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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended March 31, 1999
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 Charter)
OHIO 34-1264201
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(State of Incorporation) (I.R.S. Employer Identification No.)
5005 ROCKSIDE ROAD, SUITE 1200
INDEPENDENCE, OHIO 44131
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(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (216) 642-4522
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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None N/A
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
TITLE OF EACH CLASS
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Common Shares, without par value
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 [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common shares held by non-affiliates
of the registrant, based upon the closing market price on April 7, 2000, was
approximately $5,491,213, (based on the closing price of the registrant's Common
Stock on the Electronic Quotation System of the National Quotation Bureau LLC).
As of April 7, 2000, the registrant had 6,837,494 shares of Common Stock issued
and outstanding.
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TABLE OF CONTENTS
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PAGE
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PART I
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Item 1. Business......................................................................................... 1
Item 2. Properties....................................................................................... 8
Item 3. Legal Proceedings................................................................................ 8
Item 4. Submission of Matters to a Vote of Security Holders.............................................. 9
Executive Officers............................................................................... 9
PART II
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Item 5. Market for Registrant's Common Shares and Related Shareholder Matters............................ 11
Item 6. Selected Financial Data.......................................................................... 12
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................................................ 12
Item 7A. Quantitative and Qualitative Disclosures about Market Risk....................................... 19
Item 8. Consolidated Financial Statements and Supplementary Data......................................... 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure......................................................................... 20
PART III
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Item 10. Directors and Executive Officers of the Registrant............................................... 20
Item 11. Executive Compensation........................................................................... 22
Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 26
Item 13. Certain Relationships and Related Transactions................................................... 28
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................. 28
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FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K (this "Form 10-K") contains statements
that constitute forward looking statements. Those statements appear in a number
of places in this Form 10-K and in the documents incorporated by reference
herein and include statements regarding the intent, belief or current
expectations of International Total Services, Inc., an Ohio corporation (the
"Company" or "ITS"), 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.
Readers are cautioned that any forward looking statements in this Form
10-K 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 the Company's ability to payoff or refinance
its bank credit facility, unanticipated losses of service contracts, economic
and labor conditions in the aviation industry and commercial security industry,
the transition to new management, and negative publicity regarding the airline
security and services and commercial staffing services industries. Readers are
cautioned not to place undue reliance on forward looking statements. Other
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.
PART I
ITEM 1. BUSINESS
The Company's fiscal year ends on March 31, and its fiscal years are
identified by reference to the calendar year in which they end. For example, the
fiscal year ended March 31, 1999 is referred to as "fiscal 1999."
RECENT DEVELOPMENTS
Change in Control
On October 19, 1999, Robert A. Weitzel ("Weitzel") resigned as the
chairman, chief executive officer and director of the Company and entered into
certain additional arrangements. As of November 1, 1999, Weitzel entered into a
retirement and consulting agreement (the "Retirement and Consulting Agreement")
with the Company. This agreement required the Company to pay Weitzel $300,000 on
November 1, 1999 and $200,000 on January 3, 2000; and provide certain other
standard employment benefits through September 30, 2001. In addition, the
Company will pay Weitzel an aggregate of $500,000 under a 20 month consulting
agreement beginning February 1, 2000. The Company is obligated to pay Weitzel
the $500,000 consulting fee whether or not any services are provided. The
Retirement and Consulting Agreement also provided that Weitzel enter into a
voting trust agreement (the "Voting Trust Agreement") among the Company,
Weitzel, and H. Jeffrey Schwartz, J. Jeffrey Eakin and John P. O'Brien, as
voting trustees (the "Trustees"), and a stock restriction agreement between
Weitzel and the Company (the "Stock Restriction Agreement"). The three Trustees
constitute the entire Board of Directors of the Company as of the date of the
filing of this Form 10-K. Pursuant to the Voting Trust Agreement, Weitzel
transferred record ownership, and thereby voting control, of 3,324,979 shares of
the Company's Common Stock, representing approximately 48.6% of the issued and
outstanding shares of the Company's Common Stock, ("Common Stock") held by
Weitzel individually and by The Weitzel Family Limited Partnership to the voting
trust (the "Voting Trust") created by the Voting Trust Agreement. Pursuant to
the Voting Trust Agreement, a voting trust certificate was issued and delivered
to Weitzel.
The Voting Trust Agreement provides that all shares of the Common Stock
beneficially owned or acquired by Weitzel are placed in trust until the earlier
of September 30, 2001 or a payment default by the Company under certain
provisions of the Retirement and Consulting Agreement. Pursuant to the Voting
Trust Agreement, the Trustees exercise voting power with respect to the shares
of the Common Stock held in the Voting Trust, by the action of a majority of the
Voting Trustees. In addition, pursuant to the Stock Restriction Agreement, other
than transfers to his spouse, children, or grandchildren, or entities of which
those people are the beneficiaries or hold controlling interests, Weitzel is not
permitted to
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transfer shares of the Common Stock, or voting trust certificates, without first
offering those shares on identical terms to the Company, and the Company has a
specified period of time during which it may exercise its option to purchase
those shares.
In October 1999, the Company's Board of Directors named Mark D.
Thompson, President and Interim Chief Executive Officer.
Delisting of Common Shares
In June 1999, the Company announced that its Annual Report on Form 10-K
for the fiscal year ended March 31, 1999 would not be filed with the Securities
and Exchange Commission by the prescribed due date.
On July 1, 1999, the Company was informed by the Nasdaq Stock Market
that trading of the Common Stock on that market, would be halted pending the
receipt and review of additional information in accordance with Rule 4330 (c) of
Marketplace Rules of the Nasdaq Stock Market. The primary cause for the halt was
the Company's failure to timely file its Form 10-K for the fiscal year ended
March 31, 1999, which was originally due on or before July 1, 1999. On September
15, 1999, after an oral hearing on September 9, 1999, the Common Stock was
delisted from the Nasdaq Stock Market. On October 26, 1999 price quotes for the
Common Stock began appearing in the Electronic Quotation System of the National
Quotation Bureau LLC.
Other Developments
The Company received a letter dated August 20, 1999 from Arthur
Andersen LLP, the Company's independent public accountants, addressed to the
Audit Committee of the Board of Directors. The letter indicated that Arthur
Andersen had noted certain matters related to the accounting systems and
internal controls of the Company that they considered to be a "material
weakness" and recommended that the Company take steps to improve internal
accounting control procedures. A special committee of the Board of Directors was
established to, among other things, monitor the Company's progress in addressing
this weakness. The Company has addressed or implemented procedures to improve
controls related to certain issues of the identified material weakness and is in
the process of addressing the remaining issues with completion expected during
fiscal 2001.
In February 2000, the Company announced that as a result of facts
uncovered during the audit of its financial statements for fiscal 1999, the
fiscal 1999 quarters and the prior year financial statements required
restatement. The restated financial statements are included elsewhere herein.
The Company incurred a substantial operating loss in fiscal 1999 and
fiscal 2000 results will also reflect a substantial operating loss and negative
cash flow from operations. The Company's current cash flow and forecasted cash
flow raise substantial doubts about the Company's ability to continue as a going
concern. The factors which raise such doubts, and management's plans to address
them, are discussed further in ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS, and NOTE B OF NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS, contained elsewhere herein.
The Company's strategy is to use its established business base as a
platform for expanding its services and currently will not pursue any further
acquisitions (other than the two already consummated during the first quarter of
fiscal 2000) due to the unavailability of funds. It is management's intention
to seek higher overall margins by concentrating its marketing efforts on higher
margin opportunities, to formulate and implement business process improvement
initiatives, evaluate past acquisitions, improve customer services and reduce
and/or control costs with the goal of improving operating cash flow and profits.
There can be no assurance that capital will be obtained from any sources or
that this plan will be successful.
The Company's continuation as a going concern will ultimately depend on
its ability to (i) achieve profitable operations which generate positive cash
flows and (ii) obtain other sources of capital with new debt or equity
financing. The financial statements do not include any adjustments relating to
the recoverability of assets or the amount to settle liabilities that might be
necessary should the Company be unable to continue as a going concern.
COMPANY OVERVIEW
The Company is a significant domestic provider of aviation contract
support services and is a provider of commercial security staffing services. The
Company provides services to customers in more than 300 cities in the United
States and Europe. Aviation services offered by the Company include skycap,
baggage handling and aircraft appearance services, and wheelchair and electric
cart operations. The Company's security services extend beyond aviation
security, and include the provision of commercial security staffing services to
government and business clients, hospitals, arenas and museums. In September
1997, the Company completed its initial public offering (the "Initial
Offering"). The Company used the proceeds from the Initial Offering to fund
acquisitions, repay indebtedness and for general corporate purposes, including
funding of working capital.
The Company's strategy is to use the Company's established business
base as a platform for expanding the services that it provides.
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From the Initial Offering through June 30, 1999, the Company completed 18
acquisitions. Management intends to assess the impact and strategic benefits of
past acquisitions and, when appropriate, make strategic recommendations to the
Board of Directors concerning acquired companies and/or business segments. In
March 2000, the Company completed the disposition of Metroplex Control Systems
Inc. which was acquired in May 1999. See Acquisitions. The Company is not
presently pursuing acquisitions, and does not anticipate that acquisitions will
materially contribute to growth in the foreseeable future.
The Company's new management team has initiated a thorough operational
audit of each of the Company's business segments. Working with selected
consultants, management hopes to effectively evaluate the performance of each
segment and the profitability of each significant customer relationship. It is
management's intention to formulate and implement business process improvement
initiatives which will improve customer service, control costs and facilitate
timely and accurate public reporting. However, there can be no assurance that
the Company will be able to obtain and successfully deploy the necessary
technical, operational, financial, human and other resources necessary to
implement these initiatives or that these initiatives will achieve their desired
results.
The current strength of the United States economy, which has driven
unemployment to low levels, has adversely affected 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 margins.
The Company operates in a rapidly changing and dynamic market, and the
Company's strategies and plans are designed to adapt to changing market
conditions where and when possible. However, there can be no assurance that the
Company's management will identify the risks (especially those newly emerging
from time to time) affecting, and their impact on, the Company and its business.
Further, there is no assurance that the Company's strategies and plans will take
into account all market conditions or that such strategies and plans will be
successfully implemented. Accordingly, neither the historical results presented
in the Company's consolidated financial statements and discussed herein, nor any
forward-looking statements in this Form 10-K, are necessarily indicative of the
Company's future results.
INDUSTRY OVERVIEW
Aviation Staffing Services
GENERAL. In 1973, the Federal Aviation Administration (the "FAA")
mandated that airlines conduct predeparture screening of all passengers at most
airports in the U.S. Because the labor-intensive nature of predeparture
screening imposes substantial administrative burdens, most airlines have opted
to contract out predeparture screening and other security services to third
party contractors. Certain other airline services, such as food service and
fueling, historically have also been contracted out by the airlines. In the past
several years, market forces have driven airlines to outsource a number of
additional labor-intensive aviation services in order to permit airline
management to focus on the essential aspects of the airline business and to
reduce labor, benefit costs and administrative overhead. As the costs of labor
have increased, airlines have frequently outsourced baggage claim services,
skycap, baggage handling, aircraft appearance, wheelchair assistance services
and inter-gate cart services. Ticketing and check-in services are also beginning
to be outsourced.
PREDEPARTURE SCREENING. The Company is a leading provider of domestic
airline predeparture screening services. The Company currently employs
predeparture screeners at 129 U.S. airports in 41 states. The Company's
predeparture screening services include conducting x-ray or electromagnetic
inspection of all carry-on baggage, manual searches of suspicious baggage and
metal-detector searches of all passengers. The Company derived approximately
32.3%, 36.7% and 50.0% of its revenues from predeparture screening services in
fiscal 1999, 1998 and 1997, respectively.
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RAMP AND GROUND HANDLING SERVICES. The ramp and ground handling
services provided by the Company include: conveyance of checked baggage from
terminal to baggage compartment of plane and from plane to baggage carousel;
cleaning interior sections of the aircraft between flights and at the end of the
aircraft's flight day; washing the exterior of aircraft; emptying on-board
lavatories and replacing the water source with potable water; and spraying
ice-melting substance on aircraft in accordance with customer specifications.
The Company derived approximately 26.2%, 32.4% and 14.2% of its revenues from
ramp and ground handling services in fiscal 1999, 1998, and 1997, respectively.
AIRLINE SECURITY STAFFING SERVICES. The Company provides passenger
profiling services and document verification agents, primarily in Europe, where
airlines and airports have been required by regulatory agencies and the
political climate to devote significant resources to the prevention of terrorist
activity. Airlines contract with the Company to provide document verification
(customs) agents who interview passengers as they embark or disembark a country
via an international flight. In the domestic market, the Company also provides
security for parked aircraft and employee parking lots, and the checking of
employee identification cards and baggage. Airline security services other than
predeparture screening did not represent a significant percentage of the
Company's revenues in any of the last three fiscal years.
OTHER AVIATION STAFFING SERVICES. The Company's other aviation services
include providing skycaps for curbside check-in, baggage assistance and help
with routine passenger problems, wheelchair operators to transport disabled or
elderly passengers to and from the check-in area and the plane, and electric
cart drivers to provide inter-gate transportation for passengers who need to
board flights at distant gates. The Company derived approximately 12.3%, 12.4%
and 19.6% of its revenues from these services in fiscal 1999, 1998 and 1997,
respectively.
Commercial Security Staffing Services
The Company provides uniformed security officer services, business and
facility access control, security consulting, special event security and
security assessment to a broad range of commercial clients and owners or
managers of commercial offices, government buildings, airports, hospitals,
malls, distribution centers, sports arenas, museums and other facilities. The
Company entered the commercial security market in the early 1990's to further
capitalize on its staffing services experience. The Company derived
approximately 22.4%, 12.0% and 7.6% of its net revenues from commercial security
staffing services in fiscal 1999, 1998 and 1997, respectively.
Security Products Distribution
In addition to service offerings to the airline industry, the Company
distributes a line of security products through its wholly-owned subsidiary,
Crown Technical Systems, Inc. ("CTS"), including airport and commercial security
checkpoint products and hand-held metal detectors. CTS markets access control
equipment, including swipe card and other products to control access to secured
areas, and closed circuit television monitoring equipment to domestic and
international customers. The Company derived approximately 1.9%, 2.1% and 2.9%
of its net revenues from sales of security products in fiscal 1999, 1998 and
1997, respectively.
GROWTH
Prior to the Change in Control described above in "ITEM 1. BUSINESS -
Recent Developments", the Company had aggressively pursued acquisitions since
the Initial Offering in 1997. It is the view of the Company's current management
team that the Company's cost of capital makes it extremely difficult to find
attractive acquisitions at this time, given historical and prevailing operating
margins in the Company's lines of business which limit the effective yield of
capital invested in such acquisitions. The Company's credit facility also
prohibits any further acquisitions at this time. As a result, management intends
to instead focus on a renewed emphasis on sales and service, seeking an
expansion of services provided to existing customers and actively pursuing
contracts with new customers.
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ACQUISITIONS
Historically, when making a domestic acquisition, the Company generally
acquired only existing contracts and the equipment needed to fulfill the
contracts.
During fiscal 1999, the Company acquired the contracts and related
property and equipment from six companies for aggregate cash payments of $9.7
million. Two of these acquisitions were in the aviation staffing services
segment and four were in commercial security staffing services.
Since the end of fiscal 1999, the Company has completed two
acquisitions: (1) American Investigative Services, Inc., a commercial security
staffing business based in Houston, Texas, was acquired in April 1999 for $1.5
million in cash; and (2) Metroplex Control Systems, Inc. ("MCS"), which sells,
installs and services fire detectors, detention control and other security
systems from its Dallas, Texas headquarters, was acquired in June 1999 for $5.0
million in cash. The Company completed the disposition of MCS on March 10, 2000
for cash in an amount approximately equal to its net cash investment in MCS.
The Company is not presently pursuing further acquisitions, and does
not anticipate that acquisitions will materially contribute to growth in the
foreseeable future.
COMPETITION
Aviation Staffing Services
PREDEPARTURE SCREENING. Contracts for predeparture screening services
tend to be highly competitive among a handful of experienced providers and are
generally awarded to the low-cost provider. At the same time, the airlines are
sensitive about security lapses and may cancel a contract based on even minor
security breaches. Currently, the Company faces the same challenge as its
competitors do--finding qualified employees to provide consistent service at the
wage rates offered by the airlines for screeners in the current economic
environment. See "Company Overview - General". The Company's principal
competitors in domestic predeparture screening include Globe Aviation Securities
Corporation, AHL Services, Inc. and Huntleigh, Inc.
In the international security market the Company strives to distinguish
itself by developing training programs and screening methods that meet the
demands of its customers. The Company's passenger profilers are trained in
questioning techniques that are designed to elicit cooperation and to avoid
offense to innocent travelers. The Company's main competitors for international
profiling and screening services are ICTS International, N.V., AHL Services,
Inc. and International Aviation Security, Inc.
RAMP AND GROUND HANDLING SERVICES. Airlines frequently outsource ramp
and ground handling services because these services often require a considerable
investment in support equipment, which can be expensive for carriers with few
flights at a particular location. The Company has the ability to offer a package
of services which include new or refurbished equipment, maintenance and
manpower, for a fully inclusive per-hour charge. The Company has typically
offered ground handling or passenger services as "add on" services to its base
airline security business. It also offers these services on a stand-alone basis
at certain locations. In this area, the Company competes with the airlines
themselves, Signature Flight Support Services, AMR Services, Ogden Allied
Support Services, Hudson General, and Service Master Co. The Company has sought
to increase the volume of its aircraft appearance business by focusing on
providing service in accordance with detailed specifications. The Company
conducts an Aircraft Appearance and Facility Audit Program through which it
continually monitors its own performance. The Company believes that this
approach enables the Company to correct problems that might not otherwise come
to its attention until client dissatisfaction has occurred. To complement the
Quality Assurance Programs, the Company introduced a comprehensive health and
safety program system-wide to establish responsibilities and procedures for
safety awareness programs. The Company's competitors in aircraft appearance
include airlines themselves, Signature Flight Support Services, AMR Services,
Ogden Allied Support Services, Hudson General, and Service Master Co.
OTHER AVIATION SERVICES. The Company believes that customer service is
as important as cost in the competition for domestic passenger service
contracts. Because passenger service providers such as skycaps, wheelchair
operators and cart
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drivers have a high level of interaction with passengers, the Company has
developed specialized training programs that emphasize customer service and
empathy. The Company's main competitors for passenger services include the
airlines, AHL Services, Inc., Globe Aviation Securities Corporation, and
Huntleigh, Inc.
Commercial Security Staffing Services
The commercial security staffing industry is highly fragmented.
Management believes there are in excess of 100,000 separate providers of
commercial and industrial security services, and the Company does not believe
that any single participant has a significant share of the market. While the
Company has made only minor inroads into this market, the Company's competitive
strength in this area comes from its low overhead costs and its ability to
assimilate acquired commercial staffing businesses into its existing
administrative structure. In the commercial staffing field, the major providers
include Borg-Warner Security Corporation, Guardsmark, Inc. and The Wackenhut
Corporation.
Security Products Distribution
The Company, through its wholly-owned subsidiary, Crown Technical
Systems, focuses on Technical security applications and their integration into
existing security arrangements. The chief competitors in the integrated
checkpoint and automated exit lane fields are Ross Technologies and ADT
Systems.
In each of the segments where the Company operates, most of the
Company's competitors are larger and may have greater financial resources than
the Company.
SALES AND MARKETING
The Company believes that strengthening and maintaining relationships
with personnel at various levels of its customer organizations are an integral
element of its sales and marketing efforts. There are four sales executives
servicing the Company's three operating regions throughout the United States and
Europe. The Company's three regional directors in the United States and Europe
also have sales responsibilities and a portion of their incentive compensation
is dependent on meeting established sales goals. Sales staff are generally
incentivized based on margins derived from their respective annual revenues.
The Company seeks internal growth through, among other things, a
focused marketing approach based on expanding the services provided to existing
customers and increasing the volume of services provided in targeted markets.
The Company is further developing national sales and marketing strategies aimed
at improving the consistency of its sales approach. The Company has implemented
a digitally integrated contract administration function that automatically
tracks contracts, identifying in a timely manner contracts for pricing
adjustments.
The Company's marketing initiatives include the development of branded
services, direct mail marketing, creation of local, regional and national
marketing plans, strategic positioning for preferred provider partnerships,
integration of high technology components, and coordination of the Company's
participation in trade shows and other sales activities. Additionally, the
corporate marketing department conducts quarterly training sessions for sales
executives. These training sessions include presentation and customer service
skills, database management and methods for cross-selling the Company's products
and services.
MANAGEMENT AND REPORTING SYSTEMS
As a result of the strength of the United States economy, which has
resulted in the need to increase wage rates, the Company has experienced
downward pressure on its gross margins. In fiscal 1999, the Company implemented
certain strategies in an attempt to counter these pressures. These strategies
include time and motion studies and increased use of technology designed to
accomplish more services with less manpower, and an improved labor hours
monitoring system.
In late fiscal 1999, the Company installed an improved version of
portions of its Management Information System. While the prior system allowed
management to assess the results of the field operations at the end of every
month, the new
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system allows an assessment of field operations at any time. The Company has
hired consultants to assist it in evaluating organizational structure,
identifying inefficient practices, and has begun improving control over field
operations.
WORKFORCE MANAGEMENT
As of April 7, 2000, the Company had approximately 16,000 full- and
part-time non union employees engaged in performing its client services. The
Company experiences annual turnover of over 100%, and believes that improving
employee retention is important to reducing operating costs and providing high
quality service to its clients. Because employee turnover is inherent in the
nature of its business, the Company allocates significant resources to
recruiting potential employees. Each applicant must complete an interview and a
written application that includes inquiry concerning prior criminal convictions.
The Company grants various bonuses and awards to exceptional employees, in part
to further enhance retention. These include bonuses for detecting weapons and
other illegal objects, including those detected during FAA-mandated tests.
Currently, the Company faces the same challenge as its competitors do - finding
qualified employees to provide consistent service at the wage rate allowed by
clients.
For certain aviation services employees, FAA regulations require that
each applicant provide proof of citizenship or resident alien status, and each
applicant is subject to a five- or ten-year background verification, depending
upon the position, and a pre-employment drug screen. For persons with unescorted
access to secured areas, a criminal background verification procedure, which is
conducted by the Federal Bureau of Investigation, is triggered by any 12-month
gap in employment history that cannot be explained through independent
verification.
CUSTOMERS AND CONTRACT TERMS
The Company derives a significant portion of its revenues from a few
clients. In fiscal 1999, Delta Air Lines, Inc. (26.0%), Continental Airlines,
Inc. (11.7%), Trans World Airlines, Inc. (3.8%), U.S. Airways, Inc. (3.8%) and
Northwest Airlines, Inc. (2.9%) accounted for 48.0% of the Company's net
operating revenues. During fiscal 1999, 1998 and 1997, the Company's ten largest
clients accounted for an aggregate of 59.0%, 66.3% and 68.5% respectively, of
the Company's net operating revenues.
The Company's contracts with clients, including those that it has
obtained through acquisitions, generally have one- to three-year terms but are
cancelable by either party on 30 to 90 days' notice. The Company invoices its
aviation services clients weekly or biweekly. The Company invoices its
commercial security staffing services clients weekly, which is typical in that
field.
The services provided by the Company require it to train and manage low
wage workforces with high turnover rates. From time to time, the Company has
failed to meet test standards or a client's service expectations at a particular
location, and, like its competitors, has had contracts terminated because of
customer dissatisfaction with various aspects of its performance. The Company's
predeparture screening services are tested daily at numerous locations, both
internally and by the FAA, to determine the Company's ability to detect weapons
passing through checkpoints. Failure to pass FAA tests may result in fines to
the airline responsible for the checkpoint, which the Company reimburses
pursuant to its contracts in amounts up to $11,000 per test failure. In
addition, the Company's contracts with airlines typically provide that the
Company will indemnify the client against claims for property damage, or death
of or personal injury to any person, arising out of the negligent acts or
omissions of the Company, unless the claim results from a negligent act of the
customer. The Company is self-insured for the first $250,000 per incident.
The risk of contract termination as a result of actual or perceived
service failures is enhanced by the substantial publicity that often accompanies
errors in the provision of screening services, because of public concern over
airline security issues. Failure to meet tests or other performance standards
may result in fines, or the loss of a contract or service location or the
Company's license to perform services, and any such loss could have a material
adverse effect on the Company's reputation, business, results of operations and
financial condition.
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GOVERNMENT REGULATION
The Company's aviation services' clients are subject to various
regulations and directives issued by the FAA. Under current regulations,
independent contractors, such as the Company, that perform services for air
carriers and airport authorities share responsibility for aviation security with
air carriers, airport authorities, the FAA and various other federal, state and
local agencies. At airports throughout the United States, the FAA tests security
systems and conducts threat and vulnerability assessments. Through the use of
its regulatory powers, the FAA directs the aviation industry to implement
measures that address existing and anticipated threat situations.
FAA regulations require each air carrier and airport authority to
implement an FAA-approved security program. Airport authorities are responsible
for maintaining a secure environment on airport grounds and for providing law
enforcement support and training. Air carriers are responsible for the security
of all people and items connected to their aircraft, including passengers,
baggage, maintenance equipment and flight crews. Although an air carrier is
permitted to outsource certain security functions, FAA regulations require the
air carrier to provide oversight in order to assure that all requirements are
met. The FAA itself regularly conducts tests of predeparture screening
checkpoints at U.S. airports. Failure to meet requirements imposed by the FAA or
the air carrier or the failure of various tests administered by the FAA can
result in fines and other penalties to the responsible air carrier, which are in
turn passed on to the screening company under the terms of the contract between
the provider and the carrier. Regulatory compliance problems and test failures
may also result in the termination of a security contract or of services at the
affected site.
The Company's aviation and commercial security staffing services are
also subject to regulation by various state and local authorities. The Company
is required to obtain and maintain various licenses and permits from state and
local authorities to provide aviation and commercial security staffing services,
as well as certain other services.
ITEM 2. PROPERTIES
During fiscal 1999 the Company leased approximately 20,600 square feet
in Independence, Ohio, for its corporate headquarters. The initial term of the
lease expires in 2001 and may be extended, at the option of the Company, until
2006. The Company leases space in numerous facilities in the United States and
Europe to house local offices. None of these local office leases are material to
the Company's operations. The Company does not own any real estate. In April
2000, the Company signed a partial lease termination related to 6,496 square
feet leaving approximately 14,100 square feet for its corporate headquarters.
The Company believes its current facilities are adequate for its needs.
ITEM 3. LEGAL PROCEEDINGS
Because the Company's employees function in public facilities and in
the workplaces of other businesses, the Company is exposed to possible claims by
its clients' customers and employees of discrimination, harassment and
negligence, and similar claims. The Company is subject to liability for the acts
or negligence of its employees while on assignment that cause personal injury or
damages, and to claims of misuse of client proprietary information or theft of
client property. As a provider of security services, the Company faces potential
liability for claims that may arise from any terrorist activity occurring in
circumstances associated with the Company. Although the Company maintains
insurance coverage against such potential liabilities, any such claim against
the Company might exceed the amount of such insurance coverage or fall outside
the type of activities covered by such insurance.
The Company is involved in various legal proceedings, including routine
civil actions instituted by the FAA with respect to test failures, background
checks and recordkeeping matters that arise in the ordinary course of its
business and litigation relating to its acquisitions. The Company does not
believe that the ultimate outcome of these proceedings will have a material
adverse effect on the Company's business, assets, financial condition or results
of operations, however, in the event any of the foregoing litigation results in
an award of money damages against the Company, given the Company's current
liquidity situation, that award could adversely affect the financial condition
of the Company.
8
<PAGE> 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during
the fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS
Pursuant to Instruction 3 to Item 401(b) of Regulation S-K, the
following information is reported below.
Executive officers of the Company are elected by, and serve at the
discretion of, the Board of Directors until their successors are duly chosen and
qualified.
The executive officers of the Company at April 7, 2000 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Mark D. Thompson............................ 42 President and Interim Chief Executive Officer
Terri M. Jones.............................. 43 Executive Vice President
Ronald P. Koegler........................... 47 Executive Vice President and Controller
Michael F. Sosh............................. 38 Executive Vice President, Treasurer and Chief
Financial Officer
Charles P. Licata........................... 55 President, Commercial Staffing Services
Thomas M. Vaiden............................ 55 President, Aviation Services
Scott E. Brewer............................. 37 Senior Vice President and General Counsel
Neal B. Davis............................... 47 Vice President, Aviation-Western Region Operations
Stephen P. Metzler.......................... 41 Vice President, Aviation-Customer Service
</TABLE>
The following are biographical summaries of the business experience of
the executive officers of the Company.
MARK D. THOMPSON is the President and Interim Chief Executive Officer
of the Company and was named to this position in October 1999. Mr. Thompson was
the Executive Vice President and Chief Financial Officer of Lexford Residential
Trust from April 1996 until September 1999, when Lexford was acquired by Equity
Residential Properties Trust. Lexford Residential Trust was a publicly traded
real estate investment trust which specialized in the ownership and management
of multi-family housing. From January 1995 to March 1996, Mr. Thompson was a
partner with the law firm of McDonald, Hopkins, Burke & Haber. From September
1985 to December 1994, Mr. Thompson was an associate and partner with the law
firm of Benesch, Friedlander, Coplan & Aronoff, LLP.
TERRI M. JONES is the Executive Vice President - Aviation since January
2000. Ms. Jones joined the Company in November 1997 as Vice President, Marketing
and was named Senior Vice President, Sales and Marketing in June 1999. For the
seven years prior to joining the Company, Ms. Jones was with the American Heart
Association, as Director of Communications and Marketing.
RONALD P. KOEGLER has been the Executive Vice President and Controller
since joining the Company in February 2000. From 1989 until joining the Company,
Mr. Koegler held various positions with Lexford Residential Trust, most recently
as Senior Vice President and Controller since December 1996, as Vice President
and Treasurer from January 1996 to December 1996 and Controller from April 1992
to January 1996.
MICHAEL F. SOSH is the Executive Vice President, Treasurer and Chief
Financial Officer of the Company since January 2000. Mr. Sosh joined the Company
in November 1999 as a consultant. Mr. Sosh was the Senior Vice President and
Treasurer of Lexford Residential Trust from January 1997 to September 1999. From
1987 to 1997 Mr. Sosh was with the retail department store chain of Bon-Ton
Stores, Inc. (NASDAQ:BONT), as Manager of Financial Planning and Financial
Analyst from 1987 to 1995 and Divisional Vice President and Assistant Treasurer
from March 1995 to January 1997.
9
<PAGE> 12
CHARLES P. LICATA is the President of the Commercial Staffing Security
business since June 1999. Mr. Licata joined the Company in December 1998 as Vice
President of Commercial Services. Prior to joining the Company, Mr. Licata was a
Vice President at Borg-Warner Protective Services for 16 years.
THOMAS M. VAIDEN is the President of the Aviation Staffing Services
business since June 1999. Prior to June 1999, Mr. Vaiden was employed by Delta
Air Lines, Inc. for the past 34 years in various capacities. His last position
for Delta was Station Manager in Omaha, Nebraska.
SCOTT E. BREWER is the Senior Vice President and General Counsel of the
Company since June 1999. He has served as a Vice President since April 1995 and
General Counsel since September 1993. Mr. Brewer was in the private practice of
law from October 1988 to August 1993.
NEAL B. DAVIS is the Vice President, Aviation-Western Region
Operations. He has served in this position since August 1999. Prior to this
position, Mr. Davis served in an executive role with Win West Jet, LC., an
airline charter operation, since April 1998, as a founder of Professional Travel
Services, Inc., a consulting firm to the airline industry, since June 1995, and
as a Vice President for Morris Air, an airline staffing organization, from
November 1992.
STEPHEN P. METZLER is the Vice President, Aviation-Central Region since
March 2000. Prior to this position, Mr. Metzler served as a Vice
President-Customer Service from June 1999 to March 2000, as a Divisional
President from May 1995 to June 1999, as District Manager from May 1994 to May
1995 and as Aircraft Appearance Manager from December 1991 to May 1994.
* * * * *
There are no arrangements or understandings known to the Company
between any executive officer and any other person pursuant to which any
executive officer was elected to office. There is no family relationship between
any director or executive officer and any other director or executive officer of
the Company.
The following officers and directors left their positions with the
Company since March 31, 1998 and through April 7, 2000: President James O.
Singer resigned from his position in October 1998; Vice President, Finance Brian
Kenyon resigned from his position in April 1999; President Steven S. Johnston
resigned from his position in May 1999; Robert A. Weitzel, Chairman and Chief
Executive Officer, retired from his position in October 1999; Vice President,
Aviation-Eastern Region Operations, Douglas J. Robinson resigned from his
position in February 2000; and Vice President and Chief Financial Officer
Charles S. Deutchman's October 15, 1999 employment agreement ended on March 1,
2000; President of Crown Technical Systems, Inc. Robert P. Weitzel (son of
Robert A. Weitzel) resigned from his position in March 2000; Director Ivan J.
Winfield resigned in April 1999; and Director Lee Howley resigned in May 1999.
10
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
(a) Market Information
During the year ended March 31, 1999, the Common Stock was traded on
the Nasdaq Market under the symbol "ITSW". On July 1, 1999, trading of the
Common Stock was halted. On September 15, 1999, the Common Stock was delisted
from the Nasdaq Stock Market. On October 26, 1999, price quotes for the Common
Stock began appearing on the Electronic Quotation System of the National
Quotation Bureau LLC ("Pink Sheets"). See "ITEM 1. BUSINESS - Recent
Developments". As of April 7, 2000 the Common Stock is still being quoted on the
Pink Sheets and therefore there is no established public trading market for the
Common Stock. The reported closing price on the Pink Sheets on April 7, 2000 was
$1.75. The following table sets forth for the indicated periods the high and low
market prices for the Common Stock:
<TABLE>
<CAPTION>
PRICE RANGE
-----------
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDED MARCH 31, 1999
- --------------------------------
First Quarter........................................................................... $ 22.00 $ 5.625
Second Quarter.......................................................................... $ 8.125 $ 3.875
Third Quarter........................................................................... $ 6.375 $ 3.50
Fourth Quarter.......................................................................... $ 5.375 $ 3.50
FISCAL YEAR ENDED MARCH 31, 1998
- --------------------------------
Third Quarter (beginning September 19, 1997)............................................ $ 18.75 $ 13.00
Fourth Quarter.......................................................................... $ 24.13 $ 15.75
</TABLE>
(b) Shareholder Information
As of April 7, 2000, there were 54 record holders of Common Stock and
approximately 860 beneficial owners.
(c) Dividend Information
The Company has never paid, and does not anticipate paying in the
foreseeable future, cash dividends on the Common Stock. In, addition, the
Company's ability to pay cash dividends is limited by the terms of its revolving
line of credit from its lender.
11
<PAGE> 14
ITEM 6. SELECTED FINANCIAL DATA
The following sets forth certain selected financial data appearing in or
derived from the Company's historical audited financial statements. The
selected financial data should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere herein, and with
Item 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS. During fiscal 1999, 1998 and 1997, the Company paid
cash for the acquisitions of service contracts and the related equipment.
These acquisitions were accounted for under the purchase method and
accordingly their operating results are included in the consolidated
financial statements for all periods subsequent to the date of acquisition.
Certain reclassifications have been made to the prior periods' consolidated
financial statements to conform with the 1999 presentation.
<TABLE>
<CAPTION>
(amounts in thousands, except per share and employee data)
YEARS ENDED MARCH 31,
---------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(1) (1) (1) (1)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net operating revenues................... $ 226,872 $ 172,367 $ 115,242 $ 95,467 $ 92,156
Income (loss) before income taxes........ (6,501) 8,357 2,725 1,815 (293)
Net income (loss)........................ (7,295) 4,857 1,569 930 (783)
Net income (loss) per share:
Basic............................... $ (1.10) $ 0.93 $ 0.31 $ 0.16 $ (0.12)
Diluted............................. (1.10) 0.92 0.31 0.16 (0.12)
Weighted average common shares outstanding (2):
Basic............................... 6,662 5,215 5,089 5,776 6,293
Diluted............................. 6,662 5,265 5,089 5,776 6,293
AS OF MARCH 31,
---------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(1) (1)
OPERATING DATA:
Number of employees...................... 16,000 15,000 10,700 9,900 9,900
BALANCE SHEET DATA:
Cash and cash equivalents................ $ 672 $ 3,542 $ 3,018 $ 2,693 $ 1,267
Working capital (deficit)................ 3,318 11,491 1,496 (2,398) (5,343)
Total assets............................. 70,634 61,631 28,865 21,929 20,438
Long-term obligations.................... 10,859 3,682 11,641 5,790 5,810
Shareholders' equity..................... 30,841 38,319 2,800 3,710 2,979
</TABLE>
(1) Data for the years ended and as of March 31, 1998, 1997, 1996 and 1995 has
been restated to correct certain accounting errors reflected in the
Company's previously issued financial statements for those periods. See
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS AND NOTE C OF THE NOTES TO THE CONSOLIDATED FINANCIAL
STATEMENTS.
(2) The weighted average number of shares outstanding has been adjusted to
reflect the 12,892.62 for 1 stock split declared June 17, 1997.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
- --------
The Company is a significant domestic provider of aviation contract
support services and is also a provider of commercial security staffing
services. The Company provides services to customers in more than 300 cities in
the United States
12
<PAGE> 15
and Europe. Aviation support services offered by the Company include skycap,
baggage handling and aircraft appearance services, wheelchair and electric cart
operations. The Company's security services extend beyond aviation security, and
includes the provision of commercial security staffing services to government
and business clients, hospitals, arenas and museums.
The Company's services are provided under contracts that generally have
terms of one to three years, but are cancelable by either party on 30 to 90 days
notice. Although contract terms vary significantly, clients generally pay an
hourly rate for services provided. Certain services, such as aircraft cleaning,
are billed on a flat fee-for-service basis, and certain others are billed at a
fixed monthly rate. The Company recognizes revenues as the related services are
performed.
Acquisitions played an important role in the Company's net operating
revenue growth during fiscal 1999 and 1998. In fiscal 1999, the Company
completed six acquisitions of service contracts, all of which were accounted for
under the purchase method, and accordingly, their operating results are included
in the Company's consolidated financial statements for all periods subsequent to
the date of the acquisition. The Company is not presently pursuing acquisitions,
and does not anticipate that acquisitions will materially contribute to growth
in the foreseeable future.
On March 1, 1999 the Company announced the engagement of Arthur
Andersen LLP as its new independent public accountants. The Company received a
letter dated August 20, 1999 from Arthur Andersen LLP, addressed to the Audit
Committee of the Board of Directors. The letter indicated that Arthur Andersen
had noted certain matters related to the accounting systems and internal
controls of the Company that they considered to be a "material weakness" and
recommended that the Company take steps to improve internal accounting control
procedures. A special committee of the Board of Directors was established to,
among other things, monitor the Company's progress in addressing this weakness.
The Company has addressed or implemented procedures to improve controls related
to certain of the identified material weaknesses and is in the process of
addressing the remaining issues with completion expected during fiscal 2001.
Following the Change in Control during October 1999, the Company hired
a new chief executive officer and began an extensive review of internal
processes, organizational structure and business practices to identify methods
of improving the quality of its delivered services.
On November 2, 1999, the Company announced that it would revise
downward its previously announced results for the fiscal year ended March 31,
1999, and for the quarter ended June 30, 1999. These revisions were based upon
additional information identified and the completion of a review of certain
judgmental accounting estimates by the Company's management which were then
reviewed with the Audit Committee of the Board of Directors. On February 3,
2000, the Company announced a $6.3 million downward adjustment to the fiscal
1999 results and a $2.0 million downward adjustment to the first quarter fiscal
2000 results. In addition, the Company announced that it would be restating its
previously issued financial statements. This restatement is to correct
accounting that resulted from the failure of the Company to properly consider
information available at the time these financial statements were prepared,
including information that may not have been considered due to errors and
omissions in accounting or corporate records. Accordingly, the fiscal 1998,
1997, 1996 and 1995 financial statements have been restated, as described in
Note C of Notes to Consolidated Financial Statements. All amounts and
percentages in the following discussions reflect the effects of such
restatements. The Company will incur an operating loss in fiscal 2000. The
Company's new management team continues its review of all aspects of its
operations with the goal of improving profitability. Management actions taken to
increase the efficiency of the Company's operations may also result in
additional charges in fiscal 2000.
Operations have generated negative cash flow for fiscal 2000. Although
the Company obtained a one year extension of its credit facility through April
2001 (See Notes G and T of Notes to the Consolidated Financial Statements) the
negative cash generated during fiscal 2000 and forecast to continue into the
first quarter of fiscal 2001 are factors that raise doubts about the Company's
ability to continue as a going concern and the audit report of Arthur Andersen
LLP for fiscal 1999 contains an explanatory paragraph with respect to this
matter.
The Company obtained an extension of its credit facility through April
1, 2001 for use in funding operations. See "Liquidity and Capital Resources"
below. In addition, the Company will seek to grow internally by using the
established business base as a platform for expanding its services and currently
will not pursue any further acquisitions due to the unavailability of funds. It
is management's intention to seek higher overall margins by concentrating its
marketing efforts on
13
<PAGE> 16
higher margin opportunities, to formulate and implement business process
improvement initiatives, evaluate past acquisitions, improve customer services
and reduce and/or control costs with the goal of improving operating cash flow
and profits. There can be no assurance that this plan will be successful.
RESULTS OF OPERATIONS
- ---------------------
The following table sets forth the Company's results of operations in
both dollars and as a percentage of revenues for the years ended March 31:
(Dollars in Thousands)
<TABLE>
<CAPTION>
1998 1997
1999 (Restated) (Restated)
----- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues $226,872 100.0% $172,367 100.0% $115,242 100.00%
Cost of revenues 205,224 90.5% 147,311 85.5% 99,037 85.9%
---------- --------- ----------- ------------ ------------ ----------
Gross margin 21,648 9.5% 25,056 14.5% 16,205 14.1%
Selling, general and administrative expenses 24,650 10.9% 15,015 8.7% 12,627 11.0%
Amortization expense 2,334 1.0% 988 0.6% 208 0.2%
---------- --------- ----------- ------------ ------------ ----------
Operating profit (loss) (5,336) (2.4%) 9,053 5.2% 3,370 2.9%
Interest expense, net 994 0.4% 719 0.4% 637 0.5%
Other (income) expense, net 171 0.1% (23) 0.0% 8 0.0%
---------- --------- ----------- ------------ ------------ ----------
Income (loss) before income taxes (6,501) (2.9%) 8,357 4.8% 2,725 2.4%
Provision for income taxes 794 .3% 3,500 2.0% 1,156 1.0%
---------- --------- ----------- ------------ ------------ ----------
Net income (loss) $ (7,295) (3.2%) $ 4,857 2.8% $ 1,569 1.4%
========== ========= =========== ============ ============ ==========
</TABLE>
YEAR ENDED MARCH 31, 1999 COMPARED WITH YEAR ENDED MARCH 31, 1998
- -----------------------------------------------------------------
NET OPERATING REVENUES. Net operating revenues in fiscal 1999 increased
by $54.5 million, or 31.6%, as compared with fiscal 1998. The increase is mostly
attributable to revenues from the six acquisitions completed during the year,
and the inclusion of a full year of revenues from the eleven acquisitions
completed in fiscal 1998. This rate of growth is not expected to continue into
fiscal 2000 as the Company completed only two acquisitions during fiscal 2000
and has determined not to pursue further acquisitions at the present time. See
"ITEM 1-BUSINESS-Growth". Internal growth accounted for only a nominal portion
of the revenue increases in fiscal 1999. Revenues from Aviation Services
increased $23.6 million or 16.0%, Commercial Staffing Services increased $30.2
million or 145.8%, and Security Products increased $0.7 million, or 19.5%. These
growth rates did not continue into fiscal 2000. The fourth quarter of fiscal
1999 showed a 9.1% decrease in net operating revenue from the prior quarter.
COST OF REVENUES. Cost of revenues includes primarily the cost of field
personnel (wages, payroll taxes, vacation, workers' compensation and uniforms)
and related equipment costs.
Fiscal 1999 cost of revenues increased $57.9 million, or 39.3%, over
fiscal 1998. Most of this increase (approximately $56.0 million) was due to
expenses associated with fiscal 1999 acquisitions and inclusion of a full year
of expenses for fiscal 1998 acquisitions. Marginally, cost of revenues were
90.5% and 85.5% of net operating revenues for fiscal 1999 and 1998,
respectively. This deterioration of margin was largely due to: increased workers
compensation expense, increased aircraft damages and fines; and a greater
proportionate increase in wages and overtime. The approximate impact on fiscal
1999 cost of revenues for each of these items was as follows: Workers' compen-
sation - $1.5 million; aircraft damages and fines - $.8 million; and wages and
overtime - $5.7 million.
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 continue to exert downward pressure on
the Company's margins. Management is currently implementing
14
<PAGE> 17
operational strategies that it believes will improve margins, however, there can
be no assurance that these strategies will be successful.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses include support services for field personnel, bad debt
expense, charges for cessation of certain operations and professional services
(legal, audit and consulting). These expenses increased $9.7 million, or 64.2%,
to $24.7 million in fiscal 1999 from $15.0 million in fiscal 1998. Selling,
general and administrative expenses were 10.9% and 8.7% of net operating
revenues for fiscal 1999 and 1998, respectively.
During fiscal 1999, management decided to cease operations in the
Czech Republic and Italy. The Company also adjusted the carrying value of its
investment in the United Kingdom and Germany to net realizable value due to the
filing for insolvency by its joint venture partner in the United Kingdom (which
was also its largest customer in Germany). Charges of $1.8 million for the
unrealized loss on the carrying value of these assets identified for disposition
are included in fiscal 1999 results.
Bad in debt expense increased (approximately $1.2 million in fiscal
1999 compared to $.3 million fiscal 1998) primarily due to increased revenue and
information that came to the Company's attention regarding the realizability of
certain accounts receivable balances. Professional and consulting expenses
increased $1.7 million due to settlement of certain outstanding litigation and
related legal fees and additional costs incurred for accounting and consulting
due to the material weakness identified by the Company's independent public
accountants.
The balance of the increase in Selling, General and Administrative
expenses primarily relates to increased expenditures to expand the corporate
infrastructure to support the numerous acquisitions completed in fiscal 1999 and
1998. This was the primary factor for the increase in selling, general and
administrative payroll, taxes and benefits which increased $3.5 million in
fiscal 1999 as compared to 1998.
AMORTIZATION EXPENSE. Amortization expense was $2.3 million in fiscal
1999 compared to $1.0 million in fiscal 1998, an increase of $1.3 million, or
130%. The increase was the result of the additional charges to amortization for
the fiscal 1999 acquisitions and a full year's charge for fiscal 1998
acquisitions.
INTEREST EXPENSE. Interest expense increased by $.3 million to $1.0
million for fiscal 1999 from fiscal 1998, principally as a result of the
increase in the Company's level of outstanding debt obligations to an average of
$ 10.4 million from $6.1 million for fiscal 1999 and 1998, respectively,
partially offset by the decrease in the Company's effective borrowing rate to
7.9 % for fiscal 1999 from 13.2% for fiscal 1998.
INCOME TAXES. Income tax expense decreased to $.8 million for fiscal
1999 from $3.5 million for fiscal 1998. Despite recording a pre-tax book loss
for fiscal 1999, a net tax expense of $.8 million was incurred. This expense is
the tax benefit for the year's loss net of a provision to provide a deferred tax
valuation allowance to reserve for net deferred tax assets where there is
uncertainty of their future realization.
YEAR ENDED MARCH 31, 1998 COMPARED WITH YEAR ENDED MARCH 31, 1997 (RESTATED)
- -----------------------------------------------------------------
NET OPERATING REVENUES. Net operating revenues in fiscal 1998 increased
by $57.1 million, or 49.6%, as compared to fiscal 1997. This increase is
attributable to an increase in revenues from the eleven acquisitions that were
completed during the year, the inclusion of a full year of revenues from the six
acquisitions completed in fiscal 1997 and internal growth. The eleven
acquisitions completed in fiscal 1998 contributed $46.3 million to the total
increase in net operating revenues for the year, with $42.3 million in aviation
services and $4.0 million in commercial staffing services. The inclusion of a
full year of operating results from the six acquisitions completed in fiscal
1997 contributed $6.8 million to net operating revenues. Internal growth
contributed the remainder of the increase in net operating revenues in fiscal
1998 compared with fiscal 1997.
COST OF REVENUES. Fiscal 1998 cost of revenues increased $48.3 million
or 48.7% over fiscal 1997, primarily due to acquisitions. The decrease in cost
of revenues as a percent of sales is attributable to the shift in the Company's
sales mix to
15
<PAGE> 18
higher margin services such as ground handling, passenger services and
commercial staffing services and away from lower margin preboard screening
services.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in fiscal 1998 were $15.0 million compared with $12.6
million in the prior year, an increase of $2.4 million, or 18.9%. The increase
primarily reflects expenses associated with the operations of acquired
businesses. Measured as a percentage of net operating revenues, these expenses
were 8.7% in fiscal 1998 and 11.0% in fiscal 1997. This decrease is attributable
to improved overhead absorption resulting from the growth of revenues over the
prior year.
AMORTIZATION EXPENSE. Amortization expense was $1.0 million in fiscal
1998 compared to $.2 million in the fiscal 1997. The increase was the result of
the partial year (pro-rata) charges to amortization for the fiscal 1998
acquisitions in addition to a full year's charge for fiscal 1997 acquisitions.
INTEREST EXPENSE. Interest expense increased in fiscal 1998 to $0.7
million from $0.6 million in fiscal 1997 because of an increase in average
borrowings, primarily incurred to fund acquisitions.
INCOME TAXES. The Company's consolidated effective income tax rate in
fiscal 1998 was 41.9% as compared to 42.4% in fiscal 1997. The decrease in the
Company's effective tax rate in fiscal 1998 was due to reduced overall tax rates
on foreign earnings taxed at rates different than the U. S. statutory tax rate.
In addition, the amount of non-tax deductible expenses decreased causing a
reduction in the Company's effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's business is labor intensive. Consequently, it has
substantial needs for cash throughout its fiscal year. During fiscal 1999, the
Company's cash requirements were heightened by its increased payroll and by its
acquisition program and the need to support the activities resulting from those
acquisitions. Operating activities generated net cash of approximately $1.8
million. Financing activities generated net cash of $7.2 million during fiscal
1999.
During fiscal 1999, principal uses of funds, in addition to working
capital requirements, included expenditures associated with the Company's
acquisition program. These included $9.5 million in acquisitions of service
contracts, related goodwill and noncompete agreements and $0.2 million for
related property and equipment. The Company financed its acquisitions with cash
from the proceeds of the Initial Public Offering completed in September 1997,
borrowings under its credit facility and internally generated cash. In addition,
the Company spent $2.4 million on purchases of property and equipment in fiscal
1999, and received $0.4 million from the sale of equipment utilized in
operations.
During fiscal 1999, the Company had a revolving credit facility
providing maximum borrowing availability of $30 million, subject to certain
borrowing base limitations. That facility was secured by substantially all of
the Company's assets. The interest rate on that credit facility was 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 that credit
facility bore interest at a rate between LIBOR plus 1.5 percent and prime rate
plus 3.0 percent. The credit facility contained customary restrictions and
covenants, which limited the Company's ability to incur additional indebtedness
and pay dividends, required the Company to maintain prescribed debt-to-equity
and fixed charge coverage ratios, minimum net worth levels, and to satisfy
certain other financial covenants.
As a result of the net loss incurred in fiscal 1999, the Company was
not in compliance with several covenants under its credit facility. Those
covenants included maintenance of a specified minimum shareholders' equity, debt
service coverage ratio, and a specified minimum earnings before interest, taxes,
depreciation and amortization level. The lender granted the Company waivers for
all non-compliant loan covenants as at March 31, 1999, in addition to granting
waivers for the non-compliance with loan covenants during the first and second
quarters of fiscal 2000. Since the Company expected to be in violation of these
loan covenants through the remainder of fiscal 2000, the bank extended the
waivers until April 1, 2000. On August 27, 1999, the lender agreed to modify the
credit facility. The modifications included a six-month extension to the
maturity date of the facility to April 1, 2000, a $5,000,000 reduction in the
maximum available borrowings under the credit facility to $25,000,000, and a
$3,000,000 reduction in the annual capital asset acquisition allowance to
$1,000,000. As of April 7, 2000 the outstanding obligation under this facility
was $22.9 million. In April 2000,
16
<PAGE> 19
Management secured, from its lenders, certain amendments to its existing credit
facility. Among them are an extension of the term to April 1, 2001 with a
reduction of the interest rate to be charged on borrowings to Prime plus 0.75%,
if the loan is repaid by December 31, 2000. The amended agreement also includes
an increase to the percentage advance rate of eligible receivables as well as
more relaxed financial covenants. The financial covenants include certain net
worth covenants and a minimum debt coverage ratio, and standard financial
reporting requirements. As of April 1, 2000 the Company was in compliance with
all covenants.
In consideration for the amendment and extension of the credit facility
the Company granted the banks warrants for the purchase of 300,000 shares of the
Company's Common Stock at an exercise price of $1.41, which the Board determined
was the fair market value of the Company's Common Stock as of the date of the
grant. The warrants expire on March 31, 2007. As part of the transaction, the
banks were granted a "put" option commencing April 1, 2001 which would, if
exercised, require the Company to purchase all the warrants at $1.00 per warrant
and the Company retained a "call" option commencing immediately at an initial
price of $4.50 per warrant. The call price increases by $1.00 per warrant per
year commencing April 1, 2001.
The Company made capital expenditures in fiscal 2000 (exclusive of the
$6.5 million cash outlay for the two acquisitions completed during the first
quarter of fiscal 2000) of approximately $1.0 million, primarily related to
leasehold improvements, computer software and systems and equipment used in
operations.
The Company anticipates negative cash flow from operations for the
first half of fiscal 2001 but believes that the Company will generate positive
cash flow from operations in the second half of fiscal 2001 when the benefits of
improved margins and expense reductions are expected to be realized. Although
there can be no assurance, the Company believes that amounts available under its
credit facility will be sufficient to meet its cash requirements until
operations begin to generate positive cash flow. The entire credit facility will
become due and payable on April 1, 2001. The Company will seek to refinance its
outstanding borrowings under the credit facility on or prior to December 31,
2000, but there can be no assurance as to the Company's ability to obtain a
replacement credit facility or otherwise refinance its debt.
As previously discussed, the Company's lack of external financing
sources will limit its ability to grow by acquisitions and rely on net cash
generated by operations to pay expenses and existing liabilities. Such
limitations may have an adverse impact on the Company's liquidity and results of
operations.
YEAR 2000 BUSINESS MATTERS
- --------------------------
STATE OF READINESS
The information set forth under this caption is hereby designated to be
a "Year 2000 Readiness Disclosure" under The Year 2000 Information Readiness
Disclosure Act (The "Year 2000 Act"), Public Law 105-271, and the statements
below and the Company, as the maker thereof, shall be entitled to the
protections provided by The Year 2000 Act.
At the end of the twentieth century, there was worldwide concern
regarding the use by many existing computer programs of only the last two digits
rather than four to identify the year in a date field. If not corrected, many
computer applications would fail to treat year dates intended to represent years
in the twenty-first century as such but instead treat them as still in the
twentieth century, potentially resulting in system failure or miscalculations,
disruption of business operations, including, among other things, an inability
to initiate, receive, process, invoice or otherwise complete normal business
activities. These Year 2000 issues affected virtually all companies and
organizations.
The Company completed its assessment of its most significant systems
and updated them to be Year 2000 compliant.
HISTORICAL AND REMAINING COSTS TO BECOME YEAR 2000 COMPLIANT
As of March 31, 1999, the Company had expended approximately $1.2
million on its Year 2000 compliance efforts. The Company spent an additional
$0.1 million after March 31, 1999 to complete its Year 2000 preparations. All
costs were expensed as incurred.
CONTINGENCY PLAN
The Company's significant operations are based on manual labor such as
airline baggage handling and security services and rely heavily on third parties
like airlines, air traffic control systems and airport authorities. As of April
2000, the Company has not encountered any Year 2000 failure problems and is
unable to determine if there will be any failure problems in the
17
<PAGE> 20
future. The Company has not adopted a formal contingency plan and is unable to
determine if any failure will occur, whether it will have a material impact on
the Company's results of operations, liquidity and financial condition.
EURO CONVERSION
- ---------------
On January 1, 1999, 11 of the 15 countries that are members of the
European Union introduced a new currency unit called the "Euro," which will
ultimately replace the national currencies of these 11 countries. The conversion
rates between the Euro and the participating nations' currencies were fixed
irrevocably as of January 1, 1999, with the participating national currencies
being removed from circulation between January 1, 2002 and June 30, 2002, and
replaced by Euro notes and coinage. During the "transition period" from January
1, 1999 through December 31, 2001, public and private entities as well as
individuals may pay for goods and services using either checks, drafts or wire
transfers denominated in Euro or the participating country's national currency.
Under the regulations governing the transition to a single currency,
there is a "no compulsion, no prohibition" rule, which states that no one is
obligated to use the Euro until the notes and coinage have been introduced on
January 1, 2002. In keeping with this rule, as of January 1, 1999, the Company
is now also able to (i) receive Euro-denominated payments, (ii) invoice in Euro
as requested by vendors and suppliers and (iii) perform appropriate conversion
and rounding calculations. Full conversion of all affected country operations to
the Euro is expected to be completed by the time national currencies are removed
from circulation. The cost of software and business process conversion required
to achieve such abilities is not expected to be material.
The Company does not anticipate that the introduction and use of the
Euro will materially affect the Company's foreign exchange, or will have a
material adverse effect on operating results or cash flows due to the
immateriality of European operations to the Company's financial statements.
However, the ultimate effect of the Euro on competition due to foreign currency
risk cannot yet be determined and may have an adverse effect, on the Company's
operations, financial position or cash flows. Conversely, introduction of the
Euro may also have positive effects, such as lower foreign currency risk.
NEW ACCOUNTING PRONOUNCEMENTS
- -----------------------------
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities" (as amended by SFAS No. 137).
SFAS No. 133 must first be applied in the first quarter of fiscal years that
begin after June 15, 2000 (the first quarter of fiscal 2002 for the Company) and
in general requires that entities recognize all derivative financial instruments
as assets or liabilities, measured at fair value, and include in earnings the
changes in the fair value of such assets and liabilities in either operations or
comprehensive income (loss). The Company does not presently utilize derivative
instruments, either for hedging or other purposes, and therefore it is expected
that the adoption of the requirements of SFAS No. 133 will not have a material
effect on its financial statements.
During fiscal 1998, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No.
131 revises the manner in which an entity determines the operating segments it
must report and requires the disclosure of additional segment information. The
Company adopted the provisions of SFAS No. 131 for the fiscal year ended March
31, 1999. As the adoption of this pronouncement only modified disclosures, there
was no effect on the Company's consolidated financial position, results of
operations or cash flows.
In fiscal 1998, the AICPA issued Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use" ("SOP 98-1"). SOP 98-1 requires the capitalization of certain
costs incurred in the development of software used by a company for its own
internal operations. The Company adopted the provisions of SOP 98-1 for the
fiscal year ended March 31, 1999. The adoption of this pronouncement did not
have a material effect on the Company's consolidated financial position, results
of operations or cash flows.
18
<PAGE> 21
FORWARD LOOKING STATEMENTS
- --------------------------
In addition to discussing and analyzing the Company's recent historical
financial results and condition, the preceding management's discussion and
analysis of financial condition and results of operations includes statements
regarding certain trends or of other forward-looking information concerning the
Company's anticipated revenues, costs, financial resources or otherwise
affecting or relating to the Company which are intended to qualify for the
protections afforded "forward-looking statements" under the Private Securities
Litigation Reform Act of 1995. The forward-looking statements made herein and
elsewhere in this Form 10-K are inherently subject to risks and uncertainties,
which could cause the Company's actual results or other future events pertaining
to the Company to differ materially from the forward-looking statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is subject to foreign
currency and interest rate risks. The risks primarily relate to the sale of the
Company's services to foreign customers through its foreign subsidiaries and
changes in interest rates on the Company's short-term financing.
FOREIGN CURRENCY RISK
- ---------------------
A portion of the Company's revenues (3.5% of total revenues for the
year ended March 31, 1999) are received, and operating costs are incurred, in
foreign currencies. The denomination of foreign subsidiaries' account balances
in their local currency exposes the Company to certain foreign exchange rate
risks which the Company believes are not material. The Company does not engage
in hedging transactions to reduce exposure to fluctuations in foreign currency
exchange rates.
The financial results of the Company's foreign subsidiaries are
measured in their local currencies. Assets and liabilities are translated into
U.S. dollars at the rates of exchange at the end of each year and revenues and
expenses are translated at average rates of exchange during the year. Resulting
translation adjustments are reported as a component of comprehensive income
(loss).
Historically, the Company has not experienced any significant foreign
currency gains or losses involving U.S. dollars and other currencies. This is
primarily due to natural hedges of revenues and expenses in the functional
currencies of the countries in which subsidiaries are located. Although the
Company did not have any forward foreign currency exchange contracts in place at
March 31, 1999, it does monitor its foreign currency exposure and does not
anticipate any material impact on financial statements in the near future.
INTEREST RATE RISK
- ------------------
The Company maintains a revolving line of credit which subjects the
Company to the risk associated with movements in market interest rates. This
line of credit had a balance at March 31, 1999 of $10.9 million, which was at a
variable rate of interest based on prime. Since revolving payments and
borrowings are made on this line of credit on a daily basis with a variable
market interest rate, the March 31, 1999 balance of this debt is considered to
be at fair value. Based upon the Company's April 7, 2000 outstanding balance on
the variable rate credit facility, a hypothetical increase of 100 basis points
in the prime rate of interest would adversely effect future earnings and cash
flows by approximately $229,000 on an annual basis. The Company monitors its
interest rate risk, but does not engage in any hedging activities using
derivative financial instruments to mitigate such risk.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements on page F-1.
19
<PAGE> 22
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
The information required by Item 9, which relates to the change in the
Company's accounting firm, is incorporated herein by reference to the
information set forth under the Company's Form 8-K Securities and Exchange
Commission filing dated March 1, 1999.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A portion of the information required by this Item 10 is incorporated
by reference to the information under the heading "Executive Officers", in Part
I of this Annual Report on Form 10-K.
20
<PAGE> 23
<TABLE>
<CAPTION>
DIRECTORS OF THE REGISTRANT
- ---------------------------
- --------------------------------------------------------------------------------------------------------------------------------
Director Term to
Name of Director Age Principal Occupation and Other Information Since Expire
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
John P. O'Brien 58 Co-Chairman of the Board of International Total Services, Inc. August 1999 Next
since October 1999. Currently, Mr. O'Brien is Managing Director Annual
of Inglewood Associates, a firm specializing in consulting and Meeting
investing in financial turnarounds, since 1990; Chairman of the
Board of Allied Construction Products, Inc., a majority owned
subsidiary of PUBCO, Inc., since 1993; and is a Director of
American Italian Pasta Company (NYSE:PLB) since 1997. From 1995
to 1999 Mr. O'Brien was Chairman of the Board and Chief
Executive Officer of Jeffrey Mining Products LP, a distributor
of underground mining products. Prior to 1990, Mr. O'Brien was
with the public accounting firm of PriceWaterhouse, LLP, most
recently as the firm's Southeast Regional Managing Partner.
- --------------------------------------------------------------------------------------------------------------------------------
H. Jeffrey Schwartz 45 Co-Chairman of the Board of International Total Services, Inc. April 1999 Next
since October 1999. Mr. Schwartz is an attorney engaged as a Annual
partner with the law firm of Benesch, Friedlander, Coplan & Meeting
Aronoff, LLP. Mr. Schwartz has been with this firm since 1983
and currently heads his firm's Business Reorganization
Department and serves on its Executive Committee. Mr. Schwartz
is also a Director of Driveoff.com, Inc a full service
internet automobile purchasing solution, and a subsidiary of
Navidec Inc. (NASDQ:NVDC)
- --------------------------------------------------------------------------------------------------------------------------------
J. Jeffrey Eakin 53 Currently Mr. Eakin is Senior Vice President and a founder of September 1998 Next
Preferred Capital Inc., a general equipment finance company, Annual
since 1997. From 1994 to 1997 Mr. Eakin was a founder of and Meeting
served as Vice President and Division Credit Officer for DVI
Capital Company, a wholly owned wholesale finance company
subsidiary of DVI, Inc. (NYSE:DVI) From 1992 to 1994 Mr. Eakin
was Director of Credit and Funding for Picker Financial Group, a
joint venture lease financing company between Picker
International and LDI Corporation.
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
- -------------------------------------------------------
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors and executive officers, and owners of more than
10% of the Company's Common Shares, to file with the Securities and Exchange
Commission (the "SEC") initial reports of ownership and reports of changes in
ownership of Common Shares and other equity securities of the Company. Executive
officers, directors and owners of more than 10% of the Common Shares are
required by SEC regulations to furnish the Company with copies of all forms they
file pursuant to Section 16(a). To the Company's knowledge, based solely on its
review of the copies of such reports furnished to the Company and written
representations that no other reports were required, during the fiscal year
ended March 31, 1999, all Section 16(a) filing requirements applicable to its
executive officers, directors and greater-than-10% beneficial owners were
complied with.
21
<PAGE> 24
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
- --------------------------
The following table sets forth a summary of the compensation earned for
services rendered by the Company's Chief Executive Officer, three other most
highly compensated executive officers who were serving as an executive officer
of the registrant at March 31, 1999 and any other individual that would have
been among the three most highly compensated executives but for the fact that
the individual was not serving as an Executive Officer at the end of the last
completed fiscal year for the fiscal years ended March 31, 1999, 1998 and 1997
("Named Executive Officers").
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (2)
----------------------
NAME AND FISCAL SALARY OTHER ANNUAL
PRINCIPAL POSITION YEAR (1) ($) BONUS ($) COMPENSATION ($)
<S> <C> <C> <C> <C>
Robert A. Weitzel (4) 1999 300,000 100,000
Chairman and Chief 1998 309,288 211,025 1,897(3)
Executive Officer 1997 312,250 200,244 447(3)
James O. Singer (5) 1999 164,744 25,000
President and Chief 1998 135,000 50,000
Operating Officer 1997 -- --
Scott E. Brewer 1999 81,154 61,933
Senior Vice President and 1998 55,770 77,065
General Counsel 1997 50,000 38,239 43,402(8)
Steven S. Johnston (6) 1999 128,194 -- (9)
President and Chief 1998 -- --
Operating Officer 1997 -- --
Brian Kenyon (7) 1999 84,569 47,781 (9)
Vice President, Finance 1998 -- --
1997 -- --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company's fiscal year ends on March 31, and its fiscal years are
identified by reference to the calendar year in which they end. Amounts
shown include compensation earned or awarded for each fiscal year.
(2) No named executive officer received perquisites or other personal
benefits in excess of the lesser of $50,000 or 10% of that individual's
salary plus annual bonus.
(3) Represents amounts contributed by the Company to the Company's 401(k)
Plan as matching contributions relating to before-tax contributions
made by that individual.
(4) Mr. Robert A. Weitzel joined the Company in September 1978, and
resigned in October 1999. Mr. Weitzel was under a two-year employment
contract, which would have expired on December 31, 2000. The Company
and Mr. Weitzel came to an agreement on his resignation, effective
October 19, 1999. See "ITEM 1 BUSINESS - Recent Developments".
(5) Mr. Singer joined the Company in April 1997 and resigned in November
1998. Mr. Singer was under a two-year employment contract, which would
have expired December 24, 1999. Both parties to the contract came to an
agreement on the termination, effective November 12, 1998 to pay Mr.
Singer $100,000 severance, payable over a period of six months. Fiscal
1999 compensation includes $75,000 of this amount.
22
<PAGE> 25
(6) Mr. Johnston joined the Company in October 1998 and resigned in May
1999.
(7) Mr. Kenyon joined the Company in April 1998 and resigned in April 1999.
Mr. Kenyon was under a one-year employment contract, which would have
expired April 20, 1999.
(8) Amount reflects the fair market value of Common Stock awarded on
November 1, 1996, as determined by an independent appraisal.
(9) Mr. Johnston and Mr. Kenyon were granted Common Stock options of 25,000
and 50,070 shares respectively during fiscal 1999 at an exercise price
of the closing market price on the day of the grant. The exercise price
on Mr. Kenyon's options were re-priced to a lower price on September
18, 1998. Both Mr. Johnston's and Mr. Kenyon's options expired 90 days
after their employment with the Company terminated.
OPTIONS
- -------
<TABLE>
<CAPTION>
OPTION GRANTS IN FISCAL YEAR 1999
INDIVIDUAL GRANTS
-----------------
POTENTIAL REALIZABLE
PERCENTAGE OF VALUE AT ASSUMED
TOTAL OPTIONS ANNUAL RATES OF STOCK
GRANTED TO PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN EXERCISE OPTION TERM(4)
GRANTED (#) FISCAL PRICE EXPIRATION ----------------
NAME (1) YEAR(2) ($/SHARE)(3) DATE(3) 5%($) 10%($)
---- ------- ----------- ------------ ----------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
Robert A. Weitzel -- -- -- -- -- --
James O. Singer -- -- -- -- -- --
Scott E. Brewer -- -- -- -- -- --
Steven S. Johnston 25,000 25.8% 4.50 10/26/08 70,750 179,295
Brian Kenyon 50,070 51.7% 5.00 4/20/08 157,440 398,993
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Options vest in annual 25% increments.
(2) Based on 96,756 options granted to all employees during fiscal year
1999.
(3) Options were granted at the closing price for the Common Stock on the
day of the grant. Mr. Johnston and Mr. Kenyon were granted Common Stock
options of 25,000 and 50,070 shares respectively during fiscal 1999 at
an exercise price of the closing market price on the day of the grant.
The exercise price on Mr. Kenyon's options were re-priced to a lower
price on September 18, 1998. Both Mr. Johnston's and Mr. Kenyon's
options expired 90 days after their employment with the Company
terminated.
(4) These amounts are based on hypothetical appreciation rates of 5% and
10%, as required by the SEC and are not intended to forecast the actual
future appreciation of the Common Stock. No gain to optionees is
possible without an actual increase in the price of the Common Stock,
which would benefit all of the Company's shareholders. All calculations
are based on a ten-year option period.
23
<PAGE> 26
AGGREGATED OPTION EXERCISES IN FISCAL 1999
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF VALUE OF
UNEXERCISED UNEXERCISED
OPTIONS AT IN-THE-MONEY
FISCAL YEAR-END (1) OPTIONS AT FISCAL
SHARES VALUE (#) YEAR-END ($)(2)
ACQUIRED ON REALIZED EXERCISABLE/ EXERCISABLE/
NAME EXERCISE (#) ($) UNEXERCISABLE UNEXERCISABLE
---- ------------ ------ ------------- -------------
<S> <C> <C> <C> <C>
Robert A. Weitzel -- -- 16,667/50,003 -0-/-0-
James O. Singer -- -- -0-/-0- -0-/-0-
Scott E. Brewer -- -- 12,517/37,553 -0-/-0-
Steven S. Johnston -- -- -0-/25,000 -0-/-0-
Brian Kenyon -- -- -0-/50,070 -0-/-0-
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Includes options with exercise price ranging from $4.50 to $11.25.
(2) Using the March 31, 1999 Common Stock closing price of $3.50, none of
these options were in-the-money.
OPTION REPRICING
- ----------------
In September 1998 the Board of Directors approved the repricing of
Brian Kenyon's stock options. Mr. Kenyon's then existing share options were
repriced so the exercise price equaled the fair market value of the Company's
Common Stock as of the close of business on the day of the repricing. The
exercise price at the time of repricing was changed from $20 per share to $5 per
share. The Board took this action based on the fact that Mr. Kenyon joined the
Company in April 1998 and was provided the share options in April 1998 as
incentive to improve Company performance and shareholder value. Subsequent to
April 1998, based upon financial results for the year ended March 31, 1998 the
market value of the shares decreased to prices ranging between $6 and $7 per
share by the end of July 1998. The price continued to decline to $5 per share in
September 1998 based on the disappointing financial results for the first
quarter of fiscal 1999. The Board determined that since the decline in the share
price related to factors occurring prior to the time Mr. Kenyon joined the
Company, maintaining his option strike at $20 per share unfairly penalized Mr.
Kenyon for factors beyond his control. The Board of Directors believed that the
repricing of the options provided Mr. Kenyon a fairer opportunity to benefit
from his contributions to the Company. Mr. Kenyon subsequently resigned from the
Company in April 1999 and his options lapsed.
J. Jeffrey Eakin, Director
24
<PAGE> 27
<TABLE>
<CAPTION>
TEN YEAR OPTIONS/SAR REPRICINGS
Number of Market Price of Exercise Price
Securities Stock at Time at Time of New Length of Original
Underlying of Repricing or Repricing or Exercise Option Term
Options/SAas Amendment Amendment Price Remaining at Date
Repriced or of Repricing or
Name Date Amended $ $ $ Amendment
- ----------------------------- ---------- -------------- ----------------- ----------------- ------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Brian Kenyon 9/18/98 50,070 $5.00 $20.00 $5.00 9.58 years
</TABLE>
Vice President, Finance
DIRECTOR'S COMPENSATION. Each director who is not an employee of the
Company is compensated at the rate of $12,000 per year and also receives $1,000
for attendance at each meeting of the Board of Directors and for each meeting of
any committee. Upon joining the Board in September 1998, Mr. Eakin received an
option to purchase 5,000 shares of Common Stock at the exercise price of $5.00
per share. In addition, the Directors participate in the Non-Employee Director
Compensation Plan which provided a one-time grant of 50,000 phantom shares of
the Company's common stock to each Director, 20% of which vested at grant and
the remainder of which vests in 10% increments upon the attainment of certain
target shares prices. Vesting is accelerated as a result of a change in control
of the Company and the plan provides that non-employee directors may have a
portion of their fees that would otherwise be paid to them deferred into phantom
shares.
EMPLOYMENT AGREEMENTS. The Company entered into an employment agreement
(the "Thompson Agreement') effective October 28, 1999 with Mark D. Thompson
pursuant to which Mr. Thompson serves as the Company's President and Interim
Chief Executive Officer. Under the terms of the Thompson Agreement, Mr. Thompson
is employed indefinitely on a month-to-month basis, subject to termination by
the Board of Directors with at least ninety (90) days advance notice. Mr.
Thompson receives a base salary of $300,000 per year. Mr. Thompson was granted
75,000 fully vested shares of Common Stock on January 13, 2000, the date Mr.
Thompson's agreement was approved by the Board. In addition, Mr. Thompson was
granted a restricted stock award of 100,000 shares of Common Stock which vest
over a four year period or upon the achievement of specified average share
prices over 10-day trading periods, and which vesting is subject to acceleration
upon the occurrence of a change in control or termination of Mr. Thompson's
employment other than for "cause" (as defined in the Thompson Agreement).
The Company entered into an employment agreement with Scott E. Brewer
effective September 1997 for an initial term to December 31, 1999, which was
automatically extended through December 31, 2000. Mr. Brewer's base annual
salary was $110,000 as of September 1, 1999. Mr. Brewer is also entitled to a
bonus keyed to the Company's profits, if any.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION. The
members of the Compensation Committee during fiscal 1999 were J. Jeffrey Eakin,
Ivan J. Winfield and Lee Howley. No member of the Compensation Committee has
served as an executive officer or employee of the Company or served during
fiscal 1999 as an executive officer of another entity of which any executive
officer of the Company was a director or member of the Compensation Committee.
25
<PAGE> 28
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information with respect to each person
or group known to the Company to be beneficial owners, as of April 7, 2000 of
more than 5% of the Common Stock and by all directors of the Company, the Chief
Executive Officer of the Company and the Named Executive Officers and by all
officers and directors of the Company as a group:
<TABLE>
<CAPTION>
NUMBER OF
SHARES PERCENT
BENEFICIALLY OF CLASS
NAME AND BENEFICIAL OWNER OWNED (3) OUTSTANDING
- ------------------------- --------- -----------
<S> <C> <C>
Robert A. Weitzel (1)................................................................... 3,324,979 48.6%
Wanger Asset Management, L.P. (4)....................................................... 500,000 7.3%
Brantley Partners IV, LP (5)............................................................ 417,000 6.1%
John P. O'Brien ........................................................................ 0(2) *
H. Jeffrey Schwartz .................................................................... 0(2) *
J. Jeffrey Eakin ....................................................................... 7,000(2) *
Mark D. Thompson (6).................................................................... 175,000 2.6%
Terri M. Jones.......................................................................... 26,000 *
Ronald P. Koegler....................................................................... 25,000 *
Michael F. Sosh......................................................................... 25,000 *
Charles P. Licata....................................................................... 25,000 *
Thomas M. Vaiden........................................................................ 0 *
Scott E. Brewer......................................................................... 41,151 *
Neal B. Davis........................................................................... 0 *
Stephen P. Metzler...................................................................... 8,545 *
Peter J. Collins........................................................................ 5,008 *
Steven S. Johnston (7).................................................................. 0 *
Brian Kenyon (8)........................................................................ 0 *
James O. Singer (9)..................................................................... 300 *
All directors, the Voting Trust, and executive officers as a group (14 people as a group) 3,662,685 52.5%
</TABLE>
* Less than one percent (1%).
(1) Mr. Robert A. Weitzel resigned from the Company in October 1999. On
November 5, 1999, Mr. Weitzel entered into a Voting Trust Agreement
among the Company, Mr. Weitzel, H. Jeffrey Schwartz, J. Jeffrey Eakin,
and John P. O'Brien, as Voting Trustees. Pursuant to the Voting Trust
Agreement, Mr. Weitzel and the Weitzel Family Limited Partnership
transferred record ownership, and thereby voting control, of 3,324,979
shares of Common Stock to the Voting Trust. Pursuant to the Voting
Trust, the Trustees, constituting the entire Board of Directors of the
Company, exercise voting power with respect to Mr. Weitzel's shares
while Mr. Weitzel exercises dispositive and investment control, subject
to the stock retention agreement. See "ITEM 1 BUSINESS - Recent
Developments". In addition, Mr. Weitzel is contractually obligated to
transfer the voting rights of any stock options he may exercise to this
Voting Trust. At April 7, 2000, all of Mr. Weitzel stock options had
lapsed.
(2) The Trustees reported beneficial ownership of 3,324,979 Common Shares
pursuant to a Voting Trust Agreement between the Company, Trustees and
Mr. Weitzel. Pursuant to the Voting Trust Agreement, Mr. Weitzel
transferred record ownership, and thereby voting control, of 3,324,979
shares of Common Stock to the Voting Trust. The Trustees reported
shared voting power with respect to all of Mr. Weitzel's Shares. See
"ITEM 1 BUSINESS - Recent Developments".
26
<PAGE> 29
(3) Includes Common Stock which may be acquired within 60 days pursuant to
the Company's September 1997 Long-Term Incentive Plan as follows:
Mr. J. Jeffrey Eakin 5,000
Terri M. Jones 25,000
Ronald P. Koegler 25,000
Michael F. Sosh 25,000
Charles P. Licata 25,000
Mr. Scott E. Brewer 25,035
Mr. Stephen P. Metzler 8,345
Mr. Peter Collins 5,008
All directors
and executive officers as a group 140,388
(4) Based solely on information set forth in a Schedule 13G filed with the
Securities and Exchange Commission on February 11, 2000; Wanger Asset
Management, L.P. ("WAM"), Wanger Asset Management Ltd ("WAM Limited").
and Acorn Investment Trust ("Acorn") (collectively "WAM Parties"),
reported the beneficial ownership of 500,000 Common Shares. The
principal business address of the WAM Parties is 227 West Monroe
Street, Suite 3000, Chicago, Illinois 60606. The WAM Parties reported
shared voting and dispositive power with respect to all such shares of
Common Stock. According to the Schedule 13G, Acorn is the only person
known to be entitled to receive all dividends from, and all proceeds
from the sale of, shares of Common Stock to the extent of more than 5%
of the class.
(5) Based solely on information set forth in a Schedule 13D filed with the
Securities and Exchange Commission on November 15, 1999. Brantley
Capital Corporation reports beneficial ownership of 104,250 Common
Shares. Brantley Partners IV, L.P. reports beneficial ownership of
312,750 shares of Common Stock. Each entity disclaims beneficial
ownership of all shares of Common Stock owned by the other entity. The
Company is unable to determine from the Schedule 13D the exact
relationship between the entities. The principal address listed for
Brantley Capital Corporation and Brantley Partners IV L.P. is 20600
Chagrin Blvd., Suite 1150, Cleveland, Ohio 44122.
(6) Mr. Thompson was granted 75,000 fully vested shares of Common Stock
effective January 13, 2000. In addition, Mr. Thompson was granted
100,000 shares of restricted stock which vests over a four year period.
Mr. Thompson holds voting rights over the entire 175,000 shares of
Common Stock.
(7) Mr. Johnston resigned from the Company in May 1999.
(8) Mr. Kenyon resigned from the Company in April 1999.
(9) Mr. Singer resigned from the Company in November 1998
27
<PAGE> 30
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See "ITEM 1 BUSINESS - Recent Developments".
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) (1) and (2) FINANCIAL STATEMENTS
See Index to Consolidated Financial Statements on page F-1.
(a) (3) Exhibits - See Item 14(c).
(b) REPORTS ON FORM 8-K
On March 1, 1999, a Current Report on Form 8-K was filed
announcing the engagement of Arthur Andersen LLP as its new
independent auditors and the dismissal of its prior auditors,
Grant Thornton LLP.
(c) Exhibit No. Description
----------- -----------
3.1 Amended and Restated Articles of Incorporation*
3.2 Amended and Restated Code of Regulations*
4.1 Specimen Common Share Certificate*
10.3 Employment Agreement between the Company and Scott E.
Brewer*
10.9 Directors' Deferred Compensation Plan*
10.10 Long-Term Incentive Plan*
10.11 Third Amended and Restated Consolidated Replacement
Credit Facility and Security Agreement, dated as of
March 31, 1997, between Bank One, Cleveland, NA, and
the Company*
10.12 First Amendment to Third Amended and Restated
Consolidated Replacement Credit Facility and Security
Agreement, dated as of October 10, 1997, between Bank
One, Cleveland, NA and the Company**
10.13 Amended and Restated Replacement Promissory Note
executed by the Company in favor of Bank One, NA,
successor by merger to Bank One, Cleveland, NA**
10.14 Second Amendment to Third Amended and Restated
Consolidated Replacement Credit Facility and Security
Agreement, dated as of December 16, 1998, between
Bank One, Cleveland, NA and the Company
10.15 Employment Agreement between the Company and Mark D.
Thompson
10.16 Non-Employee Director Compensation Plan
21.1 Subsidiaries of International Total Services, Inc.
27 Financial Data Schedule.
* Incorporated by reference from the Company's Registration Statement on Form
S-1 (Registration No. 333-29463), as amended.
** Incorporated by reference from the Company's Form 10-K for fiscal 1998 filed
on July 14, 1998.
(d) FINANCIAL STATEMENT SCHEDULES
See Index to Consolidated Financial Statements and Schedule
on Page F-1
28
<PAGE> 31
Signatures
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.
APRIL 28, 2000 INTERNATIONAL TOTAL SERVICES, INC.
- --------------
By: /s/ Mark D. Thompson
-------------------------------------
Mark D. Thompson
President and Interim Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
April 28, 2000 /s/ Mark D. Thompson
- -------------- -------------------------------------
Mark D. Thompson
President and Interim Chief Executive
Officer (Principal Executive Officer)
April 28, 2000 /s/ Ronald P. Koegler
- -------------- -------------------------------------
Ronald P. Koegler
Executive Vice President and
Controller (Principal Accounting O
Officer)
April 28, 2000 /s/ Michael F. Sosh
- -------------- -------------------------------------
Michael F. Sosh
Executive Vice President and
Treasurer (Principal Financial
Officer)
April 28, 2000 /s/ John P. O'Brien
- -------------- -------------------------------------
John P. O'Brien
Director, Co-Chairman of the Board
of Directors
April 28, 2000 /s/ H. Jeffrey Schwartz
- -------------- -------------------------------------
H. Jeffrey Schwartz
Director, Co-Chairman of the Board
of Directors
April 28, 2000 /s/ J. Jeffrey Eakin
- -------------- -------------------------------------
J. Jeffrey Eakin
Director
29
<PAGE> 32
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The following consolidated financial statements of International Total Services,
Inc. and Subsidiaries are included in Item 8:
Report of Independent Public Accountants - For the Year Ended March 31, 1999................................ F-2
Report of Independent Public Accountants - For the Years Ended March 31, 1998 and 1997...................... F-3
Consolidated Balance Sheets as of March 31, 1999 and 1998................................................... F-4
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the years ended March 31, 1999, 1998 and 1997...................................................... F-6
Consolidated Statements of Shareholders' Equity for the years ended March 31, 1999, 1998 and 1997........... F-7
Consolidated Statements of Cash Flows for the years ended March 31, 1999, 1998 and 1997..................... F-8
Notes to Consolidated Financial Statements as of March 31, 1999, 1998 and 1997.............................. F-9
The following consolidated financial statement schedule of International
Total Services, Inc. and Subsidiaries is included in Item 14(d):
Schedule II - Valuation and Qualifying Accounts for the years ended
March 31, 1999, 1998 and 1997............................................................................... F-25
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
F-1
<PAGE> 33
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
FOR THE YEAR ENDED MARCH 31, 1999
---------------------------------
To the Shareholders and Board of Directors of
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES:
We have audited the accompanying consolidated balance sheet of International
Total Services, Inc. and Subsidiaries, (an Ohio corporation), as of March 31,
1999, and the related consolidated statements of operations and comprehensive
loss, shareholders' equity, and cash flows for the year then ended. These
consolidated financial statements and the schedule referred to below are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements and schedule based on our
audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of International
Total Services, Inc. and Subsidiaries as of March 31, 1999 and the results of
their operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note B, the
Company incurred a loss from operations in fiscal 1999 and fiscal 2000 (based on
unaudited information) and has negative tangible net worth. In addition, the
Company generated negative cash flow from operations in fiscal 2000 (based on
unaudited information). These matters raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
Our audit was made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic consolidated financial statements. This schedule has been subjected to
the auditing procedures applied in the audit of the basic consolidated financial
statements and, in our opinion, fairly states in all material respects, the
financial data required to be set forth therein in relation to the basic
consolidated financial statements taken as a whole.
/s/ ARTHUR ANDERSEN LLP
Cleveland, Ohio,
April 14, 2000.
F-2
<PAGE> 34
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Shareholders and Board of Directors
INTERNATIONAL TOTAL SERVICES, INC.
We have audited the accompanying consolidated balance sheet of International
Total Services, Inc. and subsidiaries as of March 31, 1998, and the related
consolidated statements of operations and comprehensive income (loss),
shareholders' equity, and cash flows for each of the two years in the period
ended March 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
International Total Services, Inc. and subsidiaries as of March 31, 1998, and
the consolidated results of their operations and their consolidated cash flows
for each of the two years in the period ended March 31, 1998 in conformity with
accounting principles generally accepted in the United States.
Our audits were made for the purpose of forming an opinion on the basic
consolidated financial statements taken as a whole. The schedule listed in the
index to consolidated financial statements is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part
of the basic consolidated financial statements. This schedule has been subjected
to the auditing procedures applied in the audit of the basic consolidated
financial statements and, in our opinion, fairly states in all material
respects, the financial data required to be set forth therein for the years
ended March 31, 1998 and 1997 in relation to the basic consolidated financial
statements taken as a whole.
/S/ GRANT THORNTON LLP
Cleveland, Ohio
May 15, 1998, except for Note C as to
which the date is April 14, 2000
F-3
<PAGE> 35
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998
---- ----
(RESTATED)
ASSETS
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents......................................................... $ 672 $ 3,542
Accounts receivable--net of allowance for doubtful
accounts of $513 and $100, respectively....................................... 23,811 20,768
Deferred taxes.................................................................... 3,033 2,007
Uniforms, net..................................................................... 2,691 2,686
Other current assets.............................................................. 1,422 1,684
----------- -----------
Total current assets........................................................ 31,629 30,687
PROPERTY AND EQUIPMENT
Security equipment................................................................ 4,729 3,682
Service equipment................................................................. 2,636 2,362
Computer equipment................................................................ 2,882 2,049
Furniture and fixtures............................................................ 1,136 994
Autos ............................................................................ 974 1,607
Leasehold improvements............................................................ 63 56
----------- -----------
12,420 10,750
Less accumulated depreciation and amortization.................................... 5,773 5,255
----------- -----------
Property and equipment, net................................................. 6,647 5,495
INTANGIBLES, less accumulated amortization of
$3,932 and $1,636, respectively................................................... 32,254 25,295
SECURITY DEPOSITS AND OTHER.......................................................... 104 154
----------- -----------
TOTAL ASSETS................................................................ $ 70,634 $ 61,631
=========== ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-4
<PAGE> 36
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--CONTINUED
MARCH 31
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998
---- ----
(RESTATED)
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable......................................................... $ 1,871 $ 1,226
Accrued payroll and employee benefits.......................................... 17,832 12,530
Other accrued expenses......................................................... 8,554 5,342
Income taxes payable........................................................... 54 98
------------- -----------
Total current liabilities................................................ 28,311 19,196
DEFERRED TAXES.................................................................... 623 434
LONG-TERM DEBT OBLIGATIONS........................................................ 10,859 3,682
SHAREHOLDERS' EQUITY
Common shares, without par value, stated at $.01 per share -authorized 20,000
shares, 6,662 shares
issued and outstanding at March 31, 1999 and 1998........................... 67 67
Additional paid-in capital..................................................... 31,211 31,211
Accumulated other comprehensive loss:
Foreign currency translation adjustment.................................... (387) (204)
Retained earnings (deficit).................................................... (50) 7,245
-------------- -----------
Total shareholders' equity............................................... 30,841 38,319
------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY............................... $ 70,634 $ 61,631
============= ===========
</TABLE>
F-5
The accompanying notes are an integral part of these Consolidated
Financial Statements.
<PAGE> 37
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
FOR THE YEARS ENDED MARCH 31
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(RESTATED) (RESTATED)
<S> <C> <C> <C>
Net operating revenues....................................... $ 226,872 $ 172,367 $ 115,242
Cost of revenues............................................. 205,224 147,311 99,037
-------------- ------------ -------------
GROSS MARGIN........................................... 21,648 25,056 16,205
Selling, general and administrative expenses................. 24,650 15,015 12,627
Amortization expense......................................... 2,334 988 208
-------------- ------------ -------------
OPERATING PROFIT (LOSS)................................ (5,336) 9,053 3,370
Interest expense, net........................................ 994 719 637
Other (income) expense, net.................................. 171 (23) 8
-------------- ------------ -------------
1,165 696 645
-------------- ------------ -------------
INCOME (LOSS) BEFORE INCOME TAXES...................... (6,501) 8,357 2,725
Provision for income taxes................................... 794 3,500 1,156
-------------- ------------ -------------
NET INCOME (LOSS)...................................... (7,295) 4,857 1,569
============== ============ =============
Other comprehensive income (loss)
Foreign currency translation adjustment............... (183) (105) (21)
-------------- ------------ -------------
COMPREHENSIVE INCOME (LOSS).......................... $ (7,478) $ 4,752 $ 1,548
============== ============ =============
Net income (loss) per share:
Basic..................................................... $ (1.10) $ 0.93 $ 0.31
============== ============ =============
Diluted................................................... $ (1.10) $ 0.92 $ 0.31
============== ============ =============
Weighted average number of shares outstanding:
Basic..................................................... 6,662 5,215 5,089
============== ============ =============
Diluted................................................... 6,662 5,265 5,089
============== ============ =============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-6
<PAGE> 38
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ACCUMULATED
ADDITIONAL OTHER RETAINED TOTAL
PREFERRED COMMON PAID-IN COMPREHENSIVE EARNINGS TREASURY SHAREHOLDERS'
SHARES SHARES CAPITAL LOSS (DEFICIT) STOCK EQUITY
------ ------ ------- ---- --------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT APRIL 1, 1996,
AS PREVIOUSLY REPORTED......... $ 220 $ 64 $ 362 $ (78) $ 3,998 $ (588) $ 3,978
Prior period adjustments........ -- -- -- -- (269) -- (269)
--------- -------- --------- -------- -------- --------- ----------
BALANCE AT APRIL 1, 1996,
AS RESTATED.................... 220 64 362 (78) 3,729 (588) 3,709
--------- -------- --------- -------- -------- --------- ----------
Purchase of common shares
for treasury.................. -- -- -- -- -- (1,226) (1,226)
Issuance of common shares
from treasury................. -- -- 171 -- -- 31 202
Foreign currency translation adjustment -- -- -- (21) -- -- (21)
Dividends declared--Class E
preferred stock............... -- -- -- -- (52) -- (52)
Redeem Class E Preferred Stock.. (200) -- -- -- -- -- (200)
Acquisition and merger of
affiliate..................... -- -- 35 -- (1,219) 2 (1,182)
Retirement of treasury stock.... (20) (27) (95) -- (1,639) 1,781 --
Net income, as restated......... -- -- -- -- 1,569 -- 1,569
--------- -------- --------- -------- -------- --------- ----------
BALANCE AT MARCH 31, 1997,
AS RESTATED.................... -- 37 473 (99) 2,388 -- 2,799
Purchase of common shares....... -- -- (165) -- -- -- (165)
Contribution of common shares
by shareholder................ -- -- 805 -- -- -- 805
Initial Public Offering--
issuance of common shares..... -- 30 29,963 -- -- -- 29,993
Foreign currency translation adjustment -- -- (105) -- -- (105)
Other........................... -- -- 135 -- -- -- 135
Net income, as restated......... -- -- -- -- 4,857 -- 4,857
--------- -------- --------- -------- -------- --------- ----------
BALANCE AT MARCH 31, 1998,
AS RESTATED.................... -- 67 31,211 (204) 7,245 -- 38,319
Foreign currency translation adjustment -- -- -- (183) -- -- (183)
Net loss........................ -- -- -- -- (7,295) -- (7,295)
--------- -------- --------- -------- --------- --------- -----------
BALANCE AT MARCH 31, 1999....... $ -- $ 67 $ 31,211 $ (387) $ (50) $ -- $ 30,841
========= ======== ========= ======== ========= ========= ===========
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-7
<PAGE> 39
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MARCH 31
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(RESTATED) (RESTATED)
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) ........................................... $ (7,295) $ 4,857 $ 1,569
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation............................................... 1,240 948 837
Amortization............................................... 2,334 988 208
Other...................................................... (104) 334 1,498
Deferred income taxes...................................... (837) (73) (390)
Changes in working capital:
Accounts receivable...................................... (3,043) (8,984) (2,709)
Other assets............................................. 307 147 (1,144)
Trade accounts payable................................... 645 (57) (161)
Accrued expenses......................................... 8,513 5,594 2,084
----------- ------------ -------------
Net cash provided by operating activities.............. 1,760 3,754 1,792
INVESTING ACTIVITIES:
Purchases of property and equipment........................... (2,373) (1,508) (1,052)
Proceeds received from sale of equipment...................... 446 -- 160
Purchased property and equipment of acquired businesses....... (187) (1,699) --
Payments for acquisitions of businesses, primarily
by purchase of service contracts............................ (9,510) (19,042) (2,760)
Deposit on acquisition of business............................ -- -- (2,571)
----------- ------------ -------------
Net cash used in investing activities.................... (11,624) (22,249) (6,223)
FINANCING ACTIVITIES:
Net proceeds from Initial Public Offering..................... -- 29,993 --
Net borrowings (payments) on note payable to bank............. 7,177 (2,400) 2,850
(Payments) borrowings on subordinated debt.................... -- (3,000) 3,000
Principal payments on long-term debt.......................... -- (5,439) --
Purchase of Company common shares............................. -- (165) (1,226)
Other......................................................... -- 135 153
----------- ------------ -------------
Net cash provided by financing activities.................. 7,177 19,124 4,777
Effect of exchange rates on cash................................. (183) (105) (21)
----------- ------------ -------------
Net (decrease) increase in cash and cash equivalents....... (2,870) 524 325
Cash and cash equivalents at beginning of year................... 3,542 3,018 2,693
----------- ------------ -------------
Cash and cash equivalents at end of year......................... $ 672 $ 3,542 $ 3,018
=========== ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest................................................... $ 771 $ 841 $ 782
=========== ============ =============
Income taxes............................................... $ 1,412 $ 3,943 $ 1,231
=========== ============ =============
</TABLE>
The accompanying notes are an integral part of these Consolidated
Financial Statements.
F-8
<PAGE> 40
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999, 1998 AND 1997
(TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BUSINESS
International Total Services, Inc. and Subsidiaries (the "Company"), an
Ohio corporation, is a provider of aviation security and other aviation
services, providing personnel and management support to airlines at airports
primarily in the United States and Europe. The Company also provides commercial
staffing services and security products to various businesses in the United
States.
FISCAL YEAR
The Company's fiscal year ends on March 31. All references to fiscal
years in these notes to the consolidated financial statements represent the year
in which the fiscal period ends (i.e. fiscal 1999 is the year ended March 31,
1999) unless otherwise noted.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned foreign and domestic subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
REVENUE RECOGNITION
Revenues are recognized at the time that aviation and commercial
security services are provided. Revenues generated from sales of security
products are recognized when the products are delivered and installed.
TRANSLATION OF FOREIGN CURRENCIES
All balance sheet accounts of foreign operations are translated into
U.S. dollars at the fiscal year-end rate of exchange, and statement of
operations items are translated at the weighted average exchange rate for the
fiscal year. The resulting translation adjustments are reflected in
comprehensive income (loss) and displayed as a separate component of
shareholders' equity.
STATEMENTS OF CASH FLOWS
During fiscal 1998 and 1997, the Company entered into the following
noncash transactions (during fiscal 1999, there were no such noncash
transactions):
(1) During fiscal 1998, the Company's principal shareholder,
who was also, at the time, the Company's Chairman and Chief Executive
Officer, contributed 73,101 common shares, valued at approximately
$805,000, to a former employee to settle the Company's previously
recorded liability to him.
(2) During fiscal 1997, the Company redeemed 200 shares of
Class E preferred shares from its principal shareholder in settlement
of a $200,000 note receivable from him. In addition, the Company
declared $52,000 in
F-9
<PAGE> 41
dividends, including all dividend arrearages, on the preferred shares
and paid the dividends by reducing the accrued interest receivable due
on the note.
(3) During fiscal 1997, the Company acquired an affiliated
entity in a transaction accounted for in a manner similar to a pooling.
The acquisition was completed by issuing 4,126 common shares from
treasury to the Company's (and the affiliate's) principal shareholder,
paying $12,500 to the other shareholders of the affiliate and by
offsetting $1.7 million in notes and accrued interest receivable due to
the Company from the shareholders of the affiliate against
corresponding obligations of the affiliate to such shareholders. The
notes and interest receivable included $1.3 million due from the
Company's principal shareholder. The shareholders of the affiliate were
also officers of the Company.
FINANCIAL INSTRUMENTS
The Company considers all highly liquid investments with original
maturities of three months or less to be cash and cash equivalents. Other
financial instruments consisting of trade and other receivables, and long-term
debt, are considered to have a fair value which approximates their carrying
value at March 31, 1999 and 1998, due to the short term duration of receivables
and the fact that the debt instruments have variable rate interest features and
a relatively short-term duration.
UNIFORMS
Uniforms consist of uniforms on hand that have not been issued to
employees and uniforms in service. Uniforms in service are recorded at cost and
amortized over their expected useful lives of 18 months.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided
over the estimated useful lives of the respective assets, principally five or
seven years, using the straight-line method.
INTANGIBLES
Intangibles consist primarily of goodwill, representing the excess
purchase price paid over the fair value of net assets acquired from the
acquisitions of various aviation service and commercial security businesses,
primarily through the assumption of security service contracts. Intangibles
include the fair value of those service contracts acquired in the acquisitions.
Goodwill is being amortized on a straight-line basis over the life of
the contracts, including anticipated renewals (generally 20 years), based on the
Company's historical retention rate, giving consideration to additional business
obtained or obtainable as a result of entering new markets through the
acquisition of existing contracts. The service contracts are being amortized on
a straight-line basis over their remaining lives, up to a maximum of five years.
Accumulated amortization of intangibles was $3,932,000 and $1,636,000 at March
31, 1999 and 1998, respectively. Management of the Company regularly evaluates
the recoverability of its goodwill and long-lived assets under APB Opinion No.
17 "Intangible Assets" and Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets To Be Disposed Of."
The Company uses projected undiscounted future cash flows to determine whether
the carrying amount of the asset can be recovered over its remaining life. Based
on the assessments made, management believes that there has been no impairment
of the Company's domestic goodwill and long-lived assets. The Company recorded a
$472,000 write-down of contracts and goodwill at two of its foreign locations.
See Note F for a discussion of the foreign operations.
SELF-INSURANCE RESERVES
The Company is self-insured up to a stop loss of $250,000 per claim for
general liability and workers' compensation claims. An estimated provision for
claims under the self-insurance programs is recorded and revised annually based
on industry trends, historical experience and management judgment. Changes in
assumptions for such matters as legal actions, medical costs and actual
experience could cause estimates to change in the near term.
F-10
<PAGE> 42
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Since actual results could differ from those estimates,
management revises estimates as better information becomes available.
ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities."
This Statement establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires companies to recognize all
derivatives on the balance sheet as assets and liabilities, measured at fair
value. Gains or losses resulting from changes in the values of those derivatives
would be accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This Statement is effective for fiscal years
beginning after June 15, 2000. The Company will adopt this Statement on April 1,
2001, and it is expected not to have a material effect on its financial
statements.
RECLASSIFICATIONS
All 1997 share and per share amounts have been adjusted for the
12,892.62 for 1 stock split declared on June 17, 1997. Certain reclassifications
have been made to the prior periods' consolidated financial statements to
conform with the 1999 presentation.
NOTE B - GOING CONCERN
-------------
The accompanying consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities, including any commitments and/or contingent
liabilities, in the normal course of business. The Company incurred a loss from
operations for fiscal 1999 and fiscal 2000, and has negative tangible net worth.
Operations have generated negative cash flow for fiscal 2000. These factors
raise doubts about the Company's ability to continue as a going concern.
The Company's strategy is to use the established business base as a
platform for expanding its services and currently will not pursue any further
acquisitions (other than the two (2) already consummated during the first
quarter of fiscal 2000) due to the unavailability of funds. It is management's
intention to seek higher overall margins by concentrating its marketing efforts
on higher margin opportunities, to formulate and implement business process
improvement initiatives, evaluate past acquisitions, improve customer services
and reduce and/or control costs with the goal of improving operating cash flow
and profits. There can be no assurance that capital will be obtained from any
sources or that this plan will be successful.
The Company's continuation as a going concern will ultimately depend on
its ability to (i) achieve profitable operations which generate positive cash
flows and (ii) obtain other sources of capital with new debt or equity
financing. The financial statements do not include any adjustments relating to
the recoverability of assets or the amount to settle liabilities that might be
necessary should the Company be unable to continue as a going concern.
NOTE C - RESTATEMENT
-----------
Subsequent to March 31, 1999 management determined that its
previously issued fiscal 1998, 1997, 1996 and 1995 financial statements and
the unaudited results for the first, second and third quarters of fiscal 1999
required restatement. See Note U. This restatement is to correct accounting
that resulted from the failure of the Company to properly consider
F-11
<PAGE> 43
information available at the time those financial statements were prepared,
including information that may not have been considered due to errors and
omissions in accounting or corporate records.
The Company's fiscal 1998 and 1997 financial statements have been
restated to (i) increase Workers' Compensation expense, (ii) charge to expense
in fiscal 1998 and 1997 vacation costs incurred for those years but not accrued
(iii) record various liabilities relating to corporate rent that should have
been accrued in fiscal 1998 (iv) adjust the 1998 and 1997 income tax provisions
for the tax effects of the adjustments described above. The total and per share
effects of each of these adjustments on the previously reported results of
operations for 1998 and 1997 and the restated amounts are as follows:
<TABLE>
<CAPTION>
Years Ended March 31,
---------------------
1998 1997
---- ----
Earnings Per Earnings Per
Net Income Share* Net Income Share*
---------- ------ ---------- ------
<S> <C> <C> <C> <C>
Amounts previously reported $5,245 $1.01 $1,696 $0.33
------ ----- ------ -----
Restatement Adjustments:
Increase in Worker's Compensation (272) (.05) (66) (.01)
Increase in Vacation Expense (304) (.06) (142) (.03)
Increase in miscellaneous operating expenses (70) (.02)
Related income tax adjustments 258 .05 81 .02
------ --- ------ ------
Total restated adjustments (388) (.08) (127) (.02)
------- ----- ----- -----
Restated Amount $4,857 $0.93 $1,569 $0.31
====== ===== ====== =====
</TABLE>
*Calculated using the weighted average number of basic shares
outstanding. The diluted per share amounts for these periods would be
approximately the same as the basic per share amounts presented above.
The accompanying financial statements also reflect adjustments to the
April 1, 1996 balance of retained earnings for the effects as of
that date of changes to the Company's previously reported fiscal 1996, 1995 and
prior financial statements as follows:
Retained Earnings as of April 1, 1996,
as previously reported $ 3,998
------
Prior period adjustments (net of tax):
Increase in Workers Compensation expense
1996 (26)
1995 (5)
Increase in Vacation expense
1996 (82)
1995 (60)
Prior (96)
-------
(269)
Retained Earnings at April 1, 1996, as restated $3,729
------
Impact on Earnings per share:*
Decrease to 1996 Net Income per Share $(0.02)
=======
Increase to 1995 Net Loss per Share $ 0.01
=======
F-12
<PAGE> 44
*Calculated using the weighted average number of basic shares outstanding. The
diluted per share amount for these periods would be the same as the basic per
share amounts presented above.
NOTE D - COMPREHENSIVE INCOME (LOSS)
--------------------------
Effective April 1, 1998 the Company adopted SFAS No. 130, "Reporting
Comprehensive Income" which requires disclosure of comprehensive income (loss).
Comprehensive income (loss) is defined as changes in shareholders' equity from
non-owner sources and for the Company, includes net income (loss) and changes in
the foreign currency translation adjustment. The adoption of this statement had
no impact on the Company's net income (loss) or shareholders' equity. Prior year
financial statements have been reclassified to conform to the requirements of
this statement.
NOTE E - ACQUISITIONS OF OPERATING CONTRACTS
-----------------------------------
During fiscal year 1999, the Company acquired aviation services and
commercial staffing contracts and related property and equipment from six
companies for an aggregate purchase price of approximately $9.7 million. During
the fiscal year ended March 31, 1998, the Company acquired aviation service and
commercial security contracts and related property and equipment from eleven
entities for an aggregate purchase price of approximately $23.3 million. The
acquisitions have been accounted for under the purchase method of accounting
with the purchase price allocated to the contracts based upon their estimated
fair market values. The purchase price allocation for the 1999 acquisitions
resulted in goodwill of approximately $7.4 million, which is being amortized to
operations on a straight-line basis over 20 years. The purchase price allocation
for the 1998 acquisitions resulted in goodwill of approximately $19.8 million.
The operating results related to the acquired contracts have been included in
the Company's results of operations from the respective dates of acquisition.
The following unaudited pro forma results of operations give effect to
the above acquisitions as if the acquisitions had occurred at April 1, 1997:
<TABLE>
<CAPTION>
Years Ended March 31
--------------------------
1999 1998
---- ----
<S> <C> <C>
Net operating revenues.............................. $ 232,536 $ 232,446
Net income (loss)................................... $ (7,030) $ 7,088
Net income (loss) per share:
Basic ..................................... $ (1.06) $ 1.36
Diluted ..................................... (1.06) $ 1.35
</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 fiscal 1998, or of results which may
occur in the future.
NOTE F - FOREIGN OPERATIONS
------------------
In the fourth quarter of fiscal 1999, management decided to abandon all
operating activities, consisting of aviation services, in Italy and the Czech
Republic due to poor operating performance (total operating losses of
approximately $269,000). This resulted in a charge of $190,000 in fiscal 1999 to
operations to write-off all of the remaining assets, consisting primarily of
accounts receivable and other net assets associated with these entities.
The Company also decided to cease all of its operating activities,
consisting of aviation services, in Germany based on unfavorable past
performance and the insolvency of its largest customer. A charge of $457,000 to
operations was incurred in fiscal 1999 to recognize the write-off of the related
net assets, exclusive of intangibles. These assets primarily consisted of
accounts receivable and other assets. For the fiscal year ending March 31, 1999,
prior to the charges discussed above, the German affiliate recorded a loss from
operations of approximately $353,000.
F-13
<PAGE> 45
Also as a result of the customer's insolvency mentioned above, the
Company wrote off its $409,000 investment in the United Kingdom joint venture
with this customer.
In conjunction with the above, the Company recognized an impairment
charge of approximately $472,000; which is equal to the value of unamortized
contracts and goodwill associated with the Italian and German entities, as all
operations within these countries were ceased. This charge is included as a
component of selling, general and administrative expenses in the accompanying
statement of operations. The Company reviewed the realizability of its contracts
and related goodwill based on historical and future profitability and concluded
it does not expect to receive any future benefit from these assets.
Management also evaluated the receivables associated with its
Philippine operations. Based on management's analysis of the realizabilty of the
Philippine operations receivables, the Company recorded an additional allowance
for doubtful accounts of approximately $247,000 at March 31, 1999.
The above charges were recorded during the fourth quarter of fiscal
1999.
NOTE G - FINANCING ARRANGEMENTS
----------------------
Prior to August 27, 1999, the Company had a credit facility secured by
substantially all accounts receivable, equipment, and other assets. The credit
facility provided for borrowings under a revolving promissory note of up to $30
million through September 30, 1999, limited to a percentage of eligible
receivables. The revolving promissory note bears interest at a variable rate
based on the Company's total debt to tangible net worth ranging from LIBOR plus
1.50% to the bank's prime rate plus 3.00%. The Company had approximately
$10,859,000 and $3,682,000 outstanding under the facility at March 31, 1999 and
1998, respectively with weighted average interest rates of 7.57% and 7.13%,
respectively.
The credit facility limited the Company's ability to incur additional
indebtedness and pay dividends, required the Company to maintain prescribed
debt-to-equity and fixed charge coverage ratios, minimum net worth levels, and
to satisfy certain other financial covenants. At March 31, 1999, the Company was
not in compliance with certain of these covenants. Waivers were obtained for
these covenant violations as of March 31, 1999 and waivers were obtained through
March 31, 2000 for those covenants which the Company does not anticipate meeting
through the end of fiscal 2000.
On August 27, 1999, the lender agreed to modify the credit facility.
The modifications included a six-month extension of the maturity date to April
1, 2000, a $5,000,000 reduction in the maximum available borrowings to
$25,000,000, and a $3,000,000 reduction in the annual capital asset acquisition
allowance to $1,000,000. In April 2000, the Bank Credit Facility was amended and
extended to April 1, 2001. See Note T Subsequent Events. At April 7, 2000,
outstanding obligations under this facility were $22.9 million.
NOTE H - LEASE OBLIGATIONS
-----------------
The Company leases certain equipment and facilities under operating
leases that expire at various dates. The future minimum lease commitments under
these operating leases are as follows:
YEARS ENDED MARCH 31,
---------------------
2000................................................. $ 1,231
2001................................................. 1,032
2002................................................. 692
2003................................................. 458
2004................................................. 296
Thereafter........................................... 29
----------
Total Future Minimum Lease Commitments............... $ 3,738
==========
Rent expense incurred under operating leases was $3.3 million, $2.2
million and $1.4 million for the years ended March 31, 1999, 1998 and 1997,
respectively.
F-14
<PAGE> 46
NOTE I - LITIGATION
----------
The Company is subject to on-going legal proceedings and claims which
arise in the ordinary course of its business. While the ultimate outcome of
these matters cannot be reasonably estimated at this time, these actions, when
ultimately settled or adjudicated, will not, in the opinion of management, have
a material adverse effect on the financial condition or results of operations of
the Company. The Company has accrued for matters where management has determined
that it is probable a liability for which a loss or range of loss can be
reasonably estimated has been incurred. The Company does not believe that the
ultimate outcome of these proceedings will have a material adverse effect on the
Company's business, assets, financial condition or results of operations,
however, in the event any of the foregoing litigation results in an award of
money damages against the Company, given the Company's liquidity situation, any
award could adversely affect the financial condition of the Company.
NOTE J - RELATED PARTY TRANSACTIONS
--------------------------
The Company had notes receivable due from the Company's principal
shareholder, approximately $325,000, which were fully repaid in September 1997.
Interest income on shareholder notes amounted to $14,000 and $119,000 in the
years ended March 31, 1998 and 1997, respectively. See discussions of other
Related Party Transactions in Notes A and T.
NOTE K - SELF INSURANCE RESERVE
----------------------
The Company carries insurance for workers' compensation and general
liability matters. The Company self insures all employees except for those in
states that require coverage under the state's workers' compensation funds. The
insurance coverages have deductibles of $250,000 per occurrence. Under the terms
of the insurance agreement, the Company has $210,000 in cash on deposit with
insurance carriers, which is included in other current assets in the
accompanying consolidated balance sheets, and an outstanding letters of credit
in the amount of $990,000 at March 31, 1999. These funds and letter of credit
serve as collateral for any claims incurred but not reported.
The Company has an accrued liability for unpaid workers' compensation
claims and claims incurred but not reported (IBNR) of approximately $3.8 million
and $1.8 million at March 31, 1999 and 1998, respectively which is included in
accrued payroll and employee benefits in the accompanying consolidated balance
sheets. The Company has accrued liability for litigation matters that have
arisen in the normal operation of the Company of approximately $1.5 million and
$1.2 million, respectively at March 31, 1999 and 1998, which is included in
other accrued expenses in the accompanying consolidated balance sheets.
NOTE L - OTHER ACCRUED EXPENSES
----------------------
Other accrued expenses includes the following at March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Legal and professional (including litigation reserve) $ 1,856 $ 1,226
FAA fines and aircraft damages 1,329 512
Other accrued accounts (all individually below $500) 5,369 3,604
-------- --------
Total other accrued expenses $ 8,554 $ 5,342
======= =======
</TABLE>
NOTE M - INCOME TAXES
The components of income (loss) before income taxes and provision for
income taxes consist of the following:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
(Restated) (Restated)
INCOME (LOSS) BEFORE INCOME TAXES
Domestic....................................................... $ (4,718) $ 7,914 $ 2,289
Foreign........................................................ (1,783) 443 436
------------- ------------ ----------
</TABLE>
F-15
<PAGE> 47
<TABLE>
<S> <C> <C> <C>
Total..................................................... $ (6,501) $ 8,357 $ 2,725
============= ============ ==========
PROVISION FOR INCOME TAXES
CURRENT TAX EXPENSE:
Federal..................................................... $ 1,270 $ 2,650 $ 1,095
State....................................................... 145 700 253
Foreign..................................................... 215 223 199
------------ ------------ ----------
Total current............................................. 1,630 3,573 1,547
DEFERRED TAX EXPENSE (BENEFIT):
Federal..................................................... (2,187) (78) (331)
State....................................................... (366) 5 (60)
------------ ------------ ----------
Total deferred............................................ (2,553) (73) (391)
------------ ------------ ----------
Total provision before valuation allowance
on net deferred tax assets.................. (923) 3,500 1,156
Valuation allowance on net deferred tax assets............ 1,717 - -
Total provision for income taxes.................................. $ 794 $ 3,500 $ 1,156
============= ============ ===========
</TABLE>
A reconciliation of the provision for income taxes computed at the
United States federal statutory tax rate to the Company's effective tax rate is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
1999 1998 1997
---- ---- ----
(Restated) (Restated)
<S> <C> <C> <C>
Tax at U.S. federal income tax rate (34%)......................... $ (2,210) $ 2,841 $ 926
Valuation allowance............................................... 1,717 -- --
State income taxes--net of U.S. federal tax benefit............... 195 452 118
Difference between foreign and U.S. federal tax rates............. 101 72 51
Nondeductible items............................................... 718 57 60
Other--net........................................................ 273 78 1
------------ ------------ ----------
$ 794 $ 3,500 $ 1,156
============ ============ ==========
Effective tax rates.......................................... (12.20%) 41.9% 42.4%
============ ============ ==========
</TABLE>
The Company does not provide deferred income taxes on unremitted
earnings of foreign subsidiaries, as such funds are deemed indefinitely
reinvested in those operations.
F-16
<PAGE> 48
Deferred income taxes reflect the tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and for income tax purposes. Significant components of deferred tax
assets and liabilities relate to the following at March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
DEFERRED TAX ASSETS: (Restated)
<S> <C> <C>
Accrued workers' compensation............................................ $ 1,538 $ 785
Accrued legal expenses................................................... 904 571
Deferred compensation.................................................... 81 81
Amortization of intangibles.............................................. 101 35
Allowance for doubtful accounts.......................................... 235 40
State income taxes....................................................... -- 63
Other accruals not currently deductible.................................. 928 554
Other.................................................................... 963 132
---------- -------
Total Deferred Tax Assets................................................ 4,750 2,261
---------- -------
DEFERRED TAX LIABILITIES:
Depreciation............................................................. 610 620
Other.................................................................... 13 68
---------- -------
Total Deferred Tax Liabilities........................................... 623 688
---------- -------
Net Deferred Tax Asset before Valuation Allowance........................ 4,127 1,573
Less: Valuation Allowance............................................ ( 1,717) -
---------- -------
Net Deferred Tax Assets............................................... $ 2,410 $ 1,573
============ =======
</TABLE>
The Company periodically reviews the need for a valuation allowance
against certain deferred tax assets and recognizes these assets to the extent
that realization is more likely than not. Based upon a review of earnings
history, taxes paid, and tax losses for fiscal 2000, the Company recognized to
the extent expected to be realized, the tax benefit of $2.4 million. The Company
provided a valuation allowance of $1.7 million in 1999, primarily against the
net deferred tax assets relating to significant accruals for which utilization
is uncertain, since the Company is unable to determine, at this time, that the
generation of future taxable income can be predicted to be more likely than not.
The net change in the valuation allowance for the year ended March 31, 1999 was
$1.7 million and $0 for the two prior years.
The net deferred tax assets are classified in the balance sheet as
follows at March 31:
<TABLE>
<CAPTION>
1999 1998
---- ----
(Restated)
<S> <C> <C>
Current deferred income taxes..................................... $ 3,033 $ 2,007
Noncurrent deferred income taxes.................................. (623) (434)
-------------- --------------
Net deferred tax assets......................................... $ 2,410 $ 1,573
============= ==============
</TABLE>
NOTE N - INITIAL PUBLIC OFFERING
-----------------------
On September 24, 1997, the Company completed a public offering of
3,021,477 shares of its Common Stock and received net proceeds of approximately
$30 million. The Company used the proceeds from the Initial Offering to repay
indebtedness and for general corporate purposes, including working capital, and
mostly to fund acquisitions.
NOTE O - CAPITAL STOCK
-------------
The Company has authorized Common Stock at March 31, 1999 of 20,000,000
shares. The Common Stock has one vote per share.
The Company had authorized 5 million preferred shares. The Company had
issued ten shares of Class A preferred stock for $20,000 and 200 shares of Class
E preferred stock for $200,000. All preferred shares were redeemed and retired
in 1997. Prior to their redemption, in March 1997, the Company declared and paid
dividends on the Class E preferred shares in the amount of $52,000, which
included all dividends in arrears, at that date.
F-17
<PAGE> 49
NOTE P - NET INCOME (LOSS) PER SHARE
---------------------------
Net income (loss) per share--basic is based on the weighted average
number of shares outstanding during each period.
Net income (loss) 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 potentially dilutive common share
obligations outstanding.
For purposes of calculating the basic and diluted net income (loss) per
share, no adjustments have been made to net income (loss). The share amounts
used for the years ended March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Basic common shares (weighted average) 6,662 5,215 5,089
Dilutive stock options - 50 -
----- ----- -----
Diluted common shares 6,662 5,265 5,089
===== ===== =====
</TABLE>
There were no dilutive stock options outstanding at March 31, 1999.
NOTE Q - LONG-TERM INCENTIVE PLAN
------------------------
In September 1997, the Company adopted the Long-Term Incentive Plan
(the "Plan") for its officers and directors. The Company accounts for the Plan
under APB Opinion No. 25 and related interpretations. The Plan allows the
Company to grant options to officers and directors for up to 500,000 common
shares. Options currently outstanding become exercisable one to five years from
the grant date and expire 10 years after the grant date. The options are
exercisable at the market price of the Company's common shares on the date of
grant. Accordingly, no compensation cost has been recognized for the Plan. Had
compensation cost for the Plan been determined based on the fair value of the
options at the grant date consistent with the method of SFAS No. 123,
"Accounting for Stock-Based Compensation", the Company's net income (loss) and
earnings (loss) per share for the years ended March 31, 1999 and 1998 would have
been reduced (increased) to the proforma amounts indicated below. There were no
outstanding options at March 31, 1997.
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
---------------------------
1999 1998
---- ----
<S> <C> <C>
NET INCOME (LOSS)
(Restated)
As reported ........................................................ $ (7,295) $ 4,857
Proforma ........................................................ $ (7,636) $ 4,561
NET INCOME (LOSS) PER SHARE--BASIC
As reported ........................................................ $ (1.10) $ 0.93
Proforma ........................................................ $ (1.15) $ 0.87
NET INCOME (LOSS) PER SHARE--DILUTED
As reported ........................................................ $ (1.10) $ 0.92
Proforma ........................................................ $ (1.15) $ 0.87
</TABLE>
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes options-pricing model with the following weighted-average
assumptions: expected volatility of 45%; risk-free interest rate of 6.24%; and
expected lives of 10 years. The effect of applying SFAS 123 for the pro forma
disclosures are not representative of the effect expected on reported net income
(loss) per share in future years, since the valuations are based on highly
subjective assumptions about the future, including stock price volatility and
exercise patterns.
F-18
<PAGE> 50
A summary of the status of the Company's plan as of and for the years
ended March 31 are as follows:
<TABLE>
<CAPTION>
1999 1998
---------------------------------- -----------------------------------
Weighted Average Weighted Average
Exercise price Exercise price
Shares per share Shares per share
------------ --------------------- ------------ ----------------------
<S> <C> <C> <C> <C>
Outstanding at beginning of year... 265 $ 11.25 - -
Granted................................ 97 5.95 265 $ 11.25
Forfeited.............................. (115) 11.25 - -
---------- ---------- ---------- --------
Outstanding at end of year......... 247 $ 9.17 265 $ 11.25
========== ========== ========== ========
Options exercisable at end of year.. 38 0
========== ==========
Weighted average fair value of
options granted during the year... $ 13.78 $ 7.43
========== ==========
Weighted average remaining
contractual life (years)............. 8.78 9.49
========== ==========
</TABLE>
On September 18, 1998, the Company reset the price of 50,070 stock
options to $5.00 per share. On that same day, the Company reset the price of
16,690 stock options to $11.25 per share. There were no options exercised during
fiscal 1998 or 1999. The exercise prices of outstanding options on March 31,
1999 range from $4.50 to $11.25.
The outstanding options expire at various dates through the year 2008.
A summary of stock options outstanding and exercisable as of March 31, 1999 is
as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ---------------------------------------------------------- ------------------------------------------
Weighted Average
Remaining Weighted Average
Number Contractual Life Per Share Exercise Number Weighted Average
Outstanding (years) Price Exercisable Per Share Exercise Price
- --------------- -------------------- ------------------- ------------- --------------------------
<S> <C> <C> <C> <C>
25 9.58 $ 4.50 - -
55 9.06 $ 5.00 - -
167 8.56 $11.25 38 $11.25
--- --
247 38
=== ==
</TABLE>
As of March, 31, 1998 there were approximately 265,000 stock options
outstanding with a weighted average remaining contractual life of 9.49 years and
a weighted average exercise price or $11.25 per share. None of the options were
exercisable as of March 31, 1998.
NOTE R - DEFINED CONTRIBUTION PLANS
--------------------------
The Company and its subsidiaries have a defined contribution (401k)
plan for substantially all employees. Employees may contribute up to 15% of
their pay. Currently, the Company contributes, in cash, amounts equal to 5% of
the employee's contributions, up to the first 8% of the employee's pay. The
employee vests in the Company match over a five year period on a pro rata basis.
The amount expensed for the Company's matching contribution to the plan was
$95,000 and $14,000 in fiscal 1999 and 1998, respectively.
NOTE S - REPORTABLE SEGMENTS
-------------------
In 1999, the Company adopted SFAS No. 131 "Disclosures about Segments
of an Enterprise and Related Information" This statement requires companies to
identify segments consistent with the manner in which management makes decisions
about allocating resources to segments and measuring their performance. It also
requires disclosures of products and services, geographic areas and major
customers. The following disclosures have been made in accordance with this new
statement.
The Company has three segments: Aviation Staffing Services, Commercial
Security Staffing Services, and Security Products Distribution. The aviation
services offered by the Company include skycap, baggage handling, aircraft
appearance, wheelchair and electric cart operations. The Company's commercial
staffing services extend beyond aviation security, and include the provision of
uniformed security officers, facility access control, security consulting,
special event security and
F-19
<PAGE> 51
security assessment to a broad range of clients. The Security Products
Distribution segment offers a line of security products including airport and
commercial security checkpoint products and hand-held metal detectors.
The Company's reportable segments are strategic business units that
offer different products and services to different markets. Aviation services is
treated as a separate business because of its unique marketing focus and the
specialized needs of its customer base, the airline industry. Commercial
staffing services is treated as a separate business due to its focus on security
services and its wide range of clients. Security Products is treated as a
separate business because it markets tangible security goods.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (see Note A).
The following table provides selected information about the Company's
three business units. The Company makes operating decisions based on segment
revenues, costs of operating revenues, gross margins, and net income. It does
not make operating decisions based on the level of assets held by a segment.
SEGMENT DISCLOSURE DATA
-----------------------
<TABLE>
<CAPTION>
COMMERCIAL
AVIATION SECURITY SECURITY
STAFFING STAFFING PRODUCTS
FOR THE YEAR ENDED MARCH 31, 1999 SERVICES SERVICES DISTRIBUTION TOTALS
- --------------------------------- -------- -------- ------------ ------
<S> <C> <C> <C> <C>
Net operating revenues........................... $171,726 $ 50,849 $ 4,297 $ 226,872
Cost of revenues................................. $158,558 $ 43,282 $ 3,384 $ 205,224
Gross margin..................................... $ 13,168 $ 7,567 $ 913 $ 21,648
Net income (loss)................................ $ (6,005) $ (1,484) $ 194 $ (7,295)
FOR THE YEAR ENDED MARCH 31, 1998 (Restated)
- ----------------------------------
Net operating revenues........................... $148,082 $ 20,688 $ 3,597 $ 172,367
Cost of revenues................................. $127,856 $ 16,681 $ 2,774 $ 147,311
Gross margin..................................... $ 20,226 $ 4,007 $ 823 $ 25,056
Net income ...................................... $ 4,458 $ 169 $ 230 $ 4,857
FOR THE YEAR ENDED MARCH 31, 1997 (Restated)
- ---------------------------------
Net operating revenues........................... $103,181 $ 8,740 $ 3,321 $115,242
Cost of revenues................................. $ 89,616 $ 6,937 $ 2,484 $ 99,037
Gross margin..................................... $ 13,565 $ 1,803 $ 837 $ 16,205
Net income (loss)................................ $ 1,500 $ (109) $ 178 $ 1,569
</TABLE>
F-20
<PAGE> 52
<TABLE>
<CAPTION>
DISCLOSURE OF GEOGRAPHIC INFORMATION
------------------------------------
NET OPERATING REVENUES FOR THE YEAR ENDED MARCH 31, 1999 AND ASSETS AT MARCH 31, 1999
-------------------------------------------------------------------------------------
REVENUES ASSETS
---------------- ---------------
<S> <C> <C>
United States........................................................ $ 218,889 $ 70,010
Other Countries...................................................... 7,983 624
---------------- ---------------
Total................................................................ $ 226,872 $ 70,634
================ ===============
NET OPERATING REVENUES FOR THE YEAR ENDED MARCH 31, 1998 AND ASSETS AT MARCH 31, 1998 (Restated)
-------------------------------------------------------------------------------------
REVENUES ASSETS
---------------- ---------------
United States........................................................ $ 166,996 $ 60,135
Other Countries...................................................... 5,371 1,496
---------------- ---------------
Total................................................................ $ 172,367 $ 61,631
================ ===============
NET OPERATING REVENUES FOR THE YEAR ENDED MARCH 31, 1997 AND ASSETS AT MARCH 31, 1997 (Restated)
-------------------------------------------------------------------------------------
REVENUES ASSETS
---------------- ---------------
United States........................................................ $ 111,635 $ 27,770
Other Countries...................................................... 3,607 1,095
---------------- ---------------
Total................................................................ $ 115,242 $ 28,865
================ ===============
</TABLE>
DISCLOSURE ABOUT MAJOR CUSTOMERS
Revenues from the Company's largest customer were approximately 26.0%,
25.6% and 6.6% of net operating revenues for the years ended March 31, 1999,
1998 and 1997, respectively. Accounts receivable from this customer were 32.7%
and 19.7% of net accounts receivable at March 31, 1999 and 1998, respectively.
Services provided to another major customer represented approximately
11.7%, 14.8% and 19.0% of net operating revenues for the years ended March 31,
1999, 1998 and 1997 respectively. Accounts receivable from this customer were
2.4% and 2.6% of net accounts receivable at March 31, 1999 and 1998,
respectively.
Furthermore, five airline customers, including the two noted above,
accounted for approximately 48%, 54% and 44% of net operating revenues for the
years ended March 31, 1999, 1998 and 1997, respectively, and accounted for 42.6%
and 30.7% of net accounts receivable at March 31, 1999 and 1998, respectively.
NOTE T - SUBSEQUENT EVENTS
-----------------
CHANGE IN CONTROL
On October 19, 1999, Robert A. Weitzel ("Weitzel") resigned as the
chairman, chief executive officer and director of the Company and entered into
certain additional arrangements. As of November 1, 1999, Weitzel entered into a
retirement and consulting agreement (the "Retirement and Consulting Agreement")
with the Company. This agreement required the Company to pay Weitzel $300,000 on
November 1, 1999 and $200,000 on January 3, 2000, which has been made, and
provide certain other standard employment benefits through September 30, 2001.
In addition, the Company will pay Weitzel an aggregate of $500,000 under a 20
month consulting agreement beginning February 1, 2000. The Company is obligated
to pay Weitzel the $500,000 consulting fee whether or not any services are
performed. The Retirement and Consulting Agreement also provided that Weitzel
enter into a voting trust agreement (the "Voting Trust Agreement") among
F-21
<PAGE> 53
the Company, Weitzel, and H. Jeffrey Schwartz, J. Jeffrey Eakin and John P.
O'Brien, as voting trustees (the "Trustees"), and a stock restriction agreement
between Weitzel and the Company (the "Stock Restriction Agreement"). The three
Trustees constitute the entire Board of Directors of the Company as of February
15, 2000 pursuant to the Voting Trust Agreement, Weitzel transferred record
ownership, and thereby voting control, of 3,324,979 shares of the Company's
Common Stock, representing approximately 48.6% of the issued and outstanding
shares of the Company's Common Stock, held by Weitzel individually and by The
Weitzel Family Limited Partnership to the voting trust (the "Voting Trust")
created by the Voting Trust Agreement. Pursuant to the Voting Trust Agreement, a
voting trust certificate was issued and delivered to Weitzel.
The Voting Trust Agreement provides that all shares of the Company's
Common Stock transferred to the Trust are held in trust until the earlier of
September 30, 2001 or a payment default by the Company under certain provisions
of the Retirement and Consulting Agreement. Pursuant to the Voting Trust
Agreement, the Trustees exercise voting power with respect to the shares of the
Company's Common Stock held in the Voting Trust, by the action of a majority of
the Voting Trustees. In addition, any transfer of the voting trust certificate
is only permitted in accordance with the Stock Restriction Agreement.
Pursuant to the Stock Restriction Agreement, other than transfers to
his spouse, children, or grandchildren, or entities of which those people are
the beneficiaries or hold controlling interests, Weitzel is not permitted to
transfer shares of the Company's Common Stock, or voting trust certificates,
without first offering those shares on identical terms to the Company, and the
Company has a specified period of time during which it may exercise its option
to purchase those shares.
DELISTING OF COMMON SHARES
On July 1, 1999, the Company was informed by the Nasdaq Stock Market
that trading of the Company's Common Stock would be halted pending the receipt
and review of additional information in accordance with Rule 4330 (c) of
Marketplace Rules of the Nasdaq Stock Market. The primary cause for the extended
halt is a result of the non-timely filing of the Company's Form 10-K for fiscal
year ended March 31, 1999, which was originally due on or before July 1, 1999.
On September 15, 1999, after an oral hearing on September 9, 1999, the Company's
Common Stock was delisted from the Nasdaq Stock Market. On October 26, 1999 the
Company's Common Stock began being quoted on the Electronic Quotation System of
the National Quotation Bureau LLC.
GUARANTEE OF DEBT
On July 7, 1999, the Company entered into a First Demand Guarantee with
a German bank to guarantee overdrafts of the German operations up to 500,000
Deutsche Marks (approximately $270,000 at that date). In February 2000 the
Company received notice for a claim amounting to approximately $122,000 related
to this guarantee.
ACQUISITIONS
In April, 1999, the Company acquired the commercial security contracts
and goodwill of American Investigative and Security Services, Inc. headquartered
in Houston, Texas for approximately $1.5 million in cash. The acquired contracts
cover commercial staffing services throughout Texas. The transaction will be
accounted for as a purchase.
In June, 1999, the Company acquired the outstanding stock of Metroplex
Control Systems, Inc. ("Metroplex") headquartered in Dallas, Texas for
approximately $5.0 million in cash. Metroplex sells, installs and services fire
detectors, detention control and other security systems throughout the United
States. The transaction was accounted for as a purchase. In March 2000, the
Company completed the disposition of Metroplex. The sale proceeds combined with
the cash flow distributions received during the period Metroplex was owned was
approximately equivalent to the Company's net cash investment.
EMPLOYMENT AGREEMENTS
In October, 1999, the Company entered into an employment agreement with
Mr. Mark D. Thompson, President and Interim Chief Executive Officer. In addition
to setting a base salary of $300,000, effective January 13, 2000, Mr. Thompson
F-22
<PAGE> 54
was granted 75,000 shares of common stock as well as an additional 100,000
shares of restricted common stock which vest either over a set period of time or
upon attainment of specified goals. Upon termination of employment, Mr.
Thompson's 100,000 common shares fully vest.
EXTENSION OF BANK CREDIT FACILITY
In April 2000 management secured, with its lenders, certain amendments
to its existing credit facility. Among them are an extension of the term to
April 1, 2001 with a reduction of the interest rate to be charged on borrowings
to prime plus 0.75%, if the loan is repaid by December 31, 2000. The amended
agreement also includes an increase to the percentage advance rate of eligible
receivables as well as more relaxed financial covenants. The financial covenants
include certain net worth covenants and a minimum debt coverage ratio and
standard financial reporting requirements. As of April 1, 2000, the Company was
in compliance with all covenants.
In consideration for the amendment and extension of the credit facility
the Company granted the banks warrants for the purchase of 300,000 shares of the
Company's Common Stock at an exercise price of $1.41, which the Board determined
was the fair market value of the Company's Common Stock as of the date of the
grant. The warrants expire on March 31, 2007. As part of the transaction, the
banks were granted a "put" option commencing April 1, 2001 which would, if
exercised, require the Company to purchase the warrants at $1.00 per warrant and
the Company retained a "call" option commencing immediately at an initial price
of $4.50 per warrant. The call price increases by $1.00 per warrant per year
commencing April 1, 2001.
NOTE U - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED AND RESTATED)
-------------------------------------------------------
The following is a summary of the unaudited restated quarterly results
of operations for the years ended March 31, 1999 and 1998.
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------
FISCAL 1999
<S> <C> <C> <C> <C>
Net operating revenues (1).................... $ 56,121 $ 58,407 $ 58,858 $ 53,486
============ ============ ============ ==============
Gross margin, as previously reported(1)....... $ 7,125 $ 7,586 $ 7,552 $ (1,884)
Restatement(2)............................ $ (1,292) $ (1,287) $ (1,100) $ 4,948
------------ ------------ ------------ --------------
Gross margin, as restated..................... $ 5,833 $ 6,299 $ 6,452 $ 3,064
============ ============ ============ ==============
Net income, as previously reported............ $ 448 $ 425 $ 490 $ (9,442)
Restatement (2)........................... $ (342) $ (262) $ (276) $ 1,664
------------ ------------ ------------ --------------
Net income/(loss) as restated................. $ 106 $ 163 $ 214 $ (7,778)
============ ============ ============ ===============
Net income/(loss) per share
Basic
As reported........................... $ 0.07 $ 0.06 $ 0.07 $ (1.41)
Restatement........................... $ (0.05) $ (0.04) $ (0.04) $ 0.24
------------ ------------ ------------ --------------
As restated.......................... $ 0.02 $ 0.02 $ 0.03 $ (1.17)
============ ============ ============ ==============
Diluted
As reported........................... $ 0.07 $ 0.06 $ 0.07 $ (1.41)
Restatement........................... $ (0.05) $ (0.04) $ (0.04) $ 0.24
------------ ------------ ------------ --------------
As restated.......................... $ 0.02 $ 0.02 $ 0.03 $ (1.17)
============ ============ ============ ==============
FISCAL 1998
Net operating revenues (1).................... $ 38,205 $ 38,442 $ 46,056 $ 49,664
============ ============ ============ ==============
Gross margin, as previously reported (1)...... $ 6,151 $ 5,990 $ 7,028 $ 6,463
Restatement (2)........................... $ (144) $ (185) $ (164) $ (83)
------------ ------------ ------------ --------------
Gross margin, as restated..................... $ 6,007 $ 5,805 $ 6,864 $ 6,380
============ ============ ============ ==============
Net income, as previously reported............ $ 853 $ 1,125 $ 1,826 $ 1,441
Restatement (2)........................... $ (98) $ (122) $ (109) $ (59)
------------ ------------ ------------ --------------
</TABLE>
F-23
<PAGE> 55
<TABLE>
<S> <C> <C> <C> <C>
Net income, as restated....................... $ 755 $ 1,003 $ 1,717 $ 1,382
============ ============ ============ ==============
Net income/(loss) per share
Basic
As reported........................... $ 0.23 $ 0.29 $ 0.27 $ 0.22
Restatement........................... $ (0.02) $ (0.03) $ (0.01) $ (0.02)
------------ ------------ ------------ --------------
As restated........................... $ 0.21 $ 0.26 $ 0.26 $ 0.20
============ ============ ============ ==============
Diluted
As reported........................... $ 0.23 $ 0.29 $ 0.27 $ 0.21
Restatement .......................... $ (0.02) $ (0.03) $ (0.01) $ (0.02)
------------ ------------ ------------ --------------
As restated........................... $ 0.21 $ 0.26 $ 0.26 $ 0.19
============ ============ ============ ==============
</TABLE>
(1) Amounts for the first three quarters of fiscal 1999 and each quarter of
fiscal 1998 reflect certain reclassifications to the amounts previously
reported to be consistent with the fiscal 1999 presentation. There was
no impact on net income (loss).
(2) Represents the effect on amounts previously reported for the first
three quarters of fiscal 1999 and each quarter of fiscal 1998 (see Note
C).
RESULTS OF THE THREE MONTHS ENDED MARCH 31, 1999
------------------------------------------------
Reported earnings for the fourth quarter of fiscal 1999 were impacted
materially by several non-recurring items and the results of an in depth review
by the Company's management which led to changes in the Company's reserves and
accruals. The following is a summary of these adjustments:
<TABLE>
<S> <C>
Write down of assets of foreign operations 1,775(1)
Increase in legal and professional accrual 1,277(2)
Increase in allowance for customer incentive programs and
allowance for doubtful accounts 1,048(3)
Write off of fixed assets 575(4)
</TABLE>
(1) Represents charges to operations relative to cessation of business
and/or adjustments to assets in Italy, Czech Republic, Germany, United
Kingdom and Philippines. (See Note F)
(2) Charges for legal settlements, changes in case status, legal fees and
additional accounting and consulting services incurred as a result of
the material weakness in internal controls identified by the Company's
independent public accountants.
(3) Represents charges for a customer incentive program and adjustment in
reserve for bad debts based on a Company review of accounts receivable
collected after fiscal year end.
(4) During the fourth quarter, the Company identified specific fixed assets
that were no longer being utilized in operations. These assets were
directly owned or were covered by non-cancelable operating leases. The
Company wrote-off those assets no longer utilized in operations and
provided for all future monthly obligations for those assets abandoned
or covered by non-cancelable operating leases.
F-24
<PAGE> 56
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
FOR THE YEARS ENDED MARCH 31, 1999, 1998 AND 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
ADDITIONS
BALANCE AT CHARGED TO: BALANCE AT
BEGINNING ----------- END OF
DESCRIPTION OF PERIOD EXPENSES OTHER DEDUCTIONS PERIOD
----------- --------- -------- ----- ---------- ------
(Restated) (d)
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1999
- -------------------------
Self Insurance Reserve $2,996 $5,402 - $3,063 (a) $5,335
Reserve for FAA Fines and Aircraft Damage 512 1,821 - 1,004 (b) 1,329
Allowance for Doubtful Accounts 100 1,248 - 835 (c) 513
Year Ended March 31, 1998 (Restated) (d)
- -------------------------
Self Insurance Reserve $1,556 $4,723 - $3,283 (a) $2,996
Reserve for FAA Fines and Aircraft Damage 397 1,280 - 1,165 (b) 512
Allowance for Doubtful Accounts 100 319 - 319 (c) 100
Year Ended March 31, 1997 (Restated) (d)
- -------------------------
Self Insurance Reserve $225 $2,358 - $1,027 (a) $1,556
Reserve for FAA Fines and Aircraft Damage 37 574 - 214 (b) 397
Allowance for Doubtful Accounts 100 57 - 57 (c) 100
</TABLE>
(a) Cash payments of insurance premiums and claims.
(b) Cash payments made for fines and reduction of claims.
(c) Trade receivables written off.
(d) Amounts have been restated. (See Note C of Notes to Consolidated
Financial Statements)
F-25
<PAGE> 1
EXHIBIT 10.14
SECOND AMENDMENT
TO
THIRD AMENDED AND RESTATED CONSOLIDATED
REPLACEMENT CREDIT FACILITY AND SECURITY AGREEMENT
--------------------------------------------------
THIS SECOND AMENDMENT TO THIRD AMENDED AND RESTATED CONSOLIDATED
REPLACEMENT CREDIT FACILITY AND SECURITY AGREEMENT (this "Agreement") dated as
of December 16, 1998, is entered into by and between INTERNATIONAL TOTAL
SERVICES, INC., an Ohio corporation ("Borrower"), and BANK ONE, NA, successor by
merger to BANK ONE, CLEVELAND, NA, a national bank (the "Bank").
WITNESSETH
----------
WHEREAS, the Borrower and the Bank are parties to that certain Third
Amended and Restated Consolidated Replacement Credit Facility and Security
Agreement dated as of March 31, 1997, as amended by that certain First Amendment
dated as of October 10, 1997 (the "Loan Agreement", all terms defined in said
Loan Agreement being used herein with the same meaning), pursuant to which the
Bank has agreed to make a $30,000,000 Revolving Loan to the Borrower until
September 30, 1999, evidenced by a Note dated October 10, 1997 and payable to
the Bank, such Note being payable on demand; and
WHEREAS, the Borrower and the Bank have agreed to amend the Loan
Agreement (i) to provide for a new form of Borrowing Base Certificate; and (ii)
to modify certain definitions in Section 1 of the Loan Agreement, to modify
certain provisions of Section 2 of the Loan Agreement and to modify certain
convents in Section 8 of the Loan Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Borrower and the Bank agree as follows:
AGREEMENT
Section 1. AMENDMENT OF LOAN AGREEMENT.
A. The definition of "Commitment" set forth in Section 1 of the
Agreement is, effective the Effective Date, hereby amended and restated to read
in its entirety as follows:
COMMITMENT - Lender's letter to Borrower dated March 21, 1997,
as accepted by Borrower on March 25, 1997; Lender's letter to Borrower dated
June 11, 1997, containing
<PAGE> 2
Option A and B as accepted by Borrower on June 11, 1997 as to Option B; and
Lender's letter to Borrower dated December 3, 1998, as accepted by Borrower on
December 9, 1998.
B. Subsection 2.3(A) of the Agreement is, effective the Effective Date,
amended and restated to read in its entirety as follows:
2.3 REVOLVING LOAN.
(A) REVOLVING LOAN. Subject at all times to the terms hereof,
the Lender will, from and after December 16, 1998 until September 30, 1999 make
such loans to the Borrower as from time to time the Borrower requests (the
"Revolving Loan") consisting of advances made by Lender against the value of
Eligible Accounts-Domestic and Eligible Accounts-Foreign. Subject to the
provisions of Subsection (B) of this Section 2.3, the aggregate unpaid principal
of the Revolving Loan outstanding at any one time shall not exceed the lesser of
(a) the line of credit approved for Borrower, which is currently Thirty Million
Dollars ($30,000,000), less the face amount of all outstanding Letters of Credit
issued by Lender for the account of Borrower or (b) the sum of (i) eighty
percent (80%) of the unpaid face amount of Eligible Accounts-Domestic (or such
other percentages of Eligible Accounts-Domestic as may from time to time be
fixed by the Lender upon notice to the Borrower) and (ii) the lesser of fifty
percent (50%) of the unpaid face amount of Eligible Accounts-Foreign (or such
other percentages of Eligible Accounts- Foreign as may from time to time be
fixed by the Lender upon notice to the Borrower) or Three Hundred Fifteen
Thousand Dollars ($315,000) (or such other dollar amount as may from time to
time be fixed by the Lender upon notice to the Borrower) less a reserve equal to
twenty-five percent (25%) of the Borrower's accrued payroll and related expenses
account calculated at the most recent calendar month-end plus the difference
between seventy-five percent (75%) of the accrued payroll and related expense
account and forty percent (40%) of the qualified accounts receivable value (Line
8 of the Borrowing Base Certificate); provided, however, that if this figure is
zero or negative, a zero value will be added to the reserve for payroll and
related expenses account, otherwise the difference will be added to the reserve
for payroll and related expenses account; and further provided, however, the
reserve is limited to a maximum of fifty percent (50%) of the Borrower's accrued
payroll and related expenses account.
C. Subsection 8.1(O) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
(O) Maintain at all times a Tangible Net Worth equal to or
greater than Five Hundred Thousand Dollars ($500,000) commencing September 30,
1998 and thereafter, and maintain at all times Stockholder's Equity equal to or
greater than Thirty-Eight Million Dollars ($38,000,000) commencing September 30,
1998 and thereafter, such covenants to be calculated monthly in accordance with
GAAP based on Borrower's internally prepared interim financial statements.
D. Subsection 8.2(K) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
2
<PAGE> 3
(K) Make Capital Expenditures during any fiscal year of
Borrower which, in the aggregate, exceed Four Million Dollars ($4,000,000).
E. EXHIBIT A attached to the Loan Agreement is, effective the Effective
Date, hereby deleted and the form of Borrowing Base Certificate attached to this
Agreement as EXHIBIT A is hereby substituted therefor.
Section 2. EFFECTIVE DATE OF THE AGREEMENT.
The effective date of this Agreement ("Effective Date") shall be the
date on which all conditions precedent have been satisfied, or waived by the
Bank in writing.
Section 3. CONDITIONS PRECEDENT.
Borrower hereby acknowledges and agrees that the effectiveness of this
Agreement is conditioned upon the receipt by the Bank, on or prior to the date
hereof, in form and substance satisfactory to the Bank and its counsel, of the
following:
A. A certificate, dated as of the date hereof, signed by the Chief
Executive Officer of Borrower and to the effect that:
1) As of said date, no Event of Default has occurred and
is continuing, and no event has occurred and is
continuing that, with the giving of notice or passage
of time, or both, would be an Event of Default; and
2) The representations and warranties of Borrower set
forth in Section 7 of the Loan Agreement are true and
correct as of such date; and
3) Borrower is in compliance with all of the terms and
conditions set forth in the Loan Agreement on and as
of said date.
B. A certificate, dated as of the date hereof, signed by the Secretary
of Borrower certifying as follows:
1) Borrower's Articles of Incorporation and Code of
Regulations have not been modified or amended since
June 17, 1997 (or certifying that true, correct and
complete copies of all such modifications and
amendments are attached thereto); and
2) Copies of resolutions of Borrower's Board of
Directors are attached thereto with respect to the
approval of this Agreement and of the matters
contemplated hereby and authorizing the execution,
delivery and performance of this Agreement and each
other document, instrument, agreement or note to be
delivered pursuant hereto; and
3
<PAGE> 4
3) As to the incumbency and signatures of the officers
of Borrower signing this Agreement and each other
document, instrument, agreement or note to be
delivered pursuant hereto.
C. An Acknowledgement, Consent and Agreement in the form of EXHIBIT B
attached hereto, with all blanks completed, duly executed and delivered by
Transport, NBC, and the Guarantors to Bank.
D. The written opinion of counsel for Borrower as to the enforceability
of this Agreement, the Loan Agreement, Note, and each of the other Credit
Documents and covering such other issues thereunder as requested by Bank and its
counsel.
E. Such other documents, instruments, agreements and notes as the Bank
may reasonably request to implement this Agreement and the transactions
contemplated hereby and by the Loan Agreement.
SECTION 4. FEES AND EXPENSES.
Borrower shall pay all out-of-pocket fees and expenses incurred by the
Bank in connection with the preparation, negotiation, execution and delivery of
this Agreement, the promissory notes, guaranty, participation agreement, and all
the other agreements, documents or certificates required or contemplated hereby,
including, without limitation, legal fees and expenses of the Bank.
SECTION 5. REFERENCES.
On and after the effective date of this Agreement, each reference in
the Loan Agreement to "this Agreement", "hereunder", "hereof", or words of like
import referring to the Loan Agreement, and in the Note to the "Loan Agreement",
"thereof", or words of like import referring to the Loan Agreement shall mean
and refer to the Loan Agreement as previously amended and as amended hereby.
References to EXHIBIT A in the Loan Agreement shall be deemed to refer to the
form of Borrowing Base Certificate attached hereto as EXHIBIT A. The Loan
Agreement, as previously amended and as amended by this Agreement, and all
Credit Documents are and shall continue to be in full force and effect and are
hereby and in all respects ratified and confirmed. References to the Loan
Agreement in the Note shall be deemed to include all amendments to the Loan
Agreement whether specified in the Note or not.
SECTION 6. APPLICABLE LAW.
This Agreement shall be deemed to be a contract under the laws of the
State of Ohio, and for all purposes shall be construed in accordance with the
laws of the State of Ohio.
4
<PAGE> 5
SECTION 7. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument, and any one
of the parties hereto may execute this Agreement by signing any such
counterpart.
IN WITNESS WHEREOF, the Borrower and the Bank have caused this
Agreement to be executed by their duly authorized officers as of the date and
year first above written.
BANK ONE, NA INTERNATIONAL TOTAL SERVICES, INC.
By /s/Louis G. Johnston By /s/Robert A. Weitzel
-------------------- --------------------
Name: Louis G. Johnston Name: Robert A. Weitzel
Title: Senior Vice President Title: Chief Executive Officer
5
<PAGE> 6
SCHEDULE 1
List of Guarantors
------------------
DOMESTIC
Crown Technical Systems, Inc. (Ohio)
T.I.S. Incorporated (Texas)
Certified Investigative Services, Inc. (Texas)
I.T.S. of New York, Inc. (New York)
Selective Detective Services, Inc. (New Jersey)
FOREIGN
International Total Services, Ltd. (United Kingdom)
International Transport Security, s.r.o. (Czech Republic)
International Transport Services, Ltd. (Thailand)
EXHIBIT A
---------
FORM OF BORROWING BASE CERTIFICATE
<PAGE> 7
EXHIBIT B
---------
FORM OF ACKNOWLEDGMENT, CONSENT AND AGREEMENT (GUARANTORS)
ACKNOWLEDGEMENT, CONSENT AND AGREEMENT
--------------------------------------
The undersigned each hereby acknowledges receipt of a copy of the Second
Amendment to Third Amended and Restated Consolidated Replacement Credit Facility
and Security Agreement dated as of December 16, 1998, by and between
International Total Services, Inc. ("Borrower") and Bank One, NA, successor by
merger to Bank One, Cleveland, NA ("Bank One") and by executing this
Acknowledgment, Consent and Agreement the undersigned each hereby agrees to
remain bound by the terms and conditions of its respective Amended and Restated
Replacement Guaranty Agreement, Guaranty Agreement, Amended and Restated
Replacement Guarantor Security Agreement and Guarantor Security Agreement, as
applicable, each dated as of August 11, 1995, executed and delivered to Bank One
in connection with the Second Amended and Restated Replacement Credit Agreement
dated as of August 11, 1995, as subsequently amended, and each other document
hereafter executed in connection herewith or therewith by the undersigned.
Dated: December 16, 1998
CROWN TECHNICAL SYSTEMS, INC.
By: /s/Robert A. Weitzel
--------------------------------
Name: Robert A. Weitzel
Title: Chairman of the Board
T.I.S. INCORPORATED
By: /s/Robert A. Weitzel
--------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
CERTIFIED INVESTIGATIVE SERVICES,
INC.
By: /s/ Robert A. Weitzel
--------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
<PAGE> 8
I.T.S. OF NEW YORK, INC.
By: /s/Robert A. Weitzel
--------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
SELECTIVE DETECTIVE SERVICES, INC.
By: /s/Robert A. Weitzel
--------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
INTERNATIONAL TOTAL SERVICES, LTD.
By: /s/Robert A. Weitzel
--------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
INTERNATIONAL TRANSPORT SECURITY,
s.r.o.
By: /s/Robert A. Weitzel
--------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
INTERNATIONAL TRANSPORT SERVICES,
LTD.
By: /s/Robert A. Weitzel
--------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
<PAGE> 1
EXHIBIT 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made as of the 28th day of October, 1999,
by and between INTERNATIONAL TOTAL SERVICES, INC., an Ohio corporation (the
"Corporation"), and MARK D. THOMPSON, an Ohio resident ("Thompson").
RECITALS
WHEREAS, the Corporation desires to employ Thompson and Thompson
desires to enter into the employ of the Corporation, all on the terms and
subject to the conditions set forth in this Agreement; and
WHEREAS, Thompson has requested, and the Corporation has agreed, that
Thompson be indemnified for all liabilities arising out of or relating to his
services to the Corporation whether as a consultant, employee or officer of the
Corporation or otherwise;
NOW, THEREFORE, in consideration of the recitals and of the mutual
covenants and agreements set forth herein and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Corporation and Thompson hereby agree as follows:
1. Employment, Contract Period. During the period specified in this
Section 1, the Corporation shall employ Thompson, and Thompson shall serve the
Corporation, on the terms and subject to the conditions set forth herein. The
term of Thompson's employment hereunder shall commence as of the date hereof
(the "Effective Date"), and, subject to prior termination as provided in Section
8 hereof, shall continue indefinitely on a month-to-month basis. The term of
Thompson's employment hereunder shall be automatically renewed on the first of
each following month for an additional term of one month, unless the Corporation
shall have given at least ninety (90) days advance notice of its intention not
to renew the term of Thompson's employment hereunder. The term of Thompson's
employment hereunder is sometimes hereinafter referred to as the "Contract
Period".
2. Position; Duties; Responsibilities.
(a) At all times during the Contract Period, Thompson shall
have the titles of "President" and "Interim Chief Executive Officer"
and shall have and perform duties and responsibilities as may be
assigned by the Board of Directors of the Corporation, which duties and
responsibilities will be those customarily performed by a chief
executive officer of a publicly-held company of comparable size in the
same or related industries.
(b) Thompson shall devote such professional time, energy and
talent to the business of and to the furtherance of the purposes and
objectives of the Corporation as he deems appropriate to carry out his
duties hereunder.
(c) Thompson shall report directly to the Board of Directors
of the Corporation.
3. Compensation. The Corporation shall pay to Thompson a base salary at
the rate specified in Paragraph (a), below, and a bonus, if any, as provided in
Paragraph (b), below.
<PAGE> 2
(a) The rate of Thompson's base salary shall be $300,000 per
year, payable in accordance with the Corporation's usual pay practices
(and in any event no less frequently than monthly), as the same may be
increased (but not decreased) from time to time (based upon the
performance of the Corporation and Thompson) as determined by the Board
of Directors of the Corporation in its sole discretion.
(b) For each calendar year or portion thereof that Thompson is
employed under this Agreement, the Corporation may pay to Thompson a
bonus, which will be based upon the performance of the Corporation and
Thompson, at such times and in such amounts as the Board of Directors
of the Corporation, in its sole discretion, may determine.
(c) Upon adoption of this Agreement, the Corporation shall
grant to Thompson 75,000 of the Corporation's common shares on a fully
vested and unrestricted basis. In addition, the Corporation shall grant
Thompson 100,000 of the Corporation's common shares as a restricted
stock award subject to the vesting, forfeiture and other provisions set
forth in the Restricted Stock Award Agreement attached hereto as
Exhibit "A." The Corporation shall use its reasonable best efforts
consistent with fiscal responsibility to register such common shares
with the Securities and Exchange Commission for resale by Thompson as
soon as practicable after the Effective Date.
4. Reimbursement for Expenses. The Corporation shall reimburse Thompson
for all reasonable, ordinary and necessary expenses incurred by him in the
performance of his duties hereunder, provided that Thompson accounts to the
Corporation therefor in a manner sufficient to substantiate deductions with
respect to those expenses by the Corporation for federal income tax purposes.
5. Vacations. During the Contract Period, Thompson shall be entitled to
up to four (4) weeks (twenty (20) days) of vacation each year to be taken at
such time or times as Thompson may determine in such a manner as to avoid undue
disruption to the business of the Corporation.
6. Benefits. During the Contract Period, Thompson and his family shall
be entitled to participate in such pension, retirement, medical reimbursement,
insurance and similar plans, if any, enjoyed by executive officers of the
Corporation generally. Thompson shall also be entitled to participate in any
option or other employee benefit compensation plan that is enjoyed by executive
officers of the Corporation generally. Thompson's participation in and benefits
under any such plan shall be on the terms and subject to the conditions
specified in the governing document of that plan.
7. Effect of Disability While in Employ of the Corporation. If while
Thompson is employed by the Corporation, he becomes disabled, by reason of
physical or mental impairment, to such an extent that he is unable to
substantially perform his duties under this Agreement:
(a) the Corporation may relieve Thompson of his duties under
this Agreement for as long as Thompson is so disabled.
(b) the Corporation shall pay to Thompson, net of the offset
referred to in the last sentence of this Paragraph (b), all base salary
to which he would have been entitled under
2
<PAGE> 3
this Agreement had he continued to be actively employed by the
Corporation to the earliest of (i) the first date on which he is no
longer so disabled, (ii) the date on which he has been so disabled for
an aggregate of 120 business days (whether or not consecutive) during
any period of twelve consecutive calendar months, (iii) the date of his
death, or (iv) the 90th day of his disability. Any payment referred to
in this Paragraph (b) shall be made at the same time as that payment
would have been made if Thompson were not disabled. Payments under this
Paragraph (b) for any period shall be offset, dollar for dollar, by any
disability benefits (other than benefits payable pursuant to any
disability income policy all of the premiums for which were paid by
Thompson) for that period that are received by Thompson.
(c) Except as provided in this Section 7, the Corporation
shall have no further obligations to Thompson for base salary for any
period during which Thompson is so disabled to such an extent that he
is unable to substantially perform his duties under this Agreement.
8. Termination.
(a) AT EXPIRATION OF A TERM. If the Corporation gives Thompson
90 days' advance notice of its intention not to renew the term of
Thompson's employment hereunder (as permitted by Section 1), Thompson's
employment hereunder shall terminate at the close of business on the
last day of the month next preceding the first day of the month as to
which such 90 days' advance notice was given.
(b) DEATH OR DISABILITY. Thompson's employment hereunder will
terminate immediately upon Thompson's death. The Corporation may
terminate Thompson's employment hereunder immediately upon giving
notice of termination if Thompson is disabled, by reason of physical or
mental impairment, to such an extent that he has been unable to
substantially perform his duties under this Agreement for an aggregate
of 120 business days (whether or not consecutive) during any period of
twelve consecutive calendar months.
(c) FOR CAUSE. The Board of Directors of the Corporation, by
action of three-quarters of all of its duly elected members, may
terminate Thompson's employment under this Agreement if it determines
in good faith that Thompson has, by action or failure to act, given the
Corporation Cause for that termination and delivers written notice of
that termination, describing the facts constituting Cause, to Thompson.
For purposes hereof, the term "Cause" shall mean Thompson's fraud or
commission of a felony which results in material injury to the business
or reputation of the Corporation, or Thompson's willful breach of this
Agreement, which breach has not been cured within thirty (30) days
after the Corporation gives notice thereof to Thompson.
(d) WITHOUT CAUSE. The Board of Directors of the Corporation
may terminate Thompson's employment hereunder at any time without Cause
upon notice to Thompson.
(e) BY THOMPSON FOR GOOD REASON. Thompson may terminate his
employment hereunder for "Good Reason" at any time upon thirty (30)
days' advance notice from
3
<PAGE> 4
Thompson to the Board of Directors of the Corporation. Thompson shall
be deemed to have "Good Reason" to terminate his employment under this
Agreement if, at any time during the Contract Period, (i) the
Corporation materially changes Thompson's duties and responsibilities
without his consent; (ii) Thompson's place of employment or the
principal executive offices of the Corporation are moved to a location
more than fifty (50) miles from Public Square in the City of Cleveland,
Ohio; (iii) there occurs a material breach by the Corporation of any of
its obligations under this Agreement (other than those specified in
this Section 8(e)); or (iv) there occurs a "Change in Control" (as
hereinafter defined) of the Corporation.
The term "Change in Control" means the first to occur of the
following events (i) any person or group of commonly controlled
persons, other than the voting trust established and maintained
pursuant to the Voting Trust Agreement made and entered into as of
November 1, 1998 by and among the Corporation, Robert A. Weitzel, H.
Jeffrey Schwartz, John P. O'Brien and J. Jeffrey Eakin (the "Voting
Trust"), acquire ownership or control, directly or indirectly, of more
than twenty percent (20%) of the voting control or value of the equity
interests in the Corporation; (ii) the shareholders of the Corporation
approve an agreement to merge or consolidate with another corporation
or other entity resulting (whether separately or in connection with a
series of transactions) in a change in ownership of twenty percent
(20%) or more of the voting control or value of the equity interests in
the Corporation, or an agreement to sell or otherwise dispose of all or
substantially all of the Corporation's assets (including, without
limitation, a plan of liquidation or dissolution), or otherwise approve
of a fundamental alteration in the nature of the Corporation's
business; (iii) at any time during any period of twenty-four (24)
consecutive months, individuals who were directors at the beginning of
the 24-month period no longer constitute a majority of the members of
the Board of Directors of the Corporation, unless the election, or the
nomination for election by the Corporation's shareholders, of each
director who was not a director at the beginning of the period is
approved by at least a majority of the directors who (x) are in office
at the time of the election or nomination and (y) were directors at the
beginning of the period (the "Continuing Directors"); (iv) the election
of any director to the Board of Directors of the Corporation who was
not nominated by the Continuing Directors; or (v) termination of the
Voting Trust.
Thompson may exercise his right to terminate under this
Section 8(e) only if Thompson gives the Corporation written notice
thereof within thirty (30) days after he first knew of the existence of
the events constituting "Good Reason" and, with respect to the events
specified in clauses (i) and (iii) of the definition of "Good Reason"
above, the Corporation fails to eliminate or cure the events
constituting "Good Reason" within ten (10) days after receiving that
notice.
(f) BY THOMPSON WITHOUT GOOD REASON. Thompson may terminate
his employment hereunder at any time upon notice from Thompson to the
Board of Directors of the Corporation.
The exercise by the Corporation of its rights of termination under this
Section 8 shall be the Corporation's sole remedy in the event of the occurrence
of the event as a result of which such right
4
<PAGE> 5
to terminate arises. Upon any termination of this Agreement, Thompson shall be
deemed to have resigned from all offices and directorships held by Thompson in
the Corporation.
In the event of a termination claimed by the Corporation to be for
"Cause" pursuant to Section 8(c) or by Thompson to be for "Good Reason" pursuant
to Section 8(e), Thompson or the Corporation shall have the right to have the
justification for said termination determined by arbitration in Cleveland, Ohio.
In order to exercise such right, Thompson or the Corporation shall serve on the
other party hereto, within thirty (30) days after termination, a written request
for arbitration. The Corporation immediately shall request the appointment of an
arbitrator by the American Arbitration Association and thereafter the question
of "Cause" or "Good Reason," as the case may be, shall be determined under the
rules of the American Arbitration Association, and the decision of the
arbitrator shall be final and binding on both parties. The parties shall use all
reasonable efforts to facilitate and expedite the arbitration and shall act to
Cause the arbitration to be completed as promptly as possible. During the
pendency of the arbitration, Thompson shall continue to receive all compensation
and benefits to which he is entitled hereunder, and if at any time during the
pendency of such arbitration the Corporation fails to pay and provide all
compensation and benefits to Thompson in a timely manner, the Corporation shall
be deemed to have automatically waived whatever rights it then may have had to
terminate Thompson's employment for Cause. Expenses of the arbitration shall be
borne by the parties in the proportion determined by the arbitrator based upon
the reasonableness of the positions of the parties.
9. Payments Upon Termination. Upon any termination of Thompson's
employment, the Corporation shall pay to Thompson all accrued, unpaid base
salary and other benefits accrued through the date of termination. Upon any
termination pursuant to Sections 8(a), 8(d) or 8(e), the Corporation shall pay
to Thompson all of the compensation and benefits payable hereunder for the
remainder of the Contract Period.
10. Tax Adjustment Payments. If all or any portion of the amounts
payable to Thompson under this Agreement (together with all other payments of
cash or property, whether pursuant to this Agreement or otherwise, including,
without limitation, the issuance of common shares of the Corporation, or the
granting, exercise or termination of options therefor) constitutes "excess
parachute payments" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code"), that are subject to the excise tax
imposed by Section 4999 of the Code (or any similar tax or assessment), the
amounts payable hereunder shall be increased to the extent necessary to place
Thompson in the same after-tax position as he would have been in had no such tax
assessment been imposed on any such payment paid or payable to Thompson under
this Agreement or any other payment that Thompson may receive in connection
therewith. The determination of the amount of any such tax or assessment and the
incremental payment required hereby in connection therewith shall be made by the
accounting firm employed by Thompson and said incremental payment shall be made
within five (5) days after that determination has been made. If, after the date
upon which the payment required by this Section 10 has been made, it is
determined (pursuant to final regulations or published rulings of the Internal
Revenue Service, final judgment of a court of competent jurisdiction, Internal
Revenue Service audit assessment, or otherwise) that the amount of excise or
other similar taxes or assessments payable by Thompson is greater than the
amount initially so determined, then the Corporation shall pay Thompson an
amount equal to the sum of (i) such additional excise or other taxes, plus (ii)
any interest, fines and penalties resulting
5
<PAGE> 6
from such underpayment, plus (iii) an amount necessary to reimburse Thompson for
any income, excise or other tax assessment payable by Thompson with respect to
the amounts specified in (i) and (ii) above and the reimbursement provided by
this clause (iii), in the manner described above in this Section 10. Payment
thereof shall be made within five (5) days after the date upon which such
subsequent determination is made.
11. Indemnification.
(a) INDEMNIFICATION IN NON-DERIVATIVE ACTIONS. The Corporation
shall indemnify Thompson against any and all losses, claims, damages,
liabilities, costs and expenses other than attorneys' fees (including
any and all losses, claims, damages, liabilities, costs and expenses
arising out of events occurring prior to the Effective Date) with
respect to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative,
other than an action by or in the right of the Corporation, by reason
of the fact that he is or was a consultant to or agent or officer of
the Corporation, or is or was serving at the request of the Corporation
as a consultant to or a director, trustee, officer, employee or agent
of another corporation, domestic or foreign, nonprofit or for profit,
partnership, limited liability company, joint venture, trust or other
enterprise, including judgments, fines and amounts paid in settlement,
actually and reasonably incurred by him in connection with such action,
suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of
the Corporation, and with respect to any criminal action or proceeding,
had no reasonable Cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order,
settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that Thompson
did not act in good faith and in a manner which he reasonably believed
to be in or not opposed to the best interests of the Corporation, and
with respect to any criminal action or proceeding, that he had
reasonable Cause to believe that his conduct was unlawful.
(b) INDEMNIFICATION IN DERIVATIVE ACTIONS. The Corporation
shall indemnify Thompson against any and all losses, claims, damages,
liabilities, costs and expenses other than attorneys' fees (including
any and all losses, claims, damages, liabilities, costs and expenses
arising out of events occurring prior to the Effective Date) with
respect to any threatened, pending or completed action or suit by or in
the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a consultant to or agent or
officer of the Corporation, or is or was serving at the request of the
Corporation as a consultant to or a director, trustee, officer,
employee or agent of another corporation, domestic or foreign,
nonprofit or for profit, partnership, limited liability company, joint
venture, trust or other enterprise, actually and reasonably incurred by
him in connection with the defense or settlement of such action or suit
if he acted in good faith and in a manner he reasonably believed to be
in or not opposed to the best interests of the Corporation, except that
no indemnification shall be made in respect of any claim, issue or
matter as to which Thompson shall have been adjudged to be liable for
gross negligence or gross misconduct in the performance of his duty to
the Corporation unless, and only to the extent that the court in which
such action or suit was brought shall determine upon application that,
despite the
6
<PAGE> 7
adjudication of liability, but in view of all the circumstances of the
case, Thompson is fairly and reasonably entitled to indemnity for such
expenses as such court shall deem proper.
(c) COUNSEL. Thompson shall, at his own expense, have the
right to retain counsel of his own choosing to represent him in
connection with any matters as to which the provisions of this Section
11 apply.
(d) ADVANCE PAYMENT OF EXPENSES. Expenses, excluding
attorneys' fees, incurred in defending any action, suit or proceeding
referred to in this Section 11, shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding
upon receipt of an undertaking by or on behalf of Thompson to repay
such amount, unless it shall ultimately be determined that he is
entitled to be indemnified by the Corporation as provided herein. Such
fees and expenses shall be paid from time to time as incurred upon
request by Thompson.
(e) NONEXCLUSIVITY. The parties agree that nothing in this
Agreement shall be construed to limit or negate any rights of Thompson
under the Corporation's Articles of Incorporation or Code of
Regulations, as the same may be amended from time to time, or any other
agreement, vote of shareholders or directors, or provision of
applicable law, whether statutory or common law, or otherwise, which
provides Thompson with broader protection than that provided herein.
(f) SURVIVAL. The provisions of this Section 11 shall survive
the termination of this Agreement.
12. Liability Insurance. The Corporation will maintain officer's acts
and omissions liability insurance for Thompson in amounts comparable to that
maintained for other executive officers employed by the Corporation. In the
event that Thompson is subject to a liability in excess of the coverage limits
of such insurance, the Corporation will be responsible for any such uninsured
liabilities to the extent provided herein.
13. Assignment and Binding Effect. The obligations of the parties
hereto may not be assigned or transferred, except upon the merger, consolidation
or sale of the Corporation, or the sale of all or substantially all the assets
of the Corporation, with or to another person or entity. This Agreement shall be
binding upon and inure to the benefit of Thompson and the Corporation; provided,
however, that this Agreement shall also inure to the benefit of Thompson's
heirs, personal representatives, executors and administrators.
14. Notices. All notices under this Agreement shall be in writing and
shall be deemed effective when delivered in person, or three days after deposit
thereof in the official U.S. mail, postage prepaid, for delivery as registered
or certified mail, or its delivery by a courier service, such as, for example,
FedEx or UPS, addressed:
7
<PAGE> 8
if to Thompson, to
Mark D. Thompson
682 Laurel Ridge Drive
Gahanna, Ohio 43230
Telephone: (614) 337-1917
and if to the Corporation, to
International Total Services, Inc.
1200 Crown Centre
5005 Rockside Road
Cleveland, Ohio 44131
Attention, Chairman, Board of Directors
Telephone: (216) 642-4522
Telecopier: (216) 642-4539
In lieu of personal notice or notice by deposit in the official U.S. mail, or
delivery by courier service, a party may give notice by confirmed telegram,
telex or facsimile. Either party may change the address to which notice to that
party may be mailed by notifying the other party of the change in the manner
contemplated in this Section.
15. Severability. Any provision of this Agreement that is prohibited or
unenforceable shall be ineffective to the extent, but only to the extent, of
such prohibition or unenforceability without invalidating the remaining portions
hereof and such remaining portions of this Agreement shall continue to be in
full force and effect.
16. Governing Law. The provisions of this Agreement shall be governed
by and construed in accordance with the laws of the State of Ohio applicable to
contracts made in and to be performed within the State of Ohio.
17. Entire Agreement. This Agreement embodies the entire agreement and
understanding between the parties hereto and, except as provided herein,
supersedes all prior understandings, whether written or oral, with respect to
the employment of Thompson by the Corporation. This Agreement was adopted by the
Compensation Committee of the Corporation's Board of Directors on January 13,
2000.
18. Counterparts. This Agreement may be executed in two or more
counterparts, each of which will be deemed an original, but all of which
together shall constitute but one and the same instrument.
8
<PAGE> 9
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
INTERNATIONAL TOTAL SERVICES, INC.
By: /s/ H. Jeffrey Schwartz
-----------------------------------
Name:
-----------------------------
Title: CO-CHAIRMAN OF THE BOARD
----------------------------
MARK D. THOMPSON
/s/ Mark D. Thompson
--------------------------------------
9
<PAGE> 1
EXHIBIT 10.16
INTERNATIONAL TOTAL SERVICES, INC.
NON-EMPLOYEE DIRECTOR COMPENSATION PLAN
This International Total Services, Inc. Non-Employee Director
Compensation Plan ("Plan") was adopted by the Compensation Committee of the
Board on January 5, 2000.
ARTICLE I
DEFINITIONS
1.1 "Board" means the Company's Board of Directors.
1.2 "Change in Control" means the first to occur of the following
events (i) any person or group of commonly controlled persons, other than the
voting trust established and maintained pursuant to the Voting Trust Agreement
made and entered into as of November 1, 1998 by and among the Corporation,
Robert A. Weitzel, H. Jeffrey Schwartz, John P. O'Brien and J. Jeffrey Eakin
(the "Voting Trust"), acquire ownership or control, directly or indirectly, of
more than twenty percent (20%) of the voting control or value of the equity
interests in the Corporation excluding from this clause (i), however, a transfer
of voting control to Robert A. Weitzel resulting solely and directly from the
termination of the Voting Trust pursuant to its terms; (ii) the shareholders of
the Corporation approve an agreement to merge or consolidate with another
corporation or other entity resulting (whether separately or in connection with
a series of transactions) in a change in ownership of twenty percent (20%) or
more of the voting control or value of the equity interests in the Corporation,
or an agreement to sell or otherwise dispose of all or substantially all of the
Corporation's assets (including, without limitation, a plan of liquidation or
dissolution), or otherwise approve of a fundamental alteration in the nature of
the Corporation's business; or (iii) at any time during any period of
twenty-four (24) consecutive months, individuals who were directors at the
beginning of the 24-month period no longer constitute a majority of the members
of the Board of Directors of the Corporation, unless the election, or the
nomination for election by the Corporation's shareholders, of each director who
was not a director at the beginning of the period is approved by at least a
majority of the directors who (x) are in office at the time of the election or
nomination and (y) were directors at the beginning of the period.
1.3 "Closing Price" means the closing price of a share of the Company's
common stock on a national securities exchange or inter-dealer quotation system
on the last business day prior to the date on which the value is determined, as
reported in the Wall Street Journal or such other source of quotations for or
report of trading of such shares as the Compensation Committee of the Board may
select from time to time; provided, however, that if such shares are not traded
on such an exchange, or inter-dealer quotation system, Closing Price means the
mean between the high and the low bid and asked prices (to the extent such
information is available) for such shares on the over-the-counter market on the
last business day prior to the date on which value is determined (or the next
preceding day on which sales occurred if there were no sales on such date). In
the event of a Change in Control, the Closing Price shall be determined pursuant
to the foregoing or as is otherwise determined in good faith by the Compensation
Committee of the Board.
<PAGE> 2
1.4 "Company" means International Total Services, Inc., an Ohio
corporation.
1.5 "Director Fees" means the fees that would otherwise be paid to the
Eligible Director for service on the Board and/or any of its committees,
including any annual fees and meeting fees.
1.6 "Eligible Director" means a non-employee director on the Board on
or after January 1, 2000.
1.7 "Phantom Share" means an economic interest that is equivalent in
value to the value of one share of the Company's common stock.
1.8 "Share Price Target" means for any vesting percentage on the
Schedule in Section 2.1(b) that the Closing Price on each of the trading days
(determined without regard to whether any trades are actually made) during
twenty (20) consecutive trading days equals or exceeds the relevant Share Price
Target amount listed opposite such percentage on such Schedule.
ARTICLE II
PHANTOM SHARE AWARD
2.1 AWARD. Each person who is an Eligible Director on January 5, 2000
shall receive an award of 50,000 Phantom Shares.
2.2 VESTING.
(a) 20% of the Phantom Shares awarded to an Eligible Director
under Section 2.1 shall be immediately fully vested and nonforfeitable.
(b) The remaining Phantom Shares awarded to an Eligible
Director under Section 2.1 that are not vested under Section 2.2(a)
shall vest upon the attainment of Share Price Targets as follows:
Additional Vesting
(expressed as a percentage of the total Award) Share Price Target
---------------------------------------------- ------------------
10% $ 2.00
10% $ 3.00
10% $ 4.00
10% $ 5.00
10% $ 6.00
10% $ 8.00
10% $10.00
10% $12.00
<PAGE> 3
(c) Notwithstanding Section 2.2(b) all Phantom Shares Awarded
under Section 2.1 shall immediately become fully vested and
nonforfeitable in the event of a Change in Control.
2.3 DISTRIBUTION. The Company shall pay a person receiving an award
under Section 2.1 an amount, in cash, equal to the number of the Person's vested
Phantom Shares multiplied by the Closing Price measured on the first to occur of
the following dates (the "Article II Measurement Date"): (a) the date the award
becomes fully vested; or (b) the date the director ceases to be a Board member.
Actual payment under the preceding sentence shall be made as soon as
practicable, but in no event more than ten (10) business days after the person's
Article II Measurement Date.
ARTICLE III
DIRECTOR FEE DEFERRAL
3.1 DEFERRAL. Each Eligible Director may at any time prospectively
elect to have all or some portion of the Director Fees that would otherwise be
paid to the Director for future service be deferred under this Plan. Amounts
deferred under the preceding sentence shall be converted into Phantom Shares in
a manner such that the number of Phantom Shares awarded equals one hundred
twenty percent (120%) of the fee so deferred, based upon the Closing Price on
the date the fee would otherwise be paid to the Eligible Director.
3.2 VESTING. The Phantom Shares awarded under Section 3.1 shall be
fully vested and nonforfeitable at all times.
3.3 DISTRIBUTION. The Company shall pay a person awarded Phantom Shares
pursuant to Section 3.1 an amount, in cash, equal to the number of such Phantom
Shares multiplied by the Closing price on the first to occur of the following
dates (the "Article III Measurement Date"): (a) the date the director ceases to
be a Board member; (b) the date of a Change in Control; or (c) the date
specified in the deferral election form making the deferral under Section 3.1,
provided such date is at least one year following the date the Director Fee
would otherwise be paid to the Eligible Director. Actual payment under the
preceding sentence shall be made as soon as practicable, but in no event more
than ten (10) business days after the person's Article III Measurement Date.
ARTICLE IV
MISCELLANEOUS
4.1 AMENDMENT AND TERMINATION. The Board, in its sole discretion, may
amend or terminate this Plan at any time; provided, however, that any amendment
or termination that could adversely affect an Eligible Director's rights and
interests hereunder (other than to the right to continued deferral under Article
III) will be effective as to such Eligible Director only if he consents in
writing to the amendment or termination.
<PAGE> 4
4.2 NO BENEFICIAL INTEREST OR FUNDING. No person or entity shall
acquire any beneficial interest in an amount under this Plan prior to the date
on which the amount becomes payable. The amounts payable hereunder shall not be
funded in any way and, prior to payment, the rights of an Eligible Director
hereunder shall be no greater than that of a general creditor of the Company.
4.3 ADJUSTMENTS UPON CHANGES IN CAPITALIZATION. In the event of changes
in the outstanding shares of Company stock by reason of stock dividends, stock
splits, reclassifications, recapitalizations, mergers, consolidations,
combinations, exchanges of shares, separations, reorganizations, liquidation or
similar events or in the event of extraordinary non-cash dividends or
distributions being declared with respect to such shares or similar transactions
or events, the number and class or Phantom Shares hereunder shall be equitably
adjusted by the Compensation Committee of the Board.
4.4 GOVERNING LAW. This Plan shall be governed and construed in
accordance with the laws of the State of Ohio, without giving effect to
principles of conflicts of laws thereof.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF INTERNATIONAL TOTAL SERVICES, INC.
Crown Technical Systems, Inc., an Ohio Corporation
I.T.S. of New York Security, Inc., a New York Corporation
Selective Detective Services, Inc., a New Jersey Corporation
T.I.S., Incorporated, a Texas Corporation
Certified Investigative Services, Inc., a Texas Corporation
International Total Services, Limited, a United Kingdom Company
OS Security Services, GMBH, a German company
ITS Security Services, GMBH, a German company
Texas International Services Corp., a Texas Corporation
(fka Metroplex Control Systems, Inc.)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 672,000
<SECURITIES> 0
<RECEIVABLES> 24,324,000
<ALLOWANCES> (513,000)
<INVENTORY> 2,691,000
<CURRENT-ASSETS> 31,629,000
<PP&E> 12,420,000
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0
0
<COMMON> 67,000
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<NET-INCOME> (7,295,000)
<EPS-BASIC> (1.10)
<EPS-DILUTED> (1.10)
</TABLE>
