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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- --- ACT OF 1934
For the fiscal year ended March 31, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
- --- EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 0-23073
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INTERNATIONAL TOTAL SERVICES, INC.
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(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1264201
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(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Crown Centre
5005 Rockside Road
Independence, Ohio 44131
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (216) 642-4522
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
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None N/A
Securities registered pursuant to Section 12(g) of the Act: Common Shares,
without par value
Indicated by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the common shares held by non-affiliates
of the registrant, based upon the closing market price on July 10, 1998, was
approximately $26,538,023.
As of July 10, 1998, the registrant had 6,662,494 Common Shares issued
and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held September 18, 1998, into Part III, Items 10, 11, 12 and 13.
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Business............................................................................................1
Item 2. Properties.........................................................................................10
Item 3. Legal Proceedings..................................................................................10
Item 4. Submission of Matters to a Vote of Security Holders................................................11
PART II .............................................................................................................12
Item 5. Market for Registrant's Common Shares and Related Shareholder Matters..............................12
Item 6. Selected Financial Data............................................................................13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..............13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk........................................17
Item 8. Consolidated Financial Statements and Supplementary Data...........................................17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...............17
PART III ............................................................................................................18
Item 10. Directors and Executive Officers of the Registrant................................................18
Item 11. Executive Compensation............................................................................18
Item 12. Security Ownership of Certain Beneficial Owners and Management....................................18
Item 13. Certain Relationship and Related Transactions.....................................................18
PART IV .............................................................................................................19
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................19
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FORWARD LOOKING STATEMENTS
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This Annual Report on Form 10-K (this "Form 10-K") contains
statements that constitute forward looking statements. Those statements appear
in a number of places in this Form 10-K and in the documents incorporated by
reference herein and include statements regarding the intent, belief or current
expectations of International Total Services, Inc., an Ohio corporation (the
"Company" or "ITS"), its directors or its officers with respect to (i) potential
acquisitions by the Company; (ii) the Company's financing plans; and (iii)
trends affecting the Company's financial condition or results of operations.
Prospective investors are cautioned that any forward looking
statements in this Form 10-K are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Forward looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from projected results, including unanticipated losses of
service contracts, conditions in the aviation industry, and negative publicity
regarding the airline security and services and commercial security industries.
Readers are cautioned not to place undue reliance on forward looking statements.
Factors that could cause actual results to differ materially from projected
results include, but are not limited to, those factors discussed in the "Risk
Factors" section of the prospectus contained in the Company's Registration
Statement on Form S-1 (Registration No. 333-29463), as amended.
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PART I
ITEM 1. BUSINESS
The Company's fiscal year ends on March 31, and its fiscal years are
identified by reference to the calendar year in which they end. For example, the
fiscal year ended March 31, 1998 is referred to as "fiscal 1998."
COMPANY OVERVIEW
General. The Company is a leading domestic provider of aviation
contract support services and is establishing a growing presence in the security
services market. The Company provides services to customers in more than 329
cities in the United States and Europe. The Company has used its predeparture
screening business to establish a growing presence in the broader aviation
services market. Aviation services offered by the Company include skycap,
baggage handling and aircraft appearance 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. In September
1997, the Company completed its initial public offering (the "Initial
Offering"). The Company used the proceeds from the Initial Offering to repay
indebtedness and for general corporate purposes, including working capital and
to fund acquisitions.
The Company has experienced significant revenue growth driven by the
expansion of the aviation staffing support service industry and as a result of
acquisitions and a trend toward consolidation in the market. The Company'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 intends to continue to grow internally and through acquisitions. This
growth will be generated by using the Company's established business base as a
platform for expanding the services that it provides at existing locations and
for developing new service locations. The Company targets acquisition candidates
that add geographic scope to its existing businesses, broaden its service
offerings and expand its client base. Since the Initial Offering and through
June 30, 1998, the Company has used this strategy to complete 13 acquisitions.
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The current strength of the United States economy, which has driven
unemployment to low levels has adversely affected the Company's ability to
attract and retain the workforce needed to provide the services required under
its service contracts. The difficulty in attracting these workers has resulted
in the Company's payment of increased overtime and has forced the Company to
increase the wages paid to employees in advance of increases in the rates paid
by the Company's customers. These factors have resulted in downward pressure on
the Company's gross margins. In early fiscal 1999, the Company began
implementing operational strategies that it believes will improve gross
margins, however, there can be no assurance that these strategies will be
successful or that, in the event of further improvements in the United States
economy, the Company's margins will not decrease further. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Recent Developments. The Company has completed three acquisitions
since the end of fiscal 1998. These acquisitions are described below.
GIBRALTAR PROTECTION, INC. In April 1998, the Company acquired the
commercial security contracts and goodwill of Gibraltar Protection, Inc.,
headquartered in Torrance, California, for $1.3 million in cash. The acquired
contracts cover commercial security staffing throughout Los Angeles and Orange
county California.
VERSATILE SERVICES, INC. In May 1998, the Company acquired the
contracts and goodwill of Versatile Services, Inc., headquartered in Honolulu,
Hawaii, for $0.1 million in cash. The acquired contracts cover skycap service in
Hawaii.
SECURITY COORDINATORS, INC. In June 1998, the Company acquired the
commercial security contracts and related goodwill of Security Coordinators,
Inc., headquartered in San Antonio, Texas, for $1.5 million in cash. The
acquired contracts cover commercial security staffing throughout Texas.
AVIATION SERVICES
Industry Overview
In 1973, the Federal Aviation Administration (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 business and to reduce labor, 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
appearance 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.
Ramp and ground handling services have been the fastest growing part
of the Company's aviation services business, followed by predeparture screening
services and other aviation services, based on annual revenues.
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Aviation Services.
Ramp and Ground Handling Services. The ramp and ground handling
services provided by the Company are described in the chart below.
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Service Description
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Baggage Handling................................ Conveyance of checked baggage from terminal to baggage compartment of plane
and from plane to baggage carousel.
Aircraft Appearance.............................
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.
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The Company derived approximately 32.4%, 14.2% and 12.7% of its
revenues from ramp and ground handling services in fiscal 1998, 1997 and 1996,
respectively.
Airline Security Services. The Company is a leading provider of
domestic airline predeparture screening services. The Company currently employs
approximately 4,400 predeparture screeners in more than 127 U.S. airports in 38
states. The Company's predeparture screening services include conducting x-ray
or electromagnetic inspection of all carry-on baggage, manual searches of
suspicious baggage and metal-detector searches of all passengers. The Company
also 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 the Company to
provide document verification (customs) agents who interview passengers as they
enter or leave a country via an international flight. In the domestic market,
the Company also provides parked aircraft and employee parking lot security,
and the checking of employee identification cards and baggage. The Company
derived approximately 36.7%, 50.0% and 50.0% of its revenues from airline
security services in fiscal 1998, 1997 and 1996, respectively.
Other Aviation Services. The Company's other aviation 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. The Company derived approximately 12.4%, 19.6% and
22.7% of its revenues from these services in fiscal 1998, 1997 and 1996,
respectively.
COMMERCIAL SECURITY SERVICES
The Company 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, office and
government buildings, airports, hospitals, malls, distribution centers, sports
arenas, museums and other facilities. The Company entered the commercial
security market in the early 1990s 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 16.3%, 11.7% and 11.0% of the Company's revenue in fiscal 1998,
1997, and 1996, respectively.
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SECURITY PRODUCTS DISTRIBUTION
In addition to service offerings to the airline industry, the
Company distributes a line of security products through its subsidiary, Crown
Technical Systems, Inc. ("CTS"), including airport and commercial security
checkpoint products and hand-held metal detectors. In 1992, CTS introduced the
High Efficiency Screening System ("HESS"), which replaces the standard
checkpoint configuration currently found in most U.S. airports. CTS also offers,
either with the entire HESS system or alone, an exit lane motion detector that
replaces the exit lane guard currently found at most checkpoints. CTS also
offers a separate line of hand-held and walk-through metal detectors that it
sells to banks, schools, governmental entities and large businesses. CTS also
markets control access equipment, including swipe card and other products to
control access to secured areas, and closed circuit television monitoring
equipment to domestic and international customers.
The Company derived approximately 2.1%, 3.0% and 2.2% of its
revenues from sales of security products in fiscal 1998, 1997 and 1996,
respectively.
GROWTH
The Company expects to grow internally and 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 airline security
business provides an effective platform from which to take advantage of
opportunities in other elements of the airline services business. 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.
The Company believes that the management and administrative
resources it has developed to manage its operations in 329 cities provide it
with the capacity to expand 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 aviation and
commercial security market.
The Company's use of 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 Company
believes that 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 the Company 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. The Company has experienced recent growth in the
demand for its ramp and ground handling and cabin appearance 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 existing
airline relationships, to expand its reach in these areas. Because all
carriers, regardless of location, need aircraft appearance, baggage handling
and passenger related services, the Company believes the potential market for
these services is as large as, if not larger than, the airline security market.
Outside of the airline industry, the Company provides uniformed
security officers in a wide range of commercial settings. The Company, with an
administrative infrastructure in 41 states, believes that it has the ability to
expand in this market without significant additional overhead costs.
Growth Through Acquisitions.
When making a domestic acquisition, the Company acquires only the
existing contracts and equipment needed to fulfill the contracts. When making a
European acquisition, the Company acquires all of the outstanding capital stock
of a business. The Company is willing to retain members of an acquired company's
management team that it
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believes can contribute expertise. Management believes the Company has certain
advantages resulting from the Company's size and administrative infrastructure
that may enable it to implement its acquisition strategy more successfully than
its competitors. 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.
Aviation Services Acquisitions. In fiscal 1998, the Company
completed seven aviation services acquisitions, six of which were completed
after the Initial Offering. These acquisitions are described below.
INTEX AVIATION SERVICES, INC. In April 1997, the Company acquired
the ground handling service contracts and goodwill of Intex Aviation Services,
Inc. ("Intex"), headquartered in Greenville, South Carolina, for $4.8 million in
cash. The contracts acquired from Intex cover ramp and ground handling services,
including baggage handling, lavatory and water services, aircraft appearance,
and ground support and facility services, in 30 locations across the United
States.
ARC SECURITY, INC. In October 1997, the Company acquired the
aviation service contracts and goodwill of ARC Security, Inc., headquartered in
Atlanta, Georgia, for $9.0 million in cash. The acquired contracts cover airline
security, pre-board passenger screening, and aircraft appearance services in the
eastern and southern United States for all 12 major airlines.
WHITE LION AVIATION SECURITY, LTD. In October 1997, the Company
purchased White Lion Aviation Security, Ltd. ("White Lion"), headquartered in
London, England, for $0.7 million in cash. White Lion offers aviation security,
expedited baggage and cargo delivery services at the Stanstead Airport, a
growing hub airport located outside of London, and has service contracts with a
number of international air carriers.
ASI, INC. In October 1997, the Company purchased the contracts and
goodwill of ASI, Inc., headquartered in Providence, Rhode Island, for $0.1
million in cash. The acquired contracts cover aircraft appearance and baggage
handling services.
NEPTUNE EQUIPMENT AND FACILITIES, INC. In December 1997 and February
1998, the Company acquired six aviation service contracts and goodwill from
Neptune Equipment and Facilities, Inc. ("Neptune") for $0.4 million in cash.
Neptune provided ground equipment maintenance, aircraft appearance, janitorial
and Crown Room staffing services. All of the acquired contracts are for
facilities located where the Company had existing operations.
OS SECURITY SERVICE GMBH. In December 1997, the Company purchased
OS Security Services GMBH ("OS Security"), located in Frankfurt, Germany, for
$0.3 million in cash. OS Security provides aviation security for eight major
European and international airlines and has stations at four major German
airports: Dusseldorf, Berlin, Hamburg and Stuttgart. OS Security performs
aircraft guarding, passenger profiling, and baggage and cargo screening
services, as well as VIP escorting and collection services
SKY VALET, INC. In February 1998, the Company acquired the aviation
staffing contracts and goodwill of Sky Valet, Inc., headquartered in West Palm
Beach, Florida, for $0.8 million in cash. The acquired contracts cover services
in Florida, Massachusetts, Mississippi, Pennsylvania, South Carolina, Tennessee
and Texas.
Commercial Security Acquisitions. The Company completed three
commercial security acquisitions in fiscal 1998.
CURTIS SECURITY SERVICES, INC. In October 1997, the Company acquired
the contracts and goodwill of Curtis Security Services, Inc., headquartered in
San Francisco, California, for $0.7 million in cash. The acquired contracts
cover commercial security services to approximately 50 Fortune 500 clients
located in California, Nevada and several other western states.
STOREHIRE UK LTD. In January 1998, the Company purchased Storehire
UK Ltd. ("Storehire"), headquartered in London, England, for $0.7 million in
cash. Storehire provides secure lockable storage units for
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commercial, professional and personal use, and operates in Stanstead Airport.
This acquisition complemented the Company's acquisition of White Lion.
SECUREX, INC. In February 1998, the Company acquired the contracts
and goodwill of Securex, Inc., headquartered in Tampa, Florida, for $5.4 million
in cash. The acquired contracts cover commercial security staffing, credential
checkers, ticket checkers, ticket setters and other outsourcing services.
COMPETITION
Ramp and Ground Handling Services. Airlines have found it
cost-effective to outsource ramp and ground handling services because these
services often require an investment in hard equipment, which can be expensive
for carriers with few flights. The Company has taken advantage of the
opportunity to offer a package of new or refurbished equipment, maintenance and
manpower, all for a per-hour labor charge. In addition, the Company 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 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.
The Company has sought to increase the volume of its aircraft
appearance business by focusing on providing service in accordance with detailed
specifications and using advanced cleaning equipment. The Company conducts an
Aircraft Appearance and Facility Audit Program through which it continually
monitors its own performance. Under this program, the Company's supervisors and
managers conduct a predetermined 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. The Company
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 appearance are the airlines, Signature Flight
Support Services, AMR Services, Ogden Allied Support Services, Hudson General,
and Service Master Co.
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 the Company believes it has an advantage
because of its size and overhead in underbidding other companies, the Company
faces the same challenge as its competitors do--finding qualified employees to
provide consistent service at the minimum wage rates offered by the airlines for
screeners in the current economic environment. See "Growth." 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, the Company 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, ICTS International, N.V., AHL Services, Inc. and International
Aviation Security, Inc.
Passenger 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, the Company has developed specialized
training programs that emphasize customer
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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 the Company 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.
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 on the quality of service provided, their
ability to provide national and international services, and the range of
services offered. The Company 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,
the Company believes that it offers a broader range of services than many of its
competitors.
SALES AND MARKETING
The Company believes that strengthening and maintaining
relationships with personnel at various levels of its clients' organizations
will continue to be an integral element of its sales and marketing efforts.
There are eight sales executives servicing the Company's four operating
divisions throughout the United States and Europe. The Company's four division
vice presidents in the United States and Europe also have sales responsibilities
and a portion of their incentive compensation is dependent on meeting
established sales goals.
The Company expects to continue its internal growth through a
focused marketing approach based on expanding the services provided to existing
customers and increasing the volume of services provided in targeted markets.
The Company is further developing national sales and marketing strategies aimed
at improving the consistency of its sales approach. The Company's broad,
long-term global presence provides a strong foundation from which to expand into
additional international markets.
In November 1997, the Company hired a Vice President of Marketing to
lead the Company's marketing initiatives. These initiatives include the
development of branded services, direct mail marketing, creation of local,
regional and national marketing plans, strategic positioning for preferred
provider partnerships, integration of high technology components, and
coordination of the Company's participation in trade shows and other sales
activities. Additionally, the corporate marketing department conducts quarterly
training sessions for sales executives. These training sessions include
presentation and customer service skills, database management and methods for
cross-selling the Company's products and services.
MANAGEMENT AND REPORTING SYSTEMS
In fiscal 1996, the Company implemented measures to improve its cost
structure and competitive position in preparation for more aggressive growth.
These changes included reductions in corporate headquarters staff and executive
compensation, the development of divisional budgeting systems and the
implementation of compensation programs tied to the achievement of expected
performance levels. In addition, the Company enhanced its management and control
systems in order to improve accounts receivable collection and streamline its
purchasing arrangements. Consequently, operating profit has improved from 3.1%
in fiscal 1996 to 6.1% in fiscal 1998.
Chairman and Chief Executive Officer Robert Weitzel, who co-founded
the Company in 1978, has substantial experience in the airline services and
commercial security industries. Mr. Weitzel has been the Company's
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strategic leader since 1987 and has directed over 40 acquisitions. President and
Chief Operating Officer James Singer, who joined the Company in April 1997, was
formerly President-Airline Services Division of AMR Services, and brings to the
Company broad experience in ground handling and passenger services operations.
Vice President, Finance Brian Kenyon joined the Company in April 1998 and will
be instrumental in improving financial reporting systems and the Company's
management information systems. Mr. Kenyon most recently was Director of
Financial Analysis at Signature Brands USA, Inc. Scott Brewer is the Vice
President, General Counsel of the Company. He has served as Vice President since
April 1995 and General Counsel since 1993. Mr. Brewer was in a private law
practice from October 1988 to August 1993.
The Company's business organization include, four regional
divisions--Eastern, Central, Western and International, as well as CTS. Each
division has its own controller, human resource manger and sales executive, as
well as quality control and training functions. In July 1998, the Company
disbanded its industrial security division and transferred its industrial
security operations to its regional divisions.
The Company is currently installing an updated version, that the
Company has been informed by its vendors is fully year 2000 compliant, of the
system that processes the majority of its transactions. This new version will
replace the Company's current version and the Company believes that this
version will be fully operational before year 2000 issues begin to impact the
Company. In addition, the Company will have an outside consultant perform a
review of its other information systems to determine if any other areas of
exposure exist. The cost of this new version, and of any other new information
systems, will be capitalized and depreciated over their estimated useful lives
for financial reporting purposes.
WORKFORCE MANAGEMENT
As of July 8, 1998, the Company had approximately 15,000 full and
part-time employees engaged in performing its client services. 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 that provides medical
benefits to its eligible hourly employees. In addition, the Company grants
various bonuses and awards to exceptional employees, in part to further enhance
retention. These include bonuses for detecting weapons and other illegal
objects, including those detected during FAA-mandated tests. The Company also
provides a 401(k) program for all employees who have been with the Company at
least one year.
Because employee turnover is inherent in the nature of its business,
the Company 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
cannot be explained through independent verification. The Company's policy is
not to hire applicants whose criminal background verification checks reveal
prior criminal convictions.
CUSTOMERS AND CONTRACT TERMS
The Company derives a significant portion of its revenues from a few
clients. In fiscal 1998, Delta Air Lines, Inc. (26.0%), Continental Airlines,
Inc. (14.7%), Trans World Airlines, Inc. (4.6%), U.S. Airways, Inc. (4.2%),
Southwest Airlines Co. (4.0%), and United Airlines, Inc. (3.8%) accounted for
57.3% of the Company's revenues. During fiscal 1998, 1997 and 1996, the
Company's ten largest clients accounted for an aggregate of 66.5%, 68.6% and
71.2% respectively, of the Company's revenues.
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
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<PAGE> 11
that field. In addition, 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.
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. 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 $11,000 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 deficiencies, has
resulted in the loss of a contract or service location.
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. In addition, certain initiatives reviewing
airport security are currently underway. The Company cannot predict the outcome
of these initiatives.
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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<PAGE> 12
ITEM 2. PROPERTIES
The Company leases approximately 20,548 square feet in Independence,
Ohio for its corporate headquarters. The initial term of the lease expires in
2001 and may be extended, at the option of the Company, until 2006. The Company
leases space in numerous facilities in the United States and Europe to contain
local offices. None of these local office leases are material to the Company's
operations.
ITEM 3. 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 ultimate cost of this action
and is contesting the judgment on appeal.
The Company is also involved in various legal proceedings, including
routine civil actions instituted by the FAA with respect to test failures,
background checks 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.
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<PAGE> 13
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the
following information is reported below.
Executive officers of the Company are elected by, and serve at the
discretion of, the Board of Directors until their successors are duly chosen and
qualified.
The executive officers of the Company are as follows:
<TABLE>
Name Age Position
---- --- --------
<S> <C> <C>
Robert A. Weitzel ......................................... 63 Chairman of the Board of Directors and
Chief Executive Officer
James O. Singer ........................................... 53 Director, President and Chief Operating Officer
Scott E. Brewer ........................................... 36 Vice President and General Counsel
Brian S. Kenyon ........................................... 34 Vice President, Finance
Peter J. Collins .......................................... 58 Vice President of Eastern Division
Stephen P. Metzler ........................................ 40 Vice President of Central Division
Gene R. Empey ............................................. 53 Vice President of Western Division
Dillard D. Woodson ........................................ 49 Vice President of International Division
</TABLE>
The following is a biographical summary of the business experience
of the executive officers of the Company.
Robert A. Weitzel, a Director since 1987, is the Chairman of the
Board and 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 and later served in Business Development for
Europe from May 1989 to March 1995. From April 1995 until April 1997, Mr. Singer
worked as a consultant in the aviation industry.
Brian S. Kenyon is Vice President, Finance. He has served in this
capacity since April 1998. From December 1996 to April 1998 he served as
Director, Financial Analysis for Signature Brands USA, Inc., a publicly traded
consumer products company. From October 1990 to December 1996 he was employed by
NACCO Industries, Inc., a publicly traded holding company, where he last served
as Manager of Shareholder Relations and External Reporting. From December 1986
to October 1990 he was employed by Coopers & Lybrand, where he last served as a
Senior Associate Auditor.
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.
Peter J. Collins is the Eastern Division President. He has served in
this position since October 1997. From August 1995 to October 1997 he served as
a District Manager for the Southern District for the Company. From July
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<PAGE> 14
1991 to August 1995 he was employed by Pennzoil Corporation, where he last
served as a multi-store manager in their retail operations. Prior to July 1995,
he was employed by Eastern Airlines for 30 years where he held a number of
positions.
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.
There are no arrangements or understandings known to the Company
between any executive officer and any other person pursuant to which any
executive officer was elected to office. There is no family relationship between
any director or executive officer and any other director or executive officer of
the Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
(a) MARKET INFORMATION
The Company's Common Shares are traded in the Nasdaq National Market
under the symbol "ITSW." The following table sets forth for the indicated
periods the high and low market prices for the Common Shares:
<TABLE>
<CAPTION>
Price Range
-----------
Fiscal Year ended March 31, 1998 High Low
---- ---
<S> <C> <C>
Third Quarter (beginning September 19, 1997) $18.75 $13.00
Fourth Quarter $24.13 $15.75
</TABLE>
(b) SHAREHOLDER INFORMATION
As of June 30, 1998, there were 17 record holders of Common Shares
and approximately 650 beneficial owners.
(c) DIVIDEND INFORMATION
The Company has never paid, and does not anticipate paying in the
foreseeable future, cash dividends on the Common Shares because it intends to
retain its earnings to finance the expansion of its business and for general
corporate purposes. 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.
(d) SALES OF UNREGISTERED SECURITIES
In March 1997, prior to the Initial Offering, the Company issued
4,125.64 Common Shares, to Robert A. Weitzel, the Company's Chairman of the
Board and Chief Executive Officer, in exchange for his interest in a former
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<PAGE> 15
provider of leasing services to the Company. This issuance was valued at $9.08
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.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data of the Company for the years ended March
31, 1995, 1996, 1997 and 1998 are derived from audited financial statements.
The selected financial data of the Company for the year ended March 31,
1994 has 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.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------------
1994 1995 1996 1997 1998
------------ ----------- ----------- ---------- ------------
(Amounts in Thousands, except per share and employee data)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues............................. $ 78,173 $ 92,654 $ 95,900 $ 115,745 $ 173,235
Cost of Revenues .................... 66,103 79,981 81,341 98,338 145,968
--------- --------- --------- ---------- ---------
Gross profit......................... 12,070 12,673 14,559 17,407 27,267
General and administrative expenses.. 11,075 12,655 11,603 13,334 16,677
--------- --------- --------- ---------- ---------
Operating income..................... 995 18 2,956 4,073 10,590
Interest expense-net................. 34 188 523 637 719
Other expense........................ 0 0 437 503 868
--------- --------- --------- ---------- ---------
Income (loss) before
income taxes..................... 961 (170) 1,996 2,933 9,003
Income taxes......................... 1,035 548 958 1,237 3,758
--------- --------- --------- ---------- ---------
Net income (loss)................ $ (74) $ 718 $ 1,038 $ 1,696 $ 5,245
========= ========= ========= ========== =========
Net income (loss) per share:
Basic............................ $ (0.01) $ (0.11) $ 0.18 $ 0.33 $ 1.01
Diluted.......................... $ (0.01) $ (0.11) $ 0.18 $ 0.33 $ 1.00
Weighted average common shares:
Basic............................ 6,446 6,293 5,776 5,089 5,215
Diluted.......................... 6,446 6,293 5,776 5,089 5,265
OPERATING DATA (AT PERIOD END):
Number of employees.................. 9,000 9,900 9,900 10,700 15,000
BALANCE SHEET DATA (AT PERIOD END):
Cash and cash equivalents............ 769 1,267 1,873 1,452 1,032
Working capital (deficit)............ (1,351) (4,425) (2,951) 324 9,137
Total assets......................... 14,843 20,295 20,892 27,001 58,567
Short-term bank debt and current
maturities of long-term debt....... 875 5,658 4,806 2,520 0
Long-term obligations, net of current
maturities......................... 0 152 164 7,555 544
Retained earnings.................... 3,678 2,961 3,998 2,784 8,029
shareholders' equity................. 4,273 3,139 3,978 3,195 39,103
</TABLE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is a leading domestic provider of aviation contract support
services and is establishing a growing presence in the security services market.
The Company provides services to customers in more than 329 cities in the United
States and Europe. The Company has used its predeparture screening business to
establish a growing presence in the broader aviation services market. Aviation
services offered by the Company include skycap, baggage handling and aircraft
appearance 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. The Company's revenues have grown from $95.9 million in
fiscal 1996 to $173.2 million in fiscal 1998, reflecting a compound annual
growth rate of 40 percent. The revenue growth for fiscal 1998 and 1997 was 50
percent and 21 percent, respectively.
Gross margins associated with airline security services are typically
lower than gross margins on other airlines 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 airlines 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. Gross margins associated with commercial security services
typically exceed those achieved for airline security services.
The Company's services are provided under contracts that generally have
terms of one to three years but are cancelable by either party on 30 to 90 days
notice. Although contract terms vary significantly, clients generally pay 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 1996, 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, in fiscal 1996 the Company decided 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, which
aggregated 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 1998 and 1997, 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 domestic 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 risks associated with
and the costs of integrating acquired operations.
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<PAGE> 16
In fiscal 1998, ITS completed eleven acquisitions of service contracts,
all of which were accounted for under the purchase method, and accordingly their
operating results are included in ITS's consolidated financial statements for
all periods subsequent to the date of the acquisition. All of these acquisitions
were in the Company's core operations of aviation staffing and support services
and commercial security. These acquisitions contributed approximately $46.3
million in total revenues during fiscal 1998. During fiscal 1997, the Company
completed six acquisitions of service contracts, all of which were accounted for
under the purchase method. All of the acquisitions completed in fiscal 1997
involved providers of airline security and commercial security services. These
acquisitions contributed approximately $5.9 million in total revenues during
fiscal 1997. The Company has financed its acquisitions with borrowings under its
credit facility, cash from the proceeds of the Initial Public Offering completed
in September 1997, and internally generated cash.
RESULTS OF OPERATIONS
The following table sets forth ITS' results of operations in both
dollars and as a percentage of revenues for the years ended March 31:
<TABLE>
<CAPTION>
1998* 1997* 1996*
----------------------- ----------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues ......................... $ 173,235 100.0% $ 115,745 100.0% $ 95,900 100.0%
Cost of operating revenues ....... 145,968 84.3% 98,338 85.0% 81,341 84.8%
--------- --------- --------- --------- --------- ---------
Gross profit ................. 27,267 15.7% 17,407 15.0% 14,559 15.2%
Selling, general & admin. expenses 16,677 9.6% 13,334 11.5% 11,603 12.1%
--------- --------- --------- --------- --------- ---------
Operating profit ............. 10,590 6.1% 4,073 3.5% 2,956 3.1%
Other expense .................... (868) (0.5)% (503) (0.4)% (437) (0.5)%
Interest expense ................. (719) (0.4)% (637) (0.6)% (523) (0.5)%
--------- --------- --------- --------- --------- ---------
Income before income taxes ... 9,003 5.2% 2,933 2.5% 1,996 2.1%
Income taxes ..................... 3,758 2.2% 1,237 1.1% 958 1.0%
--------- --------- --------- --------- --------- ---------
Net income ................... $ 5,245 3.0% $ 1,696 1.4% $ 1,038 1.1%
========= ========= ========= ========= ========= =========
</TABLE>
* (dollars in thousands)
YEAR ENDED MARCH 31, 1998 COMPARED WITH YEAR ENDED MARCH 31, 1997
Revenues. Revenues in fiscal 1998 increased by $57.5 million, or 49.7
percent as compared with fiscal 1997. The increase is attributable to an
increase in revenues from the eleven acquisitions completed during the year, the
inclusion of a full year of revenues from the six acquisitions completed in
fiscal 1997, and internal growth. The eleven acquisitions completed in fiscal
1998 contributed $46.3 million to the total increase in revenues for the year,
with $42.3 million in aviation services and $4.0 million in industrial security
services. The inclusion of a full year of operating results from the six
acquisitions completed in fiscal 1997 contributed $6.8 million to revenues.
Internal growth contributed the remainder of the increase in revenues in fiscal
1998 compared with fiscal 1997.
Gross Profit. Gross profit was $27.3 million in fiscal 1998 compared
with $17.4 million fiscal 1997, an increase of $9.9 million, or 56.9 percent.
The eleven acquisitions completed in fiscal 1998, and the inclusion of a full
year of operating results from the six acquisitions completed in fiscal 1997,
contributed $6.2 million and $0.7 million, respectively to the increased gross
profit. As a percentage of revenues, gross profit was 15.7 percent in fiscal
1998, compared with 15.0 percent in fiscal 1997. The increase in gross profit as
a percent of sales is attributable to the shift in the Company's sales mix to
higher margin services such as ground handling, passenger services and
industrial security and away from lower margin preboard screening services. The
current strength of the United States economy, which has driven unemployment to
low levels has adversely impacted the Company's ability to attract and retain
the workforce needed to provide the services required under its service
contracts. The difficulty in attracting these workers has resulted in the
Company's payment of increased overtime and has forced the Company to increase
the wages paid to employees in advance of increases in the rates paid by the
Company's customers. These factors have resulted in downward pressure on
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<PAGE> 17
the Company's gross margins. In early fiscal 1999, the Company began
implementing operational strategies that the Company believes will improve its
gross margins, however, there can be no assurance that these strategies will be
successful.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1998 were $16.7 million compared with $13.3
million in the prior year, an increase of $3.4 million, or 25.6 percent. The
increase primarily reflects expenses associated with the operations of acquired
businesses. Measured as a percentage of net sales, these expenses were 9.6
percent in fiscal 1998 and 11.5 percent in fiscal 1997. This decrease is
attributable to improved overhead absorption resulting from the growth of
revenues over the prior year.
Interest Expense. Interest expense increased in fiscal 1998 to $0.7
million from $0.6 million in fiscal 1997 because of an increase in average
borrowings, primarily incurred to fund acquisitions.
Income Taxes. The Company's consolidated effective income tax rate in
fiscal 1998 was 41.7 percent compared with 42.2 percent in fiscal 1997. The
decrease in the Company's effective tax rate in fiscal 1998 is due to reduced
overall tax rates on foreign earnings taxed at rates in excess of the U.S.
statutory tax rate. In addition, a decrease in expenses that are not deductible
for tax purposes lowered the Company's effective tax rate.
Net Income. As a result of the increased revenues and reduction in
selling, general and administrative expenses as a percentage of revenues, the
Company's net income increased to $5.2 million in fiscal 1998 from $1.7 million
in fiscal 1997, an increase of 206 percent.
YEAR ENDED MARCH 31, 1997 COMPARED WITH YEAR ENDED MARCH 31, 1996
Revenues. Revenues in fiscal 1997 increased by $19.8 million, or 20.7
percent, as compared to fiscal 1996. 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, $5.9 million was
attributable to the acquisitions ($3.2 million in predeparture screening and
$2.7 million in industrial security), $4.2 million to continuous bag search,
$2.3 million to the minimum wage increase, $1.4 million to aircraft cleaning and
ground handling and the remainder due to internal growth.
Gross Profit. Gross profit was $17.4 million in fiscal 1997 compared
with $14.6 million in fiscal 1996, an increase of $2.8 million, or 19.6 percent.
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 $400,000 to the increase in gross profit.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in fiscal 1997 were $13.3 million compared with $11.6
million in the prior year, an increase of $1.7 million, or 14.7 percent. The
increase primarily reflects expenses associated with the operations of acquired
businesses. Measured as a percentage of net sales, these expenses were 11.5
percent in fiscal 1997 and 12.1 percent in fiscal 1996. The decrease in these
expenses as a percentage of sales was 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
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<PAGE> 18
expenses for fiscal 1997 would have been 11.3 percent 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 1997 to $0.6
million from $0.5 million in fiscal 1996 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 1997 was 42.2 percent as compared to 48.0 percent in fiscal 1996. 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 1997 from $1.0 million in fiscal 1996, an
increase of 70.0 percent.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's business is labor intensive. Consequently, it has
substantial needs for cash throughout its fiscal year. During fiscal 1998, 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 $1.5 million. Financing
activities generated net cash of $20.4 million during fiscal 1998 primarily as a
result of the $30 million of net proceeds from the Company's Initial Offering,
offset by the repayment of $7.1 million of long-term debt and the net repayment
of $2.4 million of short-term borrowings.
Principal uses of funds, in addition to working capital requirements,
included expenditures associated with the Company's acquisition program. During
fiscal 1998, these included $19.0 million in acquisitions of service contracts,
related goodwill and noncompete agreements and $1.7 million for related property
and equipment. In addition, the Company spent $1.5 million on purchases of
property and equipment.
In April 1997, the Company acquired substantially all of the aviation
services business of Intex by purchasing 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. After the acquisition,
the Company lost contracts worth $2.5 million in annual revenue, which was
deducted from the purchase price based on a multiple of monthly revenue.
The Company has a two-year revolving credit facility providing maximum
availability of $30 million, subject to certain borrowing base limitations. This
facility expires in September 1999 and is secured by substantially all of the
Company's assets. The interest rate on this credit facility is based on either
LIBOR or the bank's base lending rate, plus a margin depending on the Company's
ratio of its debt to tangible net-worth. Borrowings under this credit facility
currently bear interest at LIBOR plus 1.5 percent. The credit facility contains
customary restrictions and covenants, which limit the Company's ability to incur
additional indebtedness and pay dividends, and require the Company to maintain
prescribed debt-to-equity and fixed charge coverage ratios, and minimum net
worth levels, and to satisfy certain other financial covenants.
The Company anticipates making capital expenditures in fiscal 1999 of
approximately $1.6 million primarily related to office space and equipment
improvements and computer software and systems. In addition, the Company
anticipates that it will continue making significant expenditures to fund its
ongoing acquisition program.
The Company believes that operating cash flows and amounts available
under its credit facility will be sufficient to meet its anticipated cash
requirements through the end of fiscal 1999.
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<PAGE> 19
RECENTLY ISSUED BUT NOT YET ADOPTED ACCOUNTING STANDARDS
During the first quarter of 1998, the AICPA's Accounting Standards
Executive Committee issued SOP 98-5, Reporting on the Costs of Start-Up
Activities. This SOP requires that costs of start-up activities be expensed as
incurred. SOP 98-5 is required to be adopted for financial statements with
fiscal years beginning after December 15, 1998 and requires the cumulative
effect of the accounting change to be reported in net income in the year of
adoption. The Company believes adoption of this standard will not have a
material impact on the Company's financial position or results of operations.
During the first quarter of 1998, the Financial Accounting Standards
Board issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. These
standards are effective for fiscal years beginning after December 15, 1997. The
Company believes adoption of these standards will not have a material impact on
the Company's financial disclosures.
YEAR 2000 BUSINESS MATTERS
The Company is currently installing an updated version, that the
Company has been informed by its vendors is fully year 2000 compliant, of the
system that processes the majority of its transactions. This new version will
replace the Company's current version and the Company believes that this
version will be fully operational before year 2000 issues begin to impact the
Company. In addition, the Company will have an outside consultant perform a
review of its other information systems to determine if any other areas of
exposure exist. The cost of this new version, and of any other new information
systems, will be capitalized and depreciated over their estimated useful lives
for financial reporting purposes.
FORWARD LOOKING STATEMENTS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations ("MD&A") contains statements that constitute forward
looking statements. Those statements appear in a number of places in this MD&A
Section and include statements regarding the intent, belief or current
expectations of International Total Services, Inc., its directors or its
officers with respect to (i) potential acquisitions by the Company; (ii) the
Company's financing plans; and (iii) trends affecting the Company's financial
condition or results of operations.
Prospective investors are cautioned that any forward looking statements
in this MD&A Section are made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. Forward looking statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from projected results, including unanticipated losses of
service contracts, conditions in the aviation industry, and negative publicity
regarding the airline security and services and commercial security industries.
Readers are cautioned not to place undue reliance on forward looking
statements. Factors that could cause actual results to differ materially from
projected results include, but are not limited to, those factors discussed in
the "Risk Factors" section of the prospectus contained in the Company's
Registration Statement on Form S-1 (Registration No. 333-29463), as amended.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
-17-
<PAGE> 20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item 10 is incorporated by
reference to the information under the headings "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" contained in the
Company's Proxy Statement in connection with its Annual Meeting of Shareholders
to be held on September 18, 1998, and the information under the heading
"Executive Officers" in Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item 11 is incorporated by
reference to the information under the heading "Executive Compensation"
contained in the Company's Proxy Statement in connection with its Annual Meeting
of Shareholders to be held on September 18, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is incorporated by
reference to the information under the heading "Security Ownership of Certain
Beneficial Owners and Management" contained in the Company's Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on September 18,
1998.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated herein by
reference to the information set forth under the heading "Certain Relationships
and Related Transactions" contained in the Company's Proxy Statement in
connection with its Annual Meeting of Shareholders to be held on September 18,
1998.
-18-
<PAGE> 21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a)(1) FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on page F-1.
(a)(2) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
(a)(3) EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C> <C> <C>
3.1 Amended and Restated Articles of Incorporation*
3.2 Amended and Restated Code of Regulations*
4.1 Specimen Common Share Certificate*
10.1 Employment Agreement between the Company and Robert A. Weitzel*
10.2 Employment Agreement between the Company and James O. Singer*
10.3 Employment Agreement between the Company and Scott E. Brewer*
10.4 Employment Agreement between the Company and Brian S. Kenyon
10.5 Employment Agreement between the Company and Robert A. Swartz*
10.9 Directors' Deferred Compensation Plan*
10.10 Long-Term Incentive Plan*
10.11 Third Amended and Restated Consolidated Replacement Credit Facility and Security
Agreement, dated as of March 31, 1997, between Bank One, Cleveland, NA, and the
Registrant*
10.12 First Amendment to Third Amended and Restated Consolidated Replacement Credit Facility
and Security Agreement, dated as of October 10, 1997, between Bank One, Cleveland, NA
and the Registrant
10.13 Amended and Restated Replacement Promissory Note executed by the Registrant in favor of
Bank One, NA, successor by merger to Bank One, Cleveland, NA
21.1 Subsidiaries*
27.1 Financial Data Schedule
* Incorporated by reference from the Company's Registration Statement on Form S-1 (Registration No.
333-29463), as amended.
(b) REPORTS ON FORM 8-K
Current Report on Form 8-K dated February 20, 1998, as amended by the Current Report on Form 8-K/A
filed with the Commission on May 6, 1998.
</TABLE>
-19-
<PAGE> 22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C>
July 13, 1998 INTERNATIONAL TOTAL SERVICES, INC.
By: /s/ Robert A. Weitzel
-------------------------------------------
Robert A. Weitzel
Director, Chairman of the Board of Directors
and Chief Executive Officer
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C>
July 13, 1998 /s/ Robert A. Weitzel
-------------------------------------------
Robert A. Weitzel
Director, Chairman of the Board of Directors
and Chief Executive Officer
July 13, 1998 /s/ Brian S. Kenyon
-------------------------------------------
Brian S. Kenyon
Vice President, Finance
(Principal Accounting Officer)
July 13, 1998 /s/ Ivan J. Winfield
-------------------------------------------
Ivan J. Winfield
Director
July 13, 1998
-------------------------------------------
Lee C. Howley, Jr.
Director
July 13, 1998 /s/ James O. Singer
-------------------------------------------
James O. Singer
Director
July 13, 1998 /s/ Jerry V. Jarret
-------------------------------------------
Jerry V. Jarrett
Director
</TABLE>
-20-
<PAGE> 23
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 as of March 31, 1998 and 1997.................................... F-3
Consolidated Statements of Income for the years ended
March 31, 1998, 1997 and 1996............................................................ F-5
Consolidated Statements of Shareholders' Equity for the years ended
March 31, 1998, 1997 and 1996............................................................ F-6
Consolidated Statements of Cash Flows for the years ended
March 31, 1998, 1997 and 1996............................................................ F-7
Notes to Consolidated Financial Statements................................................... F-8
</TABLE>
F-1
<PAGE> 24
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, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended March 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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, 1998 and
1997, and the consolidated results of their operations and their consolidated
cash flows for each of the three years in the period ended March 31, 1998 in
conformity with generally accepted accounting principles.
GRANT THORNTON LLP
Cleveland, Ohio
May 15, 1998
F-2
<PAGE> 25
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31
(Amounts in thousands)
ASSETS
<TABLE>
<CAPTION>
1998 1997
-------------- -------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,032 $ 1,452
Accounts receivable - net of allowance for doubtful
accounts of $100 in each year 20,768 11,784
Deferred taxes 1,453 1,494
Uniforms 2,686 770
Other current assets 1,684 786
-------------- -------------
Total current assets 27,623 16,286
Notes receivable from Officers -- 445
Property and Equipment
Security equipment 3,682 2,759
Service equipment 2,362 1,657
Computer equipment 2,049 1,758
Furniture and fixtures 994 860
Leasehold improvements 56 56
Autos 1,607 500
-------------- -------------
10,750 7,590
Less accumulated depreciation and amortization 5,255 4,336
-------------- -------------
Property and equipment - net 5,495 3,254
Intangibles, less accumulated amortization of
$1,636 and $648 in 1998 and 1997, respectively 25,295 4,346
Security Deposits and Other 154 2,670
-------------- -------------
25,449 7,016
-------------- -------------
TOTAL ASSETS $ 58,567 $ 27,001
============== =============
</TABLE>
The accompanying notes are an integral part of these statements.
F-3
<PAGE> 26
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS - CONTINUED
March 31
(Amounts in thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
1998 1997
------------- ---------------
<S> <C> <C>
Current Liabilities
Trade accounts payable $ 4,590 $ 2,748
Notes payable to bank - 2,400
Current maturities of long-term obligations - 120
Accrued payroll and payroll taxes 11,938 8,703
Other accrued expenses 1,860 1,418
Income taxes payable 98 573
------------- ---------------
Total current liabilities 18,486 15,962
Deferred Taxes 434 289
Long-Term Obligations 544 7,555
Shareholders' Equity
Common shares, without par value, stated at $.01 per share -
authorized 20,000 shares, issued and outstanding
6,662 and 3,660 shares in 1998 and 1997, respectively 67 37
Additional paid-in capital 31,211 473
Cumulative translation adjustment (204) (99)
Retained earnings 8,029 2,784
------------- ---------------
Total shareholders' equity 39,103 3,195
------------- ---------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 58,567 $ 27,001
============= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-4
<PAGE> 27
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended March 31
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Operating revenues $ 173,235 $ 115,745 $ 95,900
-------------- -------------- --------------
Cost of operating revenues 145,968 98,338 81,341
-------------- -------------- --------------
Gross profit 27,267 17,407 14,559
Selling, general and administrative expenses 16,677 13,334 11,603
-------------- -------------- --------------
Operating profit 10,590 4,073 2,956
Interest expense - net 719 637 523
Other expense 868 503 437
-------------- -------------- --------------
1,587 1,140 960
-------------- -------------- --------------
Income before income taxes 9,003 2,933 1,996
Income taxes 3,758 1,237 958
-------------- -------------- --------------
NET INCOME $ 5,245 $ 1,696 $ 1,038
============== ============== ==============
NET INCOME PER SHARE
Basic $ 1.01 $ 0.33 $ 0.18
============== ============== ==============
Diluted $ 1.00 $ 0.33 $ 0.18
============== ============== ==============
WEIGHTED AVERAGE NUMBER OF SHARES
Basic 5,215 5,089 5,776
============== ============== ==============
Diluted 5,265 5,089 5,776
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-5
<PAGE> 28
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the years ended March 31, 1998, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
CUMULATIVE
ADDITIONAL TRANSLATION
PREFERRED COMMON PAID-IN ADJUSTMENT RETAINED
STOCK SHARES CAPITAL AND OTHER EARNINGS
-------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C>
BALANCE AT MARCH 31, 1995 $ 220 $ 64 $ 362 $ (60) $ 2,960
Translation adjustment - - - (69) -
Sale of marketable securities - - - 51 -
Purchase of common shares for treasury - - - - -
Issuance of common shares from treasury - - - - -
Net income - - - - 1,038
------- ---- -------- ------ --------
BALANCE AT MARCH 31, 1996 220 64 362 (78) 3,998
Purchase of common shares for treasury - - - - -
Issuance of common shares from treasury - - 171 - -
Translation adjustment - - - (21) -
Dividends declared - Class E Preferred Stock - - - - (52)
Redeem Class E Preferred Stock (200) - - - -
Acquisition and merger of affiliate - - 35 - (1,219)
Retirement of Treasury Stock (20) (27) (95) - (1,639)
Net income - - - - 1,696
------- ---- -------- ------ --------
BALANCE AT MARCH 31, 1997 - 37 473 (99) 2,784
Purchase of common shares - - (165) - -
Contribution of common shares by shareholder - - 805 - -
Initial Public Offering - issuance of common shares - 30 29,963 - -
Translation adjustment - - - (105) -
Other - - 135 - -
Net income - - - - 5,245
------- ---- -------- ------ --------
BALANCE AT MARCH 31, 1998 $ - $ 67 $ 31,211 $ (204) $ 8,029
======= ==== ======== ====== ========
</TABLE>
<TABLE>
<CAPTION>
TOTAL
TREASURY SHAREHOLDERS'
STOCK EQUITY
-------- ------------
<S> <C> <C>
BALANCE AT MARCH 31, 1995 $ (406) $ 3,140
Translation adjustment - (69)
Sale of marketable securities - 51
Purchase of common shares for treasury (200) (200)
Issuance of common shares from treasury 18 18
Net income - 1,038
-------- --------
BALANCE AT MARCH 31, 1996 (588) 3,978
Purchase of common shares for treasury (1,226) (1,226)
Issuance of common shares from treasury 31 202
Translation adjustment - (21)
Dividends declared - Class E Preferred Stock - (52)
Redeem Class E Preferred Stock - (200)
Acquisition and merger of affiliate 2 (1,182)
Retirement of Treasury Stock 1,781 -
Net income - 1,696
-------- --------
BALANCE AT MARCH 31, 1997 - 3,195
Purchase of common shares - (165)
Contribution of common shares by shareholder - 805
Initial Public Offering - issuance of common shares - 29,993
Translation adjustment - (105)
Other - 135
Net income - 5,245
-------- --------
BALANCE AT MARCH 31, 1998 $ - $ 39,103
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-6
<PAGE> 29
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31
(Amounts in thousands)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income $ 5,245 $ 1,696 $ 1,038
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation 948 837 897
Amortization 988 208 268
Other 18 500 (123)
Deferred income taxes 185 (310) (295)
Changes in working capital:
Accounts receivable (8,984) (2,709) (501)
Other current and noncurrent assets (2,747) (518) 12
Trade accounts payable 1,842 315 404
Accrued expenses 4,007 1,924 264
--------------- ---------------- ----------------
Net cash provided by operating activities 1,502 1,943 1,964
INVESTING ACTIVITIES:
Additions to property and equipment (1,508) (1,052) (900)
Proceeds received from sale of equipment - 160 543
Proceeds from sale of marketable securities - - 109
Property and equipment of acquired businesses (1,699) - -
Payments for acquisitions of businesses, primarily
by purchase of security contracts (19,042) (2,760) -
Deposit on acquisition of business of Intex Aviation
Services, Inc. - (2,571) -
--------------- ---------------- ----------------
Net cash used in investing activities (22,249) (6,223) (248)
FINANCING ACTIVITIES:
Net proceeds from Initial Public Offering 29,993 - -
Net borrowings (payments) on note payable to bank (2,400) 2,005 (819)
(Payments) borrowings on subordinated debt (3,000) 3,000 -
Principal payments on long-term debt (4,131) (52) (99)
Purchase of Company common shares (165) (1,227) (200)
Other 135 154 77
--------------- ---------------- ----------------
Net cash provided by (used in) financing activities 20,432 3,880 (1,041)
Effect of exchange rates on cash (105) (21) (69)
--------------- ---------------- ----------------
NET (DECREASE) INCREASE IN CASH (420) (421) 606
Cash and cash equivalents at beginning of year 1,452 1,873 1,267
--------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 1,032 $ 1,452 $ 1,873
=============== ================ ================
- ------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------------------------
Cash paid for:
Interest $ 841 $ 782 $ 610
=============== ================ ================
Income taxes $ 3,943 $ 1,231 $ 1,138
=============== ================ ================
</TABLE>
The accompanying notes are an integral part of these statements.
F-7
<PAGE> 30
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
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 1997 and 1996
share and per share amounts have been adjusted for the 12,892.62 for 1 stock
split declared on June 17, 1997. Certain reclassifications have been made to
the 1997 and 1996 consolidated financial statements to conform with the 1998
presentation.
The Company's fiscal year ends on March 31. All references to fiscal years
in these notes to the consolidated financial statements represent the year
in which the fiscal period ends (i.e. fiscal 1998 is the year ended March
31, 1998) unless otherwise noted.
BUSINESS
International Total Services, Inc. (the Company) is a provider of aviation
security and other aviation services, providing personnel and management
support to airlines at airports primarily in the United States and Europe.
The Company also provides commercial security services to various businesses
in the United States. One airline customer accounted for 26.0%, 7.0% and
5.9% of operating revenues for the years ended March 31, 1998, 1997 and
1996, respectively. Another airline customer accounted for 14.7%, 18.9% and
18.3% of operating revenues for the same periods. Furthermore, five airline
customers, including the two noted above, accounted for approximately 54%,
44% and 39% of operating revenues for the years ended March 31, 1998, 1997
and 1996, respectively, and 43%, 35% and 39%, 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.
TRANSLATION OF FOREIGN CURRENCIES
All balance sheet accounts of foreign operations are translated into U.S.
dollars at the year-end rate of exchange, and statement of earnings items
are translated at the weighted average exchange rate for the year. The
resulting translation adjustments are made directly to a separate component
of stockholders' equity. Certain foreign activities are considered to be an
extension of the U.S. operations, and the gain or loss resulting from
remeasuring these transactions into U.S. dollars are included in income.
Gains or losses from other foreign currency transactions, such as those
resulting from the settlement of foreign receivables or payables, are also
included in the statement of earnings.
F-8
<PAGE> 31
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - 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 fiscal 1998 and 1997, the Company entered into the following noncash
transactions:
(1) During fiscal 1998, the Company's principal shareholder, who
is also the Company's chairman and chief executive officer,
contributed 73,101 common shares, valued at approximately
$805,000, to a former employee to settle the Company's
previously recorded liability to him.
(2) During fiscal 1997, the Company redeemed 200 shares of Class E
preferred shares from its principal shareholder in settlement
of a $200,000 note receivable from him. 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.
(3) During fiscal 1997, the Company acquired an affiliated entity
in a transaction accounted for in a manner similar to a
pooling. The acquisition was completed by issuing 4,126 common
shares from treasury to the Company's (and the affiliate's)
principal shareholder, paying $12,500 to the other
shareholders of the affiliate and by offsetting $1.7 million
in notes and accrued interest receivable due to the Company
from the shareholders of the affiliate against corresponding
obligations of the affiliate to such shareholders. The notes
and interest receivable included $1.3 million due from the
Company's principal shareholder. The shareholders of the
affiliate were also officers of the Company.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has determined that at March 31, 1998 and 1997, the fair value of
financial instruments included in the balance sheets approximated their
carrying values.
With respect to cash and cash equivalents, net trade receivables and
payables, this determination was based on the relatively short period to
maturity of these instruments. With respect to long-term debt, the
assessment was based on borrowing rates currently available to the Company
for debt with comparable maturities.
F-9
<PAGE> 32
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
UNIFORMS
Uniforms consists of uniforms on hand that have not been issued to employees
and uniforms in service. Uniforms in service are recorded at cost and
amortized over their expected useful lives of 18 months.
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
Intangibles primarily consist of goodwill resulting from the acquisition by
the Company of various aviation service and commercial security businesses,
primarily through the assumption of security service contracts. Intangibles
additionally include the fair value of the service contracts and, as
applicable, covenants not to compete also acquired in those acquisitions.
Goodwill, resulting from the acquisition of service contracts, is being
amortized over the estimated life of the contracts, including renewals
(generally 20 years), based on the Company's historical retention rate,
giving consideration to additional business obtained or obtainable as a
result of entering new markets by the acquisition of existing contracts. The
service contracts and covenants not to compete are being amortized over
their remaining lives of up to five years. Amortization of intangibles was
$988,000, $208,000 and $268,000 for the fiscal years ended March 31, 1998,
1997 and 1996, 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 that there
has been no impairment of the Company's long-lived assets.
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.
F-10
<PAGE> 33
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
ACCOUNTING STANDARDS
During the first quarter of 1998, the AICPA's Accounting Standards Executive
Committee issued SOP 98-5, Reporting on the Costs of Start-Up Activities.
This SOP requires that costs of start-up activities be expensed as incurred.
SOP 98-5 is required to be adopted for financial statements with fiscal
years beginning after December 15, 1998 and requires the cumulative effect
of the accounting change to be reported in net income in the year of
adoption. The Company believes adoption of this standard will not have a
material impact on the Company's financial position or results of
operations.
During the first quarter of 1998, the Financial Accounting Standards Board
issued SFAS No. 130, Reporting Comprehensive Income, and SFAS No. 131,
Disclosures About Segments of an Enterprise and Related Information. These
standards are effective for fiscal years beginning after December 15, 1997.
The Company believes adoption of these standards will not have a material
impact on the Company's financial disclosures.
NOTE B - INITIAL PUBLIC OFFERING
On September 24, 1997, the Company completed a public offering of 3,021,477
common shares and received net proceeds of approximately $30 million. A
portion of the proceeds were used to repay outstanding debt and the balance
was used for general corporate purposes, including the acquisition of
service contracts.
NOTE C - CAPITAL STOCK
The Company has authorized 5 million preferred shares. The Company had
issued ten shares of Class A preferred stock for $20,000 and 200 shares of
Class E preferred stock for $200,000. All preferred shares were redeemed and
retired in 1997. Prior to their redemption, in March 1997, the Company
declared and paid dividends on the Class E preferred shares in the amount of
$52,000, which amount included all dividends in arrears at that date.
During the fiscal years ended March 31, 1998, 1997 and 1996, the Company
reacquired 19,339 common shares, 2,028,477 common shares and 286,099 common
shares, respectively. During the 1997 and 1996 fiscal years, the Company
reissued 70,909 of those shares, including 45,124 common shares valued at
$203,000 that were granted to certain officers in November 1996.
F-11
<PAGE> 34
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE D - FINANCING ARRANGEMENTS
The Company has a committed credit facility secured by all domestic
accounts receivable, equipment, and other assets. The facility originally
consisted of a revolving promissory note of $10,500,000, a $2,000,000 term
loan and a $900,000 term loan. The credit facility was amended and
restated effective October 10, 1997. The restated credit facility provides
borrowings under a revolving promissory note up to $30 million through
September 30, 1999, limited to a formula percentage of eligible
receivables. The revolving promissory note bears interest at a variable
rate based on the Company's total debt to tangible net worth ranging from
LIBOR plus 1.50% to the bank's prime rate plus 3%. The interest rate on
borrowings outstanding at March 31, 1998 was LIBOR (5.625% at March 31,
1998) plus 1.5%. The credit facility is collateralized by substantially
all accounts receivable and property and equipment, and contains various
covenants, the most restrictive of which limit capital expenditures and
require the Company to maintain certain financial ratios.
NOTES PAYABLE TO BANK
Notes payable to bank consisted of the $2,000,000 term loan and the
$900,000 term loan (with a balance of $400,000 at March 31, 1997) which
were paid in full in September 1997 from the proceeds of the initial
public offering. The term loans had maturity dates in 1997 and,
accordingly, were classified as current liabilities at March 31, 1997.
LONG-TERM OBLIGATIONS
Long-term obligations consist of the following at March 31:
<TABLE>
<CAPTION>
===============================
1998 1997
------------- -----------------
<S> <C> <C>
Revolving promissory note $544 $4,358
Subordinated debt - 3,000
Other - 317
------------- -----------------
544 7,675
Less current portion - 120
------------- -----------------
$544 $7,555
============= =================
</TABLE>
The subordinated debt consisted of a promissory note payable, bearing
interest at 20%, due in twelve quarterly principal installments of
$250,000 each, beginning in February 1999. The note, which was
subordinated to all borrowings provided under the bank credit facility,
was fully repaid from the proceeds of the initial public offering.
F-12
<PAGE> 35
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE E - INCOME TAXES
The provision for income taxes consists of the following for the years ended
March 31:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
PRETAX INCOME
Domestic $ 8,560 $ 2,497 $ 1,635
Foreign 443 436 361
----------------- ----------------- ------------------
TOTAL $ 9,003 $ 2,933 $ 1,996
================= ================= ==================
CURRENT
Federal $ 2,650 $ 1,095 $ 884
State 700 253 233
Foreign 223 199 136
----------------- ----------------- ------------------
Total current 3,573 1,547 1,253
DEFERRED
Federal 143 (260) (251)
State 42 (50) (44)
----------------- ----------------- ------------------
Total deferred 185 (310) (295)
----------------- ----------------- ------------------
TOTAL PROVISION $ 3,758 $ 1,237 $ 958
================= ================= ==================
</TABLE>
A reconciliation of the provision for income taxes computed at the United
States federal statutory tax rate to the Company's effective tax rate is as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ------------------
<S> <C> <C> <C>
Tax at U.S. federal income
tax rate (34%) $ 3,061 $ 997 $ 679
State income taxes - net of
U.S. federal tax benefit 490 128 124
Difference between foreign
and U.S. federal tax rates 72 51 14
Nondeductible items 57 60 154
Other - net 78 1 (13)
----------------- ----------------- ------------------
$ 3,758 $ 1,237 $ 958
================= ================= ==================
Effective tax rates 41.7% 42.2% 48.0%
================= ================= ==================
</TABLE>
F-13
<PAGE> 36
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE E - INCOME TAXES - CONTINUED
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>
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
DEFERRED TAX ASSETS:
Deferred compensation $ 81 $ 428 $ 360
Accrued workers' compensation 545 360 400
Accrued legal expenses 571 536 324
Other accruals not currently deductible 240 180 164
Amortization of intangibles 35 51 22
Allowance for doubtful accounts 40 40 40
State income taxes 63 46 30
Other 132 50 55
--------------- --------------- ---------------
TOTAL DEFERRED TAX ASSETS $ 1,707 $ 1,691 $ 1,395
=============== =============== ===============
DEFERRED TAX LIABILITIES:
Depreciation $ 620 $ 340 $ 412
Deferred expenses 34 112 57
Other 34 34 31
--------------- --------------- ---------------
TOTAL DEFERRED TAX LIABILITIES $ 688 $ 486 $ 500
=============== =============== ===============
NET DEFERRED TAX ASSETS $ 1,019 $ 1,205 $ 895
=============== =============== ===============
</TABLE>
The net deferred tax assets are classified in the balance sheet as follows at
March 31:
<TABLE>
<CAPTION>
1998 1997
--------------- ---------------
<S> <C> <C>
Current deferred income taxes $ 1,453 $ 1,494
Noncurrent deferred income taxes (434) (289)
--------------- ---------------
Net deferred tax assets $ 1,019 $ 1,205
=============== ===============
</TABLE>
F-14
<PAGE> 37
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE F - LEASE OBLIGATIONS
The Company leases certain equipment and facilities under operating leases
that expire at various dates through December 31, 2004. The future minimum
lease commitments under these operating leases are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
- ---------------------------------------
<S> <C>
1999 $1,696
2000 1,300
2001 1,199
2002 873
2003 304
Thereafter 376
---------------
$5,748
===============
</TABLE>
Rent expense incurred under operating leases was $2.2 million, $1.4 million
and $1.7 million for the years ended March 31, 1998, 1997 and 1996,
respectively.
NOTE G - RELATED PARTY TRANSACTIONS
Notes receivable from officers at March 31, 1997 consisted of two notes due
from the Company's principal shareholder, plus accrued interest thereon. The
notes, which aggregated approximately $325,000, were fully repaid in
September 1997. Interest income on shareholder notes amounted to $14,000,
$119,000 and $137,000 in the years ended March 31, 1998, 1997 and 1996,
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-15
<PAGE> 38
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE I - WORKERS' COMPENSATION INSURANCE
The Company carries 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 insurance 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
$130,000 in cash on deposit with insurance carriers and an outstanding
letter of credit in the amount of $1,022,000 at March 31, 1998. 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 $1.4 million, $900,000 and $714,000 at March
31, 1998, 1997 and 1996, respectively.
NOTE J - NET INCOME PER SHARE
Net income per share - basic is based on the weighted average number of
shares outstanding during each period.
Net income per share - diluted gives effect to the net additional shares
that would have been issued had all dilutive stock options been exercised.
The Company had no other potential common stock outstanding.
The table below presents the information used to compute net income per
share, with and without dilution:
<TABLE>
<CAPTION>
==================================================================
FOR THE YEAR ENDED MARCH 31, 1998
------------------------------------------------------------------
INCOME SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT
------------------------------------------------------------------
<S> <C> <C> <C>
Net income $5,245 5,215 $1.01 Basic
=======================
Effect of dilutive securities:
Stock options - 50
------------------------------------------
$5,245 5,265 $1.00 Diluted
==================================================================
</TABLE>
F-16
<PAGE> 39
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE K - LONG-TERM INCENTIVE PLAN
In September 1997, the Company adopted the Long-Term Incentive Plan (the
"Plan") for its officers and directors. The Company accounts for the Plan
under APB Opinion No. 25 and related interpretations. The Plan allows the
Company to grant options to officers and directors for up to 267,015 common
shares. Options currently outstanding become exercisable one to five years
from the grant date and expire 10 years after the grant date. The options
are exercisable at the market price of the Company's common shares on the
date of grant. Accordingly, no compensation cost has been recognized for the
Plan. Had compensation cost for the Plan been determined based on the fair
value of the options at the grant date consistent with the method of
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS 123), the Company's net income and earnings
per share would have been reduced to the proforma amounts indicated below.
<TABLE>
<CAPTION>
========================
MARCH 31, 1998
------------------------
<S> <C>
NET INCOME
As reported $5,245
Proforma $4,949
NET INCOME PER SHARE - BASIC
As reported $1.01
Proforma $ .95
NET INCOME PER SHARE - DILUTED
As reported $1.00
Proforma $ .94
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions: expected volatility of 45 percent; risk-free interest rate of
6.24%; and expected lives of 10 years.
F-17
<PAGE> 40
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE K - LONG-TERM INCENTIVE PLAN - CONTINUED
A summary of the status of the Company's plan as of and for the year ended
March 31, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
---------------------------------------------
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 265 11.25
---------------------------------------------
Outstanding at end of year 265 $11.25
=============================================
Options exercisable at end of year 0
==============
Weighted average fair value of options
granted during the year $7.43
==============
Weighted average remaining contractual
life (years) 9.49
==============
</TABLE>
F-18
<PAGE> 41
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE L - ACQUISITIONS OF OPERATING CONTRACTS
During the fiscal year ended March 31, 1998, the Company acquired aviation
service and commercial security contracts and related property and equipment
of $1.7 million from ten entities for an aggregate purchase price of
approximately $23.3 million. 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 businesses. Accordingly, the acquisitions have been accounted
for under the purchase method of accounting. The purchase prices have been
allocated to the contracts and, where applicable, covenants not to compete,
based upon their estimated fair market values; the excess of the purchase
prices over those values have been allocated to goodwill, which is being
charged to operations on a straight-line basis over 20 years (see Note A).
The operating results related to the acquired contracts have been included
in the Company's results of operations from the respective dates of
acquisition.
The following unaudited pro forma results of operations give effect to the
above acquisitions as if the 1997 acquisitions had been made at April 1,
1995 and the 1998 acquisitions had been made at April 1, 1996:
<TABLE>
<CAPTION>
=================================================
YEARS ENDED MARCH 31,
-------------------------------------------------
1998 1997 1996
-------------------------------------------------
<S> <C> <C> <C>
Operating revenues $214,297 $203,515 $116,246
Net income $6,607 $5,550 $2,341
Net income per share:
Basic $1.27 $1.09 $0.41
Diluted $1.25 $1.09 $0.41
</TABLE>
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-19
<PAGE> 42
International Total Services, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
March 31, 1998, 1997 and 1996
(Tabular amounts in thousands, except per share and percentage data)
NOTE M - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations
for the years ended March 31, 1998 and 1997:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
- ------------------------------------------------------------------------------------------------------
FISCAL 1998
- ---------------------------------
<S> <C> <C> <C> <C>
Operating revenues $38,364 $38,604 $46,240 $50,027
Gross profit 6,540 6,312 7,418 6,997
Net income 853 1,125 1,826 1,441
Net income per share -
basic $0.23 $0.29 $0.27 $0.22
Net income per share -
diluted $0.23 $0.29 $0.27 $0.21
- ------------------------------------------------------------------------------------------------------
FISCAL 1997 (1)
- ---------------------------------
Operating revenues $24,082 $29,195 $31,885 $30,583
Gross profit 3,663 4,599 4,952 4,193
Net income 442 549 552 153
Net income per share -
basic $0.08 $0.10 $0.10 $0.04
Net income per share -
diluted $0.08 $0.10 $0.10 $0.04
</TABLE>
(1) The amounts reported above have been restated from those that were
previously reported in the Company's quarterly reports on Form 10-Q
to reflect the reclassification from revenue to other expense of
discounts given to customers.
F-20
<PAGE> 43
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
ON SCHEDULES
Shareholders and Board of Directors
INTERNATIONAL TOTAL SERVICES, INC.
In connection with our audit of the consolidated financial statements of
International Total Services, Inc. and Subsidiaries referred to in our report
dated May 15, 1998, we have also audited Schedule II for each of the three years
in the period ended March 31, 1998. 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 15, 1998
S-1
<PAGE> 44
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
For the years ended March 31, 1998, 1997 and 1996
(Amounts in thousands)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
--------------------------------
ADDITIONS
--------------------------------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS AND CHARGED TO END OF
YEAR DESCRIPTION OF PERIOD EXPENSES OTHER ACCOUNTS DEDUCTIONS PERIOD
- ---------- ------------------------------- --------------- ---------- ---------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1996 Allowance for doubtful accounts $ 100 $ 111 $ 111 $ 100
1997 Allowance for doubtful accounts $ 100 $ 57 $ 57 $ 100
1998 Allowance for doubtful accounts $ 100 $ 319 $ 319 $ 100
</TABLE>
S-2
<PAGE> 45
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
3.1 Amended and Restated Articles of Incorporation*
3.2 Amended and Restated Code of Regulations*
4.1 Specimen Common Share Certificate*
10.1 Employment Agreement between the Company and Robert A. Weitzel*
10.2 Employment Agreement between the Company and James O. Singer*
10.3 Employment Agreement between the Company and Scott E. Brewer*
10.4 Employment Agreement between the Company and Brian S. Kenyon
10.5 Employment Agreement between the Company and Robert A. Swartz*
10.9 Directors' Deferred Compensation Plan*
10.10 Long-Term Incentive Plan*
10.11 Third Amended and Restated Consolidated Replacement Credit
Facility and Security Agreement, dated as of March 31, 1997,
between Bank One, Cleveland, NA, and the Registrant*
10.12 First Amendment to Third Amended and Restated Consolidated
Replacement Credit Facility and Security Agreement, dated as
of October 10, 1997, between Bank One, Cleveland, NA,
and the Registrant
10.13 Amended and Restated Replacement Promissory Note executed by
the Registrant in favor of Bank One, NA, successor by merger
to Bank One, Cleveland, NA
21.1 Subsidiaries*
27.1 Financial Data Schedule
* Incorporated by reference from the Company's Registration Statement
on Form S-1 (Registration No. 333-29463), as amended.
<PAGE> 1
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is entered into as of the 20th day of April,
1998, between International Total Services, Inc., an Ohio corporation (the
"Company"), and Brian S. Kenyon (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 Vice
President of Finance for the Corporate Headquarters, 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 title of Vice President of Finance for the Corporate
Headquarters, subject to becoming Vice President and Chief Financial Officer
upon the first anniversary of this Employment Agreement (as described in Section
2), 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 officers holding such titles with 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 the second anniversary of this Employment
Agreement. 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 the second anniversary of this Employment
Agreement or on or before any subsequent anniversary of this Employment
Agreement.
(b) Until the first anniversary of this Employment Agreement,
the Executive shall
<PAGE> 2
be entitled to serve as Vice President of Finance for the Corporate Headquarters
of the Company. Upon the first anniversary of this Employment Agreement, the
Executive shall be entitled to serve as Vice President and Chief Financial
Officer 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 report only to the Chief Executive Officer, 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.
(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
<PAGE> 3
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 Ninety-Two Thousand Dollars
($92,000) 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 a signing bonus of
Ten Thousand Two Hundred Eighty-One Dollars and Fifteen Cents ($10,281.15),
payable in three equal monthly installments of Three Thousand Four Hundred
Twenty-Seven Dollars and Five Cents ($3,427.05) beginning thirty (30) days after
the date of this Employment Agreement; provided, however, such bonus payments
shall be prorated on a per diem basis in the event of the termination of the
Executive's employment before the third and final payment is due.
(c) The Company shall pay to the Executive bonus compensation
for each fiscal quarter of the Company, not later than sixty (60) days following
the end of such fiscal quarter or the termination of his employment, as the case
may be, prorated on a per diem basis for partial fiscal quarters, of 0.162% of
the Company's net operating profit for that fiscal quarter if the Company
achieves its operating budget goals for that fiscal quarter to be increased or
decreased from time to time as determined by the Board in its sole discretion;
provided, however, this bonus shall be increased by 0.10% of the Company's net
operating profit for that fiscal quarter if the Company exceeds its operating
budget goals for that fiscal quarter by 2.00% or more.
(d) The Company shall provide to the Executive and his family
all the medical,
<PAGE> 4
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.
(e) 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 Employment Agreement shall or shall be
considered to in any way affect the Executive's rights and benefits thereunder
except as expressly provided herein).
(f) Until the fifth anniversary of this Employment Agreement,
the Executive shall be entitled to three weeks of vacation per year. Upon the
fifth anniversary of this Employment Agreement, the Executive shall be entitled
to four weeks of vacation. The Executive shall be entitled to sick leave
allowance each year as 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 sick leave policy for executive officers.
(g) 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.
(h) 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.
(i) The Company shall reimburse the Executive during the term
of this Employment Agreement for all expenses, including continuing education
expenses and licensing fees, reasonably and necessarily incurred by the
Executive in connection with maintaining the Executive's status as a certified
public accountant. 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
<PAGE> 5
term "cause" shall mean:
(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 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
<PAGE> 6
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 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 Employment 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
<PAGE> 7
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 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
<PAGE> 8
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.
(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
<PAGE> 9
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.
(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) This Agreement may be executed in two or more
counterparts, each of which will constitute one and the same instrument.
(j) 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.
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have executed or caused
this Employment Agreement to be duly executed as of the date first above
written.
INTERNATIONAL TOTAL SERVICES, INC.
By:/s/ Robert A. Weitzel
------------------------------------
Title: Chief Executive Officer
---------------------------------
And By: /s/ Scott E. Brewer
-------------------------------
Title: Secretary
--------------------------------
/s/ Brian S. Kenyon
---------------------------------------
BRIAN S. KENYON
<PAGE> 1
Exhibit 10.12
FIRST AMENDMENT
TO
THIRD AMENDED AND RESTATED CONSOLIDATED
REPLACEMENT CREDIT FACILITY AND SECURITY AGREEMENT
--------------------------------------------------
THIS FIRST AMENDMENT TO THIRD AMENDED AND RESTATED CONSOLIDATED
REPLACEMENT CREDIT FACILITY AND SECURITY AGREEMENT (this "Agreement") dated as
of October 10, 1997, is entered into by and between INTERNATIONAL TOTAL
SERVICES, INC., an Ohio corporation ("Borrower"), and BANK ONE, NA, successor by
merger to BANK ONE, CLEVELAND, NA, a national bank (the "Bank").
WITNESSETH
WHEREAS, the Borrower and the Bank are parties to that certain Third
Amended and Restated Consolidated Replacement Credit Facility and Security
Agreement dated as of March 31, 1997 (the "Loan Agreement", all terms defined in
said Loan Agreement being used herein with the same meaning), pursuant to which
the Bank has made a $2,000,000 Term Loan to the Borrower evidenced by a Note
dated March 31, 1997 and payable to the Bank, the final installment of principal
thereunder being due on November 1, 1997; and also pursuant to which the Bank
has made a $900,000 Domestic Term Loan to the Borrower evidenced by a Note dated
February 1, 1996 and payable to the Bank, the final installment of principal
thereunder originally being due on June 30, 1996, but now due on December 31,
1997; and also pursuant to which the Bank has agreed to make a $10,5000,000
Revolving Loan to the Borrower until March 31, 1999 evidenced by a Note dated
March 31, 1997 and payable to the Bank, such Note being payable on demand; and
WHEREAS, the Borrower and the Bank have agreed to amend the Loan
Agreement (i) to extend the maturity date of the Revolving Loan to September 30,
1999; (ii) to modify certain definitions in Section 1 of the Loan Agreement, to
modify certain provisions of Section 2 of the Loan Agreement and to modify
certain convents in Section 8 of the Loan Agreement; and (iii) to increase the
Revolving Loan to an aggregate of $30,000,000;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Borrower and the Bank agree as follows:
<PAGE> 2
AGREEMENT
Section 1. AMENDMENT OF LOAN AGREEMENT.
----------------------------
A. The definitions of "Commitment", "Contract Rate", and "Notes" set
forth in Section 1 of the Agreement are, effective the Effective Date, hereby
amended and restated to read in their entirety as follows:
COMMITMENT - Lender's letter to Borrower dated March 21, 1997,
as accepted by Borrower on March 25, 1997 and Lender's letter to Borrower dated
June 11, 1997, containing Option A and B as accepted by Borrower on June 11,
1997 as to Option B.
CONTRACT RATE - A fluctuating rate established as follows:
<TABLE>
<CAPTION>
BORROWER'S TOTAL DEBT TO TANGIBLE NET WORTH CONTRACT RATE
- ------------------------------------------- -------------
<S> <C>
greater than 17.0 to 1.0 Default Rate
greater than 14.0 to 1.0 and less than or equal to 17.0 to 1.0 Base Rate plus 3.00% per annum
greater than 11.0 to 1.0 and less than or equal to 14.0 to 1.0 Base Rate plus 2.50% per annum
greater than 8.0 to 1.0 and less than or equal to 11.0 to 1.0 Base Rate plus 2.00% per annum
greater than 6.0 to 1.0 and less than or equal to 8.0 to 1.0 Base Rate plus 1.50% per annum
greater than 4.0 to 1.0 and less than or equal to 6.0 to 1.0 Base Rate plus 1.00% per annum
greater than 3.0 to 1.0 and less than or equal to 4.0 to 1.0 Base Rate plus 0.75% per annum
greater than 2.0 to 1.0 and less than or equal to 3.0 to 1.0 Base Rate
greater than 1.0 to 1.0 and less than or equal to 2.0 to 1.0 LIBOR Rate plus 2.50% per annum
greater than 0.5 to 1.0 and less than or equal to 1.0 to 1.0 LIBOR Rate plus 2.00% per annum
less than 0.50 to 1.0 LIBOR Rate plus 1.50% per annum
</TABLE>
For the purposes of this definition, Borrower's Total Debt shall be defined as
all accruals and payables for payroll and payroll related liabilities, plus all
Lender financing and Borrower's Tangible Net Worth shall be defined as net worth
less all or any capitalized value of contracts acquired after the completion of
Borrower's Initial Public Offering, and any other intangible asset which may
arise after the completion of Borrower's Initial Public Offering.
NOTES - The Amended and Restated Replacement Promissory Note
(Revolving Loan) and any other promissory note or other instrument evidencing
the Borrower's obligation to repay any Obligations.
B. The following definitions of "Initial Public Offering" and "LIBOR
Rate" are, effective the Effective Date, hereby added to Section 1 of the
Agreement to read in their entirety as follows:
-2-
<PAGE> 3
INITIAL PUBLIC OFFERING - Borrower's initial offering of stock
to the public pursuant to the prospectus dated September 19, 1997 and filed with
the SEC on September 19, 1997, the proceeds of which were, in part, used to
satisfy all indebtedness of Borrower to Seidler.
LIBOR RATE - The rate of interest determined on the basis of
the offered rate of deposits in U.S. dollars in the London interbank market,
commonly referred to as the London Interbank Offered Rate ("LIBOR"), for one and
three month periods, as elected by Borrower at the time of any advance under the
Revolving Loan as provided in Section 2.3 (A) of this Agreement; provided,
however, that Borrower shall not elect a period extending beyond the maturity
date of the Revolving Loan.
C. Subsections 2.3(A), (B) and (C) of the Agreement are, effective the
Effective Date, amended and restated to read in their entirety as follows:
2.3 Revolving Loan.
---------------
(A) REVOLVING LOAN. Subject at all times to the terms hereof,
the Lender will, from and after October 10, 1997 until September 30, 1999 make
such loans to the Borrower as from time to time the Borrower requests (the
"Revolving Loan") consisting of advances made by Lender against the value of
Eligible Accounts-Domestic and Eligible Accounts-Foreign. Subject to the
provisions of Subsection (B) of this Section 2.3, the aggregate unpaid principal
of the Revolving Loan outstanding at any one time shall not exceed the lesser of
(a) the line of credit approved for Borrower, which is currently Thirty Million
Dollars ($30,000,000), less the face amount of all outstanding Letters of Credit
issued by Lender for the account of Borrower or (b) the sum of (i) eighty
percent (80%) of the unpaid face amount of Eligible Accounts-Domestic (or such
other percentages of Eligible Accounts-Domestic as may from time to time be
fixed by the Lender upon notice to the Borrower) and (ii) the lesser of fifty
percent (50%) of the unpaid face amount of Eligible Accounts-Foreign (or such
other percentages of Eligible Accounts- Foreign as may from time to time be
fixed by the Lender upon notice to the Borrower) or Three Hundred Fifteen
Thousand Dollars ($315,000) less fifty percent (50%) of the Borrower's accrued
payroll and related expenses account calculated at the most recent calendar
month-end (or such other dollar amount as may from time to time be fixed by the
Lender upon notice to the Borrower).
(B) MAXIMUM BORROWINGS AVAILABLE UNDER REVOLVING LOAN.
Notwithstanding anything to the contrary contained in this Section 2.3, at no
time shall the loans outstanding at any time under the Revolving Loan exceed the
sum of Thirty Million Dollars ($30,000,000), less the face amount of all
outstanding Letters of Credit issued by Lender for the account of Borrower.
-3-
<PAGE> 4
(C) PAYMENT. The Revolving Loan shall be payable on September
30, 1999 and bear interest as provided in Section 2.3(D) of this Agreement and
shall otherwise be evidenced by, and repayable in accordance with, the Revolving
Note, but in the absence of such revolving promissory note shall be evidenced by
the Lender's record of disbursements and repayments.
D. Section 2.12 of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
2.12 COMMITMENT FEE. Borrower shall pay to Lender annually,
in advance, on the date of this Agreement and on October 10, 1998, and, if the
Revolving Loan is hereafter renewed, on the date of renewal and annually
thereafter if renewed for a period of more than one (1) year, a commitment fee
(the "Commitment Fee") of forty-five hundredths of one percentage point (0.45%)
of the maximum borrowings available under the Revolving Loan pursuant to Section
2.3(B) of this Agreement, whether the Borrower shall be entitled to request such
amount pursuant to Section 2.3(A) of this Agreement or not.
E. Subsection 8.1(H) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
(H) Keep adequate records and books of account with respect to
its business activities in which proper entries are made in accordance with GAAP
reflecting all its financial transactions and permit the Lender annually, in its
discretion, to conduct two (2) or three (3) field examinations and an audit as
set forth in the Commitment, at Borrower's expense.
F. Subparagraph (v) of Subsection 8.1(I) of the Agreement is, effective
the Effective Date, hereby amended and restated to read in its entirety as
follows:
8.1(I)(v) Concurrently with each request for an advance under
the Revolving Loan, and monthly, weekly or daily according to the schedule below
on the last day of each month, week or day according to the schedule below, a
certificate prepared by the chief financial officer or president of Borrower in
the form attached hereto as EXHIBIT A, which certificate may be delivered to
Lender by telecopy and on the first business day of each week Borrower shall
submit to Lender a certificate (certified by the President or Chief Financial
Officer of Borrower as of the last lay of the preceding week) that payroll taxes
for which Borrower is obligated through and as of the date of the certificate
have been paid in full or remitted when due. The Borrower shall also provide to
Lender on or before the 10th day of each month, a monthly reconciliation of
unbilled Accounts Receivable for the preceding month and, on or before the 30th
day of each month, a monthly reconciliation between Accounts Receivable as shown
on its
-4-
<PAGE> 5
CLEVELAND/0041673.03
General Ledger and Borrowing Certificates for the preceding month, each in form
acceptable to Lender and including such detail as the Lender shall require.
<TABLE>
<CAPTION>
Borrowing Certificate Frequency Leverage Ratio
------------------------------- --------------
<S> <C>
Monthly less than or equal to 2.0 to 1.0
Weekly greater than 2.0 to 1.0 and less than or equal to 4.0 to 1.0
Daily greater than 4.0 to 1.0
</TABLE>
G. Subsection 8.1(O) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
(O) Maintain at all times a Tangible Net Worth equal to or
greater than Five Hundred Thousand Dollars ($500,000) commencing September 30
1997 and thereafter, and maintain at all times Stockholder's Equity as set forth
below commencing September 30, 1997 and thereafter, such covenants to be
calculated monthly in accordance with GAAP based on Borrower's internally
prepared interim financial statements.
<TABLE>
<CAPTION>
NET PROCEEDS OF INITIAL PUBLIC OFFERING STOCKHOLDER'S EQUITY
--------------------------------------- --------------------
<S> <C>
greater than $18,000,000 and less than or equal to $19,000,000 $20,500,000
greater than $19,000,000 and less than or equal to $20,000,000 $21,500,000
greater than $20,000,000 and less than or equal to $21,000,000 $22,500,000
greater than $21,000,000 and less than or equal to $22,000,000 $23,500,000
greater than $22,000,000 $24,000,000
</TABLE>
H. Subsection 8.1(P) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
(P) Maintain Debt Coverage (as defined herein) not less than
2.5 to 1.0 at September 30, 1997 and thereafter. "Debt Coverage" as used in this
Section 8.1(P) means the ratio of Borrower's net income, plus depreciation and
amortization and net interest paid to Lender, less dividends, purchases of
treasury stock and capital expenditures, to the amount of all principal and
interest payable to Lender calculated quarterly in accordance with GAAP based
upon Borrower's quarterly and fiscal year-end financial statements.
I. Subsection 8.1(Q) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
-5-
<PAGE> 6
(Q) Maintain at all times a ratio of total unsubordinated
liabilities (including deferred liabilities and/or deferred income), computed in
accordance with GAAP, to Tangible Net Worth equal to or less than 17.0 to 1.0
commencing September 30, 1997 and thereafter, and a ratio of funded bank debt to
EBITDA of not more than 3.0 to 1.0 commencing September 30, 1997 thereafter, to
be tested quarterly beginning September 30, 1997, such covenants to be
calculated in accordance with GAAP based on Borrower's fiscal year-end financial
statements.
J. Subsection 8.2(A) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
(A) Merge or consolidate with, or acquire all or any
substantial portion of the assets or capital stock of, any Person.
K. Subsection 8.2(K) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
(K) Make Capital Expenditures during any fiscal year of
Borrower which, in the aggregate, exceed Two Million Dollars ($2,000,000).
L. EXHIBIT I attached to the Agreement is, effective the Effective
Date, hereby amended to delete item number 3 contained therein.
M. EXHIBIT J attached to the Agreement is, effective the Effective
Date, hereby amended to delete item number 5 contained therein.
Section 2. EFFECTIVE DATE OF THE AGREEMENT.
--------------------------------
The effective date of this Agreement ("Effective Date") shall be the
date on which all conditions precedent and all conditions subsequent have been
satisfied, or waived by the Bank in writing.
Section 3. CONDITIONS PRECEDENT.
---------------------
Borrower hereby acknowledges and agrees that the effectiveness of this
Agreement is conditioned upon the receipt by the Bank, on or prior to the date
hereof, in form and substance satisfactory to the Bank and its counsel, of the
following:
-6-
<PAGE> 7
A. A certificate, dated as of the date hereof, signed by the President
of Borrower and to the effect that:
1) As of said date, no Event of Default has occurred and
is continuing, and no event has occurred and is
continuing that, with the giving of notice or passage
of time, or both, would be an Event of Default; and
2) The representations and warranties of Borrower set
forth in Section 7 of the Loan Agreement are true and
correct as of such date; and
3) Borrower is in compliance with all of the terms and
conditions set forth in the Loan Agreement on and as
of said date.
B. A certificate, dated as of the date hereof, signed by the Secretary
of Borrower certifying as follows:
1) Borrower's Articles of Incorporation and Code of
Regulations have not been modified or amended since
August 11, 1995 (or certifying that true, correct and
complete copies of all such modifications and
amendments are attached thereto); and
2) Copies of resolutions of Borrower's Board of
Directors are attached thereto with respect to the
approval of this Agreement and of the matters
contemplated hereby and authorizing the execution,
delivery and performance of this Agreement and each
other document, instrument, agreement or note to be
delivered pursuant hereto; and
3) As to the incumbency and signatures of the officers
of Borrower signing this Agreement and each other
document, instrument, agreement or note to be
delivered pursuant hereto.
C. The Amended and Restated Replacement Promissory Note (Revolving
Loan) in the form of EXHIBIT A attached hereto, with all blanks completed, duly
executed and delivered by Borrower to Bank.
D. An Acknowledgement, Consent and Agreement in the form of EXHIBIT B
attached hereto, with all blanks completed, duly executed and delivered by
Transport, NBC, and the Guarantors to Bank.
E. Evidence that Borrower has completed its Initial Public Offering,
including receipt by Borrower of at least Eighteen Million Dollars ($18,000,000)
as a result of the sale of
-7-
<PAGE> 8
stock of Borrower pursuant to the Initial Public Offering, net of all costs and
expenses whatsoever incurred by Borrower in connection with the Initial Public
Offering.
F. Evidence of repayment in full of all indebtedness of Borrower to
Seidler, including receipt by Borrower from Seidler of fully executed UCC-3
Termination Statements for all outstanding UCC filings and the original
promissory note of Borrower and all guarantys of the indebtedness of Borrower to
Seidler marked "Paid in Full" or written acknowledgment from Seidler that
Borrower's indebtedness to Seidler has been fully satisfied and all security
interests and liens discharged or terminated.
G. Evidence of repayment in full of all indebtedness of Robert A.
Weitzel to Borrower.
H. A fully executed Participation Agreement between the Bank and IBJ
Schroder Business Credit Corporation ("IBJ Schroder"), pursuant to which IBJ
Schroder agrees to participate $10,000,000 of the Revolving Loan, together with
receipt by the Bank from IBJ Schroder of all funds necessary to consummate such
participation.
I. The written opinion of counsel for Borrower as to the enforceability
of this Agreement, the Loan Agreement, the Note, and each of the other Credit
Documents and covering such other issues thereunder as requested by the Bank and
its counsel.
J. Such other documents, instruments, agreements and notes as the Bank
may reasonably request to implement this Agreement and the transactions
contemplated hereby and by the Loan Agreement.
SECTION 4. FEES AND EXPENSES.
------------------
Borrower shall pay all out-of-pocket fees and expenses incurred by the
Bank in connection with the preparation, negotiation, execution and delivery of
this Agreement, the promissory notes, guaranty, participation agreement, and all
the other agreements, documents or certificates required or contemplated hereby,
including, without limitation, legal fees and expenses of the Bank. Borrower
shall pay a closing fee to IBJ Schroder of $25,000 and shall also pay all
out-of-pocket fees and expenses incurred by IBJ Schroder in connection with the
preparation, negotiation, execution and delivery of the Participation Agreement,
including, without limitation, legal fees and expenses of IBJ Schroder.
SECTION 5. REFERENCES.
-----------
On and after the effective date of this Agreement, each reference in
the Loan Agreement to "this Agreement", "hereunder", "hereof", or words of like
import referring to the Loan
-8-
<PAGE> 9
Agreement, and in the Note to the "Loan Agreement", "thereof", or words of like
import referring to the Loan Agreement shall mean and refer to the Loan
Agreement as previously amended and as amended hereby. References to Exhibit C-1
in the definition of "Revolving Note" in the Loan Agreement shall be deemed to
refer to the Promissory Note, a copy of which is attached hereto as EXHIBIT A.
References in the Loan Agreement, Note and other Credit Documents to Bank One,
Cleveland, NA shall mean and refer to Bank One, NA as successor to Bank One,
Cleveland, NA. The Loan Agreement, as previously amended and as amended by this
Agreement, and all Credit Documents are and shall continue to be in full force
and effect and are hereby and in all respects ratified and confirmed. References
to the Loan Agreement in the Note shall be deemed to include all amendments to
the Loan Agreement whether specified in the Note or not.
SECTION 6. Applicable Law.
---------------
This Agreement shall be deemed to be a contract under the laws of the
State of Ohio, and for all purposes shall be construed in accordance with the
laws of the State of Ohio.
SECTION 7. Counterparts.
-------------
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument, and any one
of the parties hereto may execute this Agreement by signing any such
counterpart.
IN WITNESS WHEREOF, the Borrower and the Bank have caused this
Agreement to be executed by their duly authorized officers as of the date and
year first above written.
BANK ONE, NA INTERNATIONAL TOTAL SERVICES, INC.
By /s/ James G. Zamborsky By /s/ Robert A. Weitzel
----------------------------- ---------------------------------
Name: James G. Zamborsky Name: Robert A. Weitzel
Title: Relationship Manager Title: Chief Executive Officer
-9-
<PAGE> 10
SCHEDULE 1
----------
List of Guarantors
------------------
Domestic
- --------
Crown Technical Systems, Inc. (Ohio)
T.I.S. Incorporated (Texas)
Certified Investigative Services, Inc. (Texas)
I.T.S. of New York, Inc. (New York)
Selective Detective Services, Inc. (New Jersey)
Foreign
- -------
International Total Services, Ltd. (United Kingdom)
International Transport Security, s.r.o. (Czech Republic)
International Transport Services, Ltd. (Thailand)
-10-
<PAGE> 1
Exhibit 10.13
AMENDED AND RESTATED
--------------------
REPLACEMENT PROMISSORY NOTE
---------------------------
(Revolving Loan)
$ 30,000,000 Cleveland, Ohio
October 10, 1997
FOR VALUE RECEIVED, INTERNATIONAL TOTAL SERVICES, INC., a corporation
organized under the laws of the State of Ohio (hereinafter referred to as the
"Company"), promises to pay to the order of BANK ONE, NA, successor by merger to
BANK ONE, CLEVELAND, NA (hereinafter referred to as the "Bank"), the principal
amount of Thirty Million Dollars ($30,000,000), or such lesser amount as shall
have from time to time been borrowed by the Company, on September 30, 1999, or
sooner as hereinafter provided, with interest on the unpaid balance of said
principal amount from the date hereof at the Contract Rate, as defined in the
Agreement hereinafter referred to, which definition is hereby accepted by the
Company, as the same may from time to time be established. If any installment of
principal, interest or other amounts due and payable hereunder are not paid when
due, or within any applicable grace periods, the Company shall pay interest
thereon at the rate per annum of six percent (6.0%) in excess of the Contract
Rate, as the same may from time to time be established.
The Company agrees to pay interest on the unpaid principal amount
outstanding of this Note in monthly installments, commencing on the 1st day of
November, 1997 and continuing on the 1st day of each month thereafter. The
unpaid balance of the principal amount outstanding and all accrued interest
thereon shall be due and payable on September 30, 1999.
Payments of both principal of and interest on this Note shall be made
in lawful money of the United States of America, at 600 Superior Avenue,
Cleveland, Ohio 44114, or at such other place as the Bank or any subsequent
holder hereof shall have designated to the Company in writing. Interest payable
on this Note shall be computed on a three hundred sixty (360) day per year basis
counting the actual number of days elapsed.
This Note, in part, evidences, but does not extinguish or satisfy, a
pre-existing indebtedness of the Company to the Bank heretofore evidenced by a
$10,500,000 Replacement Promissory Note (Revolving Loan) dated March 31, 1997 to
the Bank and is issued pursuant to and is entitled to the benefits of a Third
Amended and Restated Consolidated Replacement Credit Facility and Security
Agreement dated as of March 31, 1997, as amended by that certain First Amendment
to Third Amended and Restated Consolidated Replacement Credit Facility and
Security Agreement dated as of October 10, 1997, each by and between the
Company and the Bank (collectively, the "Agreement"), to which Agreement
reference is hereby made for a statement of the rights and obligations of the
Bank and the duties and obligations of the Company in relation thereto; but
neither
<PAGE> 2
this reference to said Agreement nor any provisions thereof shall affect or
impair the absolute and unconditional obligation of the Company to pay the
principal of or interest on this Note when due.
The Company may prepay all or any portion of this Note at any time or
times and in any amount only as provided in the Agreement.
In case an Event of Default, as defined in said Agreement, shall occur
and be continuing beyond any applicable grace period, the principal of this Note
may be declared immediately due and payable at the option of the Bank.
The Company hereby authorizes any attorney-at-law to appear in any
court of record in the State of Ohio, or in any other state or territory of the
United States, at any time or times after the above sum becomes due, and waive
the issuance and service of process and confess judgment against it, in favor of
any holder of this Note, for the amount then appearing due, together with the
costs of suit, and thereupon to release all errors and waive all rights of
appeal and stay of execution. The foregoing warrant of attorney shall survive
any judgment, it being understood that should any judgment be vacated for any
reason, the foregoing warrant of attorney nevertheless may thereafter be used
for obtaining an additional judgment or judgments.
No delay on the part of any holder hereof in exercising any power or
rights hereunder shall operate as a waiver of any power or rights. Any demand or
notice hereunder to the Company may be made by delivering the same to the
address last known to the Bank, or by mailing the same to such address, with the
same effect as if delivered to the Company in person.
This Note is executed at Cleveland, Cuyahoga County, Ohio.
"WARNING. BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND
COURT TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST
YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO
COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR
WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE
AGREEMENT OR ANY OTHER CAUSE."
INTERNATIONAL TOTAL SERVICES, INC.
By /s/ Robert A. Weitzel
--------------------------------------
Name: Robert A. Weitzel
Its: Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,032,000
<SECURITIES> 0
<RECEIVABLES> 20,868,000
<ALLOWANCES> 100,000
<INVENTORY> 0
<CURRENT-ASSETS> 27,623,000
<PP&E> 10,750,000
<DEPRECIATION> 5,255,000
<TOTAL-ASSETS> 58,567,000
<CURRENT-LIABILITIES> 18,486,000
<BONDS> 0
0
0
<COMMON> 67,000
<OTHER-SE> 39,036,000
<TOTAL-LIABILITY-AND-EQUITY> 39,103,000
<SALES> 173,235,000
<TOTAL-REVENUES> 173,235,000
<CGS> 145,968,000
<TOTAL-COSTS> 162,645,000
<OTHER-EXPENSES> 868,000
<LOSS-PROVISION> 318,651
<INTEREST-EXPENSE> 719,000
<INCOME-PRETAX> 9,003,000
<INCOME-TAX> 3,758,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,245,000
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.00
</TABLE>
