<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED DECEMBER 31, 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 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 April 30, 2000, the Registrant had 6,837,494 Common Shares issued and
outstanding.
<PAGE> 2
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 December 31, 1999 and March 31, 1999............................................. 2
Consolidated Statements of Operations and Comprehensive Income (Loss) for the:
Three Months Ended December 31, 1999 and 1998........................................... 3
Nine Months Ended December 31, 1999 and 1998............................................ 4
Consolidated Statements of Cash Flows
for the Nine Months Ended December 31, 1999 and 1998.................................... 5
Notes to Consolidated Financial Statements.................................................. 6
ITEM 2 Management's Discussion and Analysis of Financial Condition and
Results of Operations....................................................................... 13
ITEM 3 Quantitative and Qualitative Disclosures About Market Risk....................................... 18
PART II OTHER INFORMATION
ITEM 6 Exhibits and Reports on Form 8 - K............................................................... 19
</TABLE>
1
<PAGE> 3
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1999 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................ $ 1,702 $ 672
Accounts receivable - net of allowance for doubtful
accounts of $552 and $513, respectively................................ 25,701 23,811
Cost and estimated earnings in excess of billings........................ 453 --
Deferred taxes........................................................... 3,033 3,033
Uniforms, net............................................................ 2,009 2,691
Other current assets..................................................... 1,212 1,422
------------- ----------
Total current assets................................................... 34,110 31,629
PROPERTY AND EQUIPMENT
Security equipment....................................................... 4,246 4,729
Service equipment........................................................ 2,343 2,636
Computer equipment....................................................... 3,155 2,882
Furniture and fixtures................................................... 1,561 1,136
Autos.................................................................... 1,020 974
Leasehold improvements.................................................. 73 63
------------- ----------
12,398 12,420
Less accumulated depreciation and amortization........................... 6,723 5,773
------------ ----------
Property and equipment, net........................................... 5,675 6,647
INTANGIBLES, less accumulated amortization of $6,175
and $3,932, respectively................................................. 34,037 32,254
SECURITY DEPOSITS AND OTHER.................................................... 144 104
------------- ----------
TOTAL ASSETS............................................................. $ 73,966 $ 70,634
============= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable................................................... $ 2,566 $ 1,871
Billings in excess of costs and estimated earnings....................... 631 --
Accrued payroll and employee benefits.................................... 15,770 17,832
Other accrued expenses................................................... 11,361 8,554
Income taxes payable..................................................... 54 54
------------- ----------
Total current liabilities.............................................. 30,382 28,311
DEFERRED TAXES .............................................................. 623 623
LONG-TERM OBLIGATIONS.......................................................... 18,914 10,859
SHAREHOLDERS' EQUITY
Common shares, without par value, stated at $.01 per share, authorized
20,000 shares, issued and outstanding
6,662 shares at December 31, 1999 and March 31, 1999.................. 67 67
Additional paid-in capital............................................... 31,211 31,211
Accumulated other comprehensive loss..................................... (422) (387)
Retained deficit......................................................... (6,809) (50)
------------- ----------
24,047 30,841
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $ 73,966 $ 70,634
============= ==========
</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 INCOME (LOSS)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
-------------------------------
RESTATED
1999 1998
---------------------- -----------------------
<S> <C> <C> <C> <C>
Net operating revenues....................................... $ 52,805 100.0% $ 58,858 100.0%
Cost of revenues............................................ 47,290 89.6% 52,406 89.0%
---------- -------- ---------- ---------
GROSS MARGIN................................. 5,515 10.4% 6,452 11.0%
Selling, general and administrative expenses................. 8,077 15.2% 5,214 8.9%
Amortization expense......................................... 819 1.6% 611 1.0%
---------- -------- ---------- ---------
OPERATING PROFIT (LOSS)...................... (3,381) (6.4)% 627 1.1%
Interest expense-net......................................... 516 1.0% 267 0.5%
---------- -------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES............ (3,897) (7.4)% 360 0.6%
Provision for income taxes................................... -- -- 146 0.2%
---------- -------- ---------- ---------
NET INCOME (LOSS)............................ $ (3,897) (7.4)% $ 214 0.4%
========== ======== ========== =========
Other comprehensive income (loss)
Foreign currency translation adjustment................... (73) 67
---------- ----------
COMPREHENSIVE INCOME (LOSS)................... $ (3,970) $ 281
========== ==========
Net income (loss) per share:
Basic .................................................... $ (0.58) $ 0.03
========== ==========
Diluted................................................... $ (0.58) $ 0.03
========== ==========
Weighted average number of shares outstanding: (000's)
Basic .................................................... 6,662 6,662
========== ==========
Diluted................................................... 6,662 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 INCOME (LOSS)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------------------
RESTATED
1999 1998
---------------------- -----------------------
<S> <C> <C> <C> <C>
Net operating revenues....................................... $ 164,219 100.0% $ 173,386 100.0%
Cost of revenues ............................................ 147,057 89.5% 154,802 89.3%
---------- -------- ---------- ---------
GROSS MARGIN........................................ 17,162 10.5% 18,584 10.7%
Selling, general and administrative expenses................. 20,416 12.4% 15,491 8.9%
Amortization expense......................................... 2,243 1.4% 1,683 1.0%
---------- -------- ---------- ---------
OPERATING PROFIT (LOSS)............................. (5,497) (3.3)% 1,410 0.8%
Interest expense-net......................................... 1,262 0.8% 591 0.3%
---------- -------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES................... (6,759) (4.1)% 819 0.5%
Provision for income taxes................................... -- -0-% 336 0.2%
---------- -------- ---------- ---------
NET INCOME (LOSS)................................... $ (6,759) (4.1)% $ 483 0.3%
========= ========== ========= =========
Other comprehensive income (loss)
Foreign currency translation adjustment................... (35) 68
---------- ----------
COMPREHENSIVE INCOME (LOSS)......................... $ (6,794) $ 551
========== ==========
Net income (loss) per share:
Basic .................................................... $ (1.02) $ 0.07
========== ==========
Diluted................................................... $ (1.02) $ 0.07
========== ==========
Weighted average number of shares outstanding: (000's)
Basic .................................................... 6,662 6,662
========== ==========
Diluted................................................... 6,662 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>
NINE MONTHS ENDED DECEMBER 31,
-------------------------------------
RESTATED
1999 1998
-------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ (6,759) $ 483
Adjustments to reconcile net income (loss) to net
cash (used for) provided by operating activities:
Depreciation.......................................... 1,170 859
Amortization.......................................... 2,243 1,683
Gain on disposal of fixed assets...................... (62) (19)
Deferred Taxes........................................ -- (1,570)
Changes in working capital:
Accounts receivable................................. (335) (3,751)
Other assets........................................ 696 376
Trade accounts payable.............................. 662 (207)
Accrued expenses.................................... 1,029 4,338
------------- -----------
Net cash (used for) provided by operating activities (1,356) 2,192
INVESTING ACTIVITIES:
Additions to property and equipment....................... (740) (2,458)
Deposit on sale of property and equipment................. -- 200
Proceeds received from sale of equipment.................. 904 176
Property and equipment of acquired businesses............. (302) (187)
Working capital acquired, net of cash..................... (1,470) --
Intangibles from acquisitions of businesses............... (4,026) (8,434)
-------------- ------------
Net cash used for investing activities............ (5,634) (10,703)
FINANCING ACTIVITIES:
Net borrowings on note payable to bank.................... 8,055 8,760
------------- -----------
Net cash provided by financing activities......... 8,055 8,760
Effect of exchange rates on cash............................. (35) 68
-------------- -----------
Net increase in cash and cash equivalents................. 1,030 317
Cash and cash equivalents at beginning of period............. 672 3,542
------------- -----------
Cash and cash equivalents at end of period................... $ 1,702 $ 3,859
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.............................................. $ 1,218 $ 518
============= ===========
Income taxes.......................................... $ 68 $ 1,274
============= ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE> 7
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE AND NINE MONTHS ENDED DECEMBER 31, 1999
(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 December 31, 1999 and the results of its operations for the
three and nine month periods ended December 31, 1999 and 1998 and cash flows for
the nine month periods ended December 31, 1999 and 1998 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, 1999.
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 month and nine month
periods ended December 31, 1999 are not necessarily indicative of the results
that may be expected for the year ended March 31, 2000.
The Company's fiscal year ends on March 31. All references to fiscal
years in this Quarterly Report on Form 10-Q represent the year in which the
fiscal period ends (i.e. fiscal 1999 is the year ending March 31, 1999) unless
otherwise noted.
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 if the
duration of the contract is five (5) working days or less and the contract terms
require payment only after installation has been completed. This has been the
policy prior to fiscal 2000.
Commencing in the first quarter of fiscal 2000, as a result of an
acquisition (see Note D), revenues generated from the sales of security products
are recognized on the percentage of completion basis if the duration of the
contract is greater than five (5) working days and the contract payment terms
allow for related progress billings. This change was necessary since the newly
acquired company is involved in numerous long term installation contracts. This
change did not have a material impact on the results previously reported for the
sale of security products. The percentage-of-completion method is based on
estimates by the project manager.
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
CONTRACTS IN PROCESS
Contracts in process are stated at costs incurred plus estimated profit
(percentage of completion) less than or in excess of related progress billings.
The percentage of completion is based on estimates by the project manager,
consistent with billings to the customer. Management considers this estimate to
be the best available measure of progress on the contracts. All contracts in
process at period-end are scheduled to be completed and billed during the
current fiscal year. The asset, "Costs and estimated earnings in excess of
billings" represents revenues recognized or costs incurred in excess of amounts
billed. The liability, "Billings in excess of costs and estimated earnings on
uncompleted contracts", represents amounts billed in excess of revenues
recognized.
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 the reported amounts of net income
(loss).
RECLASSIFICATIONS
Certain reclassifications have been made to the prior periods' consolidated
financial statements to conform with the fiscal 2000 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, incurred a loss for the nine months ended December
31, 1999 and for 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. The restatement is to correct accounting that resulted from the
failure of the Company to properly consider 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.
7
<PAGE> 9
The following is a summary of the restated unaudited quarterly results of
operations for the year ended March 31, 1999:
<TABLE>
<CAPTION>
JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31
------- ------------ ----------- --------
<S> <C> <C> <C> <C>
FISCAL 1999
Net operating revenues $ 56,121 $ 58,407 $ 58,858 $ 53,486
======== ======== ======== ========
Gross margin, as previously reported $ 7,125 $ 7,586 $ 7,552 $(1,884)
Restatement (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 (342) (262) (276) 1,664
-------- -------- -------- --------
Net income/(loss) as restated $ 106 $ 163 $ 214 $(7,778)
======== ======== ======== ========
Net income/(loss) per share
Basic and 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)
======== ======== ======== ========
</TABLE>
NOTE D - ACQUISITIONS
During the six months ended December 31, 1999, the Company did not make
any acquisitions. During the first quarter of fiscal 2000, the Company made two
acquisitions. The Company acquired commercial security contracts from an entity
for an aggregate purchase price of approximately $1.6 million, which included
$98,000 for equipment. Approximately $1.3 million of the purchase price was
allocated to the contracts and approximately $148,000 was allocated to goodwill.
Also during the first quarter of fiscal 2000, the Company acquired the
outstanding stock of a security products distribution entity for approximately
$5.0 million in cash. The purchased net assets included cash of $826,000, net
receivables of $1,555,000, inventories of $249,000, equipment of $204,000,
accounts payable and other liabilities of $334,000 and $2,500,000 attributable
to goodwill. See Note I - Subsequent Events.
These acquisitions have been accounted for under the purchase method of
accounting, and goodwill is being charged to operations on a straight-line basis
over 20 years.
The operating results related to the acquired contracts and the
acquired security products distribution entity have been included in the
Company's results of operations from the respective dates of acquisitions.
The following unaudited pro forma results of operations give effect to
the above acquisitions as if the two acquisitions, made during the first quarter
of fiscal 2000, had been made at April 1, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
---------------------------------
1999 1998
----------- ----------
RESTATED
<S> <C> <C>
Net operating revenues......................................................... $ 52,795 $ 60,948
Net income (loss).............................................................. $ (3,886) $ 321
Net income (loss) per share:
Basic.................................................................... $ (0.58) $ 0.05
Diluted.................................................................. $ (0.58) $ 0.05
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED DECEMBER 31,
---------------------------------
1999 1998
----------- ----------
RESTATED
<S> <C> <C>
Net operating revenues......................................................... $ 165,229 $ 180,549
Net income (loss).............................................................. $ (6,697) $ 1,074
Net income (loss) per share:
Basic.................................................................... $ (1.00) $ 0.16
Diluted.................................................................. $ (1.00) $ 0.16
</TABLE>
8
<PAGE> 10
The pro forma results of operations have been prepared for comparative
purposes only and do not purport to present actual operating results had the
acquisitions been made at the beginning of each year, or results which may occur
in the future.
NOTE E - 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 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 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
security 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 revenues, gross margins, and net income (loss). It does not
make operating decisions based on the level of assets held by a segment.
<TABLE>
<CAPTION>
AVIATION COMMERCIAL SECURITY
STAFFING SECURITY STAFFING PRODUCTS
FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 SERVICES SERVICES DISTRIBUTION TOTALS
----------- -------------- ------------ ------------
<S> <C> <C> <C> <C>
Net operating revenues.................................... $ 121,038 $ 36,413 $ 6,768 $ 164,219
Cost of revenues.......................................... $ 112,005 $ 30,149 $ 4,903 $ 147,057
Gross margin ............................................ $ 9,033 $ 6,264 $ 1,865 $ 17,162
Net income (loss)......................................... $ (5,268) $ (1,743) $ 252 $ (6,759)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 (RESTATED)
Net operating revenues.................................... $ 131,375 $ 38,689 $ 3,322 $ 173,386
Cost of revenues.......................................... $ 119,127 $ 33,015 $ 2,660 $ 154,802
Gross margin ............................................ $ 12,248 $ 5,674 $ 662 $ 18,584
Net income (loss)......................................... $ 651 $ (138) $ (30) $ 483
</TABLE>
9
<PAGE> 11
DISCLOSURE OF GEOGRAPHIC INFORMATION
NET OPERATING REVENUES FOR THE NINE MONTHS ENDED DECEMBER 31, 1999 AND ASSETS AT
DECEMBER 31, 1999
<TABLE>
<CAPTION>
REVENUES ASSETS
-------------- --------------
<S> <C> <C>
United States ................................................................... $ 159,534 $ 73,237
Other Countries.................................................................. 4,685 729
-------------- --------------
Total ................................................................... $ 164,219 $ 73,966
============== ==============
</TABLE>
NET OPERATING REVENUES FOR THE NINE MONTHS ENDED DECEMBER 31, 1998 AND ASSETS AT
MARCH 31, 1999
<TABLE>
<CAPTION>
REVENUES ASSETS
-------------- --------------
<S> <C> <C>
United States ................................................................... $ 167,168 $ 70,010
Other Countries.................................................................. 6,218 624
-------------- --------------
Total ................................................................... $ 173,386 $ 70,634
============== ==============
</TABLE>
DISCLOSURE ABOUT MAJOR CUSTOMERS
During the nine months ended December 31, 1999 and 1998, revenues from
one major customer amounted to approximately 22.4% and 27.0% of net operating
revenues, respectively. Services provided to another major customer generated
revenues of 11.2% and 11.6% of net operating revenues for the nine months ended
December 31, 1999 and 1998, respectively.
Five airline customers, including the two noted above, accounted for
approximately 45.4% and 49.0% of net operating revenues for the nine months
ended December 31, 1999 and 1998, respectively, and accounted for 28.6% and
42.6% of net accounts receivable at December 31, 1999 and March 31, 1999,
respectively.
NOTE F- 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 3.0%. The Company had approximately $18.9
million and $10.9 million outstanding under the facility at December 31, 1999
and March 31, 1999, respectively with interest rates of 9.25% and 7.57%,
respectively.
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 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 credit facility was
amended and extended to April 1,2001. See Note I Subsequent Events. At April 30,
2000, outstanding obligations under this facility were $23.9 million.
The credit facility limits the Company's ability to incur additional
indebtedness and pay dividends, requires the Company to maintain prescribed
debt-to-equity and fixed charge coverage ratios, minimum net worth levels, and
to satisfy other financial covenants. At December 31, 1999, the Company was not
in compliance with certain of these covenants. Waivers were obtained for these
covenant violations and waivers were obtained through March 31, 2000 for those
covenants which the Company did not meet through the end of fiscal 2000.
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.
10
<PAGE> 12
NOTE G - DELISTING OF COMMON SHARES
On July 1, 1999, the Company was informed by the Nasdaq Stock Market
that trading of the Company's shares 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 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 stock was delisted
from the Nasdaq Stock Market. On October 26, 1999 the Company's stock began
being quoted on the Electronic Quotation System of National Quotation Bureau
LLC.
NOTE H- 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 payments to Weitzel of $300,000 on
November 1, 1999 and $200,000 on January 3, 2000, which have been made, and
provides certain other standard employment benefits through September 30, 2001.
In addition, the Company is required to pay Weitzel an aggregate of $500,000
under a 20 month consulting agreement beginning February 1, 2000 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
April 30, 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
entire cost of the Retirement and Consulting Agreement ($1.0 million) was
expensed in the third quarter of fiscal 2000.
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.
In addition, during 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 was granted 75,000 shares of Company common stock
as well as an additional 100,000 shares of restricted Company common stock which
vest either over a set period of time or upon attainment of specified goals.
Upon termination of employment other than for "cause", Mr. Thompson's 100,000
shares of restricted Company common stock would fully vest.
NOTE I - SUBSEQUENT EVENTS
EXTENSION OF BANK CREDIT FACILITY
In April 2000 management secured, from the Company's 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 30, 2000, the Company
was in compliance with all covenants.
11
<PAGE> 13
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.
DISPOSITIONS
In March 2000, the Company completed the disposition of the security
products distribution company that it had acquired in the first quarter of
fiscal 2000. See Note D - Acquisitions. The sale proceeds combined with the cash
flow distributions received during the period owned was approximately equal to
its net cash investment.
12
<PAGE> 14
INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THREE AND NINE MONTHS ENDED DECEMBER 31, 1999
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 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 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.
Acquisitions had played an important role in the Company's net
operating revenue growth during fiscal 1999 and 1998. During the first quarter
of fiscal 2000 the Company completed two acquisitions and none during the second
and third quarters. The Company is not presently pursuing further 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, as described in
Note H of Notes to Consolidated Financial Statements, 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 judgmental
accounting matters by the Company's management which were 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 of 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 were restated, as reported in the consolidated financial statements
appearing in the Company's Annual Report on Form 10-K for the year ended March
31, 1999.
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 result in additional charges in
fiscal 2000.
13
<PAGE> 15
The accompanying unaudited consolidated financial statements have been
prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities, including commitments and/or contingent
liabilities, in the normal course of business. The Company incurred a loss from
operations in the fiscal year ended March 31, 1999 and continues to incur losses
and negative cash flow in fiscal 2000 and has negative tangible net worth.
Although the Company obtained a one year extension of its credit facility in
April 2000 (See Note I of Notes to the Consolidated Financial Statements) the
negative cash generated during fiscal 2000 and forecast to continue into the
first half of fiscal 2001 are factors that raise doubts about the Company's
ability to continue as a going concern.
The Company obtained an extension of its credit facility through April
1, 2001 for use in funding operations. In addition, the Company will use its
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 this year) 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.
RESULTS OF OPERATIONS
NET OPERATING REVENUES. Revenues for the third quarter of fiscal 2000
decreased by $6.0 million, or 10.2%, to $52.8 million, as compared with $58.9
million in the third quarter of fiscal 1999. Revenues for the first nine months
of fiscal 2000 decreased by $9.2 million, or 5.3%, to $164.2 million, as
compared with the first nine months of fiscal 1999. The revenue decrease was
primarily the result of the loss of several large aviation service contracts
during the first, second and third quarters of fiscal 2000 totaling
approximately $4.5 million in quarterly revenue losses. This was partially
offset by revenues generated from the acquisition of two businesses during the
first quarter of fiscal 2000. Since the Company has decided not to pursue
acquisitions at the present time due to the Company's cost of capital and lack
of availability of funds under its current credit facility this revenue decline
is expected to continue.
COST OF REVENUES. Cost of revenues was $47.3 million in the third
quarter of fiscal 2000 compared with $52.4 million in the third quarter of
fiscal 1999, a decrease of $5.1 million, or 9.7%. As a percentage of revenues,
cost of revenues increased to 89.6% in the third quarter of fiscal 2000, from
89.0% in the third quarter of fiscal 1999. Cost of revenues was $147.1 million
in the first nine months of fiscal 2000 compared with $154.8 million in the
first nine months of fiscal 1999, a decrease of $7.7 million, or 5.0%. As a
percentage of revenues, cost of revenues increased to 89.5% in the first nine
months of fiscal 2000, from 89.3% in the first nine months of fiscal 1999. The
year-over-year reduction in gross cost of revenues is primarily due to the loss
of several large aviation service contracts, which in turn led to a reduction in
the amount of labor needed to service customer accounts. Offsetting this
reduction in labor costs was an increase in costs associated with acquired
businesses and the recognition of expenses from previous accounting periods. The
strength of the United States economy during this period, which has driven
unemployment to low levels, and has forced the Company to raise the wages paid
to employees in advance of negotiating increases in the rates paid by the
Company's customers. These factors have resulted in increased marginal costs of
operating revenues and lower gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses in the third quarter of fiscal 2000 were $8.1 million
compared with $5.2 million in the same period of the prior year, an increase of
$2.9 million, or 54.9%. Measured as a percentage of operating revenues, these
expenses were 15.2% in the third quarter of fiscal 2000 and 8.9% in the third
quarter of the prior fiscal year. Selling, general and administrative expenses
in the first nine months of fiscal 2000 were $20.4 million compared with $15.5
million in the same period of the prior year, an increase of $4.9 million, or
31.8%. Measured as a percentage of operating revenues, these expenses were 12.4%
in the first nine months of fiscal 2000 and 8.9% in the same period of the prior
year. This increase related specifically to increased corporate expenses for
consulting and professional (legal and accounting) fees, wages incurred and the
$1.0 million charge related to the Retirement and Consulting Agreement with the
former chairman. See Note H to Notes to Consolidated Financial Statements. The
Company has hired new management and consultants to assist it in evaluating
organization structure, improve inefficiencies and improve controls over field
operations. Management is evaluating the performance and profitability of each
business segment and the contract relationship with each significant customer.
These costs are expected to continue throughout fiscal 2000 as Management
formulates and implements a business improvement plan. There is no assurance
that this plan will achieve its desired result of increased profitability.
14
<PAGE> 16
AMORTIZATION EXPENSE. Contract and goodwill amortization expense
increased to $0.8 million in the third quarter of fiscal 2000 from $0.6 million
in the third quarter of fiscal 1999, an increase of 34%. Contract and goodwill
amortization expense increased to $2.2 million in the nine month period ended
December 31, 1999, an increase of $0.5 million from the $1.7 million in the same
period of the prior year. This 33.3% increase is a result of the amortization of
the contract value and goodwill for the six acquisitions completed in fiscal
1999 and the two acquisitions completed in fiscal 2000.
INTEREST EXPENSE. Interest expense increased 93.3% in the third quarter
of fiscal 2000 to $0.5 million from $0.3 million in the prior year. The increase
of $0.2 million is a result of higher average borrowings of $21.7 million in
fiscal 2000 compared with $13.2 million in fiscal 1999. Interest expense
increased 113.5% in the first nine months of fiscal 2000 to $1.3 million from
$0.6 million in the same period of the prior year. The increase in expense of
$0.7 million is a result of higher average borrowings in fiscal 2000 compared
with fiscal 1999, $20.7 million as compared to $9.4 million respectively, along
with an increase in the Company's weighted average interest rate from 8.134% to
8.275% for the nine months ended December 31, 1998 and 1999, respectively.
INCOME TAXES. Due to the net loss incurred, and the uncertainty of any
carry forward tax benefits, no income tax benefit was recorded for the quarter
and nine months ended December 31, 1999. The Company's effective income tax rate
was 40.6% for the third quarter of fiscal 1999. The Company's effective income
tax rate was 41.0% for the nine months ended December 31, 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is labor intensive. Consequently, it has
substantial needs for cash throughout its fiscal year. During fiscal 2000, the
Company's cash requirements were heightened by its increased payroll and by its
two (2) acquisitions and the need to support the activities resulting from those
acquisitions as well as those completed last fiscal year. Operating activities
used $1.4 million in cash in the first nine months of fiscal 2000, and provided
$2.2 million in fiscal 1999.
Investing activities used $5.6 million for the nine months ended
December 31, 1999, a decrease of $5.1 million from the same period in fiscal
1999. The reduction in cash used for investing activities is the result of
reductions in the pace of acquisitions and reductions in capital expenditures.
In fiscal 2000, payments for acquisitions were reduced to $4.0 million from $8.4
million in fiscal 1999. The Company anticipates that it will not continue making
expenditures to fund any acquisitions. The Company made capital expenditures
during the remainder of fiscal 2000 of approximately $0.2 million, primarily
related to leasehold improvements, computer software, and systems and equipment
used in operations.
Financing activities, which relate to net borrowings on the note
payable to the bank, provided $8.1 million, compared with $8.8 million in fiscal
1999.
During fiscal 2000, 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% and prime rate plus
3.0%. The credit facility contained customary restrictions and covenants, which
limited the Company's ability to incur additional indebtedness, pay dividends,
and required the Company to maintain prescribed debt-to-equity and fixed charge
coverage ratios, and minimum net worth levels, and to satisfy certain other
financial covenants.
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 of 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 March 31, 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 30, 2000 the outstanding obligation under this facility
was $23.9 million. In April 2000, management secured, from the Company's
lenders, certain amendments to its credit facility. Among them is an extension
of the term to April 1, 2001 with a reduction of the interest rate to
15
<PAGE> 17
be charged on borrowings to prime rate 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 30, 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.
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 a worldwide concern
regarding the use by many existing computer programs of only the last two digits
rather than four to identify the year in the date field. If not corrected, many
computer applications may have failed 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.
STATUS OF YEAR 2000 ISSUE
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
30, 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 future. The
Company has not adopted a formal contingency plan and is unable to determine if
any failure will occur and whether it will have a material impact on the
Company's results of operations, liquidity and financial condition.
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<PAGE> 18
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board (FASB) issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" (as
amended by SFAS No. 137). SFAS No. 133 must 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 and 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 affect on its financial statements.
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, among others, 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.
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<PAGE> 19
ITEM 3. 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 (2.9%
through December 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 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 December 31, 1999 of
$18.9 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 December 31, 1999
balance of this debt is considered to be at fair value. Based upon the Company's
current outstanding balance on its variable rate credit facility, a hypothetical
increase of approximately 100 basis points in the prime rate of interest would
adversely affect future earnings and cash flows by approximately $189,000 on an
annual basis. The Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
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<PAGE> 20
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8 - K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.17 Retirement and Consulting Agreement dated
November 1, 1999 between the Company and
Robert A. Weitzel.
27 Financial Data Schedule (For SEC Filing
Purposes Only)
(b) Reports on Form 8 - K
On November 17, 1999, a Form 8-K was filed regarding the resignation of
Robert A. Weitzel as chairman, chief executive officer and director and the
change in control of the Company as evidenced by the Voting Trust Agreement and
Stock Restriction Agreement filed thereto.
On February 3, 2000, a Form 8-K was filed regarding a press release
announcing that the Company expects the net amount of downward adjustments to
previously announced results for the fiscal years 1997, 1998 and 1999 to be
approximately $9 million.
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<PAGE> 21
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.
May 9, 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.
May 9, 2000 /s/ Mark D. Thompson
- ----------- -------------------------------------
Mark D. Thompson
President and Interim Chief Executive
Officer
(Principal Executive Officer)
May 9, 2000 /s/ Ronald P. Koegler
- ----------- -------------------------------------
Ronald P. Koegler
Executive Vice President and Controller
(Principal Accounting Officer)
May 9, 2000 /s/ Michael F. Sosh
- ----------- -------------------------------------
Michael F. Sosh
Executive Vice President and Treasurer
(Principal Financial Officer)
20
<PAGE> 1
EXHIBIT 10.17
RETIREMENT AND CONSULTING AGREEMENT
-----------------------------------
THIS RETIREMENT AND CONSULTING AGREEMENT (the "Consulting Agreement")
is made as of the 1st day of November, 1999, by and between Robert A. Weitzel,
an individual (the "Consultant"), and International Total Services, Inc., an
Ohio corporation (the "Company").
The Consultant was formerly chairman, chief executive officer and a
director of the Company;
The Consultant has certain skills and experience that the Company wants
to have available to it; and
The Company and the Consultant desire to enter into this Consulting
Agreement to insure the Company of the services of the Consultant, and to
establish the rights and duties of the parties.
IN CONSIDERATION of the mutual covenants and promises herein contained,
and subject to the terms and conditions herein set forth, the Consultant and the
Company agree as follows:
1. RETIREMENT.
(a) Simultaneously with the effectiveness of this Consulting
Agreement and as a result hereof:
(i) The Consultant confirms that on October 19, 1999,
he resigned as the chairman, chief executive officer and
director of the Company and agrees to execute such additional
documents as requested by the Company to evidence such
resignations;
(ii) The employment agreement between the Consultant
and the Company dated as of September 27, 1997 was terminated
effective October 19, 1999 and it is agreed that neither party
thereto has any further obligations thereunder, with the
exception of any salary or benefits accrued through October
19, 1999;
(iii) The Consultant delivers, or has delivered, to
the Company all documents, letters, notices, agreements,
correspondence and similar instruments received by the
Consultant in his capacity as an officer, director or employee
of the Company during his employment by the Company, which
were not left in the Company's office by the Consultant on
October 19, 1999 and are no longer in the Consultant's
control; and
<PAGE> 2
(iv) The Consultant executes and delivers to the
Company (1) that certain stock restriction agreement
providing, among other things, that the Company has the right
of first refusal as to any transfer of shares of Company
common stock owned directly or indirectly by the Consultant
and (2) that certain voting trust agreement providing, among
other things, for the transfer of record ownership, and
related rights, of shares of Company common stock owned
directly or indirectly by the Consultant to the trustees
thereunder.
(b) In consideration of the foregoing, the Company agrees to
(i) pay the Consultant $300,000 upon the effectiveness of this
consulting Agreement and $200,000 on January 3, 2000, (ii) pay the
Consultant's legal counsel on behalf of the Consultant an amount equal
to the Consultant's legal fees and expenses incurred by the Consultant
in connection with the transactions contemplated by this Consulting
Agreement, in an amount not to exceed $6,000, (iii) provide the
Consultant, and through the Consultant to Consultant's spouse, with
medical coverage under the Company's medical program through September
30, 2001 on a basis consistent with the coverage made available to the
Company's officers during such period; provided, however, that: (1) the
coverage provided under this sentence shall be concurrent with and not
in addition to the coverage required to be made available to the
Consultant under Part 6 of Title I of ERISA ("COBRA"); and (2) except
as required under COBRA, the Company will use its best efforts to
obtain stop-loss insurance for the coverage required to be provided
under this sentence, but for any period for which such coverage cannot
be obtained at commercially reasonable group stop-loss insurance rates,
the Company shall not be required to provide such coverage for such
period and, instead, shall pay the Consultant in cash the "applicable
premium" for such coverage (as defined under COBRA) for such period,
and (iv) provide the Consultant with directors' and officers' liability
insurance coverage under the Company's policy through September 30,
2001 on a basis consistent with the coverage made available to the
Company's officers during such period.
2. TERM AND DUTIES.
(a) The "Term of Consulting" will begin on the date of this
Consulting Agreement and will continue through September 30, 2001,
unless terminated as provided in Sections 4, 5, 6 or 7 of this
Agreement.
(b) During the Term of Consulting, the Consultant will provide
the Company with advice, recommendations and services concerning the
business of the Company. The Consultant will meet with the Company's
officers and other representatives to provide certain of the required
consulting services. The Consultant will provide such consulting
services for up to five days per month during the Term of Consulting.
(c) The Company and the Consultant acknowledge and agree that
the consulting services to be provided by the Consultant under this
Consulting Agreement will be performed as an independent contractor,
and not as an agent or employee of the
<PAGE> 3
Company. The parties also acknowledge and agree that with respect to
any payments made to the Consultant hereunder, the Company will not:
(i) withhold or pay FICA or other Federal, state, or local income or
other taxes; or (ii) comply with or contribute to state worker's
compensation, unemployment or other funds or programs. The Consultant
also acknowledges that as an independent contractor the Consultant will
not be given the right to participate in any employee benefit or
insurance plan or any other plan or other fringe benefit which is
maintained, established or provided by the Company for its employees.
3. PAYMENT. As consideration for the obligations of the Consultant
under this Consulting Agreement, during the Term of Consulting, the Company will
make the following payments to the Consultant:
(a) The Company will pay the Consultant at the monthly rate of
Twenty-five Thousand Dollars ($25,000), payable monthly on the first
business day of each month from February 1, 2000 through September 1,
2001.
(b) The Company will promptly reimburse the Consultant for all
reasonable out of pocket business expenses incurred in furtherance of
the business of the Company in accordance with reimbursement policies
adopted by the Company from time_to_time.
4. EARLY TERMINATION: DEATH. Notwithstanding anything to the contrary
in Section 2 hereof, if the Consultant dies during the Term of Consulting, the
Term of Consulting will automatically terminate. Upon such termination, the
Consultant's estate or beneficiaries will receive any payments earned and
accrued prior to the date of termination and reimbursement for expenses incurred
prior to the date of termination and payments of amounts due under Section 3(a)
and benefits under Section 1(b)(iii) and (iv) through September 1, 2001. The
parties will have no further obligation under this Agreement.
5. EARLY TERMINATION: DISABILITY. Notwithstanding anything to the
contrary in Section 2 hereof, if the Consultant by virtue of ill health or other
disability has at any time been unable to perform substantially and continuously
the duties assigned to the Consultant under this Agreement (i) for a period of
ninety (90) calendar days out of any period of one hundred and eighty (180)
consecutive calendar days during the Term of Consulting, or (ii) for an
aggregate of two hundred forty (240) days out of the Term of Consulting, then
the Company will have the right to terminate the Term of Consulting upon notice
to the Consultant. Upon such termination, the Consultant will receive any
payments earned and accrued prior to the date of termination and reimbursement
for expenses incurred prior to the date of termination and payments of amounts
due under Section 3(a) and benefits under Section 1(b)(iii) and (iv) through
September 1, 2001. The parties will have no further obligation under this
Agreement except that the Consultant will not be relieved of the Consultant's
obligations under those certain provisions hereof relating to confidentiality
and non-competition, as set forth in Section 8 hereof (the "Confidentiality
Provisions").
<PAGE> 4
6. EARLY TERMINATION: TERMINATION BY THE COMPANY.
(a) Notwithstanding anything to the contrary in Section 2
hereof, the Term of Consulting may be terminated by the Company by
giving at least sixty (60) days' prior notice of termination to the
Consultant. Upon such termination, the Consultant will be entitled to
receive any payments earned and accrued prior to the date of
termination and reimbursement for expenses incurred prior to the date
of termination and payments of amounts due under Section 3(a) and
benefits under Section 1(b)(iii) and (iv) through September 1, 2001.
The parties will have no further obligation under this Agreement except
that the Consultant will not be relieved of the Consultant's
obligations under the Confidentiality Provisions.
(b) Notwithstanding the foregoing, the Company may terminate
the Term of Consulting immediately upon notice (a "Breach Notice") to
the Consultant of a Breach. Upon delivery of the Breach Notice, the
Consultant will be entitled to receive any payments earned and accrued
prior to the date of termination and reimbursement for expenses
incurred prior to the date of termination (but not any additional
payments or benefits, the rights to which are forfeited in the event of
a termination of the Term of Consulting pursuant to this Section 6(b)).
The parties will have no further obligation under this Agreement except
that the Consultant will not be relieved of the Consultant's
obligations under the Confidentiality Provisions. The term "Breach"
will mean the Consultant's (i) conduct subsequent to the date hereof
constituting a felony or like criminal conduct as determined by the
Company, (ii) gross negligence or willful misconduct in the performance
of his duties hereunder, (iii) breach of the Confidentiality Provisions
or of the representation contained in the last sentence of Section 10
below, or (iv) breach of the voting trust agreement or stock
restriction agreement, referred to in Section 1(a)(iv) above.
7. EARLY TERMINATION: TERMINATION BY RESIGNATION OF THE CONSULTANT.
Notwithstanding anything to the contrary in Section 2 hereof, the Term of
Consulting may be terminated by the Consultant upon not less than sixty (60)
days' notice of resignation to the Company. Upon such termination, the
Consultant will be entitled to receive any payments earned and accrued prior to
the date of termination and reimbursement for expenses incurred prior to the
date of termination. The parties will have no further obligation under this
Agreement except that the Consultant will not be relieved of the Consultant's
obligations under the Confidentiality Provisions.
8. CONFIDENTIAL INFORMATION; NON-COMPETITION.
(a) The Consultant acknowledges that the Company has developed
and has taken steps to protect as trade secrets certain non-public
proprietary information, including that regarding customers,
operations, properties and employees of the Company (collectively
"Confidential Materials and Information"). In performing duties for the
Company, the Consultant has been and regularly will be exposed to and
work with the
<PAGE> 5
Company's Confidential Materials and Information. The Consultant
acknowledges that such Confidential Materials and Information are
critical to the Company's success and that the Company has invested
substantial money in developing the Company's Confidential Materials
and Information. Until September 30, 2001, the Consultant will not
reproduce, publish, disclose, divulge, discuss, use, reveal, show, or
otherwise communicate to any person or entity any Confidential
Materials and Information of the Company, including, without
limitation, in competition with or contrary to the interests of the
Company, unless specifically assigned or directed by the Company to do
so or unless it will have become public knowledge (other than by acts
by the Consultant or representatives of the Consultant in violation of
this Agreement). The covenant in this Section 8(a) has no geographical
or territorial restriction or limitation, and it applies wherever the
Consultant may be located.
(b) Until September 30, 2001, the Consultant will not (i)
actively solicit, either directly or indirectly through any third
person, any other consultant or any employee of the Company to
terminate his or her employment with the Company or (ii) employ, assist
in employing, or otherwise associate in business with, any other
consultant or any employee of the Company, without the written consent
of the Company.
(c) Until September 30, 2001, the Consultant will not, either
directly or indirectly, (i) be employed by, consult for, engage in any
business for, or have any ownership interest in any business entity
engaged in the business, or otherwise engage in the business, conducted
by the Company (which currently includes that of aviation services and
commercial security); (ii) call on, solicit or communicate with any of
the Company's customers or prospects other than for the benefit of the
Company; or (iii) interfere in any way with the Company's operation of
its business. Ownership, for personal investment purposes only, of
equity of the Company in conformance with the stock restriction
agreement and the voting trust agreement referred to above or of not in
excess of one percent (1%) of the voting stock of any publicly held
corporation will not constitute a violation hereof.
(d) The Consultant agrees that whenever the Term of Consulting
ends for any reason, all documents containing or referring to the
Company's Confidential Materials and Information as may be in the
Consultant's possession, or over which the Consultant may have control,
will be delivered by the Consultant to the Company immediately, with no
request being required.
(e) In the event the Consultant will violate any legally
enforceable provision of this Section 8 as to which there is a specific
time period during which he is prohibited from taking certain actions
or from engaging in certain activities, as set forth in such provision,
then, in such event, such violation will toll the running of such time
period from the date of such violation until such violation will cease.
<PAGE> 6
(f) The Consultant has carefully considered the nature and
extent of the restrictions upon him and the rights and remedies
conferred upon the Company under this Section 8, and acknowledges and
agrees that the same are reasonable in time and territory, are designed
to eliminate competition which otherwise would be unfair to the
Company, do not stifle the inherent skill and experience of the
Consultant, would not operate as a bar to the Consultant's sole means
of support, are fully required to protect the legitimate interests of
the Company and do not confer a benefit upon the Company
disproportionate to the detriment to the Consultant.
(g) In addition to the forgoing, the parties agrees that this
Agreement and the terms hereof are considered strictly confidential.
Each of the parties acknowledges and agrees that disclosure to anyone
without the express prior written consent of the other party hereto
will be a breach of this Agreement and cause this Agreement (other than
Sections 8 and 9) and all rights granted to the breaching party herein
to be immediately terminated, null and void and extinguished without
recourse. It is agreed that solely to the extent necessary to advise a
party hereto regarding legal and financial matters, disclosure of the
terms hereof by such party to his or its advisors, officers, directors
and employees on a need to know basis (provided such advisors are
advised of the confidentiality obligations relating to such information
and provided the disclosing party will be responsible for any
disclosure by such advisors as if made by such party) will not violate
this Section 8, nor will disclosure by such party to the extent
required by law, statute, rule or regulation or directed by a court or
governmental agency provided in any case the disclosing party notifies
the other party hereto in advance of any such disclosure. It is
acknowledged that the Company shall be permitted, and it shall not be a
breach of this Agreement, to disclose this Agreement and the terms
hereof and to file a copy of this Agreement, as part of the Company's
filing obligations under the federal securities laws and no prior
written consent of the Consultant shall be required in connection
therewith. It is further agreed that to the extent any term hereof is
disclosed by one party in breach of this Section 8(g) (other than to a
court or governmental agency under protection of an appropriate
confidential treatment order), the other party hereto will be entitled
to disclose such term without liability hereunder.
9. SURVIVAL OF COVENANTS. Notwithstanding anything herein to the
contrary, upon termination of the Term of Consulting for any reason (other than
a payment default by the Company under Sections 1(b) or 3(a) hereof, which
payment default continues for more than five days after the Company receives
notice of such default from the Consultant (in accordance with the terms hereof)
unless the Company's failure to make payment is as a result of a Breach) the
provisions of Sections 8 and 9 of this Consulting Agreement will remain in full
force and effect, and will be binding on and enforceable against the Consultant
and the Company as though such termination had not occurred. The Consultant
acknowledges that his agreement to the survival of the terms and conditions of
Sections 8 and 9 of this Consulting Agreement constitutes a material inducement
to the Company to enter into this Consulting Agreement. The Consultant expressly
agrees and understands that the remedy at law for any breach by him of Sections
8 or 9 will be inadequate and that the damages flowing from such breach are not
readily susceptible to being
<PAGE> 7
measured in monetary terms. Accordingly, it is acknowledged that upon adequate
proof of the Consultant's violation of any legally enforceable provision of
Sections 8 or 9, the Company will be entitled to immediate injunctive relief and
may obtain a temporary order restraining any threatened or further breach.
Nothing in Sections 8 and 9 will be deemed to limit the Company's remedies at
law or in equity for any breach by the Consultant of any of the provisions of
Sections 8 or 9 which may be pursued or availed of by the Company.
10. THE CONSULTANT'S REPRESENTATIONS. The Consultant represents and
warrants to and with the Company that the Consultant is not bound by or subject
to, and that he has not entered into, any covenants, agreements or restrictions
which would be breached or violated by the Consultant's execution of this
Consulting Agreement or by the Consultant's performance of his duties hereunder.
The Consultant further represents and warrants to and with the Company that, as
of the date hereof, he has not breached or violated any representation,
warranty, covenant or agreement set forth in this Consulting Agreement, and as
of the date hereof there does not exist any breach or violation of any
representation, warranty, covenant or agreement set forth in this Consulting
Agreement. The Consultant further represents and warrants to and with the
Company that, as of the date hereof, he has delivered to the Company all
documents, letters, notices, agreements, correspondence and similar instruments
received by the Consultant in his capacity as an officer, director or employee
of the Company during his employment by the Company, which were not left in the
Company's office by the Consultant on October 19, 1999 and are no longer in the
Consultant's control.
11. MISCELLANEOUS. This Agreement will be binding on and inure to the
benefit of the parties and their respective successors, permitted assigns,
heirs, executors and legal representatives. No amendment, modification, or
waiver of any provision of this Agreement, nor consent to any departure by the
Consultant therefrom, will be effective unless the same will be in writing and
signed by the Company. This Agreement will be governed by and construed in
accordance with the laws of the State of Ohio. Any notices or other
communications required or permitted under this Agreement will be deemed to have
been effectively given and made if in writing and if served either by personal
delivery or facsimile transmission to the party for whom it is intended or by
being deposited postage prepaid, in the first class United States mail,
certified or registered mail, return receipt requested, addressed as follows:
If to the Company: If to the Consultant:
International Total Services, Inc. Robert A. Weitzel
Crown Centre 7450 Main Street
5005 Rockside Road Gates Mills, OH 44040
Independence, OH 44131 Telephone No. (440) 423-7751
Attention: Board of Directors Facsimile No. (440) 423-1253
Telephone No: (216) 642-4522
Facsimile No: (216) 642-4539
12. ATTORNEY FOR THE CONSULTANT. The Consultant acknowledges that the
Consultant has retained such separate and independent legal counsel and advice
as the Consultant deems
<PAGE> 8
appropriate to advise the Consultant in connection with the execution and
delivery of this Agreement, that the Consultant is not relying on legal counsel
to the Company in this regard, and that the Consultant understands the terms and
conditions hereof which have been reviewed with the Consultant and explained by
such separate and independent legal counsel as the Consultant deems appropriate.
<PAGE> 9
13. CONSENT TO JURISDICTION AND FORUM. The Consultant expressly and
irrevocably agrees that the Company may bring any action, whether at law or in
equity, arising out of or based upon this Agreement or the Consultant's
consulting with the Company in the State of Ohio or in any federal court
therein. The Consultant irrevocably consents to personal jurisdiction in such
court and to accept service of process in accordance with the provisions of the
laws of the State of Ohio.
14. MULTIPLE COUNTERPARTS. This Agreement may be signed in multiple
counterparts (including by facsimile transmission), all of which taken together
will constitute an original agreement. The execution by one party of any
counterpart will be sufficient execution by that party, whether or not the same
counterpart has been executed by any other party.
15. SEVERABILITY. If any paragraph, subparagraph or provision of this
Agreement is found for any reason whatsoever to be invalid or inoperative, that
paragraph, subparagraph or provision shall be deemed severable and shall not
affect the force and validity of any other provision of this Agreement. If any
paragraph, subparagraph or provision of this Agreement is determined by a court
or arbitrator to be invalid or inoperative, the parties agree and it is their
desire that such court shall substitute a reasonable judicially enforceable
provision in place of the invalid or inoperative provision and that as so
modified the provision shall be as fully enforceable as if set forth herein by
the parties themselves in the modified form.
IN WITNESS WHEREOF, the parties have executed or caused to be executed
this Consulting Agreement on the date first above written.
THE CONSULTANT
/s/ Robert A. Weitzel
---------------------
Robert A. Weitzel
INTERNATIONAL TOTAL SERVICES, INC.
By: /s/ H. Jeffrey Schwartz
---------------------------
Its Co-Chairman of the Board if Directors
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<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 1,702,00
<SECURITIES> 0
<RECEIVABLES> 26,253,000
<ALLOWANCES> (552,000)
<INVENTORY> 2,009,000
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<COMMON> 67,000
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<TOTAL-LIABILITY-AND-EQUITY> 73,966,000
<SALES> 164,219,000
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