<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q/A
AMENDMENT #1
(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
--------------------------------------- ---------------------------
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
Crown Centre
5005 Rockside Road
Independence, Ohio 44131
--------------------------------------- ---------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (216) 642-4522
---------------------------
- --------------------------------------------------------------------------------
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/A
INDEX
-----
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets
September 30, 1998 (Restated) and March 31, 1998..........................................2
Consolidated Statements of Income
Three Months Ended September 30, 1998 (Restated) and 1997.................................3
Six Months Ended September 30, 1998 (Restated) and 1997...................................4
Consolidated Statements of Cash Flows
Six Months Ended September 30, 1998 (Restated) and 1997...................................5
Notes to Consolidated Financial Statements...........................................................6
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations...................12
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk..............................................15
PART II OTHER INFORMATION
ITEM 4 Submission of Matters to a Vote of Security Holders....................................................16
ITEM 5 Other Information.......................................................................................16
ITEM 6 Exhibits and Reports on Form 8 - K......................................................................16
</TABLE>
1
<PAGE> 3
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
(UNAUDITED)
<TABLE>
<CAPTION> September 30, 1998
(Restated) March 31, 1998
------------------ ------------------
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 4,680 $ 1,032
Accounts receivable - net of allowance for doubtful accounts of $177
and $100 as of September 30, 1998 and March 31, 1998, respectively 22,157 20,768
Deferred taxes 1,479 1,453
Prepaid Income Taxes 535 --
Uniforms 2,263 2,686
Other current assets 2,287 1,684
------------------ ------------------
TOTAL CURRENT ASSETS 33,401 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 5,696 5,255
------------------ ------------------
Property and equipment - net 6,422 5,495
Intangibles, less accumulated amortization of $2,708 and $1,636 as of
September 30, 1998 and March 31, 1998, respectively 32,311 25,295
Security deposits and other 96 154
------------------ ------------------
32,407 25,449
------------------ ------------------
TOTAL ASSETS $ 72,230 $ 58,567
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Trade accounts payable $ 3,456 $ 4,590
Accrued payroll and payroll taxes 13,919 11,938
Other accrued expenses 1,779 1,860
Income taxes payable -- 98
------------------ ------------------
TOTAL CURRENT LIABILITIES 19,154 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 8,902 8,029
------------------ ------------------
40,068 39,103
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 72,230 $ 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 (Restated) and September 30, 1997
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
(Restated)
------------------------ -----------------------
<S> <C> <C> <C> <C>
Operating revenues $ 58,875 100.0% $ 38,604 100.0%
Cost of operating revenues 51,289 87.1% 32,292 83.6%
---------- ---------- ---------- ----------
GROSS PROFIT 7,586 12.9% 6,312 16.4%
Selling, general and administrative expenses 5,441 9.2% 3,743 9.7%
Contract and goodwill amortization 570 1.0% 138 0.4%
---------- ---------- ---------- ----------
OPERATING PROFIT 1,575 2.7% 2,431 6.3%
Other expense 499 0.9% 162 0.4%
Interest expense-net 234 0.4% 344 0.9%
---------- ---------- ---------- ----------
733 1.3% 506 1.3%
---------- ---------- ---------- ----------
Income before income taxes 842 1.4% 1,925 5.0%
Income taxes 417 0.7% 800 2.1%
---------- ---------- ---------- ----------
NET INCOME $ 425 0.7% $ 1,125 2.9%
========== ========== ========== ==========
Net Income per share:
Basic $ 0.06 $ 0.29
========== ==========
Diluted $ 0.06 $ 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 (Restated) and September 30, 1997
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
(Restated)
----------------------- -----------------------
<S> <C> <C> <C> <C>
Operating revenues $ 115,489 100.0% $ 76,968 100.0%
Cost of operating revenues 100,778 87.3% 64,116 83.3%
---------- ---------- ---------- ----------
GROSS PROFIT 14,711 12.7% 12,852 16.7%
Selling, general and administrative expenses 10,730 9.3% 8,052 10.5%
Contract and goodwill amortization 1,072 0.9% 309 0.4%
---------- ---------- ---------- ----------
OPERATING PROFIT 2,909 2.5% 4,491 5.8%
Other expense 1,023 0.8% 321 0.4%
Interest expense-net 324 0.3% 758 1.0%
---------- ---------- ---------- ----------
1,347 1.1% 1,079 1.4%
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,562 1.4% 3,412 4.4%
Income taxes 689 0.6% 1,434 1.8%
---------- ---------- ---------- ----------
NET INCOME $ 873 0.8% $ 1,978 2.6%
========== ========== ========== ==========
Net Income per share:
Basic $ 0.13 $ 0.52
========== ==========
Diluted $ 0.13 $ 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 (Restated) and September 30, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
(Restated)
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 873 $ 1,978
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 545 382
Amortization 1,073 309
Other -- 2
Changes in working capital:
Accounts receivable (1,389) (2,982)
Prepaid Income Taxes (535)
Other current and noncurrent assets (146) (1,275)
Trade accounts payable (1,134) 3,554
Accrued expenses 1,807 94
------------------ ------------------
Net cash provided by operating activities 1,094 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 (233) --
Payments for acquisitions of businesses (7,053) (2,307)
------------------ ------------------
Net cash used in investing activities (9,473) (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 3,648 19,980
Cash and Cash Equivalents, beginning balance 1,032 1,452
------------------ ------------------
Cash and Cash Equivalents, ending balance $ 4,680 $ 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 ending 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.
NOTE B - RESTATEMENT
While preparing financial statements for the fiscal year ended March 31,
1999, the Company determined that its previously issued quarterly financial
statements for the fiscal year should be restated. Company management has
concluded that certain expense adjustments, primarily related to vacations,
workers' compensation, uniforms and bad debts, are more properly allocated
throughout the year rather than as strictly fourth quarter charges. The
adjustments require the restatement of each of the previously issued quarterly
financial statements. The year-end financial statements reflect the cummulative
effect of these quarterly adjustments. The effects of these changes are
contained entirely within fiscal year 1999.
6
<PAGE> 8
A comparison of the original and restated (unaudited) financial
statements is as follows:
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
RESTATED AND AS PER ORIGINAL 10Q FILING
(Amounts in thousands)
<TABLE>
<CAPTION>
Original
As Restated 10-Q Filing
September 30, 1998 September 30, 1998
------------------ ------------------
(UNAUDITED)
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 4,680 $ 4,732
Accounts receivable - net of allowance for doubtful accounts 22,157 22,285
Deferred taxes 1,479 1,479
Prepaid Income Taxes 535 --
Uniforms 2,263 2,477
Other current assets 2,287 2,335
------------------ ------------------
TOTAL CURRENT ASSETS 33,401 33,308
Property and Equipment
Security equipment 4,859 4,859
Service equipment 2,671 2,671
Computer equipment 2,496 2,496
Furniture and fixtures 1,104 1,104
Leasehold improvements 56 56
Autos 932 932
------------------ ------------------
12,118 12,118
Less accumulated depreciation and amortization 5,696 (5,660)
------------------ ------------------
Property and equipment - net 6,422 6,458
Intangibles, less accumulated amortization of $2,708 and $1,636 as of
September 30, 1998 and March 31, 1998, respectively 32,311 32,131
Security deposits and other 96 96
------------------ ------------------
32,407 32,227
------------------ ------------------
TOTAL ASSETS $ 72,230 $ 71,993
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Trade accounts payable $ 3,456 $ 3,456
Accrued payroll and payroll taxes 13,919 13,080
Other accrued expenses 1,779 1,488
Income taxes payable -- 19
------------------ ------------------
TOTAL CURRENT LIABILITIES 19,154 18,043
Deferred taxes 434 434
Long-Term Obligations 12,574 12,574
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) (112)
Retained earnings 8,902 9,776
------------------ ------------------
40,068 40,942
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 72,230 $ 71,993
================== ==================
</TABLE>
7
<PAGE> 9
NOTE B - RESTATEMENT (CONTINUED)
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended September 30, 1998
Restated And As Per Original 10Q Filing
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Original
As Restated 10-Q Filing
September 30, 1998 September 30, 1998
------------------------- -----------------------
<S> <C> <C> <C> <C>
Operating revenues $ 58,875 100.0% $ 58,906 100.0%
Cost of operating revenues 51,289 87.1% 50,823 86.3%
---------- ---------- ---------- ----------
GROSS PROFIT 7,586 12.9% 8,083 13.7%
Selling, general and administrative expenses 5,441 9.2% 5,241 8.9%
Contract and goodwill amortization 570 1.0% 567 1.0%
---------- ---------- ---------- ----------
OPERATING PROFIT 1,575 2.7% 2,275 3.9%
Other expense 499 0.9% 499 0.8%
Interest expense-net 234 0.4% 234 0.4%
---------- ---------- ---------- ----------
733 1.3% 733 1.2%
---------- ---------- ---------- ----------
Income before income taxes 842 1.4% 1,542 2.6%
Income taxes 417 0.7% 640 1.1%
---------- ---------- ---------- ----------
NET INCOME $ 425 0.7% $ 902 1.5%
========== ========== ========== ==========
Net Income per share:
Basic $ 0.06 $ 0.14
========== ==========
Diluted $ 0.06 $ 0.14
========== ==========
Weighted average number of shares:
Basic 6,662 6,662
========== ==========
Diluted 6,662 6,662
========== ==========
</TABLE>
8
<PAGE> 10
NOTE - B RESTATEMENT (CONTINUED)
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended September 30, 1998
Restated And As Per Original 10Q Filing
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Original
As Restated 10-Q Filing
September 30, 1998 September 30, 1998
------------------------ -----------------------
<S> <C> <C> <C> <C>
Operating revenues $ 115,489 100.0% $ 115,546 100.0%
Cost of operating revenues 100,778 87.3% 99,832 86.4%
---------- ---------- ---------- ----------
GROSS PROFIT 14,711 12.7% 15,714 13.6%
Selling, general and administrative expenses 10,730 9.3% 10,313 8.9%
Contract and goodwill amortization 1,072 0.9% 1,065 0.9%
---------- ---------- ---------- ----------
OPERATING PROFIT 2,909 2.5% 4,336 3.8%
Other expense 1,023 0.8% 1,023 0.9%
Interest expense-net 324 0.3% 323 0.3%
---------- ---------- ---------- ----------
1,347 1.1% 1,346 1.2%
---------- ---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,562 1.4% 2,990 2.6%
Income taxes 689 0.6% 1,243 1.1%
---------- ---------- ---------- ----------
NET INCOME $ 873 0.8% $ 1,747 1.5%
========== ========== ========== ==========
Net Income per share:
Basic $ 0.13 $ 0.26
========== ==========
Diluted $ 0.13 $ 0.26
========== ==========
Weighted average number of shares:
Basic 6,662 6,662
========== ==========
Diluted 6,662 6,662
========== ==========
</TABLE>
9
<PAGE> 11
NOTE - B RESTATEMENT (CONTINUED)
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended
September 30, 1998 Restated And As Per Original 10Q Filing
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
Original
As Restated 10-Q Filing
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 873 $ 1,747
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 545 509
Amortization 1,073 1,065
Other -- --
Changes in working capital:
Accounts receivable (1,389) (1,517)
Prepaid Income Taxes (535) --
Other current and noncurrent assets (146) (408)
Trade accounts payable (1,134) (1,134)
Accrued expenses 1,807 696
------------------ ------------------
Net cash provided by operating activities 1,094 958
INVESTING ACTIVITIES:
Additions to property and equipment (2,405) (2,405)
Deposit on sale of property, plant and equipment 200 200
Proceeds received from sale of equipment 18 18
Property and equipment of acquired businesses (233) (45)
Payments for acquisitions of businesses (7,053) (7,053)
------------------ ------------------
Net cash used in investing activities (9,473) (9,285)
FINANCING ACTIVITIES:
Net borrowings (payments) on note payable to bank 12,026 12,026
------------------ ------------------
Net cash provided by financing activities 12,026 12,026
Effect of exchange rates on cash 1 1
------------------ ------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 3,648 3,700
Cash and Cash Equivalents, beginning balance 1,032 1,032
------------------ ------------------
Cash and Cash Equivalents, ending balance $ 4,680 $ 4,732
================== ==================
</TABLE>
10
<PAGE> 12
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 C - 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
(Restated)
---------- ---------
<S> <C> <C>
Net income........................................... $ 425 $ 1,125
Other comprehensive income:
Foreign currency translation adjustments,
net of related tax effects........................ 46 0
---------- ---------
Comprehensive income.............. $ 471 $ 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
(Restated)
--------- ---------
<S> <C> <C>
Net income........................................... $ 873 $ 1,978
Other comprehensive income:
Foreign currency translation adjustments,
net of related tax effects........................ 92 0
--------- ---------
Comprehensive income.............. $ 965 $ 1,978
========= =========
</TABLE>
NOTE D - 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 $7.7 million. The Company believes that the purchase of these
contracts is substantially equivalent to the purchase of a business.
Accordingly, the acquisitions have been accounted for under the purchase method
of accounting. The purchase prices have been allocated to the contracts and,
when applicable, covenants not to compete, based upon their estimated fair
market values; the excess of the purchase prices over those values have been
allocated to goodwill, which is being charged to operations on a straight-line
basis over 20 years. The operating results related to the acquired contracts
have been included in the Company's results of operations from the respective
dates of acquisitions.
The following unaudited pro forma results of operations give effect to
the five acquisitions made in fiscal 1999 as if they had been made at April 1,
1997.
<TABLE>
<CAPTION>
Three Months Ended Sept. 30
-----------------------------
1998 1997
(Restated)
---------- ----------
<S> <C> <C>
Operating revenues............................................$ 60,481 $ 43,311
Net income....................................................$ 619 $ 1,431
Net income per share:
Basic................................................$ .09 $ 37
Diluted..............................................$ .09 $ .37
<CAPTION>
Six Months Ended Sept. 30
--------------------------
1998 1997
(Restated)
---------- -----------
<S> <C> <C>
Operating revenues............................................$ 120,313 $ 86,013
Net income................................................$ 1,349 $ 2,601
Net income per share:
Basic................................................$ .20 $ .69
Diluted..............................................$ .20 $ .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.
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
ITEM 2.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1998 (Restated) 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.
Gross Profit. Gross profit was $7.6 million in the second quarter of
fiscal 1999 compared with $6.3 million in the second quarter of fiscal 1998, an
increase of $1.3 million, or 20.6 percent. As a percentage of revenues, gross
profit declined to 12.9 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the second quarter of fiscal 1999 were $5.4 million
compared with $3.7 million in the prior year, an increase of $1.7 million, or
45.9 percent. Measured as a percentage of operating revenues, these expenses
were 9.2 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 49.5
percent and 41.6 percent for the second quarter of fiscal years 1999 and 1998,
respectively.
12
<PAGE> 14
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 $0.4 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 0.7 percent compared with 2.9 percent in the
prior year.
Six Months Ended September 30, 1998 (Restated) 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.
Gross Profit. Gross profit was $14.7 million in fiscal 1999 compared
with $12.9 million in fiscal 1998, an increase of $1.8 million, or 14.0 percent.
As a percentage of revenues, gross profit was 12.7 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.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the first six months of fiscal 1999 were $10.7
million compared with $8.1 million in the prior year, an increase of $2.6
million, or 32.1 percent. Measured as a percentage of operating revenues, these
expenses were 9.3 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.
13
<PAGE> 15
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 44.1
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 $0.9 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 0.8 percent compared with 2.6
percent in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $1.1 million in cash in the first six
months of fiscal 1999, a net decrease of $1.0 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 and an increase in accrued expenses.
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.
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 increase in accrued expenses resulted primarily from vacation
accruals & other accruals associated with the growth of the Company's revenues.
Investing activities used $9.5 million, an increase of $6.6 million
over the same period in fiscal 1998. Of the increase, $4.7 million relates to
investments in acquisitions. Capital expenditures 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 made capital expenditures in fiscal 1999 of approximately
$3.1 million, primarily related to security equipment and computer software
and systems. The Company anticipates that it will continue making significant
expenditures, in the future, 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
14
<PAGE> 16
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, however, it was not in compliance with its interest
coverage ratio on March 31, 1999. Management of the Company is taking steps to
regain compliance with its debt covenants.
YEAR 2000 BUSINESS MATTERS
The Company views the Year 2000 issue seriously and is taking steps to
ensure that its business will not be adversely impacted by this issue.
The Company has completed its assessment of its two most significant
systems and has updated them to be year 2000 compliant. The company's two most
significant systems are its main processor and its time and attendance system.
The main processor is used to process payroll, accounts payable,
accounts receivable and financial accounting transactions. The organization's
main processor was upgraded to a new IBM AS400. The Company then upgraded its
J.D. Edwards software to the most current release, which is fully year 2000
compliant.
In addition, the Company has been installing a new time and attendance
system. This system is year 2000 compliant and has been implemented in various
locations. The Company expects that it will be fully implemented before year
2000 issues have an impact.
The Company has investigated the level of year 2000 compliance of is
non-computer systems, such as phones, voice mail and security screening
equipment. The Company has also contacted suppliers of its most critical
support products and has received statements of their compliance efforts.
Although the ultimate impact of this issue on the Company cannot be predicted.
Management of the Company believes that the year 2000 issue will not have a
material impact on the Companys' operations.
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) the Company's financing plans; and (ii) 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.
15
<PAGE> 17
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:
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.
To Increase the Number of Shares Available Under the 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.
16
<PAGE> 18
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.
August 10, 1999
International Total Services, Inc.
By: /s/ Robert A. Weitzel
----------------------------------
Robert A. Weitzel
Director, Chairman of the Board of
Directors and Chief Executive Officer
(Principal Executive Officer)
17
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 4,680,000
<SECURITIES> 0
<RECEIVABLES> 22,334,000
<ALLOWANCES> 177,000
<INVENTORY> 0
<CURRENT-ASSETS> 33,401,000
<PP&E> 12,118,000
<DEPRECIATION> 5,696,000
<TOTAL-ASSETS> 72,230,000
<CURRENT-LIABILITIES> 19,154,000
<BONDS> 0
0
0
<COMMON> 67,000
<OTHER-SE> 40,001,000
<TOTAL-LIABILITY-AND-EQUITY> 72,394,000
<SALES> 115,489,000
<TOTAL-REVENUES> 115,489,000
<CGS> 100,778,000
<TOTAL-COSTS> 112,580,000
<OTHER-EXPENSES> 1,023,000
<LOSS-PROVISION> 54,000
<INTEREST-EXPENSE> 324,000
<INCOME-PRETAX> 1,562,000
<INCOME-TAX> 689,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 873,000
<EPS-BASIC> .13
<EPS-DILUTED> .13
</TABLE>
