<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 December 31, 1997
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 No. 333-29463
INTERNATIONAL TOTAL SERVICES, INC.
----------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-1264201
- ------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
5005 Rockside Road, Cleveland, OH 44131
- ------------------------------------------- ------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (216) 642-4522
--------------
Not Applicable
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether 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 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
-------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: 6,662,494 shares on February 6,
1998.
<PAGE> 2
INTERNATIONAL TOTAL SERVICES, INC.
FORM 10-Q
INDEX
-----
<TABLE>
<CAPTION>
Page No.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Condensed Consolidated Financial Statements -- It complies with S-X
Condensed Consolidated Balance Sheets
December 31, 1997 (Unaudited) and March 31, 1997 2
Condensed Consolidated Statements of Operations
(Unaudited) - Three Months Ended December 31, 1997 and 1996 3
Condensed Consolidated Statements of Operations
(Unaudited) - Nine Months Ended December 31, 1997 and 1996 4
Condensed Consolidated Statements of Cash Flows
(Unaudited) - Nine Months Ended December 31, 1997 and 1996 5
Notes to Condensed Consolidated Financial Statements 6-7
ITEM 2 Management's Discussion and Analysis of Financial
Condition and Results of Operations 8-10
PART II OTHER INFORMATION AND SIGNATURE
ITEM 6 Exhibits and Reports on Form 8-K 11
SIGNATURE 12
</TABLE>
1
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
Item 1 - Financial Statements
- -----------------------------
INTERNATIONAL TOTAL SERVICES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1997
---------------- ---------------
ASSETS (unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 3,755 $ 1,452
Accounts receivable - net of allowance for doubtful accounts of $100 19,316 11,784
in each period
Deferred tax assets 1,694 1,494
Other current assets 3,285 1,556
---------------- ---------------
Total current assets 28,050 16,286
Property and equipment, net of accumulated depreciation of
$4,945 and $4,336 5,044 3,254
Intangibles, less accumulated amortization of $1,230 and $649 18,668 4,346
Security deposits and other 152 3,115
---------------- ---------------
$ 51,914 $ 27,001
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term obligations $ 0 $ 2,520
Trade accounts payable 5,128 2,748
Accrued payroll and other liabilities 7,884 10,121
Income taxes payable 877 573
---------------- ---------------
Total current liabilities 13,889 15,962
---------------- ---------------
Deferred tax liability 564 289
Long-term obligations - 7,555
STOCKHOLDERS' EQUITY:
Common shares, without par value, stated at $.01 per share - authorized
20,000,000 shares, issued 6,662,494 and 3,660,357 respectively 67 37
Additional paid-in capital 31,078 473
Cumulative translation adjustment (272) (99)
Retained earnings 6,588 2,784
---------------- ---------------
Total stockholders' equity 37,461 3,195
---------------- ---------------
$ 51,914 $ 27,001
================ ===============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE> 4
INTERNATIONAL TOTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Three Months Ended December 31,
-------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating revenue $ 46,240 $ 31,741
Cost of operating revenues 38,822 26,933
----------- -----------
Gross profit 7,418 4,808
General and administrative expenses 4,421 3,624
----------- -----------
Operating income 2,997 1,184
Interest (income) expense (58) 235
----------- -----------
Income before income taxes 3,055 949
Income taxes 1,229 397
----------- -----------
Net income $ 1,826 $ 552
----------- -----------
Net income per common shares $ 0.27 $ 0.10
=========== ===========
Weighted average common shares 6,662,494 5,336,959
=========== ===========
Net income per common and common equivalent shares $ 0.27 $ 0.10
=========== ===========
Weighted average common and common equivalent shares 6,742,415 5,336,959
=========== ===========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 5
INTERNATIONAL TOTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Operating revenue $ 123,208 $ 84,792
Cost of operating revenues 102,938 71,948
---------- ----------
Gross profit 20,270 12,844
General and administrative expenses 13,103 9,711
---------- ----------
Operating income 7,167 3,133
Interest expense 700 481
---------- ----------
Income before income taxes 6,467 2,652
Income taxes 2,663 1,109
---------- ----------
Net income $ 3,804 $ 1,543
---------- ----------
Net income per common shares $ 0.79 $ 0.28
========== ==========
Weighted average common shares 4,824,471 5,566,643
========== ==========
Net income per common and common equivalent shares $ 0.78 $ 0.28
========== ==========
Weighted average common and common equivalent shares 4,852,605 5,566,643
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 6
INTERNATIONAL TOTAL SERVICES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended December 31,
-----------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 3,804 $ 1,543
Net cash used in operating activities (7,470) (226)
-------- --------
Net cash (used in) provided by operating activities (3,666) 1,317
Cash flows used in investing activities:
Purchases of property and equipment, net (827) (577)
Purchases of contracts and related equipment (13,568) (2,377)
-------- --------
Net cash used in investing activities (14,395) (2,954)
Cash flows from financing activities:
(Repayment), borrowings of long-term debt, net, and other (9,631) 3,350
Proceeds from initial public offering - net 29,995 -
-------- --------
Net cash provided by financing activities 20,364 3,350
-
-------- --------
Net change in cash and cash equivalents 2,303 1,713
Cash and cash equivalents at beginning of period 1,452 1,873
-------- --------
Cash and cash equivalents at end of period $ 3,755 $ 3,586
======== ========
Cash paid during the period for:
Interest $ 748 $ 481
======== ========
Income taxes $ 2,089 $ 852
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 7
INTERNATIONAL TOTAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
(UNAUDITED)
1. SUMMARY OF PRESENTATION - The condensed consolidated financial statements
included herein have been prepared by the Company, without audit, pursuant
to the rules and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures are
adequate to make the information not misleading. In the opinion of
management, the condensed consolidated financial statements contain all
adjustments necessary to present fairly the financial position of the
Company as of December 31, 1997, the results of its operations for the
three and nine months ended December 31, 1997 and 1996, respectively, and
its cash flows for the nine months ended December 31, 1997 and 1996. All
such adjustments are of a normal recurring nature. The results of
operations for the three and nine months ended December 31, 1997 are not
necessarily indicative of the results to be expected for the fiscal year
ending March 31, 1998. The accounting policies of the Company continue
unchanged from March 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto for the fiscal year
ended March 31, 1997 included in the Company's prospectus dated September
19, 1997.
2. INITIAL PUBLIC OFFERING - On September 24, 1997 the Company completed an
initial public offering (the "Offering" or "IPO") of its common shares.
Prior to the completion of the Offering, the capital structure of ITS
consisted of 20,000,000 shares authorized, 3,641,017 issued and
outstanding, of $.01 par value common shares.
3. ACQUISITIONS - On October 10, 1997, the Company acquired the service
contracts of National Security Services, Inc., dba Curtis Security
Services, based in San Francisco, and White Lion Aviation Security, Ltd.,
based in London, England. The two companies had combined 1996 annual
revenues of approximately $5 million.
On October 13, 1997, the Company acquired the service contracts of ARC
Security, Inc. The 1997 annual revenues of ARC were approximately $25
million. The acquisition agreement and the exhibits are included with this
report.
The Company made three additional acquisitions: October 27, 1997, ASI, Inc.
based in Providence, RI. The 1996 annual revenues for ASI were
approximately $290,000; December 2, 1997, OS Security Services in Germany.
The 1996 annual revenues for OS were approximately $1.5 million; December 4
and 12, 1997, Neptune Aviation Facilities & Equipment, Inc. The 1996 annual
revenues were approximately $1.6 million.
The above six acquisitions above were accounted for using the purchase
method of accounting. As a result, the purchase prices have been allocated
to the assets acquired, including intangibles, based on their respective
fair values. Operations for the acquisitions are included in the combined
revenues from and the costs associated with the acquired contracts.
6
<PAGE> 8
INTERNATIONAL TOTAL SERVICES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
3. ACQUISITIONS (continued) - The following summarized pro forma (unaudited)
information assumes the above six acquisitions had occurred on April 1,
1997 and 1996. The proforma results for 1996 also assumes the Intex
acquisition had occurred, whose operations are already included in 1997.
<TABLE>
<CAPTION>
Nine Months Ended December 31,
------------------------------------------
1997 1996
---------------- ---------------
<S> <C> <C>
Operating revenue $ 144,218 $ 134,394
================ ===============
Net income $ 5,342 $ 5,086
================ ===============
Earnings per share:
Basic
Net Income $1.11 $0.91
================ ===============
Diluted
Net Income $1.10 $0.91
================ ===============
</TABLE>
The above amounts reflect adjustments for interest on notes payable issued
as part of the purchase price or reduction of interest income where paid
in cash, amortization of goodwill and depreciation on revalued property,
plant and equipment.
The pro forma results do not purport to be indicative of results that
would have occurred had the acquisitions been in effect for the periods
presented, nor do they purport to be indicative of the results that will
be obtained in the future.
4. EARNINGS PER SHARE - in February 1997, the FASB issued SFAS No. 128
"Earnings Per Share" which specifies the computation, presentation, and
disclosure requirements for earnings per share. The Company adopted SFAS
No. 128, effective October 1, 1997. All prior period earnings per share
data were restated to conform with the provisions of SFAS No. 128. The per
share amounts reported under SFAS No. 128 were not materially different
from those calculated and presented under Accounting Principles Board
Opinion 15.
7
<PAGE> 9
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
- --------------------------------------------------------------------------------
of Operations
- -------------
Operating Results - Three Months Ended December 31, 1997 and 1996
- -----------------------------------------------------------------
Revenues increased $14.5 million, or 46%, to $46.2 million in the third quarter
ended December 31, 1997 from $31.7 million in the third quarter of 1996. This
increase is attributable to an increase in revenues of $11.4 million from the
thirteen acquisitions that were completed during the past eighteen months and an
increase in revenues from existing customers for aircraft cleaning and ground
handling of $3.1 million.
Gross profit was $7.4 million for the third quarter of 1997 compared to $4.8
million in the third quarter of 1996, an increase of 54%. Measured as a
percentage of net sales, gross profit margins increased to 16.0% in 1997 from
15.1% in 1996. Such improvement in 1997 was primarily attributable to higher
margin contracts mostly from the acquisitions referred to above and the increase
in revenues for aircraft cleaning and ground handling.
General and administrative expenses for the third quarter of 1997 were $4.4
million compared to $3.6 million in the third quarter of 1996, an increase of
22%. Measured as a percentage of net sales, these expenses were 9.6% in 1997 and
11.4% in 1996. This percentage decrease was due to the Company's focus on
increasing revenues without a proportionate increase in corporate expenses.
The Company had net interest income in the third quarter of 1997 of $58,000
versus $235,000 in interest expense in the third quarter of 1996 due to a
decrease in the amount of debt outstanding exclusively as a result of the
initial public offering completed September 24, 1997.
As a result of the foregoing, the Company's net income increased to $1,826,000
in the third quarter of 1997 compared to $552,000 in the third quarter of 1996,
an increase of 237%. The Company provided for income taxes at an estimated rate
of 40.2% which is less than its effective annual rate in 1996.
8
<PAGE> 10
Operating Results - Nine Months Ended December 31, 1997 and 1996
- ----------------------------------------------------------------
Revenues increased $38.4 million, or 45%, to $123.2 million for the nine months
ended December 31, 1997 from $84.8 million for the nine months ended December
31, 1996. This increase is attributable to an increase in revenues of $30.9
million from the thirteen acquisitions that were completed during the past
eighteen months and an increase in revenues from existing customers for aircraft
cleaning and ground handling of $7.5 million.
Gross profit was $20.3 million for the nine months ended December 31, 1997
compared to $12.8 million for the nine months ended December 31, 1996, an
increase of 58%. Measured as a percentage of net sales, gross profit margins
increased to 16.4% in 1997 from 15.1% in 1996. Such improvement in 1997 was
primarily attributable to higher margin contracts mostly from the acquisitions
and the increase in revenues for aircraft cleaning and ground handling.
General and administrative expenses for the nine months ended December 31, 1997
were $13.1 million compared to $9.7 million in the nine months ended December
31, 1996, an increase of 35%. Measured as a percentage of net sales, these
expenses were 10.6% in 1997 and 11.5% in 1996. This percentage decrease was due
to the Company's focus on increasing revenues without a proportionate increase
in corporate expenses.
Interest expense increased for the nine months ended December 31, 1997 to
$700,000 from $481,000 for the nine months ended December 31, 1996 due to an
increase in the amount of debt outstanding exclusively as a result of the
acquisitions. As mentioned above, the Company's interest expense was
significantly reduced after the initial public offering was completed on
September 24, 1997.
As a result of the foregoing, the Company's net income increased to $3,804,000
for the nine months ended December 31, 1997 compared to $1,543,000 for the nine
months ended December 31, 1996, an increase of 149%. The Company provided for
income taxes at an estimated rate of 41.1% which is less than its effective
annual rate in 1996.
9
<PAGE> 11
Liquidity and Capital Resources
- -------------------------------
Cash used in operating activities was $3.7 million for the nine months ended
December 31, 1997 compared to cash provided by operating activities of $1.3
million for the nine months ended December 31, 1996. This decrease of $5.0
million was the result of the increase of $2.3 million in net income before
depreciation and amortization and the decrease of $7.3 million from changes in
working capital and other due to the increase in our accounts receivable from
the growth of our revenues and the related increases in accrued payroll and
trade accounts payable.
Cash used in investing activities for the nine months ended December 31, 1997
was $14.4 million compared to $3.0 million for the nine months ended December
31, 1996. This was principally the result of the acquisitions of $13.6 million
in 1997 as compared to $2.4 million in 1996. Cash provided by financing
activities for the nine months ended December 31, 1997 was $20.4 million
compared to $3.4 million for the nine months ended December 31, 1996 due to the
proceeds from the Company's initial public offering.
Capital expenditures were approximately $827,000 for the nine months ended
December 31, 1997 compared to $577,000 for the nine months ended December 31,
1996. Historically, capital expenditures have been, and future expenditures are
anticipated to be, primarily to support expansion of the Company's operations
and management information systems.
The Company completed its initial public offering of common shares on September
24, 1997 raising net proceeds after expenses of approximately $30.0 million.
These proceeds were used to repay all outstanding amounts under the Company's
credit facility and to retire other outstanding acquisition related debt.
Following the Offering, interest expense was substantially reduced.
The Company believes that funds generated from operations, together with
existing cash, the net proceeds from the Offering, and borrowings under the $30
million credit facility, will be sufficient to finance its current operations,
planned capital expenditures, internal growth and acquisitions for at least the
next year.
Concurrent with the receipt of the Offering proceeds on September 24, 1997, all
outstanding amounts under the credit facility were repaid in full. There were no
outstanding borrowings under the credit facility at December 31, 1997.
10
<PAGE> 12
INTERNATIONAL TOTAL SERVICES, INC.
Part II - OTHER INFORMATION AND SIGNATURE
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
11 Computation of Earnings Per Share
27 Financial Data Schedule (For SEC Filing Purposes Only)
</TABLE>
(b) Reports on Form 8-K
The report on Form 8-K for the acquisition of the contracts
and assets of ARC Security, Inc. was filed October 28, 1997
and the audited financial statements were filed December 30,
1997.
11
<PAGE> 13
SIGNATURE
Pursuant to the requirements 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.
INTERNATIONAL TOTAL SERVICES, INC.
(REGISTRANT)
Date: February 6, 1998 By: /s/ Robert A. Swartz
------------------------------------
Robert A. Swartz
Vice President and Chief Financial Officer
(On behalf of the Registrant and as Chief
Accounting Officer)
12
<PAGE> 1
Exhibit 11
INTERNATIONAL TOTAL SERVICES, INC.
COMPUTATION OF EARNINGS PER SHARE
(IN THOUSANDS, EXCEPT PER-SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------------- ---------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
<S> <C> <C> <C> <C> <C> <C>
Net income $ 1,826 $ 552
=========== =========
BASIC EPS
- ---------
Net income available to common stockholders $ 1,826 6,663 $0.27 $ 552 5,337 $0.10
========= ========
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options 0 79 0 0
----------- -------- --------- -------
DILUTED EPS
- -----------
Net income available to common stockholders plus
assumed conversions $1,826 6,742 $0.27 $ 552 5,337 $0.10
=========== ======== ========= ========= ======= ========
NINE MONTHS ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------- ----------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
Net income $ 3,804 $1,543
=========== =========
BASIC EPS
- ---------
Net income available to common stockholders $ 3,804 4,825 $0.79 $1,543 5,567 $0.28
========= ========
EFFECT OF DILUTIVE SECURITIES
- -----------------------------
Stock options 0 28 0 0
----------- -------- --------- -------
DILUTED EPS
- -----------
Net income available to common stockholders plus
assumed conversions $3,804 4,853 $0.78 $1,543 5,567 $0.28
=========== ======== ========= ========= ======= ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION FROM INTERNATIONAL TOTAL
SERVICES, INC. AND SUBSIDIARIES DECEMBER 31, 1997 CONSOLIDATED FINANCIAL
STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,754,708
<SECURITIES> 0
<RECEIVABLES> 19,416,313
<ALLOWANCES> 100,000
<INVENTORY> 378,386
<CURRENT-ASSETS> 28,050,085
<PP&E> 9,988,745
<DEPRECIATION> 4,944,474
<TOTAL-ASSETS> 51,913,987
<CURRENT-LIABILITIES> 13,889,312
<BONDS> 0
0
0
<COMMON> 66,625
<OTHER-SE> 37,394,223
<TOTAL-LIABILITY-AND-EQUITY> 51,913,987
<SALES> 0
<TOTAL-REVENUES> 123,207,461
<CGS> 0
<TOTAL-COSTS> 102,937,154
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 699,550
<INCOME-PRETAX> 6,467,567
<INCOME-TAX> 2,663,416
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,804,151
<EPS-PRIMARY> .79
<EPS-DILUTED> .78
</TABLE>
