<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
COMMISSION FILE NUMBER 0-23073
INTERNATIONAL TOTAL SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
OHIO 34-1264201
---- ----------
(State of Incorporation) (I.R.S. Employer
Identification No.)
CROWN CENTRE
5005 ROCKSIDE ROAD, SUITE 1200
INDEPENDENCE, OHIO 44131
------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (216) 642-4522
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
---- ----
As of November 10, 2000, the Registrant had 6,837,494 Common Shares issued and
outstanding.
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INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
10-Q
INDEX
-----
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I FINANCIAL INFORMATION
ITEM 1 Financial Statements
Consolidated Balance Sheets
as of September 30, 2000 and March 31, 2000............................................ 2
Consolidated Statements of Operations and Comprehensive Loss for the:
Three Months Ended September 30, 2000 and 1999.......................................... 3
Six Months Ended September 30, 2000 and 1999............................................ 4
Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 2000 and 1999.................................... 5
Notes to the Consolidated Financial Statements.............................................. 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 11
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk....................................... 17
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8 - K............................................................... 18
</TABLE>
1
<PAGE> 3
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
2000 2000
----------- ----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 288 $ 792
Accounts receivable - net of allowance for doubtful
accounts of $450 and $474 respectively 29,206 27,675
Federal Income tax refund receivable -- 3,020
Deferred taxes 640 640
Uniforms, net 1,036 1,035
Other current assets 1,701 2,018
-------- --------
Total current assets 32,871 35,180
PROPERTY AND EQUIPMENT
Security equipment 3,583 3,799
Service equipment 2,204 2,206
Computer equipment 3,610 3,256
Furniture and fixtures 1,102 1,100
Autos 893 936
Leasehold improvements 70 70
-------- --------
11,462 11,367
Less accumulated depreciation and amortization 7,018 6,470
-------- --------
Property and equipment, net 4,444 4,897
INTANGIBLES, less accumulated amortization of $7,450
and $6,254, respectively 29,689 31,030
SECURITY DEPOSITS AND OTHER 171 105
-------- --------
TOTAL ASSETS $ 67,175 $ 71,212
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable $ 5,784 $ 5,466
Current portion of Revolving Credit Facility 23,883 --
Accrued payroll and employee benefits 14,460 16,314
Other accrued expenses 7,087 8,556
Income taxes payable 298 337
-------- --------
Total current liabilities 51,512 30,673
DEFERRED TAXES 640 640
REVOLVING CREDIT FACILITY -- 22,103
WARRANTS 217 --
SHAREHOLDERS' EQUITY
Common shares, without par value, stated at $.01 per share, authorized
20,000 shares, issued and outstanding
6,837 shares at September 30, 2000 and March 31, 2000 68 68
Additional paid-in capital 31,263 31,263
Accumulated other comprehensive loss (813) (470)
Retained deficit (15,712) (13,065)
-------- --------
14,806 17,796
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 67,175 $ 71,212
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
2
<PAGE> 4
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
---------------------------------
2000 1999
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
Net operating revenues ........................... $ 48,236 100.0% $ 55,609 100.0%
Cost of revenues ................................. 43,244 89.7% 49,325 88.7%
---------- ---------- ---------- ----------
GROSS MARGIN ..................... 4,992 10.3% 6,284 11.3%
Selling, general and administrative expenses ..... 4,932 10.2% 6,434 11.5%
Amortization expense ............................. 596 1.2% 652 1.2%
---------- ---------- ---------- ----------
OPERATING LOSS ................... (536) (1.1)% (802) (1.4)%
Interest expense-net ............................. 670 1.4% 426 0.8%
---------- ---------- ---------- ----------
LOSS BEFORE INCOME TAXES ......... (1,206) (2.5)% (1,228) (2.2)%
Provision for income taxes ....................... 22 0.0% -- --
---------- ---------- ---------- ----------
NET LOSS ......................... $ (1,228) (2.5)% $ (1,228) (2.2)%
========== ========== ========== ==========
Other comprehensive income
Foreign currency translation adjustment ....... (130) 168
---------- ----------
COMPREHENSIVE LOSS ..................... $ (1,358) $ (1,060)
========== ==========
Net loss per share:
Basic $ (0.18) $ (0.18)
=========== ==========
Diluted $ (0.18) $ (0.18)
=========== ==========
Weighted average number of shares outstanding:
Basic 6,747 6,662
========== ==========
Diluted 6,747 6,662
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE> 5
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
-------------------------------------------
2000 1999
--------------------- ----------------------
<S> <C> <C> <C> <C>
Net operating revenues....................................... $ 99,372 100.0% $ 111,414 100.0%
Cost of revenues ............................................ 88,974 89.5% 99,767 89.5%
---------- -------- ---------- ---------
GROSS MARGIN........................................ 10,398 10.5% 11,647 10.5%
Selling, general and administrative expenses................. 10,448 10.5% 12,339 11.1%
Amortization expense......................................... 1,196 1.2% 1,424 1.3%
---------- -------- ---------- --------
OPERATING LOSS...................................... (1,246) (1.2)% (2,116) (1.9)%
Interest expense-net......................................... 1,331 1.4% 746 0.7%
---------- ------- ------- -----
LOSS BEFORE INCOME TAXES.......................... (2,577) (2.6)% (2,862) (2.6)%
Provision for income taxes................................... 70 0.1% -- --%
---------- -------- ---------- --------
NET LOSS............................................ $ (2,647) (2.7)% $ (2,862) (2.6)%
========== ======== ========== ========
Other comprehensive income
Foreign currency translation adjustment................... (343) 38
---------- -----------
COMPREHENSIVE LOSS.................................. $ (2,990) $ (2,824)
========== ==========
Net income (loss) per share:
Basic .................................................... $ (0.39) $ (0.43)
=========== ============
Diluted................................................... $ (0.39) $ (0.43)
========== ============
Weighted average number of shares outstanding:
Basic .................................................... 6,747 6,662
========== ==========
Diluted................................................... 6,747 6,662
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE> 6
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
2000 1999
--------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................................. $ (2,647) $ (2,862)
Adjustments to reconcile net loss to net
Depreciation.......................................... 701 826
Amortization.......................................... 1,196 1,424
Loss on disposal of fixed assets...................... 21 21
Changes in working capital:
Accounts receivable................................. (1,531) 1,093
Other assets........................................ 3,203 521
Trade accounts payable.............................. 318 (935)
Accrued expenses.................................... (3,362) (1,114)
-------------- ------------
Net cash used for operating activities............ (2,101) (1,026)
INVESTING ACTIVITIES:
Additions to property and equipment....................... (455) (632)
Proceeds received from deposits and sale of equipment..... 13 146
Property and equipment of acquired businesses............. -- (302)
Working capital acquired, net of cash..................... -- (1,470)
Intangibles from acquisitions of businesses............... -- (4,005)
------------- ------------
Net cash used for investing activities............ (442) (6,263)
FINANCING ACTIVITIES:
Net borrowings on note payable to bank.................... 1,780 7,673
------------- -----------
Net cash provided by financing activities......... 1,780 7,673
Effect of exchange rates on cash............................. 259 38
------------- -----------
Net increase (decrease) in cash and cash equivalents...... (504) 422
Cash and cash equivalents at beginning of period............. 792 672
------------- -----------
Cash and cash equivalents at end of period................... $ 288 $ 1,094
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest............................................. 700 727
============ ============
Income taxes.......................................... $ 83 $ 66
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000
(TABULAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AND PERCENTAGE DATA)
(UNAUDITED)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF PRESENTATION
The accompanying unaudited financial statements include the accounts of
International Total Services, Inc. and its wholly-owned subsidiaries (the
"Company"). These financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation of the financial position
of the Company as of September 30, 2000 and the results of its operations for
the three and six month periods ended September 30, 2000 and 1999 and cash flows
for the six month periods ended September 30, 2000 and 1999 have been included.
The accompanying unaudited consolidated financial statements should be read in
conjunction with the Company's consolidated financial statements, including the
notes thereto, appearing in the Company's Annual Report on Form 10-K for the
year ended March 31, 2000.
The preparation of financial statements and the accompanying notes
thereto, in conformity with generally accepted accounting principles, requires
management to make estimates and assumptions that affect reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the respective reporting periods. Actual results could differ
from those estimates. Operating results for the three and six month periods
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the year ended March 31, 2001.
The Company's fiscal year ends on March 31. All references to fiscal
years in this Quarterly Report on Form 10-Q represent the year in which the
fiscal period ends (i.e. fiscal 2001 is the fiscal year ended March 31, 2001)
unless otherwise noted.
REVENUE RECOGNITION
Revenues are recognized at the time aviation and commercial security
services are provided. Revenues generated from the sales of security products
are recognized when the products have been delivered and installed.
Commencing in the first quarter of fiscal 2000, as a result of an
acquisition, (Note E), revenues generated from the sales of security products
were recognized on the percentage-of-completion basis. This was the policy of
the newly acquired company which was involved in numerous long term installation
contracts. The percentage-of-completion method is based on estimates by the
project manager. Commencing in fiscal 2001, the Company outsources the
distribution and installation of security products.
COST RECOGNITION
Cost of revenues include all labor costs and direct costs relating to
aviation and commercial security and the material costs related to security
products. Indirect costs are charged to selling, general and administrative
expenses as incurred. Provisions for estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes in job
performance, job conditions and estimated profitability, including those arising
from contract penalty provisions, and final contract settlements may result in
revisions to costs and income and are recognized in the period in which the
revisions are determined.
6
<PAGE> 8
CHANGE IN ESTIMATE - AMORTIZATION OF UNIFORMS IN SERVICE
Effective April 1, 2000, the Company changed the estimated useful life
of uniforms in service from 18 months to 15 months. The change was based on an
analysis of the current usage and life of uniforms after placed in service. The
estimated impact of this change on the net loss for the six months of fiscal
2001 is not significant.
NET LOSS PER SHARE
Net loss per share - basic is based on the weighted average number of
shares outstanding during each period.
Net 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 loss per share,
no adjustments have been made to the reported amounts of net loss.
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 2001, fiscal 2000 and fiscal 1999, and has negative
tangible net worth. In addition, operations generated negative cash flow for
fiscal 2001 and the revolving credit facility is due in less than one year.
These factors raise substantial doubt about the Company's ability to continue as
a going concern.
The Company's strategy is to use its established business base as a
platform for expanding 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 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.
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 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 - REPORTABLE SEGMENTS
-------------------
The Company has three segments: Aviation Staffing Services, Commercial
Security Staffing Services, and Security Products Distribution. The aviation
services offered by the Company include pre-board screening, skycap, baggage
handling, aircraft appearance, wheelchair and electric cart operations. The
Company's Commercial Security Staffing Services extend beyond aviation security,
and include the provision of uniformed security officers, facility access
control, security consulting, special event security and security assessment to
a broad range of clients. The Security Products Distribution segment, which is
being out-sourced commencing in fiscal 2001, offers a line of security products
including airport and commercial security checkpoint products and hand-held
metal detectors (Note E).
The Company's reportable segments are strategic business units that
offer different products and services to different markets. Aviation Staffing
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
Security Staffing Services is treated as a separate business due to its focus on
security services and its wide range of clients. Security Products Distribution
is treated as a separate business because it markets tangible security goods.
7
<PAGE> 9
The following table provides selected information about the Company's
three business units. The Company makes operating decisions based on segment
revenues, costs of revenues, gross margins, and net income (loss). 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 SIX MONTHS ENDED SEPTEMBER 30, 2000 SERVICES SERVICES DISTRIBUTION TOTALS
------------------------------------------- -------- -------- ------------- ------
<S> <C> <C> <C> <C>
Net operating revenues.................................... $ 76,237 $ 21,053 $ 2,082 $99,372
Cost of revenues.......................................... $ 70,135 $ 16,882 $ 1,957 $88,974
Gross margin ............................................ $ 6,102 $ 4,171 $ 125 $10,398
Net loss ............................................ $ (1,774) $ (865) $ (8) $(2,647)
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999
-------------------------------------------
Net operating revenues.................................... $ 83,023 $ 24,502 $ 3,889 $111,414
Cost of revenues.......................................... $ 76,564 $ 20,337 $ 2,866 $ 99,767
Gross margin ............................................ $ 6,459 $ 4,165 $ 1,023 $ 11,647
Net income (loss) ........................................ $ (2,212) $ (728) $ 78 $ (2,862)
</TABLE>
DISCLOSURE OF GEOGRAPHIC INFORMATION
------------------------------------
<TABLE>
<CAPTION>
NET OPERATING REVENUES FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000 AND
----------------------------------------------------------------------
ASSETS AT SEPTEMBER 30, 2000 REVENUES ASSETS
---------------------------- -------- ------
<S> <C> <C>
United States ................................................................... $ 97,702 $ 66,670
United Kingdom................................................................... 1,670 505
-------------- --------------
Total ................................................................... $ 99,372 $ 67,175
============== ==============
</TABLE>
<TABLE>
<CAPTION>
NET OPERATING REVENUES FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 AND ASSETS
-----------------------------------------------------------------------------
AT MARCH 31, 2000 REVENUES ASSETS
----------------- -------- ------
<S> <C> <C>
United States ................................................................... $ 107,835 $ 70,450
Other Countries.................................................................. 3,579 762
-------------- --------------
Total ................................................................... $ 111,414 $ 71,212
============== ==============
</TABLE>
DISCLOSURE ABOUT MAJOR CUSTOMERS
During the six months ended September 30, 2000 and 1999, revenues from
one major customer amounted to $16.8 million and $25.8 million or 16.9% and
23.1% of net operating revenues, respectively. Services provided to another
major customer generated revenues for the Company of $12.0 million or 12.0% of
net operating revenues for the six months ended September 30, 2000 and 12.6% of
total revenues during the same period in the prior year.
Five airline customers, including the two noted above, accounted for
approximately 42.0% and 46.8% of net operating revenue for the six months ended
September 30, 2000 and 1999, respectively, and accounted for 30.0% and 34.5% of
net accounts receivable at September 30, 2000 and March 31, 2000 respectively.
NOTE D - FINANCING ARRANGEMENTS
----------------------
In April 2000 management secured, from the Company's banks, certain
amendments to the Company's existing $25.0 million credit facility. Among the
amendments were 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
8
<PAGE> 10
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 October 26, 2000, the Company was in
compliance with all covenants and the outstanding obligation under this facility
was $22.9 million.
In consideration for the amendment and extension of the credit
facility, the Company granted the lenders warrants for the purchase of 300,000
shares of the Company's Common Stock at an exercise price of $1.41, which the
Company's Board of Directors 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.
In the first six months of fiscal 2001, the Company recorded a warrant
liability amounting to $217,000 related to the put option associated with
warrants granted to the banks. Interest expense was charged for the accretion of
the put option feature from the grant date to the end of the second quarter of
fiscal 2001. The Company will record an additional $83,000 over the balance of
fiscal 2001 related to the contingent put option liability.
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. The Company ceased operations in Germany during fiscal 2000.
NOTE E - DISPOSITION
-----------
In the first quarter of fiscal 2000, the Company acquired the
outstanding stock of Metroplex Control Systems, Inc. ("Metroplex") headquartered
in Dallas, Texas for approximately $5.0 million in cash. The purchase price
allocation resulted in goodwill of approximately $2.5 million which was charged
to operations in fiscal 2000 due to the subsequent disposition of Metroplex. In
March 2000, the Company completed the disposition of Metroplex in conjunction
with the Company's strategy to focus on its core businesses and outsource the
security products distribution and installation business. The Company reported a
$0.8 million loss on the sale in the fourth quarter of fiscal 2000. During the
first six months of fiscal 2000, Metroplex generated net operating revenues of
$2.0 million and net income of approximately $204,000.
NOTE F - CAPITAL STOCK
-------------
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 which began February 1, 2000. 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. 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
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<PAGE> 11
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 on that market would be halted
pending the receipt and review of additional information in accordance with
Marketplace Rules of the Nasdaq Stock Market. The primary cause for the halt was
the Company's failure to timely file the Company's 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 Company's
Common Stock was delisted from the Nasdaq Stock Market. On October 26, 1999
price quotes for the Company's Common Stock began appearing in the Electronic
Quotation System of the National Quotation Bureau LLC. Although the Company is
now current for all Securities and Exchange Commission filings, the Company does
not meet the requirements necessary to regain listing on the Nasdaq Stock
Market.
10
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INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2000
OVERVIEW
The Company is a leading provider of aviation contract support services
and is also a significant provider of commercial security staffing services. The
Company provides services to customers in the United States and United Kingdom.
Aviation support services offered by the Company include pre-board screening,
skycap, baggage handling and aircraft appearance services, 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.
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.
Operations generated negative cash flow for fiscal 2000 and for the
first six months of fiscal 2001. Although the Company obtained a one year
extension of its credit facility through April 2001 (See Note D of "Notes to the
Consolidated Financial Statements") the negative cash flow generated during
fiscal 2000 and forecast to continue at least through the first half of fiscal
2001 are factors that raise doubts about the Company's ability to continue as a
going concern. The audit report of Arthur Andersen LLP for fiscal 2000 contained
an explanatory paragraph with respect to this matter.
RESULTS OF OPERATIONS
COMPARISON OF RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
--------------------------------------------------------------
SEPTEMBER 30, 2000 AND 1999
---------------------------
The following are the Net Operating Revenues, Cost of Revenues and
Gross Margin for the second quarter of fiscal 2001 as compared to the same
period in fiscal 2000, by segment (dollars in thousands).
<TABLE>
<CAPTION>
For the Three Months Ended Sept 30,
2000 % of Rev 1999 % of Rev Inc/(Dec) % Inc/(Dec)
------------------------- ------------------------- ------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Operating Revenues:
Aviation $ 37,195 77.1% $ 41,023 73.8% $(3,828) -9.3%
Commercial Security 10,304 21.4% 12,154 21.8% (1,850) -15.2%
Security Products 737 1.5% 2,432 4.4% (1,695) -69.7%
------------------------- ------------------------- ------------------------
48,236 100.0% 55,609 100.0% (7,373) -13.3%
------------------------- ------------------------- ------------------------
Cost of Revenues:
Aviation 34,411 92.5% 37,639 91.7% (3,228) -8.6%
Commercial Security 8,274 80.3% 10,000 82.3% (1,726) -17.3%
Security Products 559 75.8% 1,686 69.3% (1,127) -66.8%
------------------------- ------------------------- ------------------------
43,244 89.7% 49,325 88.7% (6,081) -12.3%
------------------------- ------------------------- ------------------------
Gross Margin:
Aviation 2,784 7.5% 3,384 8.3% (600) -17.7%
Commercial Security 2,030 19.7% 2,154 17.7% (124) -5.8%
Security Products 178 24.2% 746 30.7% (568) -76.1%
------------------------- ------------------------- ------------------------
$ 4,992 10.3% $ 6,284 11.3% $(1,292) -20.6%
========================= ========================= ========================
</TABLE>
NET OPERATING REVENUES. Net operating revenues in the second quarter of
fiscal 2001 decreased by $7.4 million, or 13.3%, as compared with the second
quarter of fiscal 2000. The decrease is attributable to the loss of aviation and
commercial
11
<PAGE> 13
security staffing contracts and the Company's decision to phase out of the
direct sale and installation of security products and to outsource the
implementation and service functions of the related business segment during
fiscal 2001. (See Note E of "Notes to the Consolidated Financial Statements")
The decrease in aviation revenues relates to lost service contracts at
several sites which has been partially offset by price increases obtained from
airlines and new service contracts obtained since the beginning of the fiscal
2001. The Company's contracts with clients generally have one-to three-year
terms but are cancelable by either party on 30 to 90 days' notice. In the normal
course of business, the competitive bidding process and other factors, the
Company has lost certain profitable contracts. In the second quarter of fiscal
2001, the Company lost a contract at the Dallas Fort Worth airport that
generated net revenues of $7.4 million and gross margin of $1.0 million in
fiscal 2000. The loss of this and other business with the same customer
contributed to the decrease in net operating revenues and gross margin as a
percent to sales when compared to last year and the prior quarter.
The Company's strategy to focus on higher margins has resulted in price
increases and approximately 30 new contracts at targeted margin percentages.
Commencing in the third quarter of fiscal 2001 the Company has obtained
significant price increases and a major new contract. This new contract is
projected to generate net revenues of $4.0 million and gross margin of
approximately $0.4 million per year. Additionally, the company benefits from
price increases by reducing employee turnover and lowering non-reimbursed
overtime expenditures due to increased wages for employees (See "Cost of
Revenues"). The effects of this strategy may result in improved margins for the
third quarter of fiscal 2001 as compared to the prior fiscal year. Although the
Company will seek to retain profitable contracts, obtain price increases, and
generate new business, there can be no assurance that the Company will be
successful in its efforts.
The decrease in Commercial Security Staffing Services net
revenues was related to the Company's strategy, commencing in the third quarter
of fiscal 2000, to eliminate contracts that did not meet the Company's profit
criteria. Although Commercial Security Staffing Services net revenues decreased
by $1.9 million, or 15.2%, gross margin only decreased approximately $0.1
million, with gross margin as a percent of revenue increasing from 17.7% in the
second quarter of fiscal 2000 to 19.7% for the same period in fiscal 2001.
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. In the second quarter of fiscal 2001, total cost of
revenues decreased $6.1 million, or 12.3%, as compared to the same period in
fiscal 2000. Most of this decrease was due to costs associated with the service
contracts lost or discontinued. The cost of revenues for Security Products
Distribution decreased $1.1 million, primarily due to the Company's strategy
related to security products. (See Note E of "Notes to the Consolidated
Financial Statements"). Although total cost of net operating revenues
decreased, as a percent to net operating revenues, cost of net operating
revenues increased from 88.7% in fiscal 2000 to 89.7% in fiscal 2001. This
increase is primarily related to overtime costs, principally in Aviation
Services. Aviation Services overtime costs increased from 6.1% of net operating
revenues in the second quarter of fiscal 2000 to 7.9% for the same period in
fiscal 2001. This increase in overtime costs in the second quarter of fiscal
2001 as compared to the same period in fiscal 2000 was a principal factor in the
decline in Aviation Services gross margin as a percent of net operating
revenues. Aviation Services gross margin decreased from 8.3% in the second
quarter of fiscal 2000 to 7.5% for the same period in fiscal 2001.
The Company is continuing efforts to eliminate negative and low margin
contracts and improve controls over labor costs, especially non-reimbursed
overtime costs, to improve margins in the Aviation Staffing Services and
Commercial Security Staffing Services segments. The strength of the United
States economy during this period has driven unemployment to low levels 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. The low unemployment
rates have resulted in higher overtime pay than in prior years which has been
incurred in order to provide the services required per the contracts with the
customers. In addition, low unemployment rates have increased employee turnover,
which increases recruiting and training costs. The Company's ability to obtain
price increases for aviation services is dependent, in part upon the economic
strength of the airline industry, which may be impacted by rising fuel prices
and competition. These factors have resulted in downward pressure on the
Company's gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ("S, G & A"). Selling,
general and administrative expenses include corporate governance costs, support
services for field personnel, bad debt expense and professional services (legal,
audit and consulting). The following table breaks down S,G & A by business
segment and corporate administrative costs (in thousands):
12
<PAGE> 14
Three Months ended Sept 30,
---------------------------------
2000 1999
--------------- ---------------
Aviation $ 1,393 $ 2,347
Commercial Security 1,424 1,393
Security Products 16 397
Corporate Administration 2,099 2,297
--------------- ---------------
$ 4,932 $ 6,434
=============== ===============
Total S, G & A expenses decreased $1.5 million, or 23.3%, in the second
quarter of fiscal 2001 as compared to the same period in fiscal 2000. S, G & A
expenses were 10.2% and 11.5% of net operating revenues for the second quarter
of fiscal 2001 and 2000, respectively. The following discusses the changes in S,
G & A expenses by business segment for the second quarter of fiscal 2001 as
compared to the same period in fiscal 2000.
Aviation Staffing Services S, G & A expenses decreased $1.0 million for
the second quarter of fiscal 2001 as compared to the same period in fiscal 2000.
The decrease was due to aviation contracts that have been lost combined with
expense savings generated from the reorganization of aviation administration
which reduced administrative costs, primarily salary and payroll taxes and
benefits.
Commercial Security Staffing Services S, G & A expenses increased
approximately $31,000 in the second quarter of fiscal 2001 as compared to the
same period in fiscal 2000, primarily related to salary and payroll taxes and
benefits. The Company has completed the reorganization of the Commercial
Security administrative support structure.
Security Products Distribution S, G & A decreased $0.4 million in the
second quarter of fiscal 2001 as compared to the same period in fiscal 2000. The
decrease is due to the Company's intention to outsource the implementation and
service functions of this business segment during fiscal 2001. The S, G & A
associated with the Security Products Distribution business segment should be
minimal during fiscal 2001 as the Company continues to implement its strategy.
(See Note E of "Notes to the Consolidated Financial Statements")
Corporate Administration S, G & A decreased $0.2 million in the second
quarter of fiscal 2001 as compared to the same period in fiscal 2000. The
decrease is due to the Company's strategy to reduce annual Corporate
Administrative costs in fiscal 2001 as compared to fiscal 2000.
AMORTIZATION EXPENSE. Contract and goodwill amortization expense
decreased $0.1 million, or 8.6%, to $0.6 million in the second quarter of fiscal
2001 from $0.7 million in the second quarter of fiscal 2000. The decrease
relates to a decrease in goodwill amortization due to a disposition and its
related goodwill in March 2000. (See Note E of "Notes to the Consolidated
Financial Statements")
INTEREST EXPENSE. In the second quarter of fiscal 2001, interest
expense increased to $0.7 million from $0.4 million in the second quarter of
fiscal 2000. Average outstanding debt increased from $22.3 million during the
second quarter of fiscal 2000 to $23.1 million during the second quarter of
fiscal 2001. This increase in debt was primarily incurred during fiscal 2000 to
fund the negative cash flow from operations. In addition, the Company's
effective borrowing rate increased from 8.01% to 10.25% for the second quarter
of fiscal 2000 as compared to the second quarter of fiscal 2001. The increase in
the effective borrowing rate was due to the increase in the prime rate of
interest. Interest expense in the second quarter of fiscal 2001 also includes a
$75,000 non-cash charge related to the put option associated with the warrants
to purchase stock granted to the Bank. (See Note D of "Notes to the Consolidated
Financial Statements")
INCOME TAXES. Due to the loss incurred, and the uncertainty of the
Company's ability to realize any carry forward tax benefits, no tax benefit was
recorded in the second quarter of fiscal 2001 or fiscal 2000. The tax provision
for the second quarter of fiscal 2001 relates to United Kingdom tax obligations
in addition to certain domestic state and local taxes.
13
<PAGE> 15
COMPARISON OF RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2000
-------------------------------------------------------------------------------
AND 1999
--------
The following are the Net Operating Revenues, Cost of Revenues and
Gross Margin for the six months ended September 30, 2000 of fiscal 2001 as
compared to the same period in fiscal 2000, by segment (dollars in thousands).
<TABLE>
<CAPTION>
For the Six Months Ended Sept 30,
2000 % of Rev 1999 % of Rev Inc/(Dec) % Inc/(Dec)
------------------------- ------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Operating Revenues:
Aviation $ 76,237 76.7% $ 83,023 74.5% $ (6,786) -8.2%
Commercial Security 21,053 21.2% 24,502 22.0% (3,449) -14.1%
Security Products 2,082 2.1% 3,889 3.5% (1,807) -46.5%
------------------------- ------------------------- --------------------------
99,372 100.0% 111,414 100.0% (12,042) -10.8%
------------------------- ------------------------- --------------------------
Cost of Revenues:
Aviation 70,135 92.0% 76,564 92.2% (6,429) -8.4%
Commercial Security 16,882 80.2% 20,337 83.0% (3,455) -17.0%
Security Products 1,957 94.0% 2,866 73.7% (909) -31.7%
------------------------- ------------------------- --------------------------
88,974 89.5% 99,767 89.5% (10,793) -10.8%
------------------------- ------------------------- --------------------------
Gross Margin:
Aviation 6,102 8.0% 6,459 7.8% (357) -5.5%
Commercial Security 4,171 19.8% 4,165 17.0% 6 0.1%
Security Products 125 6.0% 1,023 26.3% (898) -87.8%
------------------------- ------------------------- --------------------------
$ 10,398 10.5% $ 11,647 10.5% $ (1,249) -10.7%
========================= ========================= ==========================
</TABLE>
NET OPERATING REVENUES. Net operating revenues in the first six months
of fiscal 2001 decreased by $12.0 million, or 10.8%, as compared with the same
period of fiscal 2000. The decrease is attributable to the loss of aviation and
commercial security staffing contracts and the Company's decision to phase out
of the direct sale and installation of security products and to outsource the
implementation and service functions of the related business segment during
fiscal 2001. (See Note E of "Notes to the Consolidated Financial Statements")
The decrease in aviation revenues relates to lost service contracts at
several sites which has been partially offset by price increases obtained from
airlines and new service contracts obtained since the beginning of the fiscal
2001. The Company's contracts with clients generally have one-to three-year
terms but are cancelable by either party on 30 to 90 days' notice. In the normal
course of business, the competitive bidding process and other factors, the
Company has lost certain profitable contracts. In the second quarter of fiscal
2001, the Company lost a contract at the Dallas Fort Worth airport that
generated net revenues of $7.4 million and gross margin of $1.0 million in
fiscal 2000. The loss of this and other business with the same customer
contributed to the decrease in net operating revenue when compared to last year.
The Company's strategy to focus on higher margins has resulted in price
increases and approximately 30 new contracts at targeted margin percentages.
Commencing in the third quarter of fiscal 2001 the Company has obtained
significant price increases and a major new contract. The benefit of this
strategy is reflected in gross margin as a percent of revenue, which increased
from 7.8% for the first six months of fiscal 2000 to 8.0% for the same period in
fiscal 2001. This new contract is projected to generate net revenues of $4.0
million and gross margin of approximately $0.4 million per year. Additionally,
the company benefits from price increases by reducing employee turnover and
lowering non-reimbursed overtime expenditures due to increased wages for
employees (See "Cost of Revenues"). The effects of this strategy may result in
improved margins for the third quarter of fiscal 2001 as compared to the prior
fiscal year. Although the Company will seek to retain profitable contracts,
obtain price increases, and generate new business, there can be no assurance
that the Company will be successful in its efforts.
The decrease in Commercial Security Staffing Services net revenues was
related to the Company's strategy, commencing in the third quarter of fiscal
2000, to eliminate contracts that did not meet the Company's profit criteria.
Although Commercial Security Staffing Services net revenues decreased by $3.4
million, or 14.1%, gross margin remained constant at $4.2 but increased as a
percent of revenue from 17.0% for the six months of fiscal 2000 to 19.8% for the
same period in fiscal 2001.
14
<PAGE> 16
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. In the first six months of fiscal 2001, total cost
of revenues decreased $10.8 million, or 10.8%, as compared to the same period in
fiscal 2000. Most of this decrease was due to costs associated with the service
contracts lost or discontinued. The cost of revenues for Security Products
Distribution decreased $0.9 million, primarily due to the Company's strategy
related to security products. (See Note E of "Notes to the Consolidated
Financial Statements")
The Company is continuing efforts to eliminate negative and low margin
contracts and improve controls over labor costs, especially non-reimbursed
overtime costs, to improve margins in the Aviation Staffing Services and
Commercial Security Staffing Services segments. The strength of the United
States economy during this period has driven unemployment to low levels 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. The low unemployment
rates have resulted in higher overtime pay than in prior years which has been
incurred in order to provide the services required per the contracts with the
customers. In addition, low unemployment rates have increased employee turnover,
which increases recruiting and training costs. The Company's ability to obtain
price increases for aviation services is dependent, in part upon the economic
strength of the airline industry, which may be impacted by rising fuel prices
and competition. These factors have resulted in downward pressure on the
Company's gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. ("S, G & A"). Selling,
general and administrative expenses include corporate governance costs, support
services for field personnel, bad debt expense and professional services (legal,
audit and consulting). The following table breaks down S,G & A by business
segment and corporate administrative costs (in thousands):
<TABLE>
<CAPTION>
Six Months ended Sept 30,
---------------------------------
2000 1999
--------------- ---------------
<S> <C> <C>
Aviation $ 3,026 $ 4,153
Commercial Security 2,832 2,865
Security Products 37 676
Corporate Administration 4,553 4,645
--------------- ---------------
$ 10,448 $ 12,339
=============== ===============
</TABLE>
Total S, G & A expenses decreased $1.9 million, or 15.3%, in the first
six months of fiscal 2001 as compared to the same period in fiscal 2000. S, G &
A expenses were 10.5% and 11.1% of net operating revenues for the first six
months of fiscal 2001 and 2000, respectively. The following discusses the change
in S, G & A expenses by business segment for the first six months of fiscal 2001
as compared to the same period in fiscal 2000.
Aviation Staffing Services S, G & A expenses decreased $1.1 million for
the first six months of fiscal 2001 as compared to the same period in fiscal
2000. The decrease was due to aviation contracts that have been lost combined
with expense savings generated from the reorganization of aviation
administration which reduced administrative costs, primarily salary and payroll
taxes and benefits.
Commercial Security Staffing Services S, G & A expenses decreased
approximately $33,000 in the first six months of fiscal 2001 as compared to the
same period in fiscal 2000, primarily related to salary and payroll taxes and
benefits. The Company has completed the reorganization of the Commercial
Security administrative support structure.
Security Products Distribution S, G & A decreased $0.6 million in the
first six months of fiscal 2001 as compared to the same period in fiscal 2000.
The decrease is due to the Company's intention to outsource the implementation
and service functions of this business segment during fiscal 2001. The S, G & A
associated with the Security Products Distribution business segment should be
minimal during fiscal 2001 as the Company continues to implement its strategy.
Corporate Administration S, G & A decreased $0.1 million in the first
six months of fiscal 2001 as compared to the same period in fiscal 2000. The
decrease is due to the Company's strategy to reduce annual Corporate
Administrative costs in fiscal 2001 as compared to fiscal 2000.
AMORTIZATION EXPENSE. Contract and goodwill amortization expense
decreased $0.2 million, or 16.0%, to $1.2 million in the first six months of
fiscal 2001 from $1.4 million in the same period of fiscal 2000. The decrease
relates to a decrease in
15
<PAGE> 17
goodwill amortization due to a disposition and its related goodwill in March
2000. (See Note E of "Notes to the Consolidated Financial Statements")
INTEREST EXPENSE. In the first six months of fiscal 2001, interest
expense increased to $1.3 million from $0.7 million in the same period of fiscal
2000. Average outstanding debt increased from $20.2 million during the first six
months of fiscal 2000 to $23.1 million during the same period of fiscal 2001.
This increase in debt was primarily incurred during fiscal 2000 to fund the
negative cash flow from operations. In addition, the Company's effective
borrowing rate increased from 7.82% to 10.1% for the first six months of fiscal
2000 as compared to the same period of fiscal 2001. The increase in the
effective borrowing rate was due to the increase in the prime rate of interest.
Interest expense in the first six months of fiscal 2001 also includes a $150,000
charge related to the put option associated with the warrants to purchase stock
granted to the Bank. (See Note D of "Notes to the Consolidated Financial
Statements")
INCOME TAXES. Due to the loss incurred, and the uncertainty of the
Company's ability to realize any carry forward tax benefits, no tax benefit was
recorded in the first six months of fiscal 2001 or fiscal 2000. The tax
provision for the six months of fiscal 2001 relates to United Kingdom tax
obligations in addition to certain domestic state and local taxes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is labor intensive. Consequently, it has
substantial needs for cash throughout its fiscal year. Operating activities used
net cash of approximately $2.1 million and financing activities generated net
cash of $1.8 million during the six months ended September 30, 2000. The primary
use of funds in the first six months of fiscal 2001 was to fund accrued
expenses, principally worker's compensation. The funding of worker's
compensation should decline in the second half of fiscal 2001.
During the first six months of fiscal 2001, principal uses of funds, in
addition to working capital requirements, included expenditures associated with
capital expenditures. The Company anticipates capital expenditures during the
balance of fiscal 2001 of approximately $0.3 million, primarily related to
leasehold improvements, computer software and systems and equipment used in
operations.
In April 2000 management secured, from the Company's banks, certain
amendments to the Company's existing $25.0 million credit facility. Among the
amendments were 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 October 26, 2000, the Company was in compliance with all covenants and the
outstanding obligation under this facility was $22.9 million.
In consideration for the amendment and extension of the credit
facility, the Company granted the lenders warrants for the purchase of 300,000
shares of the Company's Common Stock at an exercise price of $1.41, which the
Company's Board of Directors 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. (See
Note D of "Notes to the Consolidated Financial Statements")
The Company anticipates negative cash flow from operations for at least
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 programs to improve margins and reduce expenses are expected to
begin to generate positive cash flow. Although there can be no assurance, the
Company believes that amounts available under its credit facility, combined with
the receipt of an income tax refund of $3.0 million in May 2000, will be
sufficient to meet its cash requirements, including monthly debt service, until
operations begin to generate positive cash flow. The Company will seek to
refinance its outstanding borrowings under the credit facility on or prior to
March 31, 2001, but there can be no assurance as to the Company's ability to
obtain a replacement credit facility or otherwise refinance its debt, if
necessary, or obtain other equity financing.
The Company's lack of external financing sources will limit its ability
to grow and cause it to rely on 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.
16
<PAGE> 18
FORWARD LOOKING STATEMENTS
Forward-looking statements in this Form 10-Q including, without
limitation, statements relating to the Company's plans, strategies, objectives,
expectations, intentions, and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements involve known and unknown risks, uncertainties,
and other factors that may cause the actual results, performance, or
achievements of the company to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Statements in this quarterly report, including the notes to the
consolidated financial statements, describe factors that could contribute to or
cause such differences. These factors include, among others, the Company's
ability to pay off or refinance its 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. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of new information,
future events or otherwise. Readers are referred to the Company's Annual Report
on Form 10K as filed with the Securities and Exchange Commission which
identifies certain risk factors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
In the ordinary course of business, the Company is subject to foreign
currency, interest rate and labor market risks. The risks primarily relate to
the sale of the Company's services to foreign customers through its foreign
subsidiaries, changes in interest rates on the Company's short-term financing
and the availability and cost of labor.
Foreign Currency Risk. A portion of the Company's revenues, (1.7%
through September 30, 2000), 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 significant. The Company does not
engage in hedging transactions to reduce exposure to fluctuations in foreign
currency exchange rates.
Interest Rate Risk. The Company maintains a revolving line of credit
which subjects the Company to the risk of loss associated with movements in
market interest rates. This line of credit had a balance at September 30, 2000
of $23.8 million, which was at a variable rate of interest based on prime. Since
revolving payments and borrowing are made on this line of credit on a daily
basis subject to a market variable rate of interest, the September 30, 2000
balance of this debt is considered to be at fair value. Based upon the Company's
current outstanding balance on its revolving line of credit, a hypothetical
increase of approximately 100 basis points in the prime rate of interest would
adversely affect future earnings and cash flows by approximately $238,000 on an
annual basis. The Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
Labor Market Risk. The Company's profitability can be significantly
impacted by the availability of qualified personnel and the cost of labor.
Direct labor costs comprise approximately 82% of the Company's net operating
revenues. Changes in the labor market may increase direct labor costs through
higher wages and increased amounts of overtime that can not be recovered from
customers. The Company anticipates managing such risk by entering contracts that
permit increases based on the labor market and attempt to reduce turnover to
reduce recruiting and training costs to mitigate increases in wages. However,
there can be no assurance that the Company will be able to obtain increased
billing rates to offset increases in labor costs or to successfully reduce
employee turnover.
17
<PAGE> 19
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8 - K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
27 Financial Data Schedule (For SEC
Filing Purposes Only)
(b) Reports on Form 8 - K
No reports on Form 8-K have been filed during the quarter for which
this report is filed.
18
<PAGE> 20
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.
NOVEMBER 13, 2000
International Total Services, Inc.
By: /s/ Mark D. Thompson
-----------------------------------------
Mark D. Thompson
President and 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.
November 13, 2000 /s/ Mark D. Thompson
----------------- ---------------------
Mark D. Thompson
President and Chief Executive Officer
(Principal Executive Officer)
November 13, 2000 /s/ Ronald P. Koegler
----------------- ----------------------
Ronald P. Koegler
Executive Vice President and Controller
(Principal Accounting Officer)
November 13, 2000 /s/ Michael F. Sosh
----------------- -------------------
Michael F. Sosh
Executive Vice President, Treasurer and
Chief Financial Officer
(Principal Financial Officer)
19
