<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 June 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
----------------------------
- --------------------------------------------------------------------------------
Indicated by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
---- ----
As of August 14, 1998, the Registrant had 6,662,494 Common Shares issued and
outstanding.
<PAGE> 2
INTERNATIONAL TOTAL SERVICES, INC.
10-Q
INDEX
-----
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets
June 30, 1998 and March 31, 1998.......................................................2
Consolidated Statements of Income
Three Months Ended June 30, 1998 and 1997..............................................3
Consolidated Statements of Cash Flows
Three Months Ended June 30, 1998 and 1997..............................................4
Notes to Consolidated Financial Statements........................................................5
ITEM 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................7
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk............................................9
PART II OTHER INFORMATION
ITEM 5 OTHER INFORMATION........................................................................................10
ITEM 6 Exhibits and Reports on Form 8 - K....................................................................10
</TABLE>
1
<PAGE> 3
ITEM 1
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
June 30, 1998 March 31, 1998
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
- ------
Current Assets
Cash and cash equivalents $ 3,011 $ 1,032
Accounts receivable - net of allowance for doubtful accounts of $144
and $100 as of June 30, 1998 and March 31, 1998, respectively 21,407 20,768
Deferred taxes 1,453 1,453
Uniforms 2,805 2,686
Other current assets 2,582 1,684
-------- --------
Total current assets 31,258 27,623
Property and Equipment
Security equipment 4,143 3,682
Service equipment 2,656 2,362
Computer equipment 2,127 2,049
Furniture and fixtures 1,023 994
Leasehold improvements 56 56
Autos 1,612 1,607
-------- --------
11,617 10,750
Less accumulated depreciation and amortization 5,473 5,255
-------- --------
Property and equipment - net 6,144 5,495
Intangibles, less accumulated amortization of $2,138 and $1,636 as of
June 30, 1998 and March 31, 1998, respectively 29,207 25,295
Security deposits and other 154 154
-------- --------
29,361 25,449
-------- --------
Total Assets $ 66,763 $ 58,567
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
- ------------------------------------
Current Liabilities
Trade accounts payable $ 5,639 $ 4,590
Accrued payroll and payroll taxes 13,122 11,938
Other accrued expenses 1,820 1,860
Income taxes payable 200 98
-------- --------
Total current liabilities 20,781 18,486
Deferred taxes 434 434
Long-Term Obligations 5,951 544
Shareholders' Equity
Common shares, without par value, stated at $.01 per share -
authorized 20,000 shares, issued and outstanding 6,662
at June 30, 1998 and March 31, 1998 67 67
Additional paid-in capital 31,211 31,211
Accumulated other comprehensive loss (158) (204)
Retained earnings 8,477 8,029
-------- --------
39,597 39,103
-------- --------
Total liabilities and shareholders' equity $ 66,763 $ 58,567
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended June 30, 1998 and June 30, 1997
(Amounts in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------------------ -------------------------
<S> <C> <C> <C> <C>
Operating revenues $56,614 100.0% $38,364 100.0%
Cost of operating revenues 49,489 87.4% 31,824 83.0%
------- ----- ------- ---
Gross Profit 7,125 12.6% 6,540 17.0%
Selling, general and administrative expenses 5,289 9.3% 4,309 11.2%
Contract and goodwill amortization 502 0.9% 171 0.4%
------- ----- ------- ---
Operating Profit 1,334 2.4% 2,060 5.4%
Other 524 0.9% 159 0.4%
Interest expense-net 90 0.2% 414 1.1%
------- ----- ------- ---
614 1.1% 573 1.5%
------- ----- ------- ---
Income before income taxes 720 1.3% 1,487 3.9%
Income taxes 272 0.5% 634 1.7%
------- ----- ------- ---
Net Income $ 448 0.8% $ 853 2.2%
======= ===== ======= ===
Net Income per share:
Basic $ 0.07 $ 0.23
======= =======
Diluted $ 0.07 $ 0.23
======= =======
Weighted average number of shares:
Basic 6,662 3,655
======= =======
Diluted 6,747 3,655
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
INTERNATIONAL TOTAL SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended June 30, 1998 and June 30, 1997
(Amounts in thousands)
(Unaudited)
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
------------- -------------
<S> <C> <C>
Operating Activities:
Net Income $ 448 $ 853
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation 295 244
Amortization 502 171
Other (1) 3
Changes in working capital:
Accounts receivable (639) (3,214)
Other current and noncurrent assets (1,017) (552)
Trade accounts payable 1,049 152
Accrued expenses 1,246 (231)
------- -------
Net cash provided by (used in) operating activities 1,883 (2,574)
Investing Activities:
Additions to property and equipment (895) (298)
Proceeds received from sale of equipment 18 11
Payments for acquisitions of businesses (4,309) --
------- -------
Net cash used in investing activities (5,186) (287)
Financing Activities:
Net borrowings (payments) on note payable to bank 5,407 3,219
Other - (99)
------- -------
Net cash provided by financing activities 5,407 3,120
Effect of exchange rates on cash (125) --
------- -------
Net (Decrease) Increase in Cash and Cash Equivalents 1,979 259
Cash and Cash Equivalents, at Beginning of Year 1,032 1,452
------- -------
Cash and Cash Equivalents, at End of Period $ 3,011 $ 1,711
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
INTERNATIONAL TOTAL SERVICES, INC.
Notes to Consolidated Financial Statements
Three Months Ended June 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 June 30, 1998 and the results of its operations and cash
flows for the three month periods ended June 30, 1998 and 1997 have been
included.
Operating results for the three month period ended June 30, 1998 are
not necessarily indicative of the results that may be expected for the year
ended 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 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.
5
<PAGE> 7
INTERNATIONAL TOTAL SERVICES, INC.
Notes to Consolidated Financial Statements
Three Months Ended June 30, 1998
(Tabular amounts in thousands, except per share and percentage
data)
(UNAUDITED)
NOTE B - OTHER COMPREHENSIVE INCOME
The Company adopted SFAS No. 130, "Reporting Comprehensive Income", in
the first quarter of fiscal 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 June 30,
1998 and June 30, 1997 was as follows:
<TABLE>
<CAPTION>
June 30, June 30,
1998 1997
---------- ----------
<S> <C> <C>
Net income.......................................... $ 448 $ 853
Other comprehensive income:
Foreign currency translation adjustments,
net of related tax effects....................... 46 -
---------- ----------
Comprehensive income........................ $ 494 $ 853
========== ==========
</TABLE>
NOTE C - ACQUISITIONS OF OPERATING CONTRACTS
During the three months ended June 30, 1998, the Company acquired
aviation service and commercial security contracts from three entities for an
aggregate purchase price of approximately $3.7 million. The Company believes
that the purchase of these contracts is substantially equivalent to the
purchase of a business. Accordingly, the acquisitions have been accounted for
under the purchase method of accounting. The purchase prices have been
allocated to the contracts and, where applicable, covenants not to compete,
based upon their estimated fair market values; the excess of the purchase
prices over those values have been allocated to goodwill, which is being
charged to operations on a straight-line basis over 20 years. The operating
results related to the acquired contracts have been included in the Company's
results of operations from the respective dates of acquisitions.
The following unaudited pro forma results of operations give effect to
the above acquisitions as if the three acquisitions, made during the first
quarter of fiscal 1999, had been made at April 1, 1997.
<TABLE>
<CAPTION>
Three Months Ended June 30
--------------------------
1998 1997
------------ ---------
<S> <C> <C>
Operating revenues............................................$ 57,480 $ 40,350
Net income....................................................$ 409 $ 847
Net income per share:
Basic................................................$ .06 $ .23
Diluted..............................................$ .06 $ .23
</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.
6
<PAGE> 8
ITEM 2
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended June 30, 1998
RESULTS OF OPERATIONS
Revenues. Revenues for the first quarter of fiscal 1999 increased by
$18.2 million to $56.6 million, or 47.4% as compared with the first quarter of
fiscal 1998. The increase is primarily attributable to an increase in revenues
from the three acquisitions completed during the current fiscal year and the
inclusion of revenues from the eleven acquisitions completed in fiscal 1998. The
three acquisitions completed in fiscal 1999, which were primarily in industrial
security services, contributed $1.1 million to the total increase in revenues
for the quarter. The inclusion of the eleven acquisitions completed in fiscal
1998 contributed $12.5 million to the increase in revenues. Internal growth
contributed $4.6 million to the increase in revenues in the first quarter of
fiscal 1999 compared with the first quarter of 1998.
Gross Profit. Gross profit was $7.1 million in fiscal 1999 compared
with $6.5 million in fiscal 1998, an increase of $0.6 million, or 9.2%. The
three acquisitions completed in fiscal 1999, and the inclusion of operating
results from the eleven acquisitions completed in fiscal 1998, contributed $0.2
million and $1.7 million, respectively to the increased gross profit. As a
percentage of revenues, gross profit was 12.6% in fiscal 1999, compared with
17.0% 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 increase the wages paid to employees in advance of increases in the
rates paid by the Company's customers. These factors have resulted in downward
pressure on the Company's gross margins. The Company is currently implementing
operational strategies that the Company believes will improve its gross margins,
however, there can be no assurance that these strategies will be successful.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses in the first quarter fiscal 1999 were $5.3 million
compared with $4.3 million in the prior year, an increase of $1.0 million, or
23.3%. Measured as a percentage of operating revenues, these expenses were 9.3%
in the first quarter of fiscal 1999 and 11.2% last year. This decrease reflects
the synergies realized from the Company's acquisition program.
Contract and Goodwill Amortization. Contract and goodwill amortization
expense increased $0.3 million to $0.5 million in the first quarter of fiscal
year 1999 from $0.2 million in the first quarter of fiscal year 1998. The
increase is a result of the eleven acquisitions completed in fiscal 1998 and the
three acquisitions completed in the first quarter of fiscal 1999.
Interest Expense. Interest expense decreased in the first quarter of
fiscal 1999 to $0.1 million from $0.4 million in the prior year. The decrease
of $0.3 million is a result of the application of proceeds from the Company's
initial public offering completed in September 1997 to the payment of
debt.
Income Taxes. The Company's effective income tax rates were 37.8% and
42.6% the first quarter of fiscal years 1999 and 1998, respectively.
Net Income. As a result of the above factors, the Company's net income
decreased to $0.4 million for the first quarter of fiscal year 1999 compared
with $0.8 million for the first quarter of fiscal 1998. As a percentage of
operating revenues, the first quarter of fiscal year 1999's net income of 0.8%
decreased 1.4% from the prior year's 2.2%.
7
<PAGE> 9
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended June 30, 1998
LIQUIDITY AND CAPITAL RESOURCES
Operating activities provided $1.9 million in cash in the
first quarter of fiscal 1999, a net increase of $4.5 million when
compared to the $2.6 million used last year. The net increase was
primarily attributable to a lower increase in accounts receivable, and
increases in accrued expenses and trade accounts payable. These
factors were partially offset by increases in other current and
noncurrent assets and amortization expense and the reduction in net
income.
While accounts receivable increased $0.7 million to $21.5
million, the increase was $2.5 million lower than the increase
experienced last year. The accounts receivable increase in fiscal 1998
of $3.2 million was due mainly to an aviation contract acquired in the
first quarter of fiscal 1998.
The current year increases in trade accounts payable and
accrued expenses resulted primarily from accruals associated with the
growth of the Company's revenues.
Investing activities used $5.2 million, an increase of $4.9
million over fiscal year 1998. The increase was primarily the result of
three acquisitions totaling $3.7 million completed in the first quarter
of fiscal 1999. Capital expenditures increased $0.6 million to $0.9 in
the first quarter of fiscal year 1999 compared to 1998.
The Company anticipates making capital expenditures in fiscal
1999 of approximately $1.6 million, primarily related to office space
and equipment improvements and computer software and systems. In
addition, the Company anticipates that it will continue making
significant expenditures to fund its ongoing acquisition program.
Financing activities provided $5.3 million, an increase of
$2.1 million over fiscal year 1998. These proceeds were primarily used
to fund the three acquisitions and capital expenditures during fiscal
year 1999.
The Company has a two-year revolving credit facility providing
maximum availability of $30 million, subject to certain borrowing base
limitations. This facility expires in September 1999 and is secured by
substantially all of the Company's assets. The interest rate on this
credit facility is based on either LIBOR or the bank's base lending
rate, plus a margin depending on the Company's ratio of its debt to
tangible net-worth. Borrowings under this credit facility currently
bear interest at LIBOR plus 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, and minimum net worth levels, and to satisfy certain other
financial covenants.
The Company believes that operating cash flows and amounts
available under its credit facility will be sufficient to meet its
anticipated cash requirements through the end of fiscal 1999.
8
<PAGE> 10
INTERNATIONAL TOTAL SERVICES, INC.
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Three Months Ended June 30, 1998
Year 2000 Business Matters
The Company is currently installing an updated version of the system
that processes the majority of its transactions. The Company has been
informed by its vendors that this updated version is fully year 2000 compliant.
The Company believes that this updated version will be fully operational before
year 2000 issues begin to impact the Company. The Company does not anticipate
that the cost of installing this updated version will be material to its
financial position or results of operations. In addition, the Company will
perform an internal review of its other information systems to determine if any
other areas of exposure exist. The cost of this new version and of any other
new information systems will be capitalized and depreciated over their
estimated useful lives for financial reporting purposes.
Forward Looking Statements
This Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A) contains statements that constitute forward looking
statements. Those statements appear in a number of places in this MD&A and
include statements regarding the intent, belief or current expectations of
International Total Services, Inc., its directors or its officers with respect
to (i) potential acquisitions by the Company; (ii) the Company's financing
plans; and (iii) trends affecting the Company's financial condition or results
of operations.
Prospective investors are cautioned that any forward looking statements
in this MD&A are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. Forward looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from projected results, including unanticipated losses of service
contracts, conditions in the aviation industry, and negative publicity regarding
the airline security 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.
9
<PAGE> 11
INTERNATIONAL TOTAL SERVICES, INC.
Part II - OTHER INFORMATION AND SIGNATURE
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:
<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.
10
<PAGE> 12
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 5, 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)
11
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,011,000
<SECURITIES> 0
<RECEIVABLES> 21,551,000
<ALLOWANCES> 144,000
<INVENTORY> 0
<CURRENT-ASSETS> 31,258,000
<PP&E> 11,617,000
<DEPRECIATION> 5,473,000
<TOTAL-ASSETS> 66,763
<CURRENT-LIABILITIES> 20,781
<BONDS> 0
0
0
<COMMON> 67,000
<OTHER-SE> 39,530,000
<TOTAL-LIABILITY-AND-EQUITY> 66,763,000
<SALES> 56,614,000
<TOTAL-REVENUES> 56,614,000
<CGS> 49,489,000
<TOTAL-COSTS> 55,280,000
<OTHER-EXPENSES> 524,000
<LOSS-PROVISION> 27,000
<INTEREST-EXPENSE> 90,000
<INCOME-PRETAX> 720,000
<INCOME-TAX> 272,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 448,000
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
