<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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 February 12, 1999, the Registrant had 6,662,494 Common Shares issued and
outstanding.
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INTERNATIONAL TOTAL SERVICES, INC.
10-Q
INDEX
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<TABLE>
<CAPTION>
Page No.
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
<S> <C>
Consolidated Balance Sheets
December 31, 1998 and March 31, 1998....................................................... 2
Consolidated Statements of Income
Three Months Ended December 31, 1998 and 1997.............................................. 3
Nine Months Ended December 31, 1998 and 1997............................................... 4
Consolidated Statements of Cash Flows
Nine Months Ended December 31, 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......................................... 13
PART II Other Information
ITEM 6 Exhibits and Reports on Form 8 - K................................................................. 14
</TABLE>
1
<PAGE> 3
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31, 1998 March 31, 1998
----------------- --------------
(UNAUDITED) (AUDITED)
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 3,962 $ 1,032
Accounts receivable - net of allowance for doubtful accounts of $136
and $100 as of December 31, 1998 and March 31, 1998, respectively 24,812 20,768
Deferred taxes 1,481 1,453
Uniforms 2,295 2,686
Other current assets 2,226 1,684
-------- --------
TOTAL CURRENT ASSETS 34,776 27,623
Property and Equipment
Security equipment 4,549 3,682
Service equipment 2,766 2,362
Computer equipment 2,601 2,049
Furniture and fixtures 1,121 994
Leasehold improvements 56 56
Autos 1,036 1,607
-------- --------
12,129 10,750
Less accumulated depreciation and amortization 5,717 5,255
-------- --------
Property and equipment - net 6,412 5,495
Intangibles, less accumulated amortization of $3,305 and $1,636 as of
December 31, 1998 and March 31, 1998, respectively 32,626 25,295
Security deposits and other 122 154
-------- --------
32,748 25,449
-------- --------
TOTAL ASSETS $ 73,936 $ 58,567
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities
Trade accounts payable $ 4,383 $ 4,590
Accrued payroll and payroll taxes 13,440 11,938
Other accrued expenses 1,520 1,860
Income taxes payable 461 98
-------- --------
TOTAL CURRENT LIABILITIES 19,804 18,486
Deferred taxes 434 434
Long-Term Obligations 11,814 544
Shareholders' Equity
Common shares, without par value, stated at $.01 per share authorized
20,000 shares, issued and outstanding 6,662
at December 31, 1998 and March 31, 1998 67 67
Additional paid-in capital 31,211 31,211
Accumulated other comprehensive income (loss) (136) (204)
Retained earnings 10,742 8,029
-------- --------
41,884 39,103
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 73,936 $ 58,567
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
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INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended December 31, 1998 and December 31, 1997
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C> <C> <C>
Operating revenues $59,356 100.0% $46,240 100.0%
Cost of operating revenues 51,307 86.4% 38,822 84.0%
------- ----- ------- -----
GROSS PROFIT 8,049 13.6% 7,418 16.0%
Selling, general and administrative expenses 5,050 8.5% 3,971 8.7%
Contract and goodwill amortization 605 1.0% 266 0.6%
------- ----- ------- -----
OPERATING PROFIT 2,394 4.1% 3,181 6.9%
Other expense 498 0.8% 184 0.4%
Interest expense-net 267 0.5% (58) (0.1%)
------- ----- ------- -----
765 1.3% 126 0.3%
------- ----- ------- -----
INCOME BEFORE INCOME TAXES 1,629 2.8% 3,055 6.6%
Income taxes 663 1.1% 1,229 2.7%
------- ----- ------- -----
NET INCOME $ 966 1.7% $ 1,826 3.9%
======= ===== ======= =====
Net Income per share:
Basic $ 0.15 $ 0.27
======= =======
Diluted $ 0.15 $ 0.27
======= =======
Weighted average number of shares:
Basic 6,662 6,662
======= =======
Diluted 6,662 6,737
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
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INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Nine Months Ended December 31, 1998 and December 31, 1997
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
------------------ ----------------
<S> <C> <C> <C> <C>
Operating revenues $174,907 100.0% $123,208 100.0%
Cost of operating revenues 151,142 86.4% 102,938 83.5%
-------- ----- -------- -----
GROSS PROFIT 23,765 13.6% 20,270 16.5%
Selling, general and administrative expenses 15,365 8.8% 12,023 9.8%
Contract and goodwill amortization 1,669 1.0% 575 0.5%
-------- ----- -------- -----
OPERATING PROFIT 6,731 3.8% 7,672 6.2%
Other expense 1,521 0.9% 505 0.4%
Interest expense-net 591 0.3% 700 0.6%
-------- ----- -------- -----
2,112 1.2% 1,205 1.0%
-------- ----- -------- -----
INCOME BEFORE INCOME TAXES 4,619 2.6% 6,467 5.2%
Income taxes 1,906 1.1% 2,663 2.1%
-------- ----- -------- -----
NET INCOME $ 2,713 1.5% $ 3,804 3.1%
======== ===== ======== =====
Net Income per share:
Basic $ 0.41 $ 0.80
======== ========
Diluted $ 0.41 $ 0.79
======== ========
Weighted average number of shares:
Basic 6,662 4,736
======== ========
Diluted 6,662 4,805
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
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INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended December 31, 1998 and December 31, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 2,713 $ 3,804
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 805 616
Amortization 1,669 596
(Gain)/Loss on Disposal of Assets (19) 2
Deferred income taxes -- 75
Changes in working capital:
Accounts receivable (4,044) (7,532)
Other current and noncurrent assets (147) (1,729)
Trade accounts payable (207) 2,381
Accrued expenses 1,525 (1,706)
--------- ---------
Net cash provided/(used) by operating activities 2,295 (3,493)
INVESTING ACTIVITIES:
Additions to property and equipment (2,458) (828)
Deposit on sale of property and equipment 200 -
Proceeds received from sale of property and equipment 176 11
Property and equipment of acquired businesses (187) (1,656)
Payments for acquisitions of businesses (8,434) (11,923)
--------- ---------
Net cash used in investing activities (10,703) (14,396)
FINANCING ACTIVITIES:
Net borrowings (payments) on note payable to bank 11,270 (6,849)
Principal payments on long-term debt -- (3,000)
Proceeds from sale of stock -- 29,995
Decrease in capital lease obligation -- (227)
Decrease in note receivable from officer -- 445
--------- ---------
Net cash provided by financing activities 11,270 20,364
Effect of exchange rates on cash 68 (174)
--------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS 2,930 2,301
Cash and Cash Equivalents, beginning balance 1,032 1,452
--------- ---------
Cash and Cash Equivalents, ending balance $ 3,962 $ $3,753
========= =========
</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 Nine Months Ended December 31, 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 December 31, 1998 and the results of its operations for the
three and nine month periods ended December 31, 1998 and 1997 and cash flows for
the nine month periods ended December 31, 1998 and 1997 have been included.
Operating results for the three and nine month periods ended December
31, 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 Opinion (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
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INTERNATIONAL TOTAL SERVICES, INC.
Notes to Consolidated Financial Statements
Three and Nine Months Ended December 31, 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 December
31, 1998 and December 31, 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income $966 $1,826
Other comprehensive income:
Foreign currency translation adjustments......... (24) (174)
---- ------
Comprehensive income............. $942 $1,652
==== ======
</TABLE>
Total comprehensive income for the nine-month periods ended
December 31, 1998 and December 31, 1997 was as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net income.......................................... $2,713 $3,804
Other comprehensive income:
Foreign currency translation adjustments......... 68 (174)
------ ------
Comprehensive income............. $2,781 $3,630
====== ======
</TABLE>
NOTE C - ACQUISITIONS OF OPERATING CONTRACTS
During the nine months ended December 31, 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.
NOTE D - CONTINGENCIES
In December 1998, the FAA issued a proposed civil penalty in the
amount of $152,000 for alleged violations of Federal Aviation Regulations
pertaining to the Company's drug testing program. The Company is contesting the
proposed penalty and believes that the final outcome will not be material. The
financial statements do not include any provision for this contingency, as the
amount cannot be estimated at this time.
7
<PAGE> 9
INTERNATIONAL TOTAL SERVICES, INC.
Notes to Consolidated Financial Statements
Three and Nine Months Ended December 31, 1998
(Tabular amounts in thousands, except per share and percentage data)
(Unaudited)
NOTE E - SUBSEQUENT EVENTS
In January 1999, two ITS Security Officers were fatally shot and two
others were critically wounded while at a job site in Compton, CA. While the
financial impact of this incident has not yet been determined, management
believes that the Company will be responsible for approximately $250,000 in
damages arising from this incident. The Company will accrue adequate reserves
during the fourth quarter of fiscal 1999 to cover what it believes will be the
ultimate cost of this incident.
NOTE F - PROFORMA RESULTS OF OPERATIONS
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 Dec. 31
--------------------------
1998 1997
------- -------
<S> <C> <C>
Operating revenues....................................... $59,356 $50,719
Net income............................................... $ 966 $ 2,010
Net income per share:
Basic........................................... $ .15 $ .30
Diluted......................................... $ .15 $ .30
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended Dec. 31
-------------------------
1998 1997
------ ------
<S> <C> <C>
Operating revenues....................................... $184,580 $141,582
Net income........................................... $ 3,916 $ 5,339
Net income per share:
Basic........................................... $ .59 $ 1.13
Diluted......................................... $ .59 $ 1.11
</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 Nine Months Ended December 31, 1998
ITEM 2.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1998 and 1997
Revenues. Revenues for the third quarter of fiscal 1999 increased by
$13.1 million, or 28.4 percent, to $59.4 million, as compared with the third
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 $4.0 million to the total
increase in revenues for the quarter. The inclusion of the eleven acquisitions
completed in fiscal 1998 contributed $7.8 million to the increase in revenues.
Internal growth contributed $1.3 million of the increase in revenues in the
third quarter of fiscal 1999 compared with the third quarter of 1998.
Gross Profit. Gross profit was $8.0 million in the third quarter of
fiscal 1999 compared with $7.4 million in the third quarter of fiscal 1998, an
increase of $.6 million, or 8.5 percent. The five acquisitions completed in
fiscal 1999, and the inclusion of operating results from the eleven acquisitions
completed in fiscal 1998, contributed $1.0 million and $1.2 million,
respectively, to the increased gross profit. As a percentage of revenues, gross
profit declined to 13.6 percent in fiscal 1999, from 16.0 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 forced the Company to raise the wages paid to employees in
advance of negotiating increases in the rates paid by the Company's customers
and has resulted in the Company's payment of increased overtime. 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 third quarter of fiscal 1999 were $5.1 million
compared with $4.0 million in the prior year, an increase of $1.1 million, or
27.2 percent. Measured as a percentage of operating revenues, these expenses
were 8.5 percent in the third quarter of fiscal 1999 and 8.7 percent in the
third quarter of last year.
Contract and Goodwill Amortization. Contract and goodwill amortization
expense increased to $0.6 million in the third quarter of fiscal 1999 from $0.3
million in the third 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. Net interest expense in the third quarter of fiscal
1999 was $0.3 million compared with net interest income of $0.06 million in the
prior year. The Company completed its initial public offering of common shares
during the third quarter of fiscal 1998 and as such had lower average borrowings
in last year's third quarter. The increase in net interest expense is a result
of higher average borrowings in fiscal 1999.
9
<PAGE> 11
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Nine Months Ended December 31, 1998
Income Taxes. The Company's effective income tax rates were 40.7
percent and 40.2 percent for the third quarter of fiscal 1999 and 1998,
respectively.
Net Income. As a result of the foregoing factors, the Company's net
income decreased to $1.0 million for the third quarter of fiscal 1999 compared
with $1.8 million in the third quarter of fiscal 1998. As a percentage of
operating revenues, net income was 1.7 percent compared with 3.9 percent in the
prior year.
Nine Months Ended December 31, 1998 and 1997
Revenues. Revenues for the first nine months of fiscal 1999 increased
by $51.7 million to $174.9 million, or 42.0 percent as compared with the first
nine months of fiscal 1998. The increase is primarily attributable to an
increase in revenues from the five acquisitions completed during the current
fiscal year, the inclusion of revenues from the eleven acquisitions completed in
fiscal 1998 and internal growth. The five acquisitions completed in fiscal 1999,
which were primarily non-aviation security service contracts, contributed $7.9
million to the total increase in revenues. The inclusion of the eleven
acquisitions completed in fiscal 1998 contributed $37.8 million to the increase
in revenues. Internal growth contributed $6.0 million of the increase in
revenues in the first nine months of fiscal 1999 compared with the first nine
months of 1998.
Gross Profit. Gross profit was $23.8 million in fiscal 1999 compared
with $20.3 million in fiscal 1998, an increase of $3.5 million, or 17.2 percent.
The five acquisitions completed in fiscal 1999, and the inclusion of operating
results from the eleven acquisitions completed in fiscal 1998, contributed $1.8
million and $5.4 million, respectively to the increased gross profit. As a
percentage of revenues, gross profit was 13.6 percent in fiscal 1999, compared
with 16.5 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 nine months of fiscal 1999 were $15.4
million compared with $12.0 million in the prior year, an increase of $3.4
million, or 27.8 percent. Measured as a percentage of operating revenues, these
expenses were 8.8 percent in fiscal 1999 and 9.8 percent in the first nine
months of last year. This decrease is primarily due to the synergies realized
from the Company's acquisition program.
Contract and Goodwill Amortization. Contract and goodwill amortization
expense increased $1.1 million to $1.7 million in the first nine months of
fiscal 1999 from $0.6 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.
10
<PAGE> 12
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Nine Months Ended December 31, 1998
Interest Expense. Net interest expense decreased in the first nine
months of fiscal 1999 to $0.6 million from $0.7 million in the prior year. The
decrease is a result of lower average interest rates and lower average
borrowings in fiscal 1999.
Income Taxes. The Company's effective income tax rates were 41.3
percent and 41.2 percent for the first nine months of fiscal years 1999 and
1998, respectively.
Net Income. As a result of the above factors, the Company's net income
decreased to $2.7 million for the first nine months of fiscal 1999 compared with
$3.8 million in fiscal 1998. As a percentage of operating revenues, the first
nine months of fiscal year 1999's net income was 1.5 percent compared with 3.1
percent in the prior year.
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $2.3 million in cash in the first nine
months of fiscal 1999, a net increase of $5.8 million when compared to the $3.5
million used by operating activities last year. The net increase was primarily
attributable to a decreased year-over-year investment in accounts receivable and
a change in the level of accrued expenses.
While accounts receivable increased $4.0 million to $24.8 million
arising primarily from acquisitions, the increase was $3.5 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 level of
acquisitions year-over-year resulting in a smaller incremental investment in
accounts receivable.
The impact on operating cash flows from accrued expenses was due
primarily to the timing of payment of these expenses resulting in a favorable
year-over-year comparison of $3.2 million.
Investing activities used $10.7 million, a decrease of $3.7 million
over the same period in fiscal 1998. With regard to investing activities, $8.6
million relates to investments in acquisitions compared with $13.6 million in
fiscal 1998. Capital expenditures increased $1.6 million to $2.5 million in the
first nine months of fiscal 1999 compared with the first nine 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 $11.3 million, compared with $20.4
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.
11
<PAGE> 13
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Nine Months Ended December 31, 1998
The Company has a two-year revolving credit facility providing maximum
availability of $30 million subject to certain borrowing base limitations. At
December 31, 1998, the Company had approximately $6.6 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
coverage ratios, minimum net worth levels, and to satisfy certain other
financial covenants. The Company was in compliance with such covenants at
December 31, 1998.
The Company believes that operating cash flows and amounts available
under its credit facility are sufficient to meet its anticipated cash
requirements.
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 enterprises software package, which processes payroll, accounts
payable, accounts receivable and financial accounting transactions, and the
Company's time and attendance system.
The version of 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 underway and
is anticipated to 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 $0.2 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 September 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.
12
<PAGE> 14
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three and Nine Months Ended December 31, 1998
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) circumstances and 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 and services and commercial security industries. Readers
are cautioned not to place undue reliance on forward looking statements. Factors
that could cause actual results to differ materially from projected results
include, but are not limited to, those factors discussed in the "Risk Factors"
section of the prospectus contained in the Company's Registration Statement on
Form S-1 (Registration No. 333-29463), as amended.
ITEM 3.
Quantitative and Qualitative Disclosures
About Market Risk
Not material.
13
<PAGE> 15
INTERNATIONAL TOTAL SERVICES, INC.
PART II - OTHER INFORMATION
ITEM 6 - Exhibits and Reports on Form 8 - K
----------------------------------------------
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description
-------------- -----------
<S> <C>
27 Financial Data Schedule (For SEC Filing Purposes Only)
</TABLE>
(b) Reports on Form 8 - K
No reports on Form 8-K have been filed during the quarter for
which this report is filed.
14
<PAGE> 16
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.
February 12, 1999 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
15
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 3,962,000
<SECURITIES> 0
<RECEIVABLES> 24,948,000
<ALLOWANCES> 136,000
<INVENTORY> 0
<CURRENT-ASSETS> 34,776,000
<PP&E> 12,129,000
<DEPRECIATION> 5,717,000
<TOTAL-ASSETS> 73,936,000
<CURRENT-LIABILITIES> 19,804,000
<BONDS> 0
0
0
<COMMON> 67,000
<OTHER-SE> 41,817,000
<TOTAL-LIABILITY-AND-EQUITY> 73,936,000
<SALES> 174,907,000
<TOTAL-REVENUES> 174,907,000
<CGS> 151,142,000
<TOTAL-COSTS> 168,176,000
<OTHER-EXPENSES> 1,521,000
<LOSS-PROVISION> 81,000
<INTEREST-EXPENSE> 591,000
<INCOME-PRETAX> 4,619,000
<INCOME-TAX> 1,906,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,713,000
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
</TABLE>
