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The security firm that screens passengers at Atlanta’s Hartsfield International Airport and 112 other U.S. airports is in such dire financial straits that Delta Air Lines fears the company won’t be able to pay its employees, who might then walk off their jobs. Delta was so concerned about the financial health of the company, Cleveland-based International Total Services Inc., that last month the airline petitioned a New York bankruptcy court judge to let it temporarily assume control of security operations at Hartsfield if the firm runs out of money. ITS filed for bankruptcy protection in U.S. Bankruptcy Court in the Eastern District of New York two days after the Sept. 11 terrorist attacks. The company said in subsequent motions filed with the court that unless it finds a buyer or receives a cash infusion it could go out of business as early as Monday. At the same time, ITS directors are embroiled in a fight with the company’s retired founder and majority shareholder for control of the firm. Last week, ITS attorneys convinced a New York bankruptcy judge to postpone a special stockholders meeting after the founder, Robert A. Weitzel, threatened to use his voting power to bring in a new slate of directors. The company said an abrupt change in management would affect its solvency and potentially undermine the company’s ability to provide airport security. Weitzel, the 66-year-old founder and dissident shareholder, said in court filings that the current management’s “incompetence now threatens aviation security in the United States.” The company countered in its motions that Weitzel left the company in 1999 after he was suspected of mishandling company funds. BARELY SOLVENT Both camps agree that the company is teetering on insolvency. Current management says in its motions that the company hopes to avert a shutdown by selling ITS immediately. “ITS will be forced to cease operations” without an immediate sale or cash infusion, company attorneys told the bankruptcy judge. ITS, which has attempted since Sept. 13 to reorganize under Chapter 11 U.S. bankruptcy laws, said the filing was unrelated to fears of litigation stemming from the terrorist attacks two days earlier. ITS shares security at Newark International Airport, where a plane was hijacked Sept. 11 and later crashed into a Pennsylvania field. On Sept. 13, ITS had more than $48 million in liabilities and estimated assets of $23 million, according to bankruptcy records. “ITS is insolvent on a balance sheet basis,” one ITS motion stated. “Thus, it is expected that there will be nothing left for equity holders.” From fiscal 1999 (which began for ITS in April 1998) through the end of fiscal 2001 last March, ITS reported three consecutive years of operating losses, according to the company’s annual report filed with the U.S. Securities and Exchange Commission. Revenue dropped from $226.7 million in fiscal 1999 to $186.2 million in fiscal 2001. Net losses increased from $7.4 million in fiscal 1999 to $13.1 million in 2000 and $36.4 million in 2001. Last July, the company defaulted on several credit lines. Those defaults, coupled with mounting losses, “raise substantial doubt about the company’s ability to continue as an ongoing concern,” the company said in SEC filings. According to those filings: � In the fall of 1999, two years after ITS executives took the company public, the NASDAQ delisted the firm. It did so after stock prices fell from a high of $25 in March 1998 to a low of 40 cents. � In fiscal 2001, the company lost airline and commercial security contracts valued at $42.7 million, including its $7.4 million contract at the Dallas-Fort Worth International Airport. “From time to time, the company has failed to meet test standards or a client’s service expectations at a particular location, and, like its competitors, has had contracts terminated because of customer dissatisfaction with various aspects of its performance,” the annual report noted. “The airlines are sensitive about security lapses and may cancel a contract based on even minor security breaches.” � ITS has not been able to offer competitive bids for security contracts “due to competitors taking advantage of the company’s uncertain financial situation,” the annual report stated. “Most of the company’s competitors are larger and may have greater financial resources than the company.” � At the end of last year, “a major customer” filed for bankruptcy, forcing ITS to write off as uncollectable a $1.1 million debt. � Last May, the company paid the first of 17 monthly installments totaling $450,000 in a court settlement with a Texas security firm. � ITS is involved in other legal proceedings, among them “routine civil actions instituted by the Federal Aviation Administration with respect to test failures, background checks and record-keeping matters that arise in the ordinary course of its business, and litigation relating to its acquisitions.” If any of those cases result in a significant monetary judgment against ITS, “given the company’s current liquidity situation, such an award would adversely affect the financial condition of the company,” the annual report stated. � Because ITS relies on an untrained, low-paid workforce, the annual turnover rate for its 11,000 full-time and part-time employees is almost 100 percent, according to the annual report. “Currently, the company faces the same challenge as its competitors do — finding qualified employees to provide consistent service at the wage rates offered by the airlines for screeners in the current economic environment.” � In the wake of the Sept. 11 attacks, Delta terminated ITS contracts in three cities, and Continental Airlines removed ITS from its Cleveland hub. Prior to the contract cancellations, Delta paid ITS $40 million last year for security nationwide. ATLANTA CLIENTS PETITION COURT The company’s financial condition led Delta, the Atlanta Airport Terminal Corp. (AATC) and TBI Airport Management Co. to petition U.S. Bankruptcy Judge Conrad B. Duberstein of the Eastern District of New York Sept. 21 for authority to pay ITS’ airport security guards should the firm fail to meet its payroll. Delta is the majority shareholder in AATC, an airline-owned company responsible for Hartsfield’s domestic security checkpoints. TBI is a Florida firm that holds the contract to provide security at Hartsfield’s international gates. TBI subcontracts work to ITS. According to an ITS motion, the company agreed to a “contingent transition plan” that would permit Delta, AATC, TBI and Southwest Airlines to assume control of airport security services at Hartsfield under “certain circumstances” outlined in a court order that Duberstein sealed at the request of the litigants. Information about the court order and other sealed motions was obtained from interviews with people familiar with the documents and from motions that were not under seal. John Green, vice president of TBI Airport Management Corp., says his firm joined with Delta and AATC in filing the motions to prevent ITS security guards from walking off the job. Green confirms that the three firms now have a court-approved contingency plan to take over Hartsfield security should ITS be unable to pay employees. “It provided us the opportunity to bring another security company in and have access to personnel files and existing staff so that the responsibility to make payroll would be transferred over to the new company. It’s merely a new policy to make sure Hartsfield operates without interruption,” Green says. Green insists the court actions were “by no means an initiative on our part to disassociate ourselves with ITS. It’s merely a safety net in case the worst-case scenario occurs.” Even Weitzel insists that ITS’ security operation at Hartsfield, based on his experience while he was CEO, “is one of the best-run operations in the country.” “We’re not dissatisfied with their performance,” says Kilpatrick Stockton partner Melinda A. Marbes, who is representing AATC. “There is no disruption of service. They are doing a very good job at the Atlanta airport. I think that’s true at all the other airports. I haven’t heard anything but good things.” Rather, she says, the corporation’s decision to go to court was done only as a precaution. “Hopefully, nothing will ever come of it,” she says. “It’s a safety net. In that respect, their [filing for Chapter 11] had no effect on airport operations whatsoever.” Still, Marbes says all parties would prefer that the company’s financial difficulties not be aired publicly. That’s why they asked Duberstein to seal their motions, ITS’ answers, and his own order. Duberstein granted the requests. “It was important to my client that people not be concerned that there is any disruption [of services],” Marbes says. “In fact, there was not any disruption.” She says, “The debtor doesn’t want it to get any kind of press. I don’t want it to get any kind of press. If there’s going to be any press, I want it to be positively clear there was no service disruption. … It’s a bunch of lawyers making sure the procedural i’s and t’s are dotted.” According to bankruptcy court motions, any adverse change in ITS’ financial condition since it filed for Chapter 11 protection from creditors would be considered “a triggering event” that would allow the airlines to take over security functions immediately. That’s why ITS petitioned Duberstein last Thursday to allow it to postpone a shareholders’ meeting scheduled for last Friday in Cleveland. If Weitzel succeeded in replacing the company’s directors, the company said in court motions, that might cause its creditors to terminate interim financing, leaving it with no operating funds. That, in turn, would force the airlines to assume control of security operations. WEITZEL VS. ITS Weitzel founded the company in 1978 after directing security in military intelligence operations, according to an affidavit he filed with the bankruptcy court. He later teamed up with Havav Frankel, a former security specialist for Israel’s El Al Airlines. Frankel served as ITS’ chief security officer, and Weitzel was president and CEO. In 1997, Weitzel took ITS public at $11.25 a share and then embarked on an acquisition spree during which the firm bought 14 companies. Weitzel retired in 1999, but he and his family retain 52 percent of the company’s stock. Frankel left the company a short time later. When Weitzel retired, he placed his more than 3 million shares in a trust run by three directors who were given proxy voting powers. The trust agreement expired Sept. 30, and Weitzel regained voting powers over his majority stake. Weitzel remained as a consultant under the trust agreement, but says that the arrangement never worked. “The three trustees exhibited extreme hostility toward me,” according to his affidavit. “They did not ask for my advice and did not consult with me in any material way concerning the operation of the company. As directors, they took ill-advised actions involving cash flow and management, and had they asked, I could have told them [those actions] would result in a deterioration of the company’s financial condition.” The trustees see the relationship from a different perspective. They have sued Weitzel for $25 million, claiming that ITS’ problems stem from Weitzel’s corporate behavior “both before and after he left ITS.” The complaint, lodged in U.S. Bankruptcy Court in New York, alleges that Weitzel was forced to resign in 1999 after outside auditors uncovered evidence that he manipulated company finances for personal gain. Weitzel also has sued the trustees for $25 million, claiming that they breached their fiduciary duties, also for personal gain. Weitzel claims that ITS’ directors and most of the company’s senior executives are a cabal of Cleveland real estate attorneys and accountants who know nothing about airport security. Court filings identify ITS President Mark Thompson as a former real estate attorney with the Cleveland firm Benesch, Friedlander, Coplan & Aronoff, the same firm where ITS director H. Jeffrey Schwartz is a partner. The firm was general outside counsel for ITS for several years before the stock trust was established, according to court records. According to SEC files, several of ITS’ top management staff were employed by a real estate investment trust that owned and managed a string of apartment complexes. ITS executives contend that Weitzel, “seemingly obsessed with obtaining control,” is causing “disruption and uncertainty” that threatens the company’s survival. Directors currently are negotiating to sell ITS to an investment group, claiming in court filings that if the sale is not consummated 10 days from last Friday — this coming Monday — ITS won’t be able to pay its security staff in airports across the country. ITS lawyers contend that Weitzel’s efforts to reassert control are “negatively impacting the value of the company.” “It is imperative that ITS and its management be able to focus their time and energies to negotiating a sale of assets and that there not be any chilling of bidders by the scheduling of a shareholder meeting,” one ITS motion states. If lenders lose confidence and cut off funding, “ITS will be forced to cease all operations immediately, which will create tremendous disruptions in security services at every airport in which ITS operates, including all three major airports in the New York City metropolitan area. … The mere prospect of a [stockholders] meeting immediately jeopardize[s] ITS’ ability to continue operations and successfully reorganize.” ITS’ only hope of survival, motions filed by ITS attorneys state, is its immediate sale. “Weitzel’s attempt to create what he publicly referred to as a ‘showdown’ is a destructive sideshow to those important issues.” Persuaded by those arguments, last Thursday Judge Duberstein indefinitely postponed the scheduled shareholders meeting and said he would take up the issue again at a hearing in December. “He said he wasn’t sure who was right in terms of good management or bad management,” says Weitzel’s attorney, Jonathon Yarger of Kohrman Jackson & Krantz in Cleveland. “He said he didn’t have any evidence in front of him, but he was concerned that any change in management might be disruptive to airport security at this time. He felt he needed evidence in front of him to determine whether it would or would not be disruptive.” ITS Senior Vice President John DeMell referred all questions to the company’s King & Spalding attorney, Jeffrey E. Bjork. He referred questions to firm partners Lawrence A. Larose and Mitchell I. Sonkin, who could not be reached for comment. Delta declined comment through spokeswoman Cindy Kurczewski. ITS’ problems should not alarm the flying public, according to Hartsfield officials. Hartsfield Public Relations Manager Lanii Thomas says that the company “is well capable of managing and continuing to provide service.” We’re behind them all the way,” says Kim Vagher, executive director of the AATC. “I hope everything works out for ITS. They do a fantastic job for us.”

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