company may otherwise have.
(b) The Selling Shareholder will indemnify and hold harmless
each Underwriter, and each person, if any, who controls each Underwriter within
the meaning of the Act, against any losses, claims, damages or liabilities,
joint or several, to which such Underwriter or such controlling person may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
in whole or in part on any inaccuracy in the representations and warranties of
the Selling Shareholder contained herein or any failure of the Selling
Shareholder to perform its obligations hereunder, or arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in the Registration Statement, any related preliminary prospectus (if
used prior to the Effective Date), the Prospectus or any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a
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<PAGE> 23
material fact required to be stated therein or necessary to make the statements
therein not misleading, and, subject to the provisions of Section 12(d), will
reimburse each Underwriter and each such controlling person for any legal or
other expenses reasonably incurred by such Underwriter or such controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or action; provided, however, that the indemnity agreement
contained in this Section 12(b) with respect to any preliminary prospectus shall
not inure to the benefit of any Underwriter or to the benefit of any person
controlling such Underwriter in respect of any loss, claim, damage, liability or
action asserted by a person who purchases shares of the Stock from such
Underwriter, if such Underwriter failed to send or give a copy of the Prospectus
(as the same may then be amended or supplemented) to such person with or prior
to written confirmation of the sale to such person; and provided further, that
the Selling Shareholder will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
untrue statement or omission or alleged omission made in the Registration
Statement, any preliminary prospectus, the Prospectus or any amendment thereto
for supplement thereto in reliance upon or in conformity with written
information furnished to the Company by an Underwriter specifically for use in
the preparation thereof, as referred to in the last sentence of Section 10
hereof. This indemnity agreement will be in addition to any liability which the
Selling Shareholder may otherwise have.
The liability of the Selling Shareholder in respect of the
indemnity agreement set forth in this Section 12 shall be limited to an amount
equal to the proceeds received by the Selling Shareholder for the shares of
Stock sold to the Underwriters pursuant to this Agreement.
(c) Each Underwriter will indemnify and hold harmless the
Company, each person, if any, who controls the Company within the meaning of the
Act, each of its directors, each of its officers who have signed the
Registration Statement, and the Selling Shareholder against any losses, claims,
damages or liabilities to which the Company, or any such director, officer or
Selling Shareholder may become subject, under the Act or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement, any preliminary
prospectus, the Prospectus, or any amendment thereof or supplement thereto, or
arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, any preliminary
prospectus, the Prospectus or any amendment thereof or supplement thereto in
reliance upon or in conformity with written information furnished to the Company
by such Underwriter through you, as the Representatives of the Underwriters,
specifically for use in the preparation thereof, as referred to in the last
sentence of Section 10 of this Agreement; and will reimburse the Company and
each such director, officer or Selling Shareholder for any legal or other
expenses reasonably incurred by them in connection with investigating or
defending any such loss, claim, damage, liability or action. This indemnity
agreement will be in addition to any liability which the Underwriters may
otherwise have.
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<PAGE> 24
(d) Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against an indemnifying party
under this Section, notify each party against whom indemnification is to be
sought in writing of the commencement thereof; but the omission so to notify an
indemnifying party will not relieve it from any liability which they may have to
any indemnified party otherwise than under this Section. In case any such action
is brought against any indemnified party, and it notifies the Indemnifying party
of the commencement thereof, the Indemnifying party will be entitled to
participate in, and to the extent that it may wish, to assume the defense
thereof, with counsel approved by such indemnified party (which approval shall
not be unreasonably withheld), and after notice from the Indemnifying party to
such indemnified party of its election so to assume the defense thereof, the
Indemnifying party will not be liable to such indemnified party under this
Section for any legal or other expenses subsequently incurred by such
indemnified party in connection with the defense thereof except as provided
below and except for the reasonable costs of investigation subsequently incurred
by such indemnified party in connection with the defense thereof. The
indemnified party shall have the right to employ its counsel in any such action,
but the fees and expenses of such counsel shall be at the expense of such
indemnified party unless (i) the employment of counsel by such indemnified party
has been authorized in writing by the indemnifying parties, (ii) the named
parties to any such action include both the indemnifying party and the
indemnified party, and the indemnified party shall have reasonably concluded
that there is an actual or potential conflict of interest between the
indemnifying parties and the indemnified party in the conduct of the defense of
such action (in which case the indemnifying parties shall not have the right to
direct the defense of such action on behalf of the indemnified party) or (iii)
the indemnifying parties shall not have employed counsel to assume the defense
of such action within a reasonable time after notice of the commencement
thereof, in each of which cases the fees and expenses of counsel shall be at the
expense of the indemnifying parties. In no event shall the indemnifying party or
parties be liable for the fees and expenses of more than one counsel for all
indemnified parties in connection with any one or separate but similar or
related actions in the same jurisdiction arising out of the same allegations or
circumstances. Anything in this Section to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim or action
effected without its written consent.
(e) In order to provide for contribution in circumstances in
which the indemnification provided for in this Section is for any reason held to
be unavailable from the Company, the Selling Shareholder or the Underwriters or
is insufficient to hold harmless a party indemnified hereunder, the Company, the
Selling Shareholder and the Underwriters shall contribute to the aggregate
losses, claims, damages, liabilities and expenses of the nature contemplated by
such indemnification provisions (including any investigation, legal and other
expenses incurred in connection with, and any amount paid in settlement of, any
action, suit or proceeding or any claims asserted, but after deducting in the
case of losses, claims, damages, liabilities and expenses suffered by the
Company and the Selling Shareholder any contribution received by the Company or
the Selling Shareholder from persons, other than the Underwriters, who may also
be liable for contribution, including persons who control the Company within the
meaning of the Act, officers of the Company who signed the Registration
Statement and directors of the Company) to which the Company, the Selling
Shareholder and one or more of
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<PAGE> 25
the Underwriters may be subject, in such proportions as is appropriate to
reflect the relative benefits received by the Company, the Selling Shareholder
and the Underwriters from the offering of the Stock or, if such allocation is
not permitted by applicable law or indemnification is not available as a result
of the indemnifying party not having received notice as provided in this
Section, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company, the
Selling Shareholder and the Underwriters in connection with the statements or
omissions which resulted in such losses, claims, damages, liabilities or
expenses, as well as any other relevant equitable considerations. The relative
benefits received by the Company, the Selling Shareholder and the Underwriters
shall be deemed to be in the same proportion as (x) the total proceeds from the
offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company, (y) the total proceeds from the offering (net
of underwriting discounts and commissions but before deducting expenses)
received by the Selling Shareholder and (z) the underwriting discounts and
commissions received by the Underwriters, respectively, in each case as set
forth in the table on the cover page of the Prospectus. The relative fault of
the Company, the Selling Shareholder and of the Underwriters shall be determined
by reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omissions or alleged omission to state a
material fact relates to information supplied by the Company, the Selling
Shareholder or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission. The Company, the Selling Shareholder and the Underwriters agree that
it would not be just and equitable if contribution pursuant to this Section
12(e) were determined by pro rata allocation even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above.
The Company and the Selling Shareholder shall be severally, and not jointly,
liable for the amounts to be contributed by each of them pursuant to the
provisions of this Section 12(e). Notwithstanding the provisions of this Section
12(e), (i) in no case shall any Underwriter (except as may be provided in the
Agreement Among Underwriters) be liable or responsible for any amount in excess
of the underwriting discounts and commissions applicable to the Stock purchased
by such Underwriter hereunder and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person, if any, who was not guilty of such
fraudulent misrepresentation. For purposes of this Section 12(e), each person,
if any, who controls an Underwriter within the meaning of Section 15 of the Act
shall have the same rights to contribution as such Underwriter, and each person,
if any, who controls the Company within the meaning of Section 15 of the Act,
each officer of the Company who shall have signed the Registration Statement and
each director of the Company shall have the same rights to contribution as the
Company, subject in each case to clauses (i) and (ii) of this Section 12(e). Any
party entitled to contribution will, promptly after receipt of notice of
commencement of any action, suit or proceeding against such party in respect of
which a claim for contribution may be made against another party or parties
under this Section 12(e), notify such party or parties from whom contribution
may be sought, but the omission to so notify such party or parties shall not
relieve the party or parties from whom contribution may be sought from any
obligation it or they may have under this Section 12(e) or otherwise. No party
shall be liable for contribution for any settlement of any action or claim
effected without its written consent.
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<PAGE> 26
13. DEFAULT OF THE UNDERWRITERS. If any Underwriter or
Underwriters default in their obligations to purchase the Stock hereunder and
arrangements satisfactory to you, the Company and the Selling Shareholder,
evidenced by a writing or writings signed by you, the Company and the Selling
Shareholder, for the purchase of such Stock by other persons are not made within
36 hours after such default, this Agreement will terminate without liability on
the party of any non-defaulting Underwriter, the Company and the Selling
Shareholder (except that the Company shall be liable for the expenses to be paid
by it pursuant to the provisions of Section 8), provided, however, that if the
number of shares of the Stock which all such defaulting Underwriters have agreed
but failed to purchase shall not exceed 10% of the number of shares of the Firm
Stock or the Option Stock, as the case may be, agreed to be purchased pursuant
to this Agreement (other than the shares agreed to be taken up hereunder which
the defaulting Underwriters failed to purchase) by all non-defaulting
Underwriters, the non-defaulting Underwriters shall be obligated proportionately
to take up and pay for the shares of the Firm Stock or the Option Stock which
such defaulting Underwriters failed to purchase.
If any such default occurs, either you or the Company or the
Selling Shareholder shall have the right to postpone the Closing Date for not
more than seven business days in order that the necessary changes in the
Registration Statement, Prospectus and any other documents, as well as any other
arrangement, may be effected. As used in this Agreement, the term "Underwriters"
includes any person substituted for an Underwriter under this Section. Nothing
herein will relieve a defaulting Underwriter from its liability to the other
several Underwriters, the Company and the Selling Shareholder for its default
hereunder.
14. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY. The
respective indemnities, agreements, representations and warranties of the
Company, the Selling Shareholder and the several Underwriters, set forth in or
made pursuant to this Agreement, will remain in full force and effect,
regardless of any investigation made by or on behalf of any Underwriter, the
Company or any of its officers or directors or any controlling person or the
Selling Shareholder, and will survive delivery of and payment for the Stock and,
in the case of the agreements contained in Sections 8, 11 and 12 hereof, will
survive any termination of this Agreement.
15. NOTICES. All communications hereunder will be in writing
and, if sent to the Underwriters, will be mailed, delivered or telegraphed and
confirmed to you at McDonald & Company Securities, Inc., McDonald Investment
Center, 800 Superior Avenue, Cleveland, Ohio 44114, Attention: Daniel F. Austin,
with a copy to Calfee, Halter & Griswold LLP, 1400 McDonald Investment Center,
800 Superior Avenue, Cleveland, Ohio 44114, Attention: Thomas F. McKee, Esq., or
if sent to the Company, will be mailed, delivered or telegraphed and confirmed
to the Company at 5005 Rockside Road, Independence, Ohio 44131, Attention: Scott
E. Brewer, General Counsel, with a copy to Baker & Hostetler LLP, 3200 National
City Center, 1900 East Ninth Street, Cleveland, Ohio 44114, Attention: Albert
Adams, Esq., or if sent to the Selling Shareholder, will be mailed, delivered or
telegraphed and confirmed to the Selling Shareholder at Robert A. Weitzel, 5005
Rockside Road, Independence, Ohio 44131.
16. SUCCESSORS, GOVERNING LAW. This Agreement will inure
solely to the benefit of and be binding upon the parties hereto and the officers
and directors and controlling
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<PAGE> 27
persons referred to in Section 12 hereof and their respective successors,
assigns, heirs, executors and administrators, and no other persons will have any
right or obligation hereunder. This Agreement will be governed by and construed
in accordance with the laws of the State of Ohio, without giving effect to the
principles of conflicts of laws thereof.
17. EXECUTION IN COUNTERPARTS. This Agreement may be executed
by any one or more of the parties hereto in any number of counterparts, each of
which shall be deemed to be an original, but all such counterparts shall
together constitute one and the same instrument.
18. AUTHORITY OF THE REPRESENTATIVES. You represent and
warrant that you have been authorized by the several Underwriters to enter into
this Agreement on their behalf and to act for them in the manner hereinbefore
provided.
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<PAGE> 28
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to us the enclosed copies hereof,
whereupon it will become a binding agreement by and among the Company, the
Selling Shareholder and the several Underwriters in accordance with its terms.
Very truly yours,
INTERNATIONAL TOTAL SERVICES, INC.
By:
--------------------------------
Its:
-------------------------------
ROBERT A. WEITZEL,
The Selling Shareholder
-----------------------------------
The foregoing Agreement is hereby confirmed
and accepted by us in Cleveland, Ohio,
acting on our own behalf and as the
Representatives of the several Underwriters
named on Schedule A annexed hereto, as of
the date first above written.
McDONALD & COMPANY SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
As Representatives of the Several Underwriters
By: McDONALD & COMPANY SECURITIES, INC.
By:
-----------------------------------
Managing Director
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<PAGE> 29
SCHEDULE A
UNDERWRITERS
Number of Shares to
Underwriter be Purchased
----------- -------------------
McDonald & Company Securities, Inc......................
Morgan Keegan & Company, Inc............................
Total ................................
A-1
<PAGE> 1
Exhibit 4
NARRATIVE DESCRIPTION OF INTERNATIONAL TOTAL SERVICES, INC. SHARE CERTIFICATE
Decorative engraving covers approximately 1" of the top edge
and 3/4" of the side and bottom edges of the share certificate (the
"Certificate"), including larger, more elaborate decorative engraving in the top
left and right hand corners.
Centered in the top 1/3rd of the Certificate is the text
"INTERNATIONAL TOTAL SERVICES, INC., "with the text "INCORPORATED UNDER THE
LAWS OF THE STATE OF OHIO" AND THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NEW
YORK" appearing directly underneath. To the left and right of this text is a
rectangular shaded box (approximately 3/4" x 1 1/2"). The box to the left
contains the text "ITS" inside the box; "Common Shares" and "Number" above and
on the top edge of the box, respectively. The box to the right contains the
text "SHARES" on the top edge of the box, with the text "Common Shares"
appearing directly above the box. Also directly under the box on the
right hand side of the Certificate is the text "CUSIP 460499 10 6" and the text
"See Reverse for Certain Definitions."
Centered in the middle of the Certificate is a larger shaded
box (approximately 1 3/4" x 8 1/2") containing the text "THIS CERTIFIES THAT" in
the top left corner of the shaded box and the text "is the owner of" in the
bottom left corner of the shaded box.
Below the large shaded box is the following text:
[in small capital letters] Fully Paid and Nonassessable Common Shares,
Without Par Value, of INTERNATIONAL TOTAL SERVICES, INC. (hereinafter and on
the back hereof called the "Corporation"), transferable on the books of the
Corporation by the holder hereof in person or by a duly authorized attorney
upon surrender of this Certificate properly endorsed. This Certificate and the
shares represented hereby are issued and shall be subject to all the provisions
of the Articles of Incorporation of the Corporation (copies of which are on
file with the Transfer Agent), as now or hereafter amended, to all of which the
holder hereof by acceptance hereof assents. This Certificate is not valid
unless countersigned and registered by a Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile
signatures of its duly authorized officers.
Dated [blank]
/s/ R. Weitzel /s/ Robert A. Swartz
CHAIRMAN & CHIEF CHIEF FINANCIAL OFFICER
EXECUTIVE OFFICER
<PAGE> 2
In the lower left corner of the Certificate (approximately 1" in
diameter) is the circular corporate seal of the Corporation containing
the text: "International Total Services, Inc.," "Corporate Seal" and "Ohio."
On the lower right hand side of the Certificate in small capital
letters the following words appear vertically: "Countersigned and Registered:
First Chicago Trust Company of New York (New York, New York) Transfer Agent and
Registrar," and "Authorized Signature."
<PAGE> 3
The back of the Certificate contains the following text:
INTERNATIONAL TOTAL SERVICES, INC.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations.
<TABLE>
<CAPTION>
<S> <C>
TEN COM: as tenants in common UNIF GIFT MIN ACT- ____ Custodian _____
TEN ENT: as tenants by the entireties (cust) (minor)
JT TEN: as joint tenants with right under Uniform Gift to Minors
of survivorship and not as Act ______________________.
tenants in common (state)
UNIF TRF MIN ACT- ____ Custodian _____
(cust) (minor)
under Uniform Transfers to Minors
Act ______________________.
(state)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ___________________________ hereby sell, assign and
transfer unto
- ------------------------------------------------------------------------------
<PAGE> 4
PLEASE PRINT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
TRANSFEREE
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP
CODE, OF ASSIGNEE)
- ------------------------------------------------------------------------------
- ----------------------------------------------------------------------- of the
Common Shares represented by the within Certificate, and do hereby irrevocably
constitute and appoint _______________________________________, Attorney to
transfer the said Shares on the books of the within-named Corporation with full
power of substitution.
Dated _______________________________
X_____________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN
EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR
ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
By: ___________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE> 1
Exhibit 5
August 29, 1997
Board of Directors
International Total Services, Inc.
Crown Centre
5005 Rockside Road
Independence, Ohio 44131
Re: REGISTRATION STATEMENT ON FORM S-1 WITH RESPECT TO THE
REGISTRATION ON FORM S-1 OF UP TO 2,825,000 COMMON SHARES,
WITHOUT PAR VALUE, OF
INTERNATIONAL TOTAL SERVICES, INC.
Ladies and Gentlemen:
We have acted as counsel to International Total Services, Inc., an
Ohio corporation (the "Company"), in connection with its Registration Statement
on Form S-1 (the "Registration Statement") filed under the Securities Act of
1933, as amended (the "Act"), relating to the proposed public offering by the
Company of up to 2,825,000 of the Company's Common Shares (the "Firm Shares") to
be offered and sold by the Company and up to 423,750 Common Shares (the
"Overallotment Shares") subject to an option given to the Representative (as
defined below) by the Company to cover overallotments, if any.
We have examined originals or copies, certified or otherwise
identified to our satisfaction, of such documents as we have deemed necessary
for the purpose of this opinion including, without limitation, the respective
form of Amended and Restated Articles of Incorporation and Code of Regulations
of the Company and the form of Underwriting Agreement (the "Underwriting
Agreement"), by and between the Company and McDonald & Company Securities, Inc.,
as representative of the several underwriters (the "Representative"), each of
which is filed (or incorporated by reference) as an Exhibit to the Registration
Statement.
Based on the foregoing, we are of the opinion that:
1. The Company is validly existing as a corporation in good
standing under the laws of the State of Ohio.
<PAGE> 2
Board of Directors
International Total Services, Inc.
August 29, 1997
Page 2
2. When the Firm Shares are issued and sold in accordance with
the Underwriting Agreement, with the blanks therein
appropriately filled in, and in the manner contemplated by
the Registration Statement, the Firm Shares will be legally
issued, fully paid and nonassessable.
3. When the Overallotment Shares are issued and sold in
accordance with the Underwriting Agreement, with the blanks
therein appropriately filled in, and in the manner
contemplated by the Registration Statement, the
Overallotment Shares will be legally issued, fully paid and
nonassessable.
This opinion is limited to matters of federal law and Ohio law.
Accordingly, we express no opinion as to the law of any other jurisdiction.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the reference to our name under "Legal Matters" in
the prospectus comprising part of the Registration Statement.
Very truly yours,
/s/ Baker & Hostetler LLP
Baker & Hostetler LLP
<PAGE> 1
Exhibit 10.10
EMPLOYMENT AGREEMENT
BETWEEN
INTERNATIONAL TOTAL SERVICES, INC.
AND
ROBERT A. SWARTZ
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the day
of , 1997, between International Total Services, Inc., an Ohio
corporation (the "Company"), and Robert A. Swartz (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to be employed by the Company, on the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as its Chief
Financial Officer, and the Executive hereby accepts such employment, on the
terms and subject to the conditions hereinafter set forth.
(b) During the term of this Employment Agreement and any
renewal hereof (all references herein to the term of this Employment Agreement
shall include references to the period of renewal hereof, if any), the Executive
shall be and have the titles of Vice President and Chief Financial Officer and
shall devote such business time and all reasonable efforts to his employment as
the Executive deems appropriate and perform diligently such duties as are
customarily performed by Chief Financial Officers of publicly-held companies of
comparable size in the same or related industries, together with such other
duties as may be reasonably requested from time to time by the Board of
Directors of the Company (the "Board"), which duties shall be consistent with
his positions as set forth above and as provided in Paragraph 2.
2. Term and Positions.
(a) Subject to the provisions for renewal and termination
hereinafter provided, the term of this Employment Agreement shall begin on the
date hereof and shall continue until December 31, 1999. Such term automatically
shall be extended for one (1) additional calendar year, unless: (i) this
Employment Agreement is terminated as provided in Paragraph 4(a)(i) or 4(a)(ii)
or (ii) either the Company or the Executive shall give at least 180 days written
notice of non-extension of this Employment Agreement to the other on or before
June 30, 1999.
(b) The Executive shall be entitled to serve as the Chief
Financial Officer of the Company. Without limiting the generality
-1-
<PAGE> 3
of any of the foregoing, except as hereafter expressly agreed in writing by the
Executive: (i) the Executive shall be required to report only to the Chief
Executive Officer and the Board as an entire body, and (ii) no other individual
shall be elected or appointed as Chief Financial Officer of the Company. For
service as an officer and employee of the Company, the Executive shall be
entitled to the full protection of applicable indemnification provisions of the
articles of incorporation and code of regulations of the Company, as the same
may be amended from time to time.
(c) If:
(i) the Company materially changes the Executive's
duties and responsibilities as set forth in Paragraph 1(b) or 2(b)
without his consent (including, without limitation, by violating any of
the provisions of clause (i) or (ii) of Paragraph 2 (b));
(ii) the Executive's place of employment or the
principal executive offices of the Company are moved to a location more
than fifty (50) miles from the geographical center of Cleveland, Ohio;
(iii) there occurs a material breach by the Company
of any of its obligations under this Employment Agreement (other than
those specified in this Section 2(c)), which breach has not been cured
in all material respects within ten (10) days after the Executive gives
notice thereof to the Company; or
(iv) there occurs a "change in control" (as
hereinafter defined) of the Company,
then the Executive shall have the right to terminate his employment with the
Company, but such termination shall not be considered a voluntary resignation or
termination of such employment or of this Employment Agreement by the Executive
but rather a discharge of the Executive by the Company without "cause" (as
defined in Paragraph 4(a)(ii)).
(d) The Executive shall be considered not to have consented to
any written proposal calling for a material change in his duties and
responsibilities unless he shall give written notice of his consent thereto to
the Board within fifteen (15) days after receipt of such written proposal. If
the Executive shall not have given such consent, the Company shall have the
opportunity to withdraw such proposed material change by written notice to the
Executive given within ten (10) days after the end of said fifteen (15) day
period.
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<PAGE> 4
(e) The term "change in control" means the first to occur
of the following events:
(i) any person or group of commonly controlled
persons, other than Robert A. Weitzel or any such group of which Robert
A. Weitzel is a member, owns or controls, directly or indirectly, fifty
percent (50%) or more of the voting control or value of the equity
interests in the Company following consummation of the initial public
offering of the Company's Common Shares, without par value (the "IPO");
or
(ii) any person or group of commonly controlled
persons who own less than five percent (5%) of the voting control or
value of the equity interests in the Company during the first 30 days
following the consummation of the IPO acquire ownership or control,
directly or indirectly, of more than twenty percent (20%) of the voting
control or value of the equity interests in the Company; or
(iii) the shareholders of the Company approve an
agreement to merge or consolidate with another corporation or other
entity resulting (whether separately or in connection with a series of
transactions) in a change in ownership of twenty percent (20%) or more
of the voting control or value of the equity interests in the Company,
or an agreement to sell or otherwise dispose of all or substantially
all of the Company's assets (including, without limitation, a plan of
liquidation or dissolution), or otherwise approve of a fundamental
alteration in the nature of the Company's business.
3. Compensation.
During the term of this Employment Agreement the Company shall
pay or provide, as the case may be, to the Executive the compensation and other
benefits and rights set forth in this Paragraph 3.
(a) The Company shall pay to the Executive a base salary
payable in accordance with the Company's usual pay practices (and in any event
no less frequently than monthly) at the rate of Seventy Thousand Five Hundred
Dollars ($71,500) per annum, to be increased (but not decreased) from time to
time (based upon the performance of the Company and the Executive) as determined
by the Board in its sole discretion.
(b) The Company shall pay to the Executive bonus compensation
for each calendar month of the Company, not later than sixty (60) days following
the end of such calendar month or the termination of his employment, as the case
may be, prorated on a per diem basis for partial calendar months, of 0.75% of
the
-3-
<PAGE> 5
Company's operating income for that month if the Company achieves its operating
budget goals for that month, to be increased or decreased from time to time as
determined by the Board in its sole discretion.
(c) The Company shall provide to the Executive and his family
all the medical, dental, and all other group insurance benefits which the
Company provides generally to employees of the Company during active employment.
In the event of disability or death of the Executive, these benefits shall be
continued by the Company for life for the Executive and his spouse.
(d) The Executive shall have the right to participate in all
retirement and other benefit plans of the Company generally available from time
to time to employees of the Company and for which the Executive qualifies under
their terms (and nothing in this Agreement shall or shall be considered to in
any way affect the Executive's rights and benefits thereunder except as
expressly provided herein).
(e) The Executive shall be entitled to such periods of
vacation and sick leave allowance each year as are determined by the Executive
in his reasonable and good faith discretion, which in any event shall be not
less than as provided generally under the Company's vacation and sick leave
policy for executive officers.
(f) The Executive shall be entitled to participate in any
option or other employee benefit compensation plan that is generally available
to senior executive officers, as distinguished from general management, of the
Company. The Executive's participation in and benefits under any such plan shall
be on the terms and subject to the conditions specified in the governing
document of that plan.
(g) The Company shall reimburse the Executive or provide him
with an expense allowance during the term of this Employment Agreement for
travel, entertainment and other expenses reasonably and necessarily incurred by
the Executive in connection with the Company's business. The Executive shall
furnish such documentation with respect to reimbursement to be paid hereunder as
the Company shall reasonably request.
4. Termination.
(a) The employment of the Executive under this Employment
Agreement, and the term hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined
below) of the Executive;
(ii) for cause at any time by action of the Board.
For purposes hereof, the term "cause" shall mean:
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<PAGE> 6
(A) The Executive's fraud, commission of a
felony or of an act or series of acts which result in material
injury to the business or reputation of the Company,
commission of an act or series of repeated acts of dishonesty
which are materially inimical to the best interests of the
Company, or the Executive's willful and repeated failure to
perform his duties under this Employment Agreement, which
failure has not been cured within fifteen (15) days after the
Company gives notice thereof to the Executive; or
(B) The Executive's material breach of any
other material provision of this Employment Agreement, which
breach has not been cured in all substantial respects within
ten (10) days after the Company gives notice thereof to the
Executive; or
(iii) other than for cause at any time by action of
the Board, subject to the operation of Paragraph 4(d).
The exercise by the Company of its rights of termination under this
Paragraph 4 shall be the Company's sole remedy in the event of the
occurrence of the event as a result of which such right to terminate
arises. Upon any termination of this Employment Agreement, the
Executive shall be deemed to have resigned from all offices and
directorships held by the Executive in the Company.
(b) For purposes of this Employment Agreement, the Executive's
"permanent disability" shall be deemed to have occurred after one hundred twenty
(120) days in the aggregate during any consecutive twelve (12) month period, or
after ninety (90) consecutive days, during which one hundred twenty (120) or
ninety (90) days, as the case may be, the Executive, by reason of his physical
or mental disability or illness, shall have been unable to discharge his duties
under this Employment Agreement. The date of permanent disability shall be such
one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In
the event either the Company or the Executive, after receipt of notice of the
Executive's permanent disability from the other, dispute that the Executive's
permanent disability shall have occurred, the Executive shall promptly submit to
a physical examination by the chief of medicine of any major accredited hospital
in the Cleveland, Ohio, area and, unless such physician shall issue his written
statement to the effect that in his opinion, based on his diagnosis, the
Executive is capable of resuming his employment and devoting his full time and
energy to discharging his duties within thirty (30) days after the date of such
statement, such permanent disability shall be deemed to have occurred.
(c) In the event of a termination claimed by the Company
to be for "cause" pursuant to Paragraph 4(a)(ii), the Executive
-5-
<PAGE> 7
shall have the right to have the justification for said termination determined
by arbitration in Cleveland, Ohio. In order to exercise such right, the
Executive shall serve on the Company within thirty (30) days after termination a
written request for arbitration. The Company immediately shall request the
appointment of an arbitrator by the American Arbitration Association and
thereafter the question of "cause" shall be determined under the rules of the
American Arbitration Association, and the decision of the arbitrator shall be
final and binding on both parties. The parties shall use all reasonable efforts
to facilitate and expedite the arbitration and shall act to cause the
arbitration to be completed as promptly as possible. During the pendency of the
arbitration, the Executive shall continue to receive all compensation and
benefits to which he is entitled hereunder, and if at any time during the
pendency of such arbitration the Company fails to pay and provide all
compensation and benefits to the Executive in a timely manner, the Company shall
be deemed to have automatically waived whatever rights it then may have had to
terminate the Executive's employment for cause. Expenses of the arbitration
shall be borne equally by the parties.
(d) In the event of termination for any of the reasons set
forth in Paragraph 2(a) or subparagraph (a)(i) or (a)(ii) of this Paragraph 4,
except as otherwise provided in Paragraph 3(c), the Executive shall be entitled
to no further compensation or other benefits under this Employment Agreement,
except as to that portion of any unpaid salary and other benefits accrued and
earned by him hereunder up to and including the effective date of such
termination. If the Company terminates the Executive's employment other than
pursuant to Paragraph 2(a) or subparagraph 4(a)(i) or 4(a)(ii) or the Executive
terminates his employment pursuant to subparagraph 2(c), all of the compensation
and benefits payable to the Executive pursuant to this Employment Agreement
shall be paid to the Executive for the remainder of the term of this Employment
Agreement (as that term is defined in subparagraph 2(a)).
5. Covenants and Confidential Information.
(a) The Executive acknowledges the Company's reliance and
expectation of the Executive's continued commitment to performance of his duties
and responsibilities during the term of this Employment Agreement. In light of
such reliance and expectation on the part of the Company, during the term of
this Employment Agreement and for a period of two (2) years thereafter (and, as
to clause (ii) of this subparagraph (a), at any time during and after the term
of this Employment Agreement), the Executive shall not, directly or indirectly,
do or suffer either of the following:
(i) Own, manage, control or participate in the
ownership, management, or control of, or be employed or engaged by or
otherwise affiliated or associated as a consultant, independent
contractor or otherwise with, any
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<PAGE> 8
other corporation, partnership, proprietorship, limited liability
company, firm, association or other business entity engaged in the
business of, or otherwise engage in the business of, aviation services
or commercial security; except that the Executive may own not more than
one percent (1%) of any class of publicly traded securities of any
entity, and own interests in the Company subject only to any
restriction imposed by any agreement or instrument other than this
Agreement; or
(ii) Disclose, divulge, discuss, copy or otherwise
use or suffer to be used in any manner, in competition with, or
contrary to the interests of, the Company, any confidential information
relating to the Company's operations, properties or otherwise to its
particular business or other trade secrets of the Company, it being
acknowledged by the Executive that all such information regarding the
business of the Company compiled or obtained by, or furnished to, the
Executive while the Executive shall have been employed by or associated
with the Company is confidential information and the Company's
exclusive property; provided, however, that the foregoing restrictions
shall not apply to the extent that such information: (A) is clearly
obtainable in the public domain, (B) becomes obtainable in the public
domain, except by reason of the breach by the Executive of the terms
hereof, (C) was not acquired by the Executive in connection with his
employment or affiliation with the Company, (D) was not acquired by the
Executive from the Company or its representatives, or (E) is required
to be disclosed by rule of law or by order of a court or governmental
body or agency.
(b) The Executive agrees and understands that the remedy at
law for any breach by him of this Paragraph 5 will be inadequate and that the
damages flowing from such breach are not readily susceptible to being measured
in monetary terms. Accordingly, it is acknowledged that, upon adequate proof of
the Executive's violation of any legally enforceable provision of this Paragraph
5, the Company shall be entitled to immediate injunctive relief and may obtain a
temporary order restraining any threatened or further breach. Nothing in this
Paragraph 5 shall be deemed to limit the Company's remedies at law or in equity
for any breach by the Executive of any of the provisions of this Paragraph 5
which may be pursued or availed of by the Company.
(c) The Executive has carefully considered the nature and
extent of the restrictions upon him and the rights and remedies conferred upon
the Company under this Paragraph 5, and hereby acknowledges and agrees that the
same are reasonable in time and territory, are designed to eliminate competition
which otherwise would be unfair to the Company, do not stifle the inherent skill
and experience of the Executive, would not operate as a bar to the Executive's
sole means of support, are fully required to protect
-7-
<PAGE> 9
the legitimate interests of the Company and do not confer a benefit upon the
Company disproportionate to the detriment to the Executive.
6. Tax Adjustment Payments. If all or any portion of the amounts
payable to the Executive under this Employment Agreement (together with all
other payments of cash or property, whether pursuant to this Employment
Agreement or otherwise, including, without limitation, the issuance of common
shares of the Company, or the granting, exercise or termination of options
therefor) constitutes "excess parachute payments" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended (the "Code") that are
subject to the excise tax imposed by Section 4999 of the Code (or any similar
tax or assessment), the amounts payable hereunder shall be increased to the
extent necessary to place the Executive in the same after-tax position as he
would have been in had no such tax assessment been imposed on any such payment
paid or payable to the Executive under this Employment Agreement or any other
payment that the Executive may receive in connection therewith. The
determination of the amount of any such tax or assessment and the incremental
payment required hereby in connection therewith shall be made by the accounting
firm employed by the Executive within thirty (30) calendar days after such
payment and said incremental payment shall be made within five (5) calendar days
after determination has been made. If, after the date upon which the payment
required by this Paragraph 6 has been made, it is determined (pursuant to final
regulations or published rulings of the Internal Revenue Service, final judgment
of a court of competent jurisdiction, Internal Revenue Service audit assessment,
or otherwise) that the amount of excise or other similar taxes or assessments
payable by the Executive is greater than the amount initially so determined,
then the Company shall pay the Executive an amount equal to the sum of: (i) such
additional excise or other taxes, PLUS (ii) any interest, fines and penalties
resulting from such underpayment, PLUS (iii) an amount necessary to reimburse
the Executive for any income, excise or other tax assessment payable by the
Executive with respect to the amounts specified in (i) and (ii) above, and the
reimbursement provided by this clause (iii), in the manner described above in
this Paragraph 6. Payment thereof shall be made within five (5) calendar days
after the date upon which such subsequent determination is made.
7. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio, and has all
requisite corporate power and authority to enter into, execute and deliver this
Employment Agreement, fulfill its obligations hereunder and consummate the
transactions contemplated hereby.
-8-
<PAGE> 10
(b) The execution and delivery of, performance of obligations
under, and consummation of the transactions contemplated by, this Employment
Agreement have been duly authorized and approved by all requisite corporate
action by or in respect of the Company, and this Employment Agreement
constitutes the legally valid and binding obligation of the Company, enforceable
by the Executive in accordance with its terms.
(c) No provision of the Company's governing documents or any
agreement to which it is a party or by which it is bound or of any material law
or regulation of the kind usually applicable to and binding upon the Company
prohibits or limits its ability to enter into, execute and deliver this
Employment Agreement, fulfill its obligations hereunder and consummate the
transactions contemplated hereby.
8. Miscellaneous.
(a) The Executive represents and warrants that he is not a
party to any agreement, contract or understanding, whether employment or
otherwise, which would restrict or prohibit him from undertaking or performing
employment in accordance with the terms and conditions of this Employment
Agreement.
(b) The provisions of this Employment Agreement are severable
and if any provision may be determined to be illegal or otherwise unenforceable,
in whole or in part, the remaining provisions and any partially unenforceable
provision, to the extent enforceable in any jurisdiction, nevertheless shall be
binding and enforceable.
(c) The rights and obligations of the Company under this
Employment Agreement shall inure to the benefit of, and shall be binding on, the
Company and its successors and assigns, and the rights and obligations (other
than obligations to perform services) of the Executive under this Employment
Agreement shall inure to the benefit of, and shall be binding upon, the
Executive and his heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to
this Employment Agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Rules of the American Arbitration Association
then pertaining in the City of Cleveland, Ohio, and judgment upon the award
rendered by the arbitrator or arbitrators may be entered in any court having
jurisdiction thereof. The arbitrator or arbitrators shall be deemed to possess
the powers to issue mandatory orders and restraining orders in connection with
such arbitration; provided, however, that nothing in this Paragraph 8(d) shall
be construed so as to deny the Company the right and power to seek and obtain
any remedy available in a court for any breach or threatened breach by the
Executive of any of his covenants contained in Paragraph 5 hereof.
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<PAGE> 11
(e) Any notice to be given under this Employment Agreement
shall be personally delivered in writing or shall have been deemed duly given
when received after it is posted in the United States mail, postage prepaid,
registered or certified, return receipt requested, and if mailed to the Company,
shall be addressed to its principal place of business, attention: General
Counsel, and if mailed to the Executive, shall be addressed to him at his home
address last known on the records of the Company, or at such other address or
addresses as either the Company or the Executive, as addressee, may hereafter
designate in writing to the other.
(f) The failure of either party to enforce any provision of
this Employment Agreement shall not in any way be construed as a waiver of any
such provision as to any future violation thereof, or prevent that party
thereafter from enforcing each and every other provision of this Employment
Agreement. The rights granted the parties herein are cumulative and the waiver
of any single remedy shall not constitute a waiver of such party's right to
assert all other remedies available to it under the circumstances.
(g) This Employment Agreement supersedes all prior agreements
and understandings between the parties and may not be modified or terminated
orally. No modification, termination or attempted waiver shall be valid unless
in writing and signed by the party against whom the same is sought to be
enforced.
(h) This Employment Agreement shall be governed by and
construed according to the laws of the State of Ohio.
(i) Where necessary or appropriate to the meaning hereof, the
singular and plural shall be deemed to include each other, and the masculine,
feminine and neuter shall be deemed to include each other.
INTERNATIONAL TOTAL SERVICES, INC.
By:_________________________
Title:______________________
And By:_____________________
Title:______________________
____________________________
ROBERT A. SWARTZ
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<PAGE> 1
Exhibit 10.11
EMPLOYMENT AGREEMENT
BETWEEN
INTERNATIONAL TOTAL SERVICES, INC.
AND
SCOTT E. BREWER
<PAGE> 2
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the day of , 1997,
between International Total Services, Inc., an Ohio corporation (the "Company"),
and Scott E. Brewer (the "Executive").
W I T N E S S E T H:
WHEREAS, the Company desires to employ the Executive, and the Executive
desires to be employed by the Company, on the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual promises herein
contained, the parties agree as follows:
1. Employment.
(a) The Company hereby employs the Executive as its General
Counsel, and the Executive hereby accepts such employment, on the terms and
subject to the conditions hereinafter set forth.
(b) During the term of this Employment Agreement and any
renewal hereof (all references herein to the term of this Employment Agreement
shall include references to the period of renewal hereof, if any), the Executive
shall be and have the titles of Vice President and General Counsel and shall
devote such business time and all reasonable efforts to his employment as the
Executive deems appropriate and perform diligently such duties as are
customarily performed by Vice President and General Counsel of publicly-held
companies of comparable size in the same or related industries, together with
such other duties as may be reasonably requested from time to time by the Board
of Directors of the Company (the "Board"), which duties shall be consistent with
his positions as set forth above and as provided in Paragraph 2.
2. Term and Positions.
(a) Subject to the provisions for renewal and termination
hereinafter provided, the term of this Employment Agreement shall begin on the
date hereof and shall continue until December 31, 1999. Such term automatically
shall be extended for one (1) additional calendar year, unless: (i) this
Employment Agreement is terminated as provided in Paragraph 4(a)(i) or 4(a)(ii)
or (ii) either the Company or the Executive shall give at least 180 days written
notice of non-extension of this Employment Agreement to the other on or before
June 30, 1999.
(b) The Executive shall be entitled to serve as the General
Counsel of the Company. Without limiting the generality of any of the foregoing,
except as hereafter expressly agreed in writing by the Executive: (i) the
Executive shall be required to
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<PAGE> 3
report only to the Chief Executive Officer and the Board as an entire body, and
(ii) no other individual shall be elected or appointed as General Counsel of the
Company. For service as an officer and employee of the Company, the Executive
shall be entitled to the full protection of applicable indemnification
provisions of the articles of incorporation and code of regulations of the
Company, as the same may be amended from time to time.
(c) If:
(i) the Company materially changes the Executive's
duties and responsibilities as set forth in Paragraph 1(b) or 2(b)
without his consent (including, without limitation, by violating any of
the provisions of clause (i) or (ii) of Paragraph 2 (b));
(ii) the Executive's place of employment or the
principal executive offices of the Company are moved to a location more
than fifty (50) miles from the geographical center of Cleveland, Ohio;
(iii) there occurs a material breach by the Company
of any of its obligations under this Employment Agreement (other than
those specified in this Section 2(c)), which breach has not been cured
in all material respects within ten (10) days after the Executive gives
notice thereof to the Company; or
(iv) there occurs a "change in control" (as
hereinafter defined) of the Company,
then the Executive shall have the right to terminate his employment with the
Company, but such termination shall not be considered a voluntary resignation or
termination of such employment or of this Employment Agreement by the Executive
but rather a discharge of the Executive by the Company without "cause" (as
defined in Paragraph 4(a)(ii)).
(d) The Executive shall be considered not to have consented to
any written proposal calling for a material change in his duties and
responsibilities unless he shall give written notice of his consent thereto to
the Board within fifteen (15) days after receipt of such written proposal. If
the Executive shall not have given such consent, the Company shall have the
opportunity to withdraw such proposed material change by written notice to the
Executive given within ten (10) days after the end of said fifteen (15) day
period.
(e) The term "change in control" means the first to occur
of the following events:
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(i) any person or group of commonly controlled
persons, other than Robert A. Weitzel or any such group of which Robert
A. Weitzel is a member, owns or controls, directly or indirectly, fifty
percent (50%) or more of the voting control or value of the equity
interests in the Company following consummation of the initial public
offering of the Company's Common Shares, without par value (the "IPO");
or
(ii) any person or group of commonly controlled
persons who own less than five percent (5%) of the voting control or
value of the equity interests in the Company during the first 30 days
following the consummation of the IPO acquire ownership or control,
directly or indirectly, of more than twenty percent (20%) of the voting
control or value of the equity interests in the Company; or
(iii) the shareholders of the Company approve an
agreement to merge or consolidate with another corporation or other
entity resulting (whether separately or in connection with a series of
transactions) in a change in ownership of twenty percent (20%) or more
of the voting control or value of the equity interests in the Company,
or an agreement to sell or otherwise dispose of all or substantially
all of the Company's assets (including, without limitation, a plan of
liquidation or dissolution), or otherwise approve of a fundamental
alteration in the nature of the Company's business.
3. Compensation.
During the term of this Employment Agreement the Company shall
pay or provide, as the case may be, to the Executive the compensation and other
benefits and rights set forth in this Paragraph 3.
(a) The Company shall pay to the Executive a base salary
payable in accordance with the Company's usual pay practices (and in any event
no less frequently than monthly) at the rate of Fifty Thousand Dollars ($50,000)
per annum, to be increased (but not decreased) from time to time (based upon the
performance of the Company and the Executive) as determined by the Board in its
sole discretion.
(b) The Company shall pay to the Executive bonus compensation
for each calendar month of the Company, not later than sixty (60) days following
the end of such calendar month or the termination of his employment, as the case
may be, prorated on a per diem basis for partial calendar months, of 0.75% of
the Company's operating income for that month if the Company achieves its
operating budget goals for that month, to be increased or decreased from time to
time (based upon the performance of the
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Company and the Executive) as determined by the Board in its sole discretion.
(c) The Company shall provide to the Executive and his family
all the medical, dental, and all other group insurance benefits which the
Company provides generally to employees of the Company during active employment.
In the event of disability or death of the Executive, these benefits shall be
continued by the Company for life for the Executive and his spouse.
(d) The Executive shall have the right to participate in all
retirement and other benefit plans of the Company generally available from time
to time to employees of the Company and for which the Executive qualifies under
their terms (and nothing in this Agreement shall or shall be considered to in
any way affect the Executive's rights and benefits thereunder except as
expressly provided herein).
(e) The Executive shall be entitled to such periods of
vacation and sick leave allowance each year as are determined by the Executive
in his reasonable and good faith discretion, which in any event shall be not
less than as provided generally under the Company's vacation and sick leave
policy for executive officers.
(f) The Executive shall be entitled to participate in any
option or other employee benefit compensation plan that is generally available
to senior executive officers, as distinguished from general management, of the
Company. The Executive's participation in and benefits under any such plan shall
be on the terms and subject to the conditions specified in the governing
document of that plan.
(g) The Company shall reimburse the Executive or provide him
with an expense allowance during the term of this Employment Agreement for
travel, entertainment and other expenses reasonably and necessarily incurred by
the Executive in connection with the Company's business. The Executive shall
furnish such documentation with respect to reimbursement to be paid hereunder as
the Company shall reasonably request.
4. Termination.
(a) The employment of the Executive under this Employment
Agreement, and the term hereof, may be terminated by the Company:
(i) on the death or permanent disability (as defined
below) of the Executive;
(ii) for cause at any time by action of the Board.
For purposes hereof, the term "cause" shall mean:
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(A) The Executive's fraud, commission of a
felony or of an act or series of acts which result in material
injury to the business or reputation of the Company,
commission of an act or series of repeated acts of dishonesty
which are materially inimical to the best interests of the
Company, or the Executive's willful and repeated failure to
perform his duties under this Employment Agreement, which
failure has not been cured within fifteen (15) days after the
Company gives notice thereof to the Executive; or
(B) The Executive's material breach of any
other material provision of this Employment Agreement, which
breach has not been cured in all substantial respects within
ten (10) days after the Company gives notice thereof to the
Executive; or
(iii) other than for cause at any time by action of
the Board, subject to the operation of Paragraph 4(d).
The exercise by the Company of its rights of termination under this
Paragraph 4 shall be the Company's sole remedy in the event of the
occurrence of the event as a result of which such right to terminate
arises. Upon any termination of this Employment Agreement, the
Executive shall be deemed to have resigned from all offices and
directorships held by the Executive in the Company.
(b) For purposes of this Employment Agreement, the Executive's
"permanent disability" shall be deemed to have occurred after one hundred twenty
(120) days in the aggregate during any consecutive twelve (12) month period, or
after ninety (90) consecutive days, during which one hundred twenty (120) or
ninety (90) days, as the case may be, the Executive, by reason of his physical
or mental disability or illness, shall have been unable to discharge his duties
under this Employment Agreement. The date of permanent disability shall be such
one hundred twentieth (120th) or ninetieth (90th) day, as the case may be. In
the event either the Company or the Executive, after receipt of notice of the
Executive's permanent disability from the other, dispute that the Executive's
permanent disability shall have occurred, the Executive shall promptly submit to
a physical examination by the chief of medicine of any major accredited hospital
in the Cleveland, Ohio, area and, unless such physician shall issue his written
statement to the effect that in his opinion, based on his diagnosis, the
Executive is capable of resuming his employment and devoting his full time and
energy to discharging his duties within thirty (30) days after the date of such
statement, such permanent disability shall be deemed to have occurred.
(c) In the event of a termination claimed by the Company
to be for "cause" pursuant to Paragraph 4(a)(ii), the Executive
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shall have the right to have the justification for said termination determined
by arbitration in Cleveland, Ohio. In order to exercise such right, the
Executive shall serve on the Company within thirty (30) days after termination a
written request for arbitration. The Company immediately shall request the
appointment of an arbitrator by the American Arbitration Association and
thereafter the question of "cause" shall be determined under the rules of the
American Arbitration Association, and the decision of the arbitrator shall be
final and binding on both parties. The parties shall use all reasonable efforts
to facilitate and expedite the arbitration and shall act to cause the
arbitration to be completed as promptly as possible. During the pendency of the
arbitration, the Executive shall continue to receive all compensation and
benefits to which he is entitled hereunder, and if at any time during the
pendency of such arbitration the Company fails to pay and provide all
compensation and benefits to the Executive in a timely manner, the Company shall
be deemed to have automatically waived whatever rights it then may have had to
terminate the Executive's employment for cause. Expenses of the arbitration
shall be borne equally by the parties.
(d) In the event of termination for any of the reasons set
forth in Paragraph 2(a) or subparagraph (a)(i) or (a)(ii) of this Paragraph 4,
except as otherwise provided in Paragraph 3(c), the Executive shall be entitled
to no further compensation or other benefits under this Employment Agreement,
except as to that portion of any unpaid salary and other benefits accrued and
earned by him hereunder up to and including the effective date of such
termination. If the Company terminates the Executive's employment other than
pursuant to Paragraph 2(a) or subparagraph 4(a)(i) or 4(a)(ii) or the Executive
terminates his employment pursuant to subparagraph 2(c), all of the compensation
and benefits payable to the Executive pursuant to this Employment Agreement
shall be paid to the Executive for the remainder of the term of this Employment
Agreement (as that term is defined in subparagraph 2(a)).
5. Covenants and Confidential Information.
(a) The Executive acknowledges the Company's reliance and
expectation of the Executive's continued commitment to performance of his duties
and responsibilities during the term of this Employment Agreement. In light of
such reliance and expectation on the part of the Company, during the term of
this Employment Agreement and for a period of two (2) years thereafter (and, as
to clause (ii) of this subparagraph (a), at any time during and after the term
of this Employment Agreement), the Executive shall not, directly or indirectly,
do or suffer either of the following:
(i) Own, manage, control or participate in the
ownership, management, or control of, or be employed or engaged by or
otherwise affiliated or associated as a consultant, independent
contractor or otherwise with, any
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other corporation, partnership, proprietorship, limited liability
company, firm, association or other business entity engaged in the
business of, or otherwise engage in the business of, aviation services
or commercial security; except that the Executive may own not more than
one percent (1%) of any class of publicly traded securities of any
entity, and own interests in the Company subject only to any
restriction imposed by any agreement or instrument other than this
Agreement; or
(ii) Disclose, divulge, discuss, copy or otherwise
use or suffer to be used in any manner, in competition with, or
contrary to the interests of, the Company, any confidential information
relating to the Company's operations, properties or otherwise to its
particular business or other trade secrets of the Company, it being
acknowledged by the Executive that all such information regarding the
business of the Company compiled or obtained by, or furnished to, the
Executive while the Executive shall have been employed by or associated
with the Company is confidential information and the Company's
exclusive property; provided, however, that the foregoing restrictions
shall not apply to the extent that such information: (A) is clearly
obtainable in the public domain, (B) becomes obtainable in the public
domain, except by reason of the breach by the Executive of the terms
hereof, (C) was not acquired by the Executive in connection with his
employment or affiliation with the Company, (D) was not acquired by the
Executive from the Company or its representatives, or (E) is required
to be disclosed by rule of law or by order of a court or governmental
body or agency.
(b) The Executive agrees and understands that the remedy at
law for any breach by him of this Paragraph 5 will be inadequate and that the
damages flowing from such breach are not readily susceptible to being measured
in monetary terms. Accordingly, it is acknowledged that, upon adequate proof of
the Executive's violation of any legally enforceable provision of this Paragraph
5, the Company shall be entitled to immediate injunctive relief and may obtain a
temporary order restraining any threatened or further breach. Nothing in this
Paragraph 5 shall be deemed to limit the Company's remedies at law or in equity
for any breach by the Executive of any of the provisions of this Paragraph 5
which may be pursued or availed of by the Company.
(c) The Executive has carefully considered the nature and
extent of the restrictions upon him and the rights and remedies conferred upon
the Company under this Paragraph 5, and hereby acknowledges and agrees that the
same are reasonable in time and territory, are designed to eliminate competition
which otherwise would be unfair to the Company, do not stifle the inherent skill
and experience of the Executive, would not operate as a bar to the Executive's
sole means of support, are fully required to protect
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<PAGE> 9
the legitimate interests of the Company and do not confer a benefit upon the
Company disproportionate to the detriment to the Executive.
6. Tax Adjustment Payments. If all or any portion of the amounts
payable to the Executive under this Employment Agreement (together with all
other payments of cash or property, whether pursuant to this Employment
Agreement or otherwise, including, without limitation, the issuance of common
shares of the Company, or the granting, exercise or termination of options
therefor) constitutes "excess parachute payments" within the meaning of Section
280G of the Internal Revenue Code of 1986, as amended (the "Code") that are
subject to the excise tax imposed by Section 4999 of the Code (or any similar
tax or assessment), the amounts payable hereunder shall be increased to the
extent necessary to place the Executive in the same after-tax position as he
would have been in had no such tax assessment been imposed on any such payment
paid or payable to the Executive under this Employment Agreement or any other
payment that the Executive may receive in connection therewith. The
determination of the amount of any such tax or assessment and the incremental
payment required hereby in connection therewith shall be made by the accounting
firm employed by the Executive within thirty (30) calendar days after such
payment and said incremental payment shall be made within five (5) calendar days
after determination has been made. If, after the date upon which the payment
required by this Paragraph 6 has been made, it is determined (pursuant to final
regulations or published rulings of the Internal Revenue Service, final judgment
of a court of competent jurisdiction, Internal Revenue Service audit assessment,
or otherwise) that the amount of excise or other similar taxes or assessments
payable by the Executive is greater than the amount initially so determined,
then the Company shall pay the Executive an amount equal to the sum of: (i) such
additional excise or other taxes, PLUS (ii) any interest, fines and penalties
resulting from such underpayment, PLUS (iii) an amount necessary to reimburse
the Executive for any income, excise or other tax assessment payable by the
Executive with respect to the amounts specified in (i) and (ii) above, and the
reimbursement provided by this clause (iii), in the manner described above in
this Paragraph 6. Payment thereof shall be made within five (5) calendar days
after the date upon which such subsequent determination is made.
7. Representations and Warranties of the Company.
(a) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Ohio, and has all
requisite corporate power and authority to enter into, execute and deliver this
Employment Agreement, fulfill its obligations hereunder and consummate the
transactions contemplated hereby.
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(b) The execution and delivery of, performance of obligations
under, and consummation of the transactions contemplated by, this Employment
Agreement have been duly authorized and approved by all requisite corporate
action by or in respect of the Company, and this Employment Agreement
constitutes the legally valid and binding obligation of the Company, enforceable
by the Executive in accordance with its terms.
(c) No provision of the Company's governing documents or any
agreement to which it is a party or by which it is bound or of any material law
or regulation of the kind usually applicable to and binding upon the Company
prohibits or limits its ability to enter into, execute and deliver this
Employment Agreement, fulfill its obligations hereunder and consummate the
transactions contemplated hereby.
8. Miscellaneous.
(a) The Executive represents and warrants that he is not a
party to any agreement, contract or understanding, whether employment or
otherwise, which would restrict or prohibit him from undertaking or performing
employment in accordance with the terms and conditions of this Employment
Agreement.
(b) The provisions of this Employment Agreement are severable
and if any provision may be determined to be illegal or otherwise unenforceable,
in whole or in part, the remaining provisions and any partially unenforceable
provision, to the extent enforceable in any jurisdiction, nevertheless shall be
binding and enforceable.
(c) The rights and obligations of the Company under this
Employment Agreement shall inure to the benefit of, and shall be binding on, the
Company and its successors and assigns, and the rights and obligations (other
than obligations to perform services) of the Executive under this Employment
Agreement shall inure to the benefit of, and shall be binding upon, the
Executive and his heirs, personal representatives and assigns.
(d) Any controversy or claim arising out of or relating to
this Employment Agreement, or the breach thereof, shall be settled by
arbitration in accordance with the Rules of the American Arbitration Association
then pertaining in the City of Cleveland, Ohio, and judgment upon the award
rendered by the arbitrator or arbitrators may be entered in any court having
jurisdiction thereof. The arbitrator or arbitrators shall be deemed to possess
the powers to issue mandatory orders and restraining orders in connection with
such arbitration; provided, however, that nothing in this Paragraph 8(d) shall
be construed so as to deny the Company the right and power to seek and obtain
any remedy available in a court for any breach or threatened breach by the
Executive of any of his covenants contained in Paragraph 5 hereof.
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(e) Any notice to be given under this Employment Agreement
shall be personally delivered in writing or shall have been deemed duly given
when received after it is posted in the United States mail, postage prepaid,
registered or certified, return receipt requested, and if mailed to the Company,
shall be addressed to its principal place of business, attention: General
Counsel, and if mailed to the Executive, shall be addressed to him at his home
address last known on the records of the Company, or at such other address or
addresses as either the Company or the Executive, as addressee, may hereafter
designate in writing to the other.
(f) The failure of either party to enforce any provision of
this Employment Agreement shall not in any way be construed as a waiver of any
such provision as to any future violations thereof, or prevent that party
thereafter from enforcing each and every other provision of this Employment
Agreement. The rights granted the parties herein are cumulative and the waiver
of any single remedy shall not constitute a waiver of such party's right to
assert all other remedies available to it under the circumstances.
(g) This Employment Agreement supersedes all prior agreements
and understandings between the parties and may not be modified or terminated
orally. No modification, termination or attempted waiver shall be valid unless
in writing and signed by the party against whom the same is sought to be
enforced.
(h) This Employment Agreement shall be governed by and
construed according to the laws of the State of Ohio.
(i) Where necessary or appropriate to the meaning hereof, the
singular and plural shall be deemed to include each other, and the masculine,
feminine and neuter shall be deemed to include each other.
INTERNATIONAL TOTAL SERVICES, INC.
By:_________________________
Title:______________________
And By:_____________________
Title:______________________
____________________________
SCOTT E. BREWER
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Exhibit 23.1
CONSENT OF GRANT THORNTON LLP
We have issued our reports dated May 9, 1997 accompanying the consolidated
financial statements and schedules of International Total Services, Inc. and
subsidiaries contained in the Registration Statement and Prospectus. We consent
to the use of the aforementioned reports in the Registration Statement and
Prospectus, and to the use of our name as it appears under the caption
"Experts".
/s/ Grant Thornton LLP
Cleveland, Ohio
August 27, 1997
