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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
Date of Report (date of earliest event reported): December 29, 1997
Commission File No. 333-29463
International Total Services, Inc.
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(Exact name of registrant as specified in its charter)
OHIO 34-1264201
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization Identification No.)
5005 Rockside Road, Cleveland, OH 44131
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(Address of principal executive offices)
Registrant's telephone number, including area code 216-642-4522
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ITEM 2: ACQUISITION OR DISPOSITION OF ASSETS
On October 13, 1997, International Total Services, Inc. (the "Company")
completed its acquisition of the contracts and assets of ARC Security Inc./ ARC
Security Services, Inc. and Appaloosa Transport Company, Inc., ("ARC"), all of
which were Georgia corporations, from the sole shareholder of ARC.
The Acquisition was accomplished pursuant to a Plan and Agreement of Acquisition
dated as of October 13, 1997 among the Company and ARC.
ARC provided airline security, pre-board passenger screening, and pre-flight
cleaning and servicing of airplanes and airport terminals, located mainly in the
eastern and southern United States for all 12 major airlines.
Total consideration for the Acquisition consisted of the payment to the
shareholder of ARC of $8.4 million to purchase the contracts and assets and the
assumption of $195,000 in debt.
The cash consideration for the transaction was made available from the proceeds
of the Company's Initial Public Offering completed on September 24, 1997. The
acquisition will be accounted for under the purchase method of accounting for
financial reporting purposes.
The purchase price and other terms of the Acquisition Agreement were determined
through arms-length negotiations. The Company is not aware of any pre-existing
material relationships between (i) ARC or any of its shareholders, and (ii) the
Company, any of the Company's affiliates, directors and officers or any
associate of such directors and officers.
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ITEM 3: FINANCIAL STATEMENTS AND EXHIBITS
The required financial statements are attached.
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ARC Security, Inc.
CONSOLIDATED BALANCE SHEET
August 31, 1997
ASSETS
Current Assets
Cash $ 32,502
Accounts receivable
Trade 3,763,134
Other 129,331
Prepaid expenses
Insurance 342,207
Other 51,051
----------
Total current assets 4,318,225
Property, Plant and Equipment - at cost
Buildings 151,639
Leasehold improvements 56,744
Equipment 3,486,431
Furniture and fixtures 43,021
----------
3,737,835
Less accumulated depreciation 1,764,192
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1,973,643
Land 26,175
----------
1,999,818
Other Assets
Advances to officer 174,030
Deposits 51,249
Other 66,185
----------
291,464
----------
$6,609,507
==========
LIABILITIES
Current Liabilities
Notes payable
Bank $1,900,698
Other 258,175
Current maturities of long-term debt 593,449
Accounts payable 414,186
Accrued liabilities
Payroll and related taxes 1,256,341
Other 171,184
Estimated income taxes 24,000
----------
Total current liabilities 4,618,033
Long-Term Debt 1,069,716
Deferred Income Taxes 139,320
Commitments --
Stockholder's Equity
Common stock, no par value; authorized 10,000 shares,
issued and outstanding, 100 shares 474
Additional paid-in capital 40,237
Retained earnings 741,727
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782,438
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$6,609,507
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The accompanying notes are an integral part of this statement.
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ARC Security, Inc.
CONSOLIDATED STATEMENT OF EARNINGS AND RETAINED EARNINGS
Year ended August 31, 1997
Sales $ 29,897,798
Operating expenses
Salaries and wages 22,502,915
Payroll taxes 2,079,398
Insurance 1,737,549
Bad debt expense 124,790
General and administrative 2,985,466
------------
29,430,118
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Income from operations 467,680
Other income (expense)
Interest expense (404,541)
Other 14,429
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(390,112)
------------
Earnings before income taxes 77,568
Provision for income taxes 40,000
------------
NET EARNINGS 37,568
Retained earnings - September 1, 1996 704,159
------------
Retained earnings - August 31, 1997 $ 741,727
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ARC SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
NOTE A - SUMMARY OF ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of ARC
Security, Inc. and its wholly-owned subsidiaries, ARC Services, Inc. and
Appaloosa Transport Company. All material intercompany accounts and
transactions have been eliminated.
NATURE OF OPERATIONS
The Company provides airport security, transportation and airport personnel
contract services (including baggage handling, cabin cleaning and skycap
services) for airports and related companies. The Company performs these
services throughout the United States, significant customers are major
airlines. Revenues are recognized at the time services are performed.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost and depreciation is provided
over the estimated useful lives of the respective assets (5 to 31 years),
principally on a straight-line basis.
INCOME TAXES
The Company provides deferred taxes for temporary differences between the tax
and financial reporting bases of assets and liabilities at the rate expected
to be in effect when taxes become payable or receivable.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
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ARC SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AUGUST 31, 1997
NOTE B - NOTES PAYABLE
Notes payable include a note due to a bank under a $2,000,000 line of credit
that expires in 1999. Amount due under the agreement, $1,900,698 at August 31,
1997, are limited by a formula based upon eligible accounts receivable. The
agreement provides for interest at prime plus 3% ( % at a August 31, 1997) and
for an annual facility fee and monthly administrative fees.
Notes payable also include a note payable in the amount of $258,175 for
insurance premiums, bearing interest at the rate of 7.47% per annum. The note,
which is collateralized by the unearned portion of the insurance premiums is due
in equal monthly installments of principal and interest of $29,587 through May,
1998.
NOTE C - LONG-TERM DEBT
Long-term debt consists of the following:
Notes payable $ 377,605
Capital lease obligations 1,285,560
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1,663,165
Less current maturities 593,449
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$1,069,716
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The notes payable are collateralized by certain property and equipment and are
guaranteed by the Company's sole shareholder. Maturities by year ended August 31
are as follows: 1998 - $322,052; 1999 - $54,041; 2000 - $1,512.
The assets held under capital leases are recorded at the lower of the present
value of the minimum lease payments or the fair value of the assets. These
assets and the related accumulated amortization are included in property, plant
and equipment at August 31,1997 and approximated $1,706,000 and $214,000,
respectively.
The following is a schedule by years of future minimum lease payments under
capital leases together with the present value of future payments. The present
value is calculated at the rate implicit in the leases which ranged from
approximately 9% to 33% at August 31,1997.
YEAR ENDING AUGUST 31,
1998 $ 422,061
1999 374,134
2000 368,361
2001 368,462
2002 98,261
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1,631,279
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Less amount representing interest 345,719
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PRESENT VALUE OF NET MINIMUM LEASE PAYMENTS $1,285,560
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NOTE D - SALE OF ASSETS
On October 13, 1997, the Company entered into an asset purchase agreement (the
Agreement) with International Total Services, Inc. (ITS). Under the Agreement,
ITS acquired substantially all of the Company's aviation service contracts and
operating assets and assumed the Company's rights under certain lease agreements
related to operating equipment. The purchase price was $8,450,000, payable in
cash at the time of closing. As part of the Agreement, neither the Company nor
its shareholder or employees directly compete against ITS in the aviation
services business.
NOTE E - COMMITMENTS
The Company has entered into operating leases primarily for offices and
equipment. Rent expense related to these leases approximated $242,000, including
$93,000 for the lease of its facility in Atlanta, which lease is with an officer
of the Company. Rental commitments, excluding the related party lease,
approximated $150,000 per year for the next five years.
NOTE F - INCOME TAXES
The Company's income tax provision at August 31, 1997 was comprised of the
following components:
Current (principally federal) $24,000
Deferred 16,000
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$40,000
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The deferred provision primarily relates to changes in the differences between
the book and tax bases of property and equipment. The total provision differs
from the amount calculated by applying statutory rates to income before taxes
principally because of certain permanently nondeductible expenses.
NOTE G - STATEMENT OF CASH FLOWS
The Company paid approximately $120,000 and $405,000 for income taxes and
interest, respectively, during the year ended August 31, 1997. Also during the
year ended August 31, 1997, the Company incurred capital lease obligations of
approximately $987,000 for the acquisition of property and equipment.
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UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION
BALANCE SHEET
(Amounts in thousands)
ITS ARC Adjustments
March 31, August 31, for Adjusted
1997 1997 Acquisition Pro Forma
---- ---- ----------- ---------
ASSETS
Current assets:
Cash and cash equivalents 1452 32 (32) (5) 1452
Accounts receivable, net of allowance for 11784 3763 (3763) (5) 11784
doubtful accounts of $100,000
Security equipment held for sale 294 0 0 294
Uniforms 770 0 0 770
Deferred tax assets 1494 0 0 1494
Prepaid expenses and other assets 492 523 (523) (5) 492
----- ---- ---- -----
Total current assets 16286 4318 (4318) 16286
Notes Receivable from Officer 445 0 0 445
Property and Equipment 7590 3764 (2264) 9090
Less accumulated depreciation and amortization (4336) (1764) 1764 (4336)
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3254 2000 (500) 4754
Contracts and Noncompete Agreement, less 4346 0 7141 (6) 11487
accumulated amortization
Security Deposits and Other 2670 291 (291) (5) 2670
----- ---- ---- -----
7016 291 6850 14157
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27001 6609 2032 35642
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable to bank/other 2400 2159 6291 (3, 5) 10850
Current maturities of long-term
obligations 120 593 (402) (3, 5) 311
0 0
Trade accounts payable 2748 414 (414) (5) 2748
Accrued payroll and payroll taxes 8703 1256 (1256) (5) 8703
Other accrued expenses 1418 172 (172) 1418
Income taxes payable 573 24 (24) 573
----- ---- ---- -----
Total current liabilities 15962 4618 4023 24603
Deferred Tax Liability 289 139 (139) (5) 289
Long-Term Obligations 7555 1070 (1070) (5) 7555
Stockholders' Equity
Preferred stock 0 0 0 0
Common stock 36 0 0 36
Additional paid-in capital 473 40 (40) (5) 473
Cumulative translation adjustment (98) 0 0 (98)
Retained earnings 2784 742 (742) (5) 2784
----- ---- ---- -----
3195 782 (782) 3195
Less treasury stock 0 0 0 0
----- ---- ---- -----
3195 782 (782) 3195
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27001 6609 2032 35642
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UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
Year Ended
(Amounts in thousands, except share and per share data)
ITS ARC ADJUSTMENTS FOR AS
March 31, 1997 August 31, 1997 ACQUISITION ADJUSTED
-------------- --------------- ----------- --------
REVENUES $115,242 $29,898 $ 0 $ 145,140
COST OF REVENUES $ 98,338 $26,445 ($ 1,027)(1) $ 123,756
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GROSS PROFIT $ 16,904 $ 3,453 $ 1,027 $ 21,384
($ 797)(2a)
GENERAL AND ADMINISTRATIVE EXPENSE $ 13,334 $ 2,985 $ 464 (2b) $ 15,986
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OPERATING INCOME $ 3,570 $ 468 $ 1,360 $ 5,398
INTEREST EXPENSE AND OTHER $ 637 $ 390 $ 474 (3) $ 1,501
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INCOME BEFORE INCOME TAXES $ 2,933 $ 78 $ 886 $ 3,897
INCOME TAXES $ 1,237 $ 40 $ 360 (4) $ 1,637
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NET INCOME $ 1,696 $ 38 $ 526 $ 2,260
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# OF SHARES OUTSTANDING 5089480 100 n/a 5089480
-------- ------- --------- ---------
EARNINGS PER SHARE (7) $ 0.33 $380.00 n/a $ 0.44
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NOTE: SINCE THE ARC ONE YEAR AUDIT WAS COMPLETED FOR 8/31/97, IT WAS NOT
PRACTICAL TO PROFORMA THE $ ABOVE WITHIN THE 93 DAY PERIOD FOLLOWING MARCH 31,
1997.
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1. Represents a reduction in ARC's historical costs for workers'
compensation and liability insurance to conform them to the cost
structure associated with the company's programs.
2a. Represents a reduction in compensation expense associated with the
elimination of certain salaries paid to ARC's officers not employed by
the Company subsequent to the acquisition.
2b. Represents the additional amortization costs to be charged to expense
after allocation of the purchase price in the ARC acquisition as follows:
amortization of service contracts (5 years) $ 143
amortization of goodwill (20 years) $ 321
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$ 464
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3. Represents the reduction of interest expense and debt on ARC debt not
assumed with the contract acquisition and an increase in debt and
interest expense on for the acquisition purchase price.
4. Represents an adjustment to the historical provision for income taxes to
reflect the application of the Company's estimated effective tax rate of
42% after giving effect to the forgoing adjustments.
5. Represents the elimination of assets and liabilities reflected on the
historical financial statements of ARC but not acquired by the Company.
6. Represents adjustments associated with the allocation of the purchase
price for the ARC acquisition. The allocation of the purchase price for
the ARC acquisition is as follows:
Service contracts $ 714
Equipment $1,500
Goodwill $6,427
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$8,641
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7. Earnings per share are computed by dividing net earnings, after giving
effect to preferred dividend requirements, by the weighted average number
of shares outstanding.
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SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THE
REGISTRANT HAS DULY CAUSED THIS CURRENT REPORT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
INTERNATIONAL TOTAL SERVICES, INC.
By: /s/ ROBERT A. SWARTZ
ROBERT A. SWARTZ
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
Dated: December 29, 1997
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