<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
INTERNATIONAL TOTAL SERVICES, INC.
- --------------------------------------------------------------------------------
(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
---------------------------
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Indicate 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
------ ------
As of November 13, 1998, the Registrant had 6,662,494 Common Shares issued and
outstanding.
<PAGE> 2
INTERNATIONAL TOTAL SERVICES, INC.
10-Q
INDEX
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<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets
September 30, 1998 and March 31, 1998.....................................................2
Consolidated Statements of Income
Three Months Ended September 30, 1998 and 1997............................................3
Six Months Ended September 30, 1998 and 1997..............................................4
Consolidated Statements of Cash Flows
Six Months Ended September 30, 1998 and 1997..............................................5
Notes to Consolidated Financial Statements...........................................................6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations....................9
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk..............................................12
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders....................................................13
ITEM 5 Other Information.......................................................................................13
ITEM 6 Exhibits and Reports on Form 8 - K......................................................................13
</TABLE>
1
<PAGE> 3
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
September 30, 1998 March 31, 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 4,732 $ 1,032
Accounts receivable - net of allowance for doubtful accounts of $111
and $100 as of September 30, 1998 and March 31, 1998, respectively 22,285 20,768
Deferred taxes 1,479 1,453
Uniforms 2,477 2,686
Other current assets 2,335 1,684
------------------ ------------------
TOTAL CURRENT ASSETS 33,308 27,623
Property and Equipment
Security equipment 4,859 3,682
Service equipment 2,671 2,362
Computer equipment 2,496 2,049
Furniture and fixtures 1,104 994
Leasehold improvements 56 56
Autos 932 1,607
------------------ ------------------
12,118 10,750
Less accumulated depreciation and amortization 5,660 5,255
------------------ ------------------
Property and equipment - net 6,458 5,495
Intangibles, less accumulated amortization of $2,700 and $1,636 as of
September 30, 1998 and March 31, 1998, respectively 32,131 25,295
Security deposits and other 96 154
------------------ ------------------
32,227 25,449
------------------ ------------------
TOTAL ASSETS $ 71,993 $ 58,567
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Trade accounts payable $ 3,456 $ 4,590
Accrued payroll and payroll taxes 13,080 11,938
Other accrued expenses 1,488 1,860
Income taxes payable 19 98
------------------ ------------------
TOTAL CURRENT LIABILITIES 18,043 18,486
Deferred taxes 434 434
Long-Term Obligations 12,574 544
Shareholders' Equity
Common shares, without par value, stated at $.01 per share, authorized
20,000 shares, issued and outstanding 6,662 shares
at September 30, 1998 and March 31, 1998 67 67
Additional paid-in capital 31,211 31,211
Accumulated other comprehensive loss (112) (204)
Retained earnings 9,776 8,029
------------------ ------------------
40,942 39,103
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 71,993 $ 58,567
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1998 and September 30, 1997
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------------- -----------------------
<S> <C> <C> <C> <C>
Operating revenues $ 58,906 100.0% $ 38,604 100.0%
Cost of operating revenues 50,823 86.3% 32,292 83.6%
---------- ---------- ---------- ----------
GROSS PROFIT 8,083 13.7% 6,312 16.4%
Selling, general and administrative expenses 5,241 8.9% 3,743 9.7%
Contract and goodwill amortization 567 1.0% 138 0.4%
---------- ---------- ---------- ----------
OPERATING PROFIT 2,275 3.9% 2,431 6.3%
Other expense 499 0.8% 162 0.4%
Interest expense-net 234 0.4% 344 0.9%
---------- ---------- ---------- ----------
733 1.2% 506 1.3%
---------- ---------- ---------- ----------
Income before income taxes 1,542 2.6% 1,925 5.0%
Income taxes 640 1.1% 800 2.1%
---------- ---------- ---------- ----------
NET INCOME $ 902 1.5% $ 1,125 2.9%
========== ========== ========== ==========
Net Income per share:
Basic $ 0.14 $ 0.29
========== ==========
Diluted $ 0.14 $ 0.29
========== ==========
Weighted average number of shares:
Basic 6,662 3,879
========== ==========
Diluted 6,662 3,883
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended September 30, 1998 and September 30, 1997
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------------ -----------------------
<S> <C> <C> <C> <C>
Operating revenues $ 115,546 100.0% $ 76,968 100.0%
Cost of operating revenues 99,832 86.4% 64,116 83.3%
---------- ---------- ---------- ----------
GROSS PROFIT 15,714 13.6% 12,852 16.7%
Selling, general and administrative expenses 10,313 8.9% 8,052 10.5%
Contract and goodwill amortization 1,065 0.9% 309 0.4%
---------- ---------- ---------- ----------
OPERATING PROFIT 4,336 3.8% 4,491 5.8%
Other expense 1,023 0.9% 321 0.4%
Interest expense-net 323 0.3% 758 1.0%
---------- ---------- ---------- ----------
1,346 1.2% 1,079 1.4%
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 2,990 2.6% 3,412 4.4%
Income taxes 1,243 1.1% 1,434 1.8%
---------- ---------- ---------- ----------
NET INCOME $ 1,747 1.5% $ 1,978 2.6%
========== ========== ========== ==========
Net Income per share:
Basic $ 0.26 $ 0.52
========== ==========
Diluted $ 0.26 $ 0.52
========== ==========
Weighted average number of shares:
Basic 6,662 3,768
========== ==========
Diluted 6,662 3,770
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended
September 30, 1998 and September 30, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 1,747 $ 1,978
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 509 382
Amortization 1,065 309
Other -- 2
Changes in working capital:
Accounts receivable (1,517) (2,982)
Other current and noncurrent assets (408) (1,275)
Trade accounts payable (1,134) 3,554
Accrued expenses 696 94
------------------ ------------------
Net cash provided by operating activities 958 2,062
INVESTING ACTIVITIES:
Additions to property and equipment (2,405) (578)
Deposit on sale of property, plant and equipment 200 --
Proceeds received from sale of equipment 18 11
Property and equipment of acquired businesses (45) --
Payments for acquisitions of businesses (7,053) (2,307)
------------------ ------------------
Net cash used in investing activities (9,285) (2,874)
FINANCING ACTIVITIES:
Net borrowings (payments) on note payable to bank 12,026 (6,571)
Principal payments on long-term debt -- (3,000)
Proceeds from sale of stock -- 30,012
Decrease in capital lease obligation -- (94)
Decrease in note receivable from officer -- 445
------------------ ------------------
Net cash provided by financing activities 12,026 20,792
Effect of exchange rates on cash 1 --
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,700 19,980
Cash and Cash Equivalents, beginning balance 1,032 1,452
------------------ ------------------
Cash and Cash Equivalents, ending balance $ 4,732 $ 21,432
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
INTERNATIONAL TOTAL SERVICES, INC.
Notes to Consolidated Financial Statements
Three and Six Months Ended September 30, 1998
(Tabular amounts in thousands, except per share and percentage data)
(Unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the financial position
of the Company as of September 30, 1998 and the results of its operations for
the three and six month periods ended September 30, 1998 and 1997 and cash flows
for the six month periods ended September 30, 1998 and 1997 have been included.
Operating results for the three and six month periods ended September
30, 1998, are not necessarily indicative of the results that may be expected for
the year ending March 31, 1999. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company's annual report on Form 10-K for the year ended March 31, 1998.
The Company's fiscal year ends on March 31. All references to fiscal
years in this Quarterly Report on Form 10-Q represent the year in which the
fiscal period ends (i.e. fiscal 1999 is the year ended March 31, 1999) unless
otherwise noted.
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.
Recently Issued But Not Yet Adopted Accounting Standards
During the first quarter of fiscal 1999, the AICPA's Accounting
Standards Executive Committee issued Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-Up Activities". This SOP requires that the
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 will adopt
SOP 98-5 effective the first quarter of fiscal 2000. The Company believes
adoption of this standard will not have a material impact on the Company's
financial position or results of operations.
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 131, "Disclosures About Segments
of an Enterprise and Related Information." This standard is effective for fiscal
years beginning after December 15, 1997. The Company will adopt SFAS No. 131 in
its fiscal 1999 year-end financial statements. The Company believes adoption of
this standard will not have a material impact on the Company's financial
disclosures.
6
<PAGE> 8
INTERNATIONAL TOTAL SERVICES, INC.
Notes to Consolidated Financial Statements
Three and Six Months Ended September 30, 1998
(Tabular amounts in thousands, except per share and percentage data)
(Unaudited)
NOTE B - OTHER COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", in the
first quarter of fiscal year 1999. SFAS No. 130 requires presentation of
comprehensive income and its components in the financial statements.
Total comprehensive income for the three-month periods ended September 30,
1998 and September 30, 1997 was as follows:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30,
1998 1997
---------- ---------
<S> <C> <C>
Net income........................................... $ 902 $ 1,125
Other comprehensive income:
Foreign currency translation adjustments,
net of related tax effects........................ 46 0
---------- ---------
Comprehensive income.............. $ 948 $ 1,125
========== =========
</TABLE>
Total comprehensive income for the six-month periods ended September
30, 1998 and September 30, 1997 was as follows:
<TABLE>
<CAPTION>
Sept. 30, Sept. 30,
1998 1997
--------- ---------
<S> <C> <C>
Net income........................................... $ 1,747 $ 1,978
Other comprehensive income:
Foreign currency translation adjustments,
net of related tax effects........................ 92 0
--------- ---------
Comprehensive income.............. $ 1,839 $ 1,978
========= =========
</TABLE>
NOTE C - ACQUISITIONS OF OPERATING CONTRACTS
During the six months ended September 30, 1998, the Company acquired
staffing service contracts from five entities for an aggregate purchase price of
approximately $8.0 million. The Company believes that the purchase of these
contracts is substantially equivalent to the purchase of a business.
Accordingly, the acquisitions have been accounted for under the purchase method
of accounting. The purchase prices have been allocated to the contracts and,
when applicable, covenants not to compete, based upon their estimated fair
market values; the excess of the purchase prices over those values have been
allocated to goodwill, which is being charged to operations on a straight-line
basis over 20 years. The operating results related to the acquired contracts
have been included in the Company's results of operations from the respective
dates of acquisitions.
7
<PAGE> 9
INTERNATIONAL TOTAL SERVICES, INC.
Notes to Consolidated Financial Statements
Three and Six Months Ended September 30, 1998
(Tabular amounts in thousands, except per share and percentage data)
(Unaudited)
The following unaudited pro forma results of operations give effect to
the five acquisitions made in fiscal 1999 as if they had been made at April 1,
1997.
<TABLE>
<CAPTION>
Three Months Ended Sept. 30
-----------------------------
1998 1997
---------- ----------
<S> <C> <C>
Operating revenues............................................$ 60,512 $ 43,311
Net income....................................................$ 1,096 $ 1,431
Net income per share:
Basic................................................$ .16 $ 37
Diluted..............................................$ .16 $ .37
<CAPTION>
Six Months Ended Sept. 30
--------------------------
1998 1997
---------- -----------
<S> <C> <C>
Operating revenues............................................$ 120,370 $ 86,013
Net income................................................$ 2,223 $ 2,601
Net income per share:
Basic................................................$ .33 $ .69
Diluted..............................................$ .33 $ .69
</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.
8
<PAGE> 10
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Six Months Ended September 30, 1998
ITEM 2.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 and 1997
Revenues. Revenues for the second quarter of fiscal 1999 increased by
$20.3 million, or 52.6 percent, to $58.9 million, as compared with the second
quarter of fiscal 1998. The increase is primarily attributable to an increase in
revenues from the five acquisitions completed during the current fiscal year and
the inclusion of revenues from the eleven acquisitions completed in fiscal 1998.
The five acquisitions completed in fiscal 1999, which were primarily
non-aviation security service contracts, contributed $2.8 million to the total
increase in revenues for the quarter. The inclusion of the eleven acquisitions
completed in fiscal 1998 contributed $15.0 million to the increase in revenues.
Internal growth contributed $2.5 million of the increase in revenues in the
second quarter of fiscal 1999 compared with the second quarter of 1998.
Gross Profit. Gross profit was $8.1 million in the second quarter of
fiscal 1999 compared with $6.3 million in the second quarter of fiscal 1998, an
increase of $1.8 million, or 27.9 percent. The five acquisitions completed in
fiscal 1999, and the inclusion of operating results from the eleven acquisitions
completed in fiscal 1998, contributed $0.6 million and $2.1 million,
respectively, to the increased gross profit. As a percentage of revenues, gross
profit declined to 13.7 percent in fiscal 1999, from 16.4 percent in fiscal 1998
due to increased labor costs. 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 raise the wages paid to employees in advance of
negotiating increases in the rates paid by the Company's customers. These
factors have resulted in downward pressure on the Company's gross margins. The
Company has implemented operational strategies that it believes will improve
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 the second quarter of fiscal 1999 were $5.2 million
compared with $3.7 million in the prior year, an increase of $1.5 million, or
40.0 percent. Measured as a percentage of operating revenues, these expenses
were 8.9 percent in the second quarter of fiscal 1999 and 9.7 percent in the
second quarter of last year. The decrease in selling, general and
administrative expenses, as a percent of operating revenues, reflects the
synergies realized from the Company's acquisition program.
Contract and Goodwill Amortization. Contract and goodwill amortization
expense increased to $0.6 million in the second quarter of fiscal 1999 from $0.1
million in the second quarter of fiscal 1998. The increase is a result of the
eleven acquisitions completed in fiscal 1998 and the five acquisitions completed
in fiscal 1999.
Interest Expense. Interest expense decreased in the second quarter of
fiscal 1999 to $0.2 million from $0.3 million in the prior year. The decrease of
$0.1 million is a result of lower average interest rates on outstanding debt and
lower average borrowings in fiscal 1999 compared with fiscal 1998.
Income Taxes. The Company's effective income tax rates were 41.5
percent and 41.6 percent for the second quarter of fiscal years 1999 and 1998,
respectively.
9
<PAGE> 11
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Six Months Ended September 30, 1998
Net Income. As a result of the foregoing factors, the Company's net
income decreased to $0.9 million for the second quarter of fiscal 1999 compared
with $1.1 million in the second quarter of fiscal 1998. As a percentage of
operating revenues, net income was 1.5 percent compared with 2.9 percent in the
prior year.
Six Months Ended September 30, 1998 and 1997
Revenues. Revenues for the first six months of fiscal 1999 increased by
$38.5 million to $115.5 million, or 50.1 percent as compared with the first six
months of fiscal 1998. The increase is primarily attributable to an increase in
revenues from the five acquisitions completed during the current fiscal year and
the inclusion of revenues from the eleven acquisitions completed in fiscal 1998.
The five acquisitions completed in fiscal 1999, which were primarily
non-aviation security service contracts, contributed $4.0 million to the total
increase in revenues. The inclusion of the eleven acquisitions completed in
fiscal 1998 contributed $30.0 million to the increase in revenues. Internal
growth contributed $4.5 million of the increase in revenues in the first six
months of fiscal 1999 compared with the first six months of 1998.
Gross Profit. Gross profit was $15.7 million in fiscal 1999 compared
with $12.9 million in fiscal 1998, an increase of $2.8 million, or 22.2 percent.
The five acquisitions completed in fiscal 1999, and the inclusion of operating
results from the eleven acquisitions completed in fiscal 1998, contributed $0.9
million and $4.2 million, respectively, to the increased gross profit. As a
percentage of revenues, gross profit was 13.6 percent in fiscal 1999, compared
with 16.7 percent in fiscal 1998. 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 raise the wages paid to employees in advance of
negotiating increases in the rates paid by the Company's customers. These
factors have resulted in downward pressure on the Company's gross margins. The
Company has implemented operational strategies that it believes will improve
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 the first six months of fiscal 1999 were $10.3
million compared with $8.1 million in the prior year, an increase of $2.3
million, or 28.1 percent. Measured as a percentage of operating revenues, these
expenses were 8.9 percent in fiscal 1999 and 10.5 percent in the second quarter
of last year. The decrease in selling, general and administrative expenses,
as a percent of operating revenues, reflects the synergies realized from the
Company's acquisition program.
Contract and Goodwill Amortization. Contract and goodwill amortization
expense increased $0.8 million to $1.1 million in the first six months of fiscal
1999 from $0.3 million in fiscal 1998. The increase is a result of the eleven
acquisitions completed in fiscal 1998 and the five acquisitions completed in
fiscal 1999.
Interest Expense. Interest expense decreased in the first six months of
fiscal 1999 to $0.3 million from $0.8 million in the prior year. The decrease is
a result of lower average interest rates and lower average borrowings in fiscal
1999.
10
<PAGE> 12
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Six Months Ended September 30, 1998
Income Taxes. The Company's effective income tax rates were 41.6
percent and 42.0 percent for the first six months of fiscal years 1999 and 1998,
respectively.
Net Income. As a result of the above factors, the Company's net income
decreased to $1.7 million for the first six months of fiscal 1999 compared with
$2.0 million in fiscal 1998. As a percentage of operating revenues, the first
six months of fiscal year 1999's net income was 1.5 percent compared with 2.6
percent in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $1.0 million in cash in the first six
months of fiscal 1999, a net decrease of $1.1 million when compared to the $2.1
million provided last year. The net decrease was primarily attributable to a
decrease in accounts payable, partially offset by a smaller year-over-year
increase in accounts receivable.
While accounts receivable increased $1.5 million to $22.3 million, the
increase was $1.5 million lower than the increase experienced during the same
period last year. The favorable impact from accounts receivable is due to a
decrease in the Company's average collection period and to an aviation contract
acquired in the first quarter of fiscal year 1998.
The current year decrease in trade accounts payable is attributed to
quicker turnover of accounts payable balances and also due to final payments
made on previously completed acquisitions.
Investing activities used $9.3 million, an increase of $6.4 million
over the same period in fiscal 1998. Of the increase, $4.7 million relates to
investments in acquisitions. Capital expenditure increased $1.8 million to $2.4
million in the first six months of fiscal 1999 compared with the first six
months of 1998 due to increased investments in systems, security equipment, and
service equipment.
The Company anticipates making capital expenditures in fiscal 1999 of
approximately $4.0 million, primarily related to security equipment, service
equipment, and computer software and systems. In addition, the Company
anticipates that it will continue making significant expenditures to fund its
ongoing acquisition program.
Financing activities provided $12.0 million, compared with $20.8
million in the same period of fiscal 1998. The completion of the company's
initial public offering in September 1997 provided $30.0 million to financing
activities in fiscal 1998.
The Company has a two-year revolving credit facility providing maximum
availability of $30 million, subject to certain borrowing base limitations. At
September 30, 1998, the Company had approximately $6.5 million available under
this facility. 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 2.5 percent.
The credit facility contains customary restrictions and covenants which limit
the Company's ability to incur additional indebtedness and pay dividends, and
requires the Company to maintain prescribed debt-to-equity and fixed charge
11
<PAGE> 13
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Six Months Ended September 30, 1998
coverage ratios, minimum net worth levels, and to satisfy certain other
financial covenants. The Company was in compliance with such covenants at
September 30, 1998.
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.
YEAR 2000 BUSINESS MATTERS
The Company has completed its assessment of its two most significant
systems to determine the readiness of those systems to handle year 2000
information processing needs. The two systems covered in this assessment are
the Company's enterprise software package, which processes payroll, accounts
payable, accounts receivable and financial accounting transactions, and the
Company's time and attendance system.
The version of the enterprise software package that the Company is
currently running is not year 2000 compliant, and as such the Company has
purchased the latest version of this package from the software vendor. The
software vendor has assured the Company that this new version is fully year
2000 compliant. The process of converting to this new version is anticipated to
commence by the end of December 1998 and be completed by the end of March 1999.
The total cost of this new version and its installation is anticipated to be
approximately $0.3 million, of which approximately $0.1 million has already
been spent.
The Company's current PC based time and attendance system is also not
year 2000 compliant. The Company has developed, internally, a new AS400-based
time and attendance system which is fully year 2000 compliant. This new system
is already operational in several locations and it is expected that it will be
fully implemented by the end of March 1999. The total cost of developing and
installing this new system is anticipated to be approximately $0.4 million, of
which approximately $0.1 million has already been spent.
The Company will conduct an internal review to determine if any other
areas of exposure exist. The company does not anticipate that any other
material internal or third party issues will exist however, because this review
is not yet complete there can be no assurances that this will be the case. The
expenditures outlined above are in addition to the Company's normal budgeted
level for information systems.
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 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 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 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 3.
Quantitative and Qualitative Disclosures
About Market Risk
Not material.
12
<PAGE> 14
INTERNATIONAL TOTAL SERVICES, INC.
PART II - OTHER INFORMATION
ITEM 4 - Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of security holders at the
Annual Meeting of Stockholders held September 18, 1998, with the results
indicated:
Outstanding Shares Entitled to Vote Number of Votes
----------------------------------- ---------------
6,662,494 Common 6,662,494
Item 1: Election of Five Directors for the Ensuing Year.
<TABLE>
<CAPTION>
Votes
Director Nominee For Withheld Total
---------------- ----------------- ------------ ------------
<S> <C> <C> <C>
Robert A. Weitzel 6,199,272 84,576 6,283,848
James O. Singer 6,202,122 81,726 6,283,848
Lee C. Howley, Jr. 6,201,822 82,026 6,283,848
Ivan J. Winfield 6,202,122 81,726 6,283,848
J. Jeffrey Eakin 6,199,522 84,326 6,283,848
</TABLE>
Item 2: Approval of an Amendment to the Company's Long-Term Incentive Plan.
6,153,837 Votes FOR the amendment
126,151 Votes AGAINST the amendment
ITEM 5 - Other Information
Shareholders who wish to submit proposals to be included in the Company's proxy
materials for the 1999 annual meeting may do so in accordance with Securities
and Exchange Commission Rule 14a-8. The Company's management proxies may
exercise their discretionary voting authority for any shareholder proposal that
is submitted other than in accordance with Rule 14a-8 and is received by the
Company after June 14, 1999, without any discussion of the proposal in the
Company's proxy materials.
ITEM 6 - Exhibits and Reports on Form 8 - K
----------------------------------------------
(a) Exhibits:
Exhibit Number Description
-------------- -----------
27 Financial Data Schedule (For SEC
Filing Purposes Only)
(b) Reports on Form 8 - K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
13
<PAGE> 15
SIGNATURE
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.
November 13, 1998
International Total Services, Inc.
By: /s/ BRIAN S. KENYON
----------------------------------
Brian S. Kenyon
Vice President, Finance
On behalf of the registrant and as
Chief Accounting Officer
14
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,732,000
<SECURITIES> 0
<RECEIVABLES> 22,396,000
<ALLOWANCES> 111,000
<INVENTORY> 0
<CURRENT-ASSETS> 33,308,000
<PP&E> 12,118,000
<DEPRECIATION> 5,660,000
<TOTAL-ASSETS> 71,993,000
<CURRENT-LIABILITIES> 18,043,000
<BONDS> 0
0
0
<COMMON> 67,000
<OTHER-SE> 40,875,000
<TOTAL-LIABILITY-AND-EQUITY> 71,993,000
<SALES> 115,546,000
<TOTAL-REVENUES> 115,546,000
<CGS> 99,832,000
<TOTAL-COSTS> 111,210,000
<OTHER-EXPENSES> 1,023,000
<LOSS-PROVISION> 54,000
<INTEREST-EXPENSE> 323,000
<INCOME-PRETAX> 2,990,000
<INCOME-TAX> 1,243,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,747,000
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
</TABLE>
