<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, 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 No X
----- -----
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.
PART I FINANCIAL INFORMATION
<S> <C>
ITEM 1 Financial Statements
Consolidated Balance Sheets
as of September 30, 1999 and March 31, 1999............................................ 2
Consolidated Statements of Operations and Comprehensive Income (Loss) for the:
Three Months Ended September 30, 1999 and 1998.......................................... 3
Six Months Ended September 30, 1999 and 1998............................................ 4
Consolidated Statements of Cash Flows
for the Six Months Ended September 30, 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>
SEPTEMBER 30, MARCH 31,
1999 1999
-------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................................ $ 1,094 $ 672
Accounts receivable - net of allowance for doubtful
accounts of $630 and $513 respectively................................. 24,273 23,811
Cost and estimated earnings in excess of billings........................ 213 --
Deferred taxes........................................................... 3,033 3,033
Uniforms, net............................................................ 2,135 2,691
Other current assets..................................................... 1,293 1,422
------------- ----------
Total current assets................................................... 32,041 31,629
PROPERTY AND EQUIPMENT
Security equipment....................................................... 4,990 4,729
Service equipment........................................................ 2,340 2,636
Computer equipment....................................................... 3,114 2,882
Furniture and fixtures................................................... 1,556 1,136
Autos.................................................................... 1,064 974
Leasehold improvements................................................... 68 63
------------- ----------
13,132 12,420
Less accumulated depreciation and amortization........................... 6,545 5,773
------------ ----------
Property and equipment, net............................................ 6,587 6,647
INTANGIBLES, less accumulated amortization of $5,356
and $ 3,932, respectively................................................ 34,842 32,254
SECURITY DEPOSITS AND OTHER.................................................... 134 104
------------- ----------
ASSETS....................................................................... $ 73,604 $ 70,634
============= ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Trade accounts payable................................................... $ 968 $ 1,871
Billings in excess of costs and estimated earnings....................... 476 --
Accrued payroll and employee benefits.................................... 14,843 17,832
Other accrued expenses................................................... 10,091 8,554
Income taxes payable..................................................... 54 54
------------- ----------
Total current liabilities.............................................. 26,432 28,311
DEFERRED TAXES .............................................................. 623 623
LONG-TERM OBLIGATIONS.......................................................... 18,532 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 September 30, 1999 and March 31, 1999.................. 67 67
Additional paid-in capital............................................... 31,211 31,211
Accumulated other comprehensive loss..................................... (349) (387)
Retained deficit......................................................... (2,912) (50)
-------------- -----------
28,017 30,841
-------------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................... $ 73,604 $ 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 SEPTEMBER 30,
----------------------------------
RESTATED
1999 1998
----------------------- -------------------------
<S> <C> <C> <C> <C>
Net operating revenues....................................... $ 55,609 100.0 % $ 58,407 100.0%
Cost of revenues............................................ 49,325 88.7 % 52,108 89.2%
---------- -------- ---------- ---------
GROSS MARGIN................................. 6,284 11.3 % 6,299 10.8%
Selling, general and administrative expenses................. 6,434 11.5 % 5,217 8.9%
Amortization expense......................................... 652 1.2 % 570 1.0%
---------- -------- ---------- ---------
OPERATING PROFIT (LOSS).................... (802) (1.4)% 512 0.9%
Interest expense-net......................................... 426 0.8 % 234 0.4%
---------- -------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES.......... (1,228) (2.2)% 278 0.5%
Provision for income taxes................................... -- -- 115 0.2%
---------- -------- ---------- ---------
NET INCOME (LOSS)............................. $ (1,228) (2.2)% $ 163 0.3%
========= ======== ========= ========
Other comprehensive income
Foreign currency translation adjustment................... 168 126
---------- ----------
COMPREHENSIVE INCOME (LOSS)................... $ (1,060) $ 289
========== ==========
Net income (loss) per share:
Basic .................................................... $ (0.18) $ 0.02
========== ==========
Diluted................................................... $ (0.18) $ 0.02
========== ==========
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)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
RESTATED
1999 1998
------------------------- ------------------------
<S> <C> <C> <C> <C>
Net operating revenues....................................... $ 111,414 100.0% $ 114,528 100.0%
Cost of revenues ............................................ 99,767 89.5% 102,396 89.4%
---------- -------- ---------- ---------
GROSS MARGIN........................................ 11,647 10.5% 12,132 10.6%
Selling, general and administrative expenses................. 12,339 11.1% 10,277 9.0%
Amortization expense......................................... 1,424 1.3% 1,072 0.9%
---------- -------- ---------- ---------
OPERATING PROFIT (LOSS)............................. (2,116) (1.9)% 783 0.7%
Interest expense-net......................................... 746 0.7% 324 0.3%
---------- -------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES................... (2,862) (2.6)% 459 0.4%
Provision for income taxes................................... -- -- 190 0.2%
---------- -------- ---------- ---------
NET INCOME (LOSS)................................... $ (2,862) (2.6)% $ 269 0.2%
========= ========== ========= =========
Other comprehensive income
Foreign currency translation adjustment................... 38 1
---------- ----------
COMPREHENSIVE INCOME (LOSS)......................... $ (2,824) $ 270
========== ==========
Net income (loss) per share:
Basic .................................................... $ (0.43) $ 0.04
========== ==========
Diluted................................................... $ (0.43) $ 0.04
========== ==========
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>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
RESTATED
1999 1998
-------------- -----------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income (loss)......................................... $ (2,862) $ 269
Adjustments to reconcile net income (loss) to net
cash (used for) provided by operating activities:
Depreciation.......................................... 826 545
Amortization.......................................... 1,424 1,072
Loss on disposal of fixed assets...................... 21 --
Deferred Taxes........................................ -- (1,053)
Changes in working capital:
Accounts receivable................................. 1,093 (1,322)
Other assets........................................ 521 (60)
Trade accounts payable.............................. (935) (1,134)
Accrued expenses.................................... (1,114) 2,573
-------------- -----------
Net cash (used for) provided by operating activities (1,026) 890
INVESTING ACTIVITIES:
Additions to property and equipment....................... (632) (2,405)
Proceeds received from deposits and sale of equipment..... 146 218
Property and equipment of acquired businesses............. (302) (45)
Working capital acquired, net of cash..................... (1,470) --
Intangibles from acquisitions of businesses............... (4,005) (7,053)
-------------- ------------
Net cash used for investing activities............ (6,263) (9,285)
FINANCING ACTIVITIES:
Net borrowings on note payable to bank.................... 7,673 9,516
------------- -----------
Net cash provided by financing activities......... 7,673 9,516
Effect of exchange rates on cash............................. 38 1
------------- -----------
Net increase in cash and cash equivalents................ 422 1,122
Cash and cash equivalents at beginning of period............. 672 3,542
------------- -----------
Cash and cash equivalents at end of period................... $ 1,094 $ 4,664
============= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest.............................................. $ 727 $ 241
============= ==========
Income taxes.......................................... $ 66 $ 790
============= ==========
</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 SIX MONTHS ENDED SEPTEMBER 30, 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 September 30, 1999 and the results of its operations for
the three and six month periods ended September 30, 1999 and 1998 and cash flows
for the six month periods ended September 30, 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 six month
periods ended September 30, 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 six months ended September
30, 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 quarter ended September 30, 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 H - 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 half of
fiscal 2000, had been made at April 1, 1998.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30,
--------------------------------
1999 1998
-------------- --------
RESTATED
<S> <C> <C>
Net operating revenues......................................................... $ 55,609 $ 61,077
Net income (loss).............................................................. $ (1,228) $ 465
Net income (loss) per share:
Basic.................................................................... $ (.18) $ .07
Diluted.................................................................. $ (.18) $ .07
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED SEPTEMBER 30,
------------------------------
1999 1998
---------------- --------
RESTATED
<S> <C> <C>
Net operating revenues......................................................... $ 112,433 $ 119,601
Net income (loss).............................................................. $ (2,761) $ 753
Net income (loss) per share:
Basic.................................................................... $ (.41) $ .11
Diluted.................................................................. $ (.41) $ .11
</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.
SEGMENT DISCLOSURE DATA
-----------------------
<TABLE>
<CAPTION>
AVIATION COMMERCIAL SECURITY
STAFFING SECURITY STAFFING PRODUCTS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 1999 SERVICES SERVICES DISTRIBUTION TOTALS
- -------------------------------------------
<S> <C> <C> <C> <C>
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)
FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 (RESTATED)
- -----------------------------
Net operating revenues .................... $ 87,584 $ 24,633 $ 2,311 $ 114,528
Cost of revenues .......................... $ 79,364 $ 21,165 $ 1,867 $ 102,396
Gross margin .............................. $ 8,220 $ 3,468 $ 444 $ 12,132
Net income (loss) ......................... $ 499 $ (203) $ (27) $ 269
</TABLE>
DISCLOSURE OF GEOGRAPHIC INFORMATION
------------------------------------
<TABLE>
<CAPTION>
NET OPERATING REVENUES FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1999 AND ASSETS AT SEPTEMBER 30, 1999 REVENUES ASSETS
- --------------------------------------------------- -------- ------
<S> <C> <C>
United States ..................................... $107,835 $ 72,947
Other Countries ................................... 3,579 657
-------- --------
Total ............................................. $111,414 $ 73,604
======== ========
</TABLE>
9
<PAGE> 11
<TABLE>
<CAPTION>
NET OPERATING REVENUES FOR THE SIX MONTHS ENDED
SEPTEMBER 30, 1998 AND ASSETS AT MARCH 31, 1999 REVENUES ASSETS
- -----------------------------------------------
<S> <C> <C>
United States ................................................................... $110,473 $70,010
Other Countries.................................................................. 4,055 624
-------------- --------------
Total............................................................................ $114,528 $70,634
============== ==============
</TABLE>
DISCLOSURE ABOUT MAJOR CUSTOMERS
During the six months ended September 30, 1999 and 1998, revenues from
one major customer amounted to approximately 23.1% and 27.9% of net operating
revenues, respectively. Services provided to another major customer generated
revenues of 12.6% and 11.8% of net operating revenues for the six month periods
ended September 30, 1999 and 1998.
Five airline customers, including the two noted above, accounted for
approximately 46.8% and 50.0% of net operating revenues for the six months ended
September 30, 1999 and 1998, respectively, and accounted for 34.0% and 42.6% of
net accounts receivable at September 30, 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
$18,532,000 and $10,859,000 outstanding under the facility at September 30, 1999
and March 31, 1999, respectively with interest rates of 9.00% 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 H - 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 September 30, 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.
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.
10
<PAGE> 12
NOTE H - SUBSEQUENT EVENTS
CHANGE IN CONTROL
On October 19, 1999, Robert A. Weitzel ("Weitzel") resigned as the
chairman, chief executive officer and director of the Company and entered into
certain additional arrangements. As of November 1, 1999, Weitzel entered into a
retirement and consulting agreement (the "Retirement and Consulting Agreement")
with the Company. This agreement required 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 will pay Weitzel an aggregate of $500,000 under a 20
month consulting agreement beginning February 1, 2000. The Company is obligated
to pay Weitzel the $500,000 consulting fee whether or not 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 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.
EMPLOYMENT AGREEMENTS
In October 1999, the Company entered into an employment agreement with
Mr. Mark D. Thompson, President and Interim Chief Executive Officer. In addition
to setting a base salary of $300,000 effective January 13, 2000, Mr. Thompson
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.
EXTENSION OF BANK CREDIT FACILITY
In April 2000 management secured, from the Company's lenders, certain
amendments to its existing credit facility. Among them is 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.
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
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<PAGE> 13
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.
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<PAGE> 14
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, 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
quarter. 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 H 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 second quarter of fiscal 2000
decreased by $2.8 million, or 4.8%, to $55.6 million, as compared with $58.4
million in the second quarter of fiscal 1999. Revenues for the first six months
of fiscal 2000 decreased by $3.1 million, or 2.7%, to $111.4 million, as
compared with the first six months of fiscal 1999. The revenue decrease was
primarily the result of the loss of several large aviation service contracts
during the first and second quarters of fiscal 2000 totaling about $4.2 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 $49.3 million in the second
quarter of fiscal 2000 compared with $52.1 million in the second quarter of
fiscal 1999, a decrease of $2.8 million, or 5.3%, as a percentage of revenues,
cost of revenues decreased to 88.7% in fiscal 2000, from 89.2% in fiscal 1999.
Cost of revenues was $99.8 million in the first half of fiscal 2000 compared
with $102.4 million in the first half of fiscal 1999, a decrease of $2.6
million, or 2.5%. As a percentage of revenues, cost of revenues increased to
89.5% in fiscal 2000, from 89.4% in fiscal 1999. The year over year reduction in
gross cost of revenues is primarily due to the loss of several large service
aviation contracts, which in turn led to a reduction in the amount of labor
needed to service customer accounts. The strength of the United States economy
during this period 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 second quarter of fiscal 2000 were $6.4 million
compared with $5.2 million in the prior year, an increase of $1.2 million, or
23.1%. Measured as a percentage of operating revenues, these expenses were 11.5%
in the second quarter of fiscal 2000 and 8.9% in the second quarter of the prior
fiscal year. Selling, general and administrative expenses in the first half of
fiscal 2000 were $12.3 million compared with $10.3 million in the prior year, an
increase of $2.0 million, or 19.4%. Measured as a percentage of operating
revenues, these expenses were 11.1% in fiscal 2000 and 9.0% in the prior year.
This increase related specifically to increased corporate expenses for
consulting and professional (legal and accounting) fees and wages incurred. 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 consulting 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.
AMORTIZATION EXPENSE. Contract and goodwill amortization expense
increased to $0.7 million in the second quarter of fiscal 2000 from $0.6 million
in the second quarter of fiscal 1999, an increase of 14.4%. Contract and
goodwill amortization expense increased to $1.4 million in the six month period
ended September 30, 1999, an increase of $0.3 million from the prior
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<PAGE> 16
year's $1.1 million. This 32.8% 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 82.1% in the second
quarter of fiscal 2000 to $0.4 million from $0.2 million in the prior year. The
increase of $0.2 million is a result of higher average borrowings of $22.3
million in the second quarter fiscal 2000 compared with $10.3 million in the
second quarter fiscal 1999. Interest expense increased 130.2% in the first half
of fiscal 2000 to $0.7 million from $0.3 million in the prior year. The increase
in interest expense of $0.4 million is a result of higher average borrowings in
fiscal 2000 compared with fiscal 1999, $20.2 million as compared to $7.5 million
respectively, partially offset by a decrease in the Company's effective
borrowing rate from 8.06% to 7.82% for the six months ended September 30, 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 six months ended September 30, 1999. The Company's effective income tax rate
was 41.4% for the three and six months of fiscal 1999. The Company's effective
income tax rate was 44.1% for the six months ended September 30, 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 $1.0 million in cash in the first six months of fiscal 2000, as compared to
cash provided by operating activities of $0.9 million in fiscal 1999.
Investing activities used $6.3 million for the six months ended
September 30, 1999, a decrease of $3.0 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 $7.1
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 $0.3 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 $7.7 million, compared with $9.5 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 be charged
on borrowings to prime rate plus 0.75%, if the loan is repaid by December 31,
2000. The amended agreement also
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<PAGE> 17
includes an increase to the percentage advance rate of eligible receivables as
well as more relaxed financial covenants. The financial covenants include
certain net worth covenants and a minimum debt coverage ratio, and standard
financial reporting requirements. As of April 1, 2000 the Company was in
compliance with all covenants.
In consideration for the amendment and extension of the credit facility
the Company granted the banks warrants for the purchase of 300,000 shares of the
Company's Common Stock at an exercise price of $1.41, which the Board determined
was the fair market value of the Company's Common Stock as of the date of the
grant. The warrants expire on March 31, 2007. As part of the transaction, the
banks were granted a "put" option commencing April 1, 2001 which would, if
exercised, require the Company to purchase the warrants at $1.00 per warrant and
the Company retained a "call" option commencing immediately at an initial price
of $4.50 per warrant. The call price increases by $1.00 per warrant per year
commencing April 1, 2001.
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 the
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 (3.5%
through September 30, 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 September 30, 1999
of $18.5 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, 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 $185,000 on an
annual basis. The Company does not use interest rate derivative instruments to
manage exposure to interest rate changes.
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INTERNATIONAL TOTAL SERVICES, INC. AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8 - K
(a) Exhibits:
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.15 Third Amendment to Third Amended
and Restated Consolidated
Replacement Credit Facility and
Security Agreement, dated as of
September 14, 1999, between Bank
One, Cleveland, NA and the
Company
10.16 Second Amended and Restated
Replacement Promissory Note,
dated September 14, 1999,
executed by the Company in favor
of Bank One, NA, successor by
merger to Bank One, Cleveland NA
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.
19
<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 10.15
THIRD AMENDMENT
TO
THIRD AMENDED AND RESTATED CONSOLIDATED
REPLACEMENT CREDIT FACILITY AND SECURITY AGREEMENT
--------------------------------------------------
THIS THIRD AMENDMENT TO THIRD AMENDED AND RESTATED CONSOLIDATED
REPLACEMENT CREDIT FACILITY AND SECURITY AGREEMENT (this "Agreement") dated as
of September 14, 1999, is entered into by and between INTERNATIONAL TOTAL
SERVICES, INC., an Ohio corporation ("Borrower"), and BANK ONE, NA, successor by
merger to BANK ONE, CLEVELAND, NA, a national bank (the "Bank").
WITNESSETH
----------
WHEREAS, the Borrower and the Bank are parties to that certain Third
Amended and Restated Consolidated Replacement Credit Facility and Security
Agreement dated as of March 31, 1997, as amended by that certain First Amendment
dated as of October 10, 1997 and that certain Second Amendment dated as of
December 16, 1998 (the "Loan Agreement", all terms defined in said Loan
Agreement being used herein with the same meaning), pursuant to which the Bank
has agreed to make a $30,000,000 Revolving Loan to the Borrower until September
30, 1999, evidenced by a Note dated October 10, 1997 and payable to the Bank,
such Note being payable on September 30, 1999; and
WHEREAS, the Borrower and the Bank have agreed to amend the Loan
Agreement (i) to extend the maturity date of the Revolving Loan to April 1,
2000, (ii) to decrease the Revolving Loan to $25,000,000, and (iii) to modify
certain definitions in Section 1 of the Loan Agreement, to modify certain
provisions of Section 2 of the Loan Agreement and to modify certain covenants in
Section 8 of the Loan Agreement;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements contained herein, and for other good and valuable
consideration, the receipt and sufficiency of which is hereby acknowledged, the
Borrower and the Bank agree as follows:
AGREEMENT
Section 1. Amendment of Loan Agreement.
---------------------------
A. The definitions of "Commitment", "Contract Rate", and "Notes" set
forth in Section 1 of the Agreement are, effective the Effective Date, hereby
amended and restated to read in their entirety as follows:
<PAGE> 2
COMMITMENT - Lender's letter to Borrower dated March 21, 1997,
as accepted by Borrower on March 25, 1997; Lender's letter to Borrower dated
June 11, 1997, containing Option A and B as accepted by Borrower on June 11,
1997 as to Option B; Lender's letter to Borrower dated December 3, 1998, as
accepted by Borrower on December 9, 1998 and Lender's letter to Borrower dated
August 27, 1999, as accepted by Borrower on August 30, 1999.
CONTRACT RATE - A fluctuating rate equal to three quarters of
one percent (0.75%) above the Base Rate, provided, however, that at such time as
the Overadvance is eliminated the Contract Rate shall be a fluctuating rate
equal to the Base Rate.
NOTES - The Second Amended and Restated Replacement Promissory
Note (Revolving Loan) and any other promissory note or other instrument
evidencing Borrower's obligation to repay any Obligations.
B. Subsections 2.3(A), (B) and (C) of the Agreement are, effective the
Effective Date, amended and restated to read in their entirety as follows:
2.3 Revolving Loan.
--------------
(A) REVOLVING LOAN. Subject at all times to the terms hereof,
the Lender will, from and after September 14, 1999 until April 1, 2000 make such
loans to the Borrower as from time to time the Borrower requests (the "Revolving
Loan") consisting of advances made by Lender against the value of Eligible
Accounts-Domestic and Eligible Accounts-Foreign and additional advances as of
the date hereof aggregating up to the maximum additional sum of Three Million
Dollars ($3,000,000) for the period from the date hereof to December 31, 1999
and as of January 1, 2000, aggregating up to the maximum additional sum of One
Million Five Hundred Thousand Dollars ($1,500,000) for the period from January
1, 2000 to April 1, 2000 (collectively, the "Overadvance"). Subject to the
provisions of Subsection (B) of this Section 2.3, the aggregate unpaid principal
of the Revolving Loan outstanding at any one time shall not exceed the lesser of
(a) the line of credit approved for Borrower, which is currently Twenty-Five
Million Dollars ($25,000,000), less the face amount of all outstanding Letters
of Credit issued by Lender for the account of Borrower or (b) the sum of the
Overadvance and (i) eighty percent (80%) of the unpaid face amount of Eligible
Accounts-Domestic (or such other percentages of Eligible Accounts-Domestic as
may from time to time be fixed by the Lender upon notice to the Borrower) and
(ii) the lesser of fifty percent (50%) of the unpaid face amount of Eligible
Accounts-Foreign (or such other percentages of Eligible Accounts- Foreign as may
from time to time be fixed by the Lender upon notice to the Borrower) or Three
Hundred Fifteen Thousand Dollars ($315,000) (or such other dollar amount as may
from time to time be fixed by the Lender upon notice to the Borrower) less a
reserve equal to twenty-five percent (25%) of the Borrower's accrued payroll and
related expenses account calculated at the most recent calendar month-end. Each
reduction in the Overadvance shall automatically reduce the maximum sum of the
Overadvance, and, in any event, the Overadvance shall be reduced to One Million
Five Hundred Thousand Dollars ($1,500,000) by December 31, 1999 and shall be
eliminated by March 31, 2000.
2
<PAGE> 3
(B) MAXIMUM BORROWINGS AVAILABLE UNDER REVOLVING LOAN.
Notwithstanding anything to the contrary contained in this Section 2.3, at no
time shall the Overadvance exceed Three Million Dollars ($3,000,000) from the
date hereof to and including December 31, 1999 and One Million Five Hundred
Thousand Dollars ($1,500,000) from January 1, 2000 to and including March 31,
2000, nor shall the loans outstanding at any time under the Revolving Loan
exceed the sum of Twenty-Five Million Dollars ($25,000,000), less the face
amount of all outstanding Letters of Credit issued by Lender for the account of
Borrower.
(C) PAYMENT. The Revolving Loan shall be payable on April 1,
2000 and bear interest as provided in Section 2.3(D) of this Agreement and shall
otherwise be evidenced by, and repayable in accordance with, the Revolving Note,
but in the absence of such revolving promissory note shall be evidenced by the
Lender's record of disbursements and repayments.
C. Subsection 8.1(H) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
(H) Keep adequate records and books of account with respect to
its business activities in which proper entries are made in accordance with GAAP
reflecting all its financial transactions and permit the Lender annually, in its
discretion, to conduct quarterly field examinations as set forth in the
Commitment, at Borrower's expense.
D. Subparagraph (v) of Subsection 8.1(I) of the Agreement is, effective
the Effective Date, hereby amended and restated to read in its entirety as
follows:
8.1(I)(v) Concurrently with each request for an advance under
the Revolving Loan, and weekly on the last day of each week, a certificate
prepared by the chief financial officer or president or Borrower in the form
attached hereto as EXHIBIT A, which certificate may be delivered to Lender by
telecopy and on the first business day of each week Borrower shall submit to
Lender a certificate (certified by the president or chief financial officer of
Borrower as of the last day of the preceding week) that payroll taxes for which
Borrower is obligated through and as of the date of the certificate have been
paid in full or remitted when due. The Borrower shall also provide to Lender on
or before the 10th day of each month, a monthly reconciliation of unbilled
Accounts Receivable for the preceding month and, on or before the 30th day of
each month, a monthly reconciliation between Accounts Receivable as shown on its
General Ledger and Borrower Certificates for the preceding month, each in form
acceptable to Lender and including such detail as the Lender shall require.
E. Subsection 8.2(K) of the Agreement is, effective the Effective Date,
hereby amended and restated to read in its entirety as follows:
(K) Make Capital Expenditures during any fiscal year of
Borrower which, in the aggregate, exceed One Million Dollars ($1,000,000).
3
<PAGE> 4
F. EXHIBIT A attached to the Loan Agreement is, effective the Effective
Date, hereby deleted and the form of Borrowing Base Certificate attached to this
Agreement as EXHIBIT C is hereby substituted therefor.
Section 2. Effective Date of the Agreement.
-------------------------------
The effective date of this Agreement ("Effective Date") shall be the
date on which all conditions precedent have been satisfied, or waived by the
Bank in writing.
Section 3. Conditions Precedent.
--------------------
Borrower hereby acknowledges and agrees that the effectiveness of this
Agreement is conditioned upon the receipt by the Bank, on or prior to the date
hereof, in form and substance satisfactory to the Bank and its counsel, of the
following:
A. A certificate, dated as of the date hereof, signed by the Chief
Executive Officer of Borrower and to the effect that:
1) As of said date, no Event of Default has occurred and
is continuing, and no event has occurred and is
continuing that, with the giving of notice or passage
of time, or both, would be an Event of Default; and
2) The representations and warranties of Borrower set
forth in Section 7 of the Loan Agreement are true and
correct as of such date; and
3) Borrower is in compliance with all of the terms and
conditions set forth in the Loan Agreement on and as
of said date.
B. A certificate, dated as of the date hereof, signed by the Secretary
of Borrower certifying as follows:
1) Borrower's Articles of Incorporation and Code of
Regulations have not been modified or amended since
June 17, 1997 (or certifying that true, correct and
complete copies of all such modifications and
amendments are attached thereto); and
2) Copies of resolutions of Borrower's Board of
Directors are attached thereto with respect to the
approval of this Agreement and of the matters
contemplated hereby and authorizing the execution,
delivery and performance of this Agreement and each
other document, instrument, agreement or note to be
delivered pursuant hereto; and
4
<PAGE> 5
3) As to the incumbency and signatures of the officers
of Borrower signing this Agreement and each other
document, instrument, agreement or note to be
delivered pursuant hereto.
C. The Second Amended and Restated Replacement Promissory Note
(Revolving Loan) in the form of EXHIBIT A attached hereto, with all blanks
completed, duly executed and delivered by Borrower to Bank.
D. An Acknowledgement, Consent and Agreement in the form of EXHIBIT B
attached hereto, with all blanks completed, duly executed and delivered by
Transport, NBC, and the Guarantors to Bank.
E. The written opinion of counsel for Borrower as to the enforceability
of this Agreement, the Loan Agreement, Note, and each of the other Credit
Documents and covering such other issues thereunder as requested by Bank and its
counsel.
F. Such other documents, instruments, agreements and notes as the Bank
may reasonably request to implement this Agreement and the transactions
contemplated hereby and by the Loan Agreement.
SECTION 4. Fees and Expenses.
-----------------
Borrower shall pay Bank a restructuring fee of Seventy-Five Thousand
Dollars ($75,000) as of the date hereof and shall also pay all out-of-pocket
fees and expenses incurred by the Bank in connection with the preparation,
negotiation, execution and delivery of this Agreement, the promissory notes,
guaranty, participation agreement, and all the other agreements, documents or
certificates required or contemplated hereby, including, without limitation,
legal fees and expenses of the Bank.
SECTION 5. References.
----------
On and after the effective date of this Agreement, each reference in
the Loan Agreement to "this Agreement", "hereunder", "hereof", or words of like
import referring to the Loan Agreement, and in the Note to the "Loan Agreement",
"thereof", or words of like import referring to the Loan Agreement shall mean
and refer to the Loan Agreement as previously amended and as amended hereby.
References to EXHIBIT A in the Loan Agreement shall be deemed to refer to the
form of Borrowing Base Certificate attached hereto as EXHIBIT C. References to
EXHIBIT C-1 in the definition of "Revolving Note" in the Loan Agreement shall be
deemed to refer to the Promissory Note, a copy of which is attached hereto as
EXHIBIT A. The Loan Agreement, as previously amended and as amended by this
Agreement, and all Credit Documents are and shall continue to be in full force
and effect and are hereby and in all respects ratified and confirmed. References
to the Loan Agreement in the Note shall be deemed to include all amendments to
the Loan Agreement whether specified in the Note or not.
5
<PAGE> 6
SECTION 6. Applicable Law.
--------------
This Agreement shall be deemed to be a contract under the laws of the
State of Ohio, and for all purposes shall be construed in accordance with the
laws of the State of Ohio.
SECTION 7. Counterparts.
------------
This Agreement may be executed in any number of counterparts, all of
which taken together shall constitute one and the same instrument, and any one
of the parties hereto may execute this Agreement by signing any such
counterpart.
IN WITNESS WHEREOF, the Borrower and the Bank have caused this
Agreement to be executed by their duly authorized officers as of the date and
year first above written.
BANK ONE, NA INTERNATIONAL TOTAL SERVICES, INC.
By /s/ Louis G. Johnston By /s/ Robert A. Weitzel
--------------------- ---------------------
Name: Louis G. Johnston Name: Robert A. Weitzel
Title: Senior Vice President Title: Chief Executive Officer
6
<PAGE> 7
SCHEDULE 1
----------
List of Guarantors
------------------
Domestic
--------
Crown Technical Systems, Inc. (Ohio)
T.I.S. Incorporated (Texas)
Certified Investigative Services, Inc. (Texas)
I.T.S. of New York, Inc. (New York)
Selective Detective Services, Inc. (New Jersey)
Foreign
-------
International Total Services, Ltd. (United Kingdom)
International Transport Security, s.r.o. (Czech Republic)
International Transport Services, Ltd. (Thailand)
<PAGE> 8
EXHIBIT A
---------
Form of Second Amended and Restated Replacement Promissory Note (Revolving Loan)
- --------------------------------------------------------------------------------
[SEE EXHIBIT 10.16]
<PAGE> 9
EXHIBIT B
---------
Form of Acknowledgment, Consent and Agreement (Guarantors)
----------------------------------------------------------
ACKNOWLEDGEMENT, CONSENT AND AGREEMENT
--------------------------------------
The undersigned each hereby acknowledges receipt of a copy of the Third
Amendment to Third Amended and Restated Consolidated Replacement Credit Facility
and Security Agreement dated as of August 31, 1999, by and between International
Total Services, Inc. ("Borrower") and Bank One, NA, successor by merger to Bank
One, Cleveland, NA ("Bank One") and by executing this Acknowledgment, Consent
and Agreement the undersigned each hereby agrees to remain bound by the terms
and conditions of its respective Amended and Restated Replacement Guaranty
Agreement, Guaranty Agreement, Amended and Restated Replacement Guarantor
Security Agreement and Guarantor Security Agreement, as applicable, each dated
as of August 11, 1995, executed and delivered to Bank One in connection with the
Second Amended and Restated Replacement Credit Agreement dated as of August 11,
1995, as subsequently amended, and each other document hereafter executed in
connection herewith or therewith by the undersigned.
Dated: August 31, 1999
CROWN TECHNICAL SYSTEMS, INC.
By: /s/ Robert A. Weitzel
----------------------------------
Name: Robert A. Weitzel
Title: Chairman of the Board
T.I.S. INCORPORATED
By: /s/ Robert A. Weitzel
----------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
<PAGE> 10
CERTIFIED INVESTIGATIVE SERVICES, INC.
By: /s/ Robert A. Weitzel
----------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
I.T.S. OF NEW YORK, INC.
By: /s/ Robert A. Weitzel
----------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
SELECTIVE DETECTIVE SERVICES, INC.
By: /s/ Robert A. Weitzel
----------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
INTERNATIONAL TOTAL SERVICES, LTD.
By: /s/ Robert A. Weitzel
----------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
INTERNATIONAL TRANSPORT SECURITY, s.r.o.
By: /s/ Robert A. Weitzel
----------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
INTERNATIONAL TRANSPORT SERVICES, LTD.
By: /s/ Robert A. Weitzel
----------------------------------
Name: Robert A. Weitzel
Title: Chief Executive Officer
<PAGE> 11
EXHIBIT C
---------
Form of Borrowing Base Certificate
----------------------------------
[SEE ATTACHED]
<PAGE> 1
Exhibit 10.16
SECOND AMENDED AND RESTATED
REPLACEMENT PROMISSORY NOTE
(Revolving Loan)
$25,000,000 Cleveland, Ohio
September 14, 1999
FOR VALUE RECEIVED, INTERNATIONAL TOTAL SERVICES, INC., a corporation
organized under the laws of the State of Ohio (hereinafter referred to as the
"Company"), promises to pay to the order of BANK ONE, NA, successor by merger to
BANK ONE, CLEVELAND, NA (hereinafter referred to as the "Bank"), the principal
amount of Twenty-Five Million Dollars ($25,000,000), or such lesser amount as
shall have from time to time been borrowed by the Company, on April 1, 2000, or
sooner as hereinafter provided, with interest on the unpaid balance of said
principal amount from the date hereof at the Contract Rate, as defined in the
Agreement hereinafter referred to, which definition is hereby accepted by the
Company, as the same may from time to time be established. If any installment of
principal, interest or other amounts due and payable hereunder are not paid when
due, or within any applicable grace periods, the Company shall pay interest
thereon at the rate per annum of six percent (6.0%) in excess of the Base Rate,
as defined in the Agreement hereinafter referred to, which definition is hereby
accepted by the Company, as the same may from time to time be established.
The Company agrees to pay interest on the unpaid principal amount
outstanding of this Note in monthly installments, commencing on the 1st day of
October, 1999 and continuing on the 1st day of each month thereafter. The unpaid
balance of the principal amount outstanding and all accrued interest thereon
shall be due and payable on April 1, 2000.
Payments of both principal of and interest on this Note shall be made
in lawful money of the United States of America, at 600 Superior Avenue,
Cleveland, Ohio 44114, or at such other place as the Bank or any subsequent
holder hereof shall have designated to the Company in writing. Interest payable
on this Note shall be computed on a three hundred sixty (360) day per year basis
counting the actual number of days elapsed.
This Note, in part, evidences, but does not extinguish or satisfy, a
pre-existing indebtedness of the Company to the Bank heretofore evidenced by a
$30,000,000 Amended and Restated Replacement Promissory Note (Revolving Loan)
dated October 10, 1997 to the Bank, which note was issued in substitution for
that certain $10,500,000 Replacement Promissory Note (Revolving Loan) dated
March 31, 1997 to the Bank and is issued pursuant to and is entitled to the
benefits of a Third Amended and Restated Consolidated Replacement Credit
Facility and Security Agreement dated as of March 31, 1997, as amended by that
certain First Amendment to Third Amended and Restated
<PAGE> 2
Consolidated Replacement Credit Facility and Security Agreement dated as of
October 10, 1997, that certain Second Amendment to Third Amended and Restated
Consolidated Replacement Credit Facility and Security Agreement dated as of
December 16, 1998 and that certain Third Amendment to Third Amended and Restated
Consolidated Replacement Credit Facility and Security Agreement dated of even
date herewith, each by and between the Company and the Bank (collectively, the
"Agreement"), to which Agreement reference is hereby made for a statement of the
rights and obligations of the Bank and the duties and obligations of the Company
in relation thereto; but neither this reference to said Agreement nor any
provisions thereof shall affect or impair the absolute and unconditional
obligation of the Company to pay the principal of or interest on this Note when
due.
The Company may prepay all or any portion of this Note at any time or
times and in any amount only as provided in the Agreement.
In case an Event of Default, as defined in said Agreement, shall occur
and be continuing beyond any applicable grace period, the principal of this Note
may be declared immediately due and payable at the option of the Bank.
The Company hereby authorizes any attorney-at-law to appear in any
court of record in the State of Ohio, or in any other state or territory of the
United States, at any time or times after the above sum becomes due, and waive
the issuance and service of process and confess judgment against it, in favor of
any holder of this Note, for the amount then appearing due, together with the
costs of suit, and thereupon to release all errors and waive all rights of
appeal and stay of execution. The foregoing warrant of attorney shall survive
any judgment, it being understood that should any judgment be vacated for any
reason, the foregoing warrant of attorney nevertheless may thereafter be used
for obtaining an additional judgment or judgments.
No delay on the part of any holder hereof in exercising any power or
rights hereunder shall operate as a waiver of any power or rights. Any demand or
notice hereunder to the Company may be made by delivering the same to the
address last known to the Bank, or by mailing the same to such address, with the
same effect as if delivered to the Company in person.
This Note is executed at Cleveland, Cuyahoga County, Ohio.
<PAGE> 3
"WARNING. BY SIGNING THIS PAPER YOU GIVE UP YOUR RIGHT TO NOTICE AND
COURT TRIAL. IF YOU DO NOT PAY ON TIME, A COURT JUDGMENT MAY BE TAKEN AGAINST
YOU WITHOUT YOUR PRIOR KNOWLEDGE AND THE POWERS OF A COURT CAN BE USED TO
COLLECT FROM YOU REGARDLESS OF ANY CLAIMS YOU MAY HAVE AGAINST THE CREDITOR
WHETHER FOR RETURNED GOODS, FAULTY GOODS, FAILURE ON HIS PART TO COMPLY WITH THE
AGREEMENT OR ANY OTHER CAUSE."
INTERNATIONAL TOTAL SERVICES, INC.
By:
-----------------------------------
Name: Robert A. Weitzel
Its: Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-START> APR-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,094,000
<SECURITIES> 0
<RECEIVABLES> 24,903,000
<ALLOWANCES> (630,000)
<INVENTORY> 0
<CURRENT-ASSETS> 32,041,000
<PP&E> 13,132,000
<DEPRECIATION> 6,545,000
<TOTAL-ASSETS> 73,604,000
<CURRENT-LIABILITIES> 26,432,000
<BONDS> 0
0
0
<COMMON> 67,000
<OTHER-SE> 31,211,000
<TOTAL-LIABILITY-AND-EQUITY> 73,604,000
<SALES> 111,414,000
<TOTAL-REVENUES> 111,414,000
<CGS> 99,767,000
<TOTAL-COSTS> 113,530,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 746,000
<INCOME-PRETAX> (2,862,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,862,000)
<EPS-BASIC> (.43)
<EPS-DILUTED> (.43)
</TABLE>
