ICTS INTERNATIONAL N.V.
established at The Netherlands NOTICE OF ANNUAL GENERAL MEETING OF SHAREHOLDERS
Notice is hereby given of the Annual General Meeting of Shareholders (the
"Annual Meeting") of ICTS International N.V. (the "Company") which will be held
on Wednesday, September 21, 2005,December 6, 2006, at 10:00 A.M. local time, at the offices of the
Company, located at Biesbosch 225, 1181 JC Amstelveen, The Netherlands.
The agenda for the Annual Meeting, including proposals made by the Supervisory
Board and the Management Board, is as follows:
1. Opening of the meeting by the Chairman of the Supervisory Board.
2. Report by the Management Board on the course of business of the Company
during the financial year 20042005 with respect to the annual accounts of the
financial year 2004.2005.
3. Report by the Supervisory Board with respect to the annual accounts of the
financial year 2004.2005.
4. Report of the Audit Committee with respect to the annual accounts of the
financial year 2004.2005.
5. Adoption of the English language to be used for the annual accounts and
annual reports of the Company.
6. Adoption of the annual accounts of the financial year 2004.2005.
7. Election of two Managing Directors.
8. Election of sevensix Supervisory Directors.
9. Authorization for the Supervisory Board for a period of five years from
the date of the meeting to issue up to 17,000,000 shares, representing all
of the authorized shares and the company's common stock, for any lawful
corporate purpose without further shareholder approval.
10. Authorization for the Company, for a period of eighteen months from the
date of the Meeting, to expend funds in an amount up to US$6,500,000 to
repurchase its own Common Shares in the open market at prices not to
exceed US$10.00 per share.
11. Questions.
10.12. Adjournment.
Pursuant to the Articles of Association of the Company and Netherlands law,
copies of the annual accounts for the financial year 2004,2005, the annual report
which includes the information required pursuant to Section 2:392 of the Dutch
Civil Code and the report of the Supervisory Board are open for inspection by
the shareholders of the Company and other persons entitled to attend meetings of
shareholders at the offices of the Company at Biesbosch 225, 1181 JC,
Amstelveen, The Netherlands, from the date hereof until the close of the Annual
Meeting.
Shareholders may only exercise their shareholder rights for the shares
registered in their name on August 17, 2005,November 6, 2006, the record date for the
determination of shareholders entitled to vote on the day ofat the Annual Meeting.
The Management Board
Avraham Dan
Ran Langer
Managing Directors
August 17, 2005November 6, 2006
SHAREHOLDERS ARE URGED TO MARK, SIGN AND RETURN PROMPTLY THE ACCOMPANYING PROXY
CARD OR POWER OF ATTORNEY, AS APPLICABLE, IN THE ENCLOSED RETURN ENVELOPE.
ICTS INTERNATIONAL N.V.
Biesbosch 225
1181 JC Amstelveen,
The Netherlands
(Registered with the Chamber of Commerce at
Amsterdam/Haarlem, The Netherlands under No. 33.279.300)
-2-
PROXY STATEMENT
ANNUAL GENERAL MEETING OF SHAREHOLDERS
To be held on September 21, 2005December 6, 2006
This Proxy Statement is being furnished to holders of common shares, par value
1.0 Dutch guilder..45 Euro per share (the "Common Shares"), of ICTS International N.V., a
Netherlands corporation (the "Company"), in connection with the solicitation by
the Management Board of proxies in the form enclosed herewith for use at the
Annual General Meeting of shareholders of the Company to be held at 10:00, A.M.
local time, on Wednesday, September 21, 2005,December 6 , 2006, at the offices of the Company,
located at Biesbosch 225, 1181 JC, Amstelveen, The Netherlands, or at any
adjournment or adjournments thereof (the "Annual Meeting"). A copy of the Notice
of Annual General Meeting of Shareholders (the "Notice"), which contains the
agenda for the Annual Meeting (the "Agenda"), accompanies this Proxy Statement.
The Company's audited consolidated and simple financial statements for the
financial year ended December 31, 2004,2005, expressed in U.S. Dollars and prepared
in accordance with United States and Dutch generally accepted accounting
principles (hereinafter, the "Annual Accounts"), and the Company's 2004 annual
report (the "Annual Report"), is being mailed with this Proxy Statement.
It is proposed at the Annual Meeting to adopt resolutions approving the
following proposals (the "Proposals"):
11. Adoption of the English language to be used for the annual accounts and
annual reports of the Company (Item 5 of the Agenda).
2. Adoption of the Annual Accounts (Item 6 of the Agenda)
3. Election of two Managing Directors (Item 7 of the Agenda)
4. Election of sevensix Supervisory Directors (Item 8 of the Agenda)
5. Authorization for the Supervisory Board to issue stock (Item 9 of the
Agenda).
6. Authorization to purchase shares of the companies common stock (Item 10 of
the Agenda).
Pursuant to the Articles of Association of the Company and Netherlands law,
copies of the Annual Accounts, the Annual Report and the information required
under Section 2:392 of the Dutch Civil Code and the report of the Supervisory
Board, written in accordance with the Articles of Association of the Company,
are open for inspection by the shareholders and other persons entitled to attend
meetings of shareholders at the office of the Company at Biesbosch 225, 1181 JC,
Amstelveen, The Netherlands, from the date hereof until the close of the Annual
Meeting.
2
Since the Company is a "foreign private issuer" under United States securities
laws, the solicitation of proxies for use at the Annual Meeting is not subject
to the proxy rules contained in Regulation 14A promulgated under the United
States Securities Exchange Act of 1934, as amended.
This solicitation is made by the Management Board and the cost of the
solicitation will be borne by the Company. The Company will reimburse brokerage
firms, fiduciaries and custodians for their reasonable expenses in forwarding
solicitation materials to beneficial owners. The Company is mailing this Proxy
-3-
Statement, the Notice, the Annual Report, and the form of proxy and the Power of Attorney to
the shareholders on or about August 17, 2005.November 8, 2006.
Voting Securities and Voting Rights
At the close of business on August 17, 2005,November 6, 2006, the issued and outstanding voting
securities of the Company consisted of 6,672,980 Common Shares. The class of
Common Shares is the only class of voting stock of the Company. Shareholders may
exercise their shareholder rights to vote only the Common Shares registered in
their name on August 17, 2005,November 6, 2006, the record date for the Annual Meeting.
Shareholders owning and holding approximately 60%62.5% of the issued and
outstanding Common Shares of the Company have indicated that they will vote FOR
items 5, 6, 7, 8, 9 and 810 of the Agenda.
The Agenda set forth in the Notice was proposed by the Management Board and
approved by the Supervisory Board.
A registered holder of Common Shares may cast one vote per share at the Annual
Meeting. In accordance with Article 18 of the Articles of Association of the
Company, resolutions may be adopted only when a quorum of at least 50% percent
of the outstanding shares entitled to vote is present or represented at the
Annual Meeting, and adoption of a resolution requires an absolute majority of
the votes cast at the Annual Meeting.
Common Shares cannot be voted at the Annual Meeting unless the registered holder
is present in person or is represented by a written proxy. The Company is
incorporated in The Netherlands and, as required by the laws of The Netherlands
and the Company's Articles of Association, the Annual Meeting must be held in
the Netherlands. Shareholders who are unable to attend the Annual Meeting in
person may authorize the voting of Common Shares at the Annual Meeting by
completing and returning the enclosed power of attorney and proxy card naming
Avraham Dan and Ran Langer as proxyholders.proxy holders. If the power of attorney and proxy
in the enclosed form is duly executed and returned prior to the Annual Meeting,
all Common Shares represented thereby will be voted, and, where specifications
are made by the holder of Common Shares on the form of proxy, such proxy will be
voted by the proxyholdersproxy holders in accordance with such specifications.
If no specification is made in the power of attorney and proxy, the power of
attorney and proxy will be voted by the proxyholdersproxy holders FOR items 5, 6, 7, 8, 9
and 810 of the Agenda.
In the event a shareholder wishes to use any other form of power of attorney and
proxy, such power of attorney and proxy shall be voted in accordance with the
specification given therein, provided that (i) such power of attorney and proxy
states the number of registered Common Shares held by such shareholder, (ii) the
Common Shares for which the power of attorney and proxy is given are registered
in the name of the shareholder on August 17, 2005,November 6, 2006, and (iii) such proxy enables
the person named therein to vote the Common Shares represented thereby either in
favor of or against the Proposals, or to abstain from voting, as applicable. The
3
proxyholderproxy holder shall present the duly executed proxy together with the enclosed
form of Power of Attorney and Proxy signed by the registered shareholder.
-4-
Right of Revocation
Any shareholder who has executed and delivered a power of attorney and proxy to
the Company and who subsequently wishes to revoke such power of attorney and
proxy may do so by delivering a written notice of revocation to the Company at
its address set forth above, Attention: Chief Executive Officer, at any time
prior to the Annual Meeting.
Beneficial Ownership of Securities Owners
The following table sets forth below information regarding the beneficial
ownership (as determined under U.S. securities laws) of the Common Shares of the
Company, as of August 17,November 6, 2005, by each person who is known by the Company to
own beneficially more than 5% of the outstanding Common Shares:
- --------------------------------------------------------------------------------
Percent of
Name of Five Amount Beneficially Common Shares
Percent Shareholders Owned (a) Outstanding (b)
- --------------------------------------------------------------------------------
Atzmon Family Trust (1)(2) 4,198,500 62%
- --------------------------------------------------------------------------------4,298,500 62.5%
All officers and directors as a group (9 persons) 4,334,500 64%
- --------------------------------------------------------------------------------4,548,836
(a) The amount includes common shares owned by each of the above, directly or
indirectly and options immediately exercisable or that are exercisable within 60
days from July 15, 2005.November 6, 2006. (b) As to each shareholder, the percentage is
calculated using the amount beneficially owned by such shareholder (as
determined in accordance with (a) above) divided by the number of total
outstanding common shares and the shares issuable pursuant to the exercise of
options exercisable within 60 days from July 15,2005,November 6,2006, if any held by such
shareholder. Common shares subject to options that are immediately exercisable
or exercisable within 60 days of July 15, 2005November 6, 2006 are deemed outstanding for
computing the ownership percentage of the shareholder holding such options, but
are not deemed outstanding for computing the ownership of any other shareholder.
1. Harmony Ventures BV, owns directly and indirectly approximately 60% of the
issued and outstanding Common Shares. A family trust for the benefit of the
family of Mr. Menachem J. Atzmon (the "Atzmon Family Trust") owns 90% of Harmony
Ventures BV and the Estate of Ezra Harel owns 10% of the outstanding shares of
Harmony Ventures BV and both may be deemed to control Harmony Ventures BV. Mr.
Atzmon disclaims any beneficial interest in the Atzmon Family Trust. Harmony
Ventures BV and the Atzmon Family Trust may be able to appoint all the directors
of ICTS and control the affairs on ICTS.
2. Includes 250,000 of 550,000 options to Menachem Atzmon (Chairman of the Board) of which
250,000 shall be immediately vested and 300,000 options to be vested equally
over the next three years. With respect to the Options for 200,000 shares they
are granted in lieu of a current salary for Mr. Atzmon. Options are exercisable
at $1.35 per share representing the fair market value on the date of grant.
-5-
ITEM FOUR OF THE AGENDA:
REPORT OF THE AUDIT COMMITTEE
The Audit Committee consists of Mr. Philip M. Getter (Chairman), Lynda Davey and Gordon
Hausmann. It is anticipated that after the meeting Mr. Eytan Barak will be
appointed to the audit committee. The Audit Committee and the Supervisory Board
have adopted an Audit Committee Charter which is attached hereto as Exhibit A.
The Charter outlines the duties of the Audit Committee in relation to its
responsibilities of overseeing management's conduct of the Company's financial
reporting process, including the selection of the Company's outside auditors and
the review of the financial reports and other financial information provided by
the Company to any governmental or regulatory body, the public or other users
thereof, the Company's systems of internal accounting and financial controls and
the annual independent audit of the Company's financial statements and the
Company's legal compliance and ethics programs as established by the Management
Board and the Supervisory Board. The Audit Committee has met with the
independent auditors as
well as hired internal auditors.
The Audit Committee after such review and discussion with internal auditors and the independent
auditors have recommended that the audited financial statements be included in
the Company's annual report on Form 20-F.
4
The Audit Committee held one meeting at the end of each quarter to discuss the
financial status of the Company for a total of four8 meetings during the last financial year. All members of the
Audit Committee are "independent" under the rules of the Securities and Exchange
Commission currently applicable to the Company. Mr. Getter has financial
expertise.
The Company has also adopted a Code of Ethics for Principal Executive Officers
and Senior Financial Officers which is attached hereto as Exhibit B.
The Committee has discussed with the Company's independent auditors, the matters
required to be discussed by SAS 61 (Communications with Audit Committees)
regarding the auditor's judgments about the quality of the Company's accounting
principles as applied in its financial reporting.
The Committee has also received written disclosures and the letter from the
independent auditors required by Independence Standards Board Standard No. 1
(Independence Discussions with Audit Committees) and has discussed with such
firm their independence.
Conclusion
Based on the review and discussions referred to above, the Committee recommended
to the Company's Supervisory Board that its audited financial statements be
included in the Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2005 for filing with the Securities and Exchange Commission.
Based on their evaluation of the Company's disclosure controls and procedures
(as defined in Rules 13a-14(C) and 15d-14(C) under the Securities Exchange Act
of 1934) as of a date within 90 days of the filing date of this Annual Report on
Form 20-F, the audit committee believes that the Company's disclosure controls
and procedures are designed to ensure that information required to be disclosed
by the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the
-6-
date of their most recent evaluation. Notwithstanding the foregoing, the audit
committee is of the belief that the Companies internal controls and procedures
could be strengthened in certain aspects to improve its effectiveness. In
particular, the audit committee believes that the Company should retain
additional persons with financial background and improve its financial
record-keeping. The audit committee was advised that the Company anticipates
improving these internal controls and procedures in the future.
Submitted by the Audit Committee of the Supervisory Board
Philip M. Getter, Chairman of the Audit Committee.
-7-
ITEM FIVE OF THE AGENDA:
ADOPTION OF THE ENGLISH LANGUAGE TO BE USED FOR THE ANNUAL ACCOUNTS AND
ANNUAL REPORTS OF THE COMPANY
Pursuant to Section 2:362, Paragraph 7 of the Dutch Civil Code, the annual
accounts of a Netherlands company such as the Company must be prepared in the
Dutch language, unless the General Meeting of Shareholders resolves to use
another language. Due to the international structure of the Company, the
Management Board proposes that the annual accounts and the annual reports of the
Company be prepared in the English language until the General Meeting of
Shareholders has resolved otherwise.
A majority of the votes cast is required for this proposal, provided that a
quorum of at least 50% percent of the outstanding shares entitled to vote is
present or represented at the Annual Meeting.
THE SUPERVISORY BOARD AND MANAGEMENT RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR
" THE ADOPTION OF THE ENGLISH LANGUA GELANGUAGE (ITEM 1 ON THE POWER OF ATTORNEY AND
PROXY).
ITEM SIX OF THE AGENDA: ADOPTION OF ANNUAL ACCOUNTS
The Annual Accounts are submitted to the Company's shareholders in the English
language.
Copies of the Annual Accounts, the Annual Report, which contains the information
required under Section 2:392 of the Dutch Civil Code, and the report of the
Supervisory Board are available for inspection by the Company's shareholders and
other persons entitled to attend meetings of shareholders at the office of the
Company at Biesbosch 225, 1181 JC, Amstelveen, The Netherlands, from the date
hereof until the close of the Annual Meeting.
In accordance with Article 20 of the Articles of Association of the Company, the
Supervisory Board has determined to retain all net profit of the financial year
2004.
Adoption of the Annual Accounts also implies the approval by the shareholders of
the Company for the extension of the period prescribed by Dutch law for the
preparation of the Annual Accounts within five months after the financial year
ended on December 31,2004.31,2005.
A majority of the votes cast is required for the adoption of the Annual
Accounts, provided that a quorum of at least 50% percent of the outstanding
shares entitled to vote is present or represented at the Annual Meeting.
THE SUPERVISORY BOARD AND MANAGEMENT RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
THE ADOPTION OF ANNUAL ACCOUNTS (ITEM 2 ON THE POWER OF ATTORNEY AND PROXY).
5-8-
ITEM SEVEN OF THE AGENDA:
ELECTION OF MANAGING DIRECTORS
At the Annual Meeting, Mr. Avraham Dan and Ran Langer are to be elected to serve
as Managing Directors until their successors have been elected.
Messrs. Dan and Langer have consented to be named and have indicated their
intent to serve if elected. The Company has no reason to believe that these
nominees are unavailable for election. However, if a nominee becomes unavailable
for any reason, the persons named as proxies may vote for the election of such
person or persons for such office as the Supervisory Board of the Company may
recommend in the place of such nominee. It is intended that the proxies, unless
marked to the contrary, will be voted in favor of the election of Messrs. Dan
and Langer.
THE SUPERVISORY BOARD AND MANAGEMENT RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
THE ELECTION OF THE FOLLOWING NOMINEES (ITEM 3 ON THE POWER OF ATTORNEY AND
PROXY).
Avraham Dan is a CPA (Isr).(Israel) joined ICTS in June 2004 as Chief Financial
Officer. In September 2004 to the present he became a Managing Director. From
1995 to 2001 he was Chief Executive Office and a Director of Pazchem Limited, an
Israeli chemical company. Mr. Dan holds an MBA degree from Pace University, NY.
Ran Langer joined ICTS in 1988 through 1998 as General Manager of the German
subsidiaries of ICTS. From 1998 to the present, he serves as General Manager of
Seehafen Rostock Umschlagsgesellschaft mbH, the operator of the Seaport in
Rostock, Germany. Mr. Langer became a Managing Director of ICTS in September
2004.
ITEM EIGHT OF THE AGENDA:
ELECTION OF SUPERVISORY DIRECTORS
At the Annual Meeting, sevensix members of the Supervisory are to be elected to serve
until their successors have been elected and qualified. The nominees to be voted
on by Shareholders are Messrs. Menachem Atzmon, M. Albert Nissim,Eytan Barak, Elie Housman,
Gordon Hausmann, David W. Sass and Philip M. Getter and Lynda Davey.Getter.
All nominees have consented to be named and have indicated their intent to serve
if elected. The Company has no reason to believe that any of these nominees are
unavailable for election. However, if any of the nominees become unavailable for
any reason, the persons named as proxies may vote for the election of such
person or persons for such office as the Supervisory Board of the Company may
recommend in the place of such nominee or nominees. Mr. M. Albert Nissim, a
director since 2000, is not standing for re-election due to an age limitation in
the Company's By-laws. It is intended that the proxies, un lessunless marked to the
contrary, will be voted in favor of the election of Messrs. Menachem Atzmon,
M. Albert Nissim,Eytan Barak, Elie Housman, Gordon Hausmann, David W. Sass and Philip M. Getter and Lynda Davey.Getter.
Menachem J. Atzmon is a CPA (Isr). Mr. Atzmon is a controlling shareholder
of Harmony Ventures B.V. Since 1996 he has been the managing director of
Albermale Investment Ltd. and Kent Investment Holding Ltd., both investment
companies. Since
-9-
January 1998 he has served as CEO of Seehafen Rostock. He has been a member of
the Supervisory Board of ICTS since 1999.
M. Albert NissimEytan Barak from the year 2001 to the present is a partner in Dovrat-Barak
Investment in High-Tech Companies Ttd., a company which arranges financial
resources and management assistance to start-up companies. He is, and has served as Secretary of ICTSbeen
since January 1994the year 2003 and becameto the present, a member of the Supervisory Board in 2002. Mr. Nissim also serves as
President of ICTS - USA, Inc. From 1994 to 1995,Directors of a
public company owned by a Israeli Bank; a Provident Fund Company managed by
"Bank Otsar Ha-Hayal" a subsidiary of Bank Hapoalim, where he workedis acting as the
managing
directorchairman of ICTSthe investment committee and member of the audit committee; and from
1990the year 2000 to the year 2003 a member of the Board of Directors of seven
Provident Companies managed by First International Bank of Israel, where he was
acting chairman of the audit committee and member of the investment committee.
He is currently, and has been since 2004 a member of the board of directors and
chairman of the finance committee of two companies owned by the Tel-Aviv
Municipality. In addition, he is currently and a member of the board of
directors and a member of the audit committee since the beginning of the year
2006 in Lumenis Ltd, a public company that was listed in Nasdaq. He is since the
year 2000 to the present he has been Vice-Presidenta member of the executive board and a directormember of Tuffy Associates. Mr. Nissim has been the
Presidentfinance committee of Pioneer
Commercial Funding Corp. ("Pioneer")the Olympic Committee of Israel. He is the chairman of the
board of "OTZMA", the Israel Center of Sport Clubs (operating about 250 clubs).
He is a member of the Board of Directors since January 1997 and also serves as the Chairman.year 2006 of Surface Tech
Ltd. He is certified a public accountant.
Elie Housman has served as Chairman of Inksure Technologies, Inc. since
February 2002. Mr. Housman was a principal at Charterhouse Group International,
a privately held merchant bank, from 1989 until June 2001. At Charterhouse, Mr.
Housman was involved in the acquisition of a number of companies with total
sales of several hundred million dollars. Mr. Housman was the Chairman of Novo
Plc. in London, a leading company in the broadcast storage and services
industry. He is also a director of EUCI Career Colleges, Incorporated, which is
listed noon the NasdaqNASDAQ Small Cap Market and the Boston Stock Exchange and Top
Image System, Ltd. At present, Mr. Housman is a director of a number of
privately held companies in the United States. He became a member of the
Supervisory Board of ICTS in 2002.
6
Gordon Hausmann is the senior partner of his own law firm which he founded
in London 2425 years ago. He specializes in business finance and banking law. He
holds office as a Board Member of the UK subsidiaries of various quoted
companies, Company Secretary of Superstar Holidays Ltd., a subsidiary of El Al
Airlines Ltd., Director of Dominion Trust Co. (UK) Ltd., associated with a
private Swiss Banking Group, and a Governor of the Hebrew University.
David W. Sass for the past 4445 years has been a practicing attorney in New
York City and is currently a senior partner in the law firm of McLaughlin &
Stern, LLP. He has been a director of ICTS since 2002. He is also corporate
secretary and a director of Pioneer Commercial Funding Corp. Mr. Sass became a
director of Inksure Technologies, Inc. in 2003, a company which develops,
markets and sells customized authentication systems designed to enhance the
security of documents and branded products and to meet the growing demand for
protection from counterfeiting and diversion. He is also a director of several
privately held corporationscorporations. He is an honorary Trustee of Ithaca College.
Philip M. Getter, sincefrom 2000 isto 2005 was a partner of DAMG Capital, LLC
Investment Bankers. For more than twenty years he was associated with GEMPH
Development LLC, a consulting firm, and its managing member since 2006. Prior
thereto he was most recently head of Investment Banking and a member of the
board of directors of Prime Charter, Ltd. He has more than thirty years of
corporate finance experience. Having served as Administrative Assistant to the
Director of United States Atomic Energy Commission from 1958 to 1959, he began
his Wall Street
-10-
career as an analyst at Bache & Co. in 1959. He was a partner with Shearson,
Hammill & Company from 1961 to 1969 and a Senior Partner of Devon Securities, an
international investment banking and research boutique from 1969 to 1975. Mr.
Getter was a member of the New York Society of Security Analysts. From 1975 to
1983 he was President and CEO of Generics Corporation of America, a public
company that was one of the largest generic drug manufacturers in the United
States. As Chairman and CEO of Wolins Pharmacal from 1977 to 1983 he led the
reorganization and restructuring one of the oldest and largest direct to the
profession distributors of pharmaceuticals. Mr. Getter became a director of
Inksure Technologies, Inc. in 2003, a company which develops, markets and sells
customized authentication systems designed to enhance the security of documents
and branded products and to meet the growing demand for protection from
counterfeiting and diversion. He has been a member of the League of American
Theatres and Producers, Advisory Board of the American Theatre Wing, Trustee of
The Kurt Weill Foundation for Music, a member of the Tony Administration
Committee and has produced for Broadway, television and film. He writes
frequently concerning the communications, education and entertainment
industries. Mr. Getter received his B.S. in Industrial Relations from Cornell
University. He is a member of several industry organizations and serves on
various boards of both public and private organizations and is Chairman of the
Audit Committees of EVCI Career Colleges, Inksure Technologies, Inc. as well as
the Company.
Lynda Davey is Chief Executive Officer of Avalon Group, Ltd. a private
investment banking firm she co- founded in 1992. She also serves as Chairperson
of Avalon Securities, Inc., a NASD member broker-dealer, and NY Venture Space,
LLC, a provider of interim office space. From 1988 throughout 1991, Ms. Davey
was Managing Director of The Tribeca Corporation, a New York based buyout firm.
Prior to 1988, Ms. Davey was Vice President in the corporate finance department
of Salomon Brothers Inc. She is a director of Tuffy Associates Corp. Ms. Davey
also serves on the Advisory Council of the Center for Women's Business Research
and Retail Finance Group of Wells Fargo Bank. She became a member of the
Supervisory Board of ICTS in 2002.
THE SUPERVISORY BOARD AND MANAGEMENT RECOMMENDS THAT THE SHAREHOLDERS VOTE "FOR"
THE ELECTION OF SUPERVISORY DIRECTORS (ITEM 4 ON THE POWER OF ATTORNEY AND
PROXY).
7-11-
AUDIT COMMITTEE REPORT
The followingITEM NINE OF THE AGENDA
AUTHORIZATION FOR THE SUPERVISORY BOARD, FOR A PERIOD OF FIVE YEARS FROM THE
DATE OF THE MEETING, TO ISSUE UP TO 17,000,000 SHARES, REPRESENTING ALL OF THE
AUTHORIZED SHARES OF THE COMPANY'S COMMON STOCK, FOR ANY LAWFUL CORPORATE
PURPOSE WITHOUT FURTHER SHAREHOLDERS APPROVAL.
Pursuant to the Company's Articles of Association and Section 2:96(1) of
the Dutch Civil Code, the Supervisory Board the Company may only issue Common
Shares in accordance with a resolution of the general meeting of shareholders or
of another company organ that is indicated by resolution of the reportgeneral meeting
for a fixed duration of up to five years. Such designation must also specify the
number of the number of shares which may be issued.
In order to further the business interests of the Company and to increase
the ease with which the Company may issue stock in connection any lawful
business purpose, the Supervisory Board requests that it be authorized by a
resolution of the Meeting to issue up to 17,000,000 Common Shares, requesting
all of the authorized shares of the Company's Audit Committee with respect toCommon shares, for a period of
five years from the Company's audited financial statementsate of the Meeting without further shareholder approval.
A majority of votes cast is required for the fiscal year ended December 31,
2004.
Review With Management
The Committee has reviewed and discussed the Company's audited financial
statements with both the Management Board and the Supervisory Board.
Review and Discussions With Independent Auditors
The Committee has discussed with Goldstein Golub Kessler LLP, the Company's
independent auditors, the matters required to be discussed by SAS 61
(Communications with Audit Committees) regarding the auditor's judgments about
the quality of the Company's accounting principles as applied in its financial
reporting.
The Committee has also received written disclosures and the letter from
Goldstein Golub Kessler LLP required by Independence Standards Board Standard
No. 1 (Independence Discussions with Audit Committees) and has discussed with
Goldstein Golub Kessler LLP their independence.
Conclusion
Based on the review and discussions referred to above, the Committee recommended
to the Company's Supervisory Board that its audited financial statements be
included in the Company's Annual Report on Form 20-F for the fiscal year ended
December 31, 2004 for filing with the Securities and Exchange Commission.
Submitted by the Audit Committeeauthorization of the
Supervisory Board Philip M. Getter, Chairmanto issue such Common Shares during such period without further
shareholder approval.
THE SUPERVISORY BOARD AND THE MANAGEMENT BOARD RECOMMEND A VOTE "FOR" ITEM NINE
(ITEM 5 OF THE PROXY CARD).
ITEM TEN OF THE AGENDA
AUTHORIZATION FOR COMPANY TO EXPEND FUNDS IN AN AMOUNT UP TO US $6,500,000 TO
REPURCHASE ITS COMMON SHARES IN THE OPEN MARKET AT PRICES NOT TO EXCEED US
$10.00 PER SHARE
Pursuant to the Company's Articles of Association and ss.2:98(4) of the
Audit Committee.Dutch Civil Code, the Company may only acquire Common Shares if authorized by
the Meeting to do so. This authorization can not be for a period greater than
eighteen months and the authorization shall determine how many shares may be
acquired, how they may be acquired, and the high and low prices to be paid for
such shares.
In an effort to raise the price of each outstanding Common Share by
reducing the number of shares outstanding, the Company asks that the shareholder
authorize the expenditure by the Company of up to US$6,500,000 to repurchase
Common Shares in the open market at prices up to $10.00 per share for a period
of eighteen months commencing the date of the Meeting.
This Proposal must be approved by at least 2/3 of the votes cast at the
Meeting.
The Supervisory Board and the Management Board each recommends a vote
"FOR" ITEM TEN (ITEM 6 OF THE PROXY CARD).
The aggregate fees billed to the Company for the financial year ended December
31, 20042005 by the principal accounting firm was $393,000 plus $133,000 for other
fees for a total of $526,000.$431,000.
The information contained in the foregoing report shall not be deemed to be
"soliciting material" or to be "filed" with the Securities and Exchange
-12-
Commission, nor shall such information be incorporated by reference into any
future filing under the Securities Act of 1933, as amended, or the Securities
Exchange Act of 1934, as amended, except to the extent that the Company
specifically incorporates it by reference in such filing.
Please sign, date and return the accompanying proxy card or other form of proxy
with Power of Attorney, as applicable, in the enclosed envelope at your earliest
convenience.
The Management Board
Avraham Dan
Ran Langer
Managing Directors
August 17, 2005
8November 6, 2006
-13-
EXHIBIT A
CHARTER OF THE AUDIT COMMITTEE
Text Source
- --------------------------------------------------------------------------------
This Charter of the Audit Committee (this NASDAQ Rule "Charter") has been
adopted by the Supervisory (the4350(d)(the 4350(d)(1) Board (the "Board") of ICTS
International, N.V. requires that "Company"). The Audit Committee (the
"Committee"Committee") that the Committee shall review and reassess this Charter annually
conduct an annual and recommend any proposed changes to the Board evaluation of
its Charter.Charter for approval.
A. Purpose
The purpose of the Committee is to assist NASDAQ Rule 4350(d)(1)(C)the Board in
its oversight of the Company's the accounting and financial reporting processes
and audits of the Company's financial statements, including (i) the quality and
integrity of the Company's financial statements, (ii) the Company's compliance
with legal and regulatory requirements, (iii) the independent auditors'
qualifications and independence and (iv) the performance of the Company's
internal audit functions and independent auditors. In fulfilling its purpose,
the Committee shall maintain free and open communication with the Company's
independent auditors, internal auditors and management.
B. Duties and Responsibilities In furtherance of its purpose, the Committee
shall have the following duties and responsibilities:
1. To review major issues regarding accounting principles, policies, practices
and judgments and financial statement presentations, including (i) any
significant changes to the Company's selection or application of accounting
principles, (ii) the adequacy and effectiveness of the Company's internal
controls and (iii) any special audit steps adopted in light of material control
deficiencies.
2. To review analyses prepared by management, the independent auditors and/or
others setting forth significant financial reporting issues and judgments made
in connection with the preparation of the financial statements, including
analyses of the effects of alternative GAAP methods on the financial statements.
1
Text Source
- --------------------------------------------------------------------------------
3. To review the effect of regulatory and accounting initiatives and off-balance
sheet structures on the Company's financial statements.
4. To review the type and presentation of information to be included in the
Company's earnings press releases, paying particular attention to any use of
"pro forma" or "adjusted" non-GAAP information, as well as review and discuss
earnings press releases and any financial information and earnings guidance
provided to analysts and rating agencies.
5. To review, or oversee the review of, internal audit functions that ensure the
appropriate control process is in place for reviewing and approving the
Company's internal transactions and accounting.
6. To periodically discuss with the Board the adequacy and effectiveness of the
Company's internal controls.
7. To discuss with management and the independent auditors the integrity of the
Company's financial reporting processes and controls, including policies and
guidelines with respect to risk assessment and risk management and the Company's
major financial risk exposures and the steps management has taken to monitor and
control such exposures.
-14-
8. To discuss with management and the independent auditors the Company's annual
audited financial statements and quarterly financial statements, including the
Company's disclosures under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations," together with the results of the
independent auditors' review prior to filing or distribution.
9. To prepare the report required to be included in the Company's annual proxy
statements pursuant to the proxy rules promulgated by the United States
Securities and Exchange Commission (the "SEC") or, if the Company does not file
a proxy statement, in the Company's annual report.
10. To discuss with management and the independent auditors the independent
auditors' judgments about the quality and appropriateness of the Company's
accounting principles and underlying estimates in its financial statements.
2
Text Source
- --------------------------------------------------------------------------------
11. To review and discuss with management and the independent auditors any
correspondence with regulators or governmental agencies and any published
reports and employee complaints concerning financial matters which raise
material issues regarding the Company's financial statements or accounting
policies.
12. To discuss with the independent auditors and management, as appropriate, any
items required to be communicated by the independent auditors in accordance with
Statement on Auditing Standards No. 61 not otherwise addressed in this Charter.
13. To discuss with the independent SEC Release 34-47265 auditors, prior to the
filing of the Final Rule: audit report with the SEC, reports Strengthening the
from management and the independent Commission's auditors regarding (i) all
critical Requirements accounting policies and practices used Regarding Auditor
by the Company, (ii) all material Independence. alternativeAlternative accounting
treatments within GAAP that have been discussed with management, including the
ramifications of the use of such alternative treatments and the treatment
preferred by the accounting firm and (iii) other material written communications
between the accounting firm and management.
14. To discuss periodically with the SEC Release 34-46427 Final Company's CEO
and CFO (i) all Rule: Certification of significant deficiencies in the design
Disclosure in Companies' or operation of internal controls Quarterly and Annual
which could adversely affect the Reports; SEC Release Company's ability to
record, process, 34-47986 Final Rule: summarize and report financial data,
Management's Report on (ii) any significant changes in Internal Control Over
internal controls, including internal Financial Reporting and control over
financial reporting, or certification of other factors that could significantly
Disclosure in Exchange Act affect such internal controls, Periodic Reports.Reports
including any corrective actions with regard to significant deficiencies and
material weaknesses and (iii) any fraud involving management or other employees
who have a significant role in the Company's internal controls.
15. To review the internal control reports SEC Release 34-47986 Final of
management prepared pursuant to the Rule: Management's Reports rules and
regulations of the SEC on Internal Control Over promulgated under the
Sarbanes-Oxley Financial Reporting and Act of 2002 prior to filing with the
Certification of SEC. Disclosure in Exchange Act Periodic Reports.
3
Text Source
- --------------------------------------------------------------------------------
16. To directly appoint, retain, Exchange Act Rule 10A-
compensate,10A-compensate, evaluate and
oversee the 3(b)(2), (5).
independent auditors engaged for the purpose of
preparing or issuing an audit report or related work or performing other audit,
review or attest services for the Company, and to resolve any disagreements
between management and the independent auditors. To approve in advance, or, in
the alternative, to establish and periodically review pre-approval policies and
-15-
procedures for all audit engagement fees and terms, including the retention of
the independent auditors for any significant permissible non-audit engagement or
relationship. To have direct responsibility for the oversight of the independent
auditors. The Committee shall inform each registered public accounting firm
performing work for the Company that such firm shall report directly to the
Committee. The Committee may terminate the independent auditors in its sole
discretion. The Committee should also take into account the opinions of
management in its dealings with the independent auditors.
17. To annually evaluate the experience, NASDAQ Rule 4350(d)(1)(B);
qualifications, performance and SEC Release 34-47265 Final independence of the
independent Rule: Strengthening the auditors, including their lead Commission's
Requirements partners. To assure the regular Regarding Auditor rotation of the
audit partners, Independence Regarding including the lead and concurring Auditor
Independence. auditAudit partners, as required by applicable laws, rules and
regulations. To consider whether there should be regular rotation of the
independent auditors. The Committee should take into account the opinions of
management and the internal auditors in its evaluation of the independent
auditors. The Committee should present its conclusions with respect to the
independent auditors to the full Board.
18. To obtain and review, on an annual basis, a formal written report from the
independent auditors describing (i) the auditing firm's internal quality control
procedures; (ii) any material issues raised within the preceding five (5) years
by the auditing firm's internal quality-control reviews, peer reviews, or any
governmental or other inquiry or investigation relating to any independent audit
conducted by the auditing firm, and the steps taken to deal with such issues;
and (iii) all relationships between the independent auditors and the Company.
4
Text Source
- --------------------------------------------------------------------------------
19. To discuss with the independent NASDAQ Rule auditors any disclosed
relationships 4350(d)(1)(B) between the auditors and the Company or any other
relationships that may adversely affect the objectivity or independence of the
independent auditor. To discuss with the independent auditors any services
provided to the Company or any other services that may adversely affect the
objectivity and independence of the independent auditor. To take, or to
recommend that the full board take, appropriate action to oversee the
objectivity and independence of the independent auditor.
20. To review with the independent auditors any audit problems or difficulties,
together with management's responses, including any restrictions on the scope of
the independent auditors' activities or on access to requested information, and
any significant disagreements with management.
21. To review the independent auditors' audit plan, including its scope,
staffing, locations, reliance upon management and general audit approach.
22. To review and approve all related NASDAQ Rule 4350(h). partyParty transactions
for potential conflict of interest situations on an ongoing basis.
23. To establish clear guidelines for the SEC Release 34-47265 Final hiring of
current or former employees Rule: Strengthening the of the Company's independent
auditors. Commission's Requirements Regarding Auditor Independence.
24. To review and discuss with the independent auditors the quality of the
Company's financial and auditing personnel and the responsibilities, budget and
staffing of the Company's internal audit functions.
25. To review with the Company's legal counsel on a quarterly basis, or more
frequently as circumstances dictate, any legal matters that could have a
-16-
significant impact on the Company's financial statements or the Company's
compliance with applicable laws, rules and regulations, any breaches of
fiduciary duties and inquiries received from regulators or governmental
agencies.
5
Text Source
- --------------------------------------------------------------------------------
26. To establish and maintain procedures Exchange Act Rule 10A-
for10A-for the receipt,
retention and (b)(3) treatment of complaints regarding accounting, internal
accounting controls or auditing matters, including procedures for the
confidential and anonymous submission by the Company's employees of concerns
regarding questionable accounting or auditing matters.
27. To conduct any investigation SEC Release 34-47654 Final appropriate to
fulfill its Rule: Standards Relating responsibilities with the authority to
to Listed Company Audit have direct access to the independent Committees. auditorsAuditors
as well as anyone in the Company.
28. To ensure that no improper influence SEC Release 34-47654 Final on the
independent directors is Rule: Standards Relating exerted by any officers or
directors to Listed Company Audit of the Company or any person acting
Committees.committees. under their direction.
29. To keep abreast of new accounting and Suggested reporting standards
promulgated by the Responsibilities. Public Company Accounting Oversight Board,
the FASB, the SEC and other relevant standard setting bodies.
30. To approve ordinary administrative Exchange Act Rule 10A-
expenses10A-expenses of the
Committee that are 3(b)(5)5). necessaryNecessary or appropriate in carrying out its duties.
31. To perform any other activities consistent with this Charter, the Company's
by-laws and governing law, as the Committee or the Board deems necessary or
appropriate.
C. Outside Advisors
The Committee, acting by majority vote, Exchange Act Rule 10A-
shall10A-shall have the
authority to retain, at the 3(b)(4),(5). Company's expense, outside legal,
accounting, or other advisors or experts it deems necessary to perform its
duties. The Committee shall retain these advisors without seeking Board approval
and shall have sole authority to approve related fees and retention terms.
6
Text Source
- --------------------------------------------------------------------------------
D. Annual Performance Evaluation
The Committee shall conduct an annual self performance evaluation, including an
evaluation of its compliance with this Charter. The Committee shall report on
its annual self performance evaluation to the Board.
E. Membership
The Committee shall consist of no fewer than NASDAQ Rule 4350(d)(2)(A); three
(3) directors, as determined by the Board. SEC Release 34-47235 Final Each
Committee member shall meet the independence Rule: Disclosure Required
requirements of The NASDAQ Stock Market and of the by Section 406 and 407 of
SEC, as determined by the Board, and any other the Sarbanes- Oxley Act of
requirements set forth in applicable laws, rules 2002.2002 and regulations. All
Committee members shall have/have a basic understanding of finance and accounting and
be able to read and understand fundamental financial statements, including the
Company's balance sheet, income statement and cash flow statement. At least one
Committee member shall have past employment experience in finance or accounting,
requisite professional certification in accounting or any other comparable
experience. At least one Committee member shall meet the requirements of an
"audit committee financial expert" as such term is defined by the SEC.
-17-
Committee members shall be appointed annually by a majority vote of the Board on
the recommendation of the Corporate Governance & Nominating Committee. Each
prospectiveProspective Committee member shall carefully evaluate existing time demands
before accepting Committee membership. No director may serve as a Committee
member if such director serves on the audit committee of more than two (2) other
public companies, unless the Board expressly determines that such service would
not impair that director's ability to serve on the Committee and such
determination is disclosed in the Company's annual proxy statement. The
Committee members may be removed, with or without cause, by a majority vote of
the Board.
No member of the Committee shall receive SEC Release 34-47654 Final compensation
other than (i) director's fees for Rule: Standards Relating service as a
director of the Company, including to Listed Company Audit reasonable
compensation for serving on the Committees. Committee and regular benefits that
other directors receive and (ii) a pension or similar compensation for past
performance, provided that such compensation is not conditioned on continued or
future service to the Company.
7
Text Source
- --------------------------------------------------------------------------------
F. Chairman
The Committee shall include a Committee Determined by the Board.Board chairman. The
Committee chairman shall be appointed by a majority vote of the Board. The
Committee chairman shall be entitled to chair all regular sessions of the
Committee, add topics to the agenda and cast a vote to resolve any ties.
G. Meetings
The Committee shall meet at least one (1) Determined by the Board.Board time per
quarter, or more frequently as circumstances dictate, and all Committee members
shall strive to attend all Committee meetings. At least two Committee meetings
each year shall be in person. Directors physically present outside the United
States may participate in all other Committee meetings by telephone or by any
other similar technology that permits instantaneous and simultaneous
communication. The Committee meetings shall follow a set agenda established by
the Committee.
The chairman may call a Committee meeting upon notice to each other Committee
member at least forty-eight (48) hours prior to the meeting. A majority of the
Committee members, acting in person or by proxy, shall constitute a quorum. The
Committee shall be responsible for maintaining minutes and other applicable
records of each Committee meeting. The Committee shall report its actions and
recommendations to the Board at the next Board meeting after each Committee
meeting.
The Committee shall meet separately in executive sessions with management, the
independent auditors and those responsible for the internal audit functions, on
a periodic basis, to discuss any matter that the Committee or any of these
groups believes may warrant Committee attention.
H. Related Party Transactions With respect to related party transactions, the
following controls:
A. For Securities and Exchange Commission purposes on disclosure of related
party transactions a related party transaction is defined as "any transaction,
or series of similar transactions, since the beginning of the Company's last
fiscal year, or any currently proposed transaction, or series of similar
transactions, to which the Company or any of its subsidiaries was or is to be a
party, in which the amount involved exceeds $60,000 and in which any of the
following persons had, or will have, a direct or indirect material interest,
naming such person and indicating the person's relationship to the Company, the
nature of such person's
-18-
interest in the transaction(s), the amount of such transaction(s) and, where
practicable, the amount of such person's interest in the transaction(s):
8
(i) Any director or executive officer of the Company;
(ii) Any nominee for election as a director;
(ii) Any security holder who is known to the Company to own of record or
beneficially more than five percent of any class of the Company's voting
securities; and
(iii) Any nominee for election as a director;
(iv) Any member of the immediate family of any of the foregoing persons.
2. Management shall conduct a full due diligence investigation of the proposed
investment, utilizing legal counsel, auditors and advisors as management
deems necessary.
3. Prior to Supervisory Board consideration the group responsible for due
diligence and negotiation shall prepare a detailed memo on the transaction which
should be disseminated prior to the matter being presented to the Supervisory
Board by way of the Committee for approval.
4. Management shall negotiate the proposed terms and conditions of the
investment. These negotiations shall not include the related parties interested
in the transaction. The transaction should be negotiated on behalf of the
Company by management who is not interested in the transaction or if no
management meets this criteria then by the independent directors (assuming they
have no interest in the transaction). All members of the Audit Committee are to
receive continuous updates of the progress of the negotiations. In the
negotiation process the fairness and reasonableness of the transaction to the
Company and its shareholders is to be the paramount consideration.
5. Whether or not a fairness opinion should be obtained should be determined by
the Supervisory Board and should be decided based upon the nature of the
transaction and its size and its proposed effect on the Company. A fairness
opinion, if obtained, should be from an independent investment banking firm,
chosen by the Committee, which describes the transaction, the terms and
concludes that the transaction is fair and reasonable to the Company and its
shareholders. There is no "de minimis rule" as to when a fairness opinion need
not be obtained.
6. All related party transactions must be approved by the majority of the
independent directors of the company. Interested directors shall not vote.
7. Whether or not a transaction should go before the shareholders depends on
A. Local law requirements for the particular transaction such as a merger;
or
B. At the discretion of the Supervisory Board in the event it is determined that
the transaction is material to the business of the company.
9-19-
Exhibit B
ICTS INTERNATIONAL, N.V.("ICTS")
CODE OF BUSINESS CONDUCT AND ETHICS
INTRODUCTION
We are committed to maintaining the highest standards of business conduct and
ethics. This Code of Business Conduct and Ethics (the "Code") reflects the
business practices and principles of behavior that support this commitment. We
expect every employee, officer and Managing Director and Supervisory Director to
read and understand the Code and its application to the performance of his or
her business responsibilities. References in the Code to employees are intended
to cover officers and, as applicable, Management Directors and Supervisory
Directors.
Officers, managers and other supervisors are expected to develop in employees a
sense of commitment to the spirit, as well as the letter, of the Code.
Supervisors are also expected to ensure that all agents and contractors conform
to Code standards when working for or on behalf of ICTS. Nothing in the Code
alters the employment at-will policy of ICTS.
The Code cannot possibly describe every practice or principle related to honest
and ethical conduct. The Code addresses conduct that is particularly important
to proper dealings with the people and entities with whom we interact, but
reflects only a part of our commitment.
Action by members of your immediate family, significant others or other persons
who live in your household also may potentially result in ethical issues to the
extent that they involve ICTS business. For example, acceptance of inappropriate
gifts by a family member from one of our suppliers could create a conflict of
interest and result in a Code violation attributable to you. Consequently, in
complying with the Code, you should consider not only your own conduct, but also
that of your immediate family members, significant others and other persons who
live in your household.
The integrity and reputation of ICTS depends on the honesty, fairness and
integrity brought to the job by each person associated with us. It is the
responsibility of each employee to apply common sense, together with his or her
own highest personal ethical standards, in making business decisions where there
is no stated guideline in the Code. Unyielding personal integrity is the
foundation of corporate integrity.
YOU SHOULD NOT HESITATE TO ASK QUESTIONS ABOUT WHETHER ANY CONDUCT MAY VIOLATE
THE CODE, VOICE CONCERNS OR CLARIFY GRAY AREAS. SECTION 16 BELOW DETAILS THE
COMPLIANCE RESOURCES AVAILABLE TO YOU. IN ADDITION, YOU SHOULD BE ALERT TO
POSSIBLE VIOLATIONS OF THE CODE BY OTHERS AND REPORT SUSPECTED VIOLATIONS,
WITHOUT FEAR OF ANY FORM OF RETALIATION, AS FURTHER DESCRIBED IN SECTION 16.
Violations of the Code will not be tolerated. Any employee who violates the
standards in the Code may be subject to disciplinary action, up to and including
termination of employment and, in appropriate cases, civil legal action or
referral for criminal prosecution.
-20-
LEGAL COMPLIANCE
Obeying the law, both in letter and in spirit, is the foundation of this Code.
Our success depends upon each employee's operating within legal guidelines and
cooperating with local, national and international authorities. It is therefore
essential that you understand the legal and regulatory requirements applicable
to your business unit and area of responsibility. While we do not expect you to
memorize every detail of these laws, rules and regulations, we want you to be
able to determine when to seek advice from others. If you do have a question in
the area of legal compliance, it is important that you not hesitate to seek
answers from your supervisor, a Managing Director, the General Counsel or the
Chairperson of the Audit Committee of the Supervisory Board.
Disregard of the law will not be tolerated. Violation of domestic or foreign
laws, rules and regulations may subject an individual, as well as ICTS, to civil
and/or criminal penalties. You should be aware that conduct and records,
including emails, are subject to internal and external audits, and to discovery
by third parties in the event of a government investigation or civil litigation.
It is in everyone's best interests to know and comply with our legal and ethical
obligations.
1. INSIDER TRADING
Employees who have access to confidential (or "inside") information are not
permitted to use or share that information for stock trading purposes or for any
other purpose except to conduct our business. All non-public information about
ICTS or about companies with which we do business is considered confidential
information. To use material non-public information in connection with buying or
selling securities, including "tipping" others who might make an investment
decision on the basis of this information, is not only unethical, it is illegal.
Employees must exercise the utmost care when handling material inside
information. We have adopted a separate Insider Trading Policy which you should
consult for more specific information on the definition of "material inside
information" and on buying and selling our securities or securities of companies
with which we do business.
2. DISCRIMINATION AND HARASSMENT
The diversity of ICTS's employees is a tremendous asset. We are firmly committed
to providing equal opportunity in all aspects of employment and will not
tolerate any illegal discrimination or harassment of any kind. In addition,
retaliation against individuals for raising claims of discrimination or
harassment is prohibited.
3. CONFLICTS OF INTEREST
A "conflict of interest" occurs when an individual's personal interest may
interfere in any way with the performance of his or her duties or the best
interests of ICTS. A conflicting personal interest could result from an
expectation of personal gain now or in the future or from a need to satisfy a
prior or concurrent personal obligation. We expect our employees to be free from
influences that conflict with the best interests of ICTS. Even the appearance of
a conflict of interest where none actually exists can be damaging and should be
avoided. Whether or not a conflict of interest exists or will exist can be
unclear. Conflicts of interest are prohibited unless specifically authorized as
described below.
-21-
If you have any questions about a potential conflict or if you become aware of
an actual or potential conflict and you are not an officer or director of ICTS,
you should discuss the matter with your supervisor, a Managing Director, the
General Counsel or the Chairperson of the Audit Committee (as further described
in Section 16). Supervisors may not authorize conflict of interest matters
without first seeking the approval of a Managing Director, the General Counsel
or the Chairperson of the Audit Committee and filing with a Managing Director,
the General Counsel or the Chairperson of the Audit Committee a written
description of the authorized activity. If the supervisor is involved in the
potential or actual conflict, you should discuss the matter directly with a
Managing Director, the General Counsel or the Chairperson of the Audit
Committee. Factors that may be considered in evaluating a potential conflict of
interest are, among others:
whether it may interfere with the employee's job performance, responsibilities
or morale;
whether the employee has access to confidential information;
whether it may interfere with the job performance, responsibilities or morale of
others within the organization;
any potential adverse or beneficial impact on our business;
any potential adverse or beneficial impact on our relationships with our
customers or suppliers or other service providers;
whether it would enhance or support a competitor's position;
the extent to which it would result in financial or other benefit (direct or
indirect) to the employee;
the extent to which it would result in financial or other benefit (direct or
indirect) to one of our customers, suppliers or other service providers; and
the extent to which it would appear improper to an outside observer.
Loans to, or guarantees of obligations of, employees or their Family Members by
ICTS could constitute an improper personal benefit to the recipients of these
loans or guarantees, depending on the facts and circumstances. Some loans are
expressly prohibited by law and applicable law requires that our Supervisory
Board approve all loans and guarantees to employees. As a result, all loans and
guarantees by ICTS must be approved in advance by the Audit Committee of the
Board of Directors.
4. HEALTH AND SAFETY
ICTS strives to provide a safe and healthy work environment. Each of us shares
the responsibility for maintaining a safe and healthy workplace by following
safety and health rules and practices and reporting accidents, injuries, unsafe
equipment
-22-
and any other unsafe practices or conditions. Further, misusing controlled
substances or selling, manufacturing, distributing, possessing, using or being
under the influence of illegal drugs on the job is absolutely prohibited.
5. INTERNATIONAL BUSINESS LAWS
Our employees are expected to comply with the applicable laws in all countries
to which they travel, in which they operate and where we otherwise do business,
including laws prohibiting bribery, corruption or the conduct of business with
specified individuals, companies or countries.
The fact that in some countries certain laws are not enforced or that violation
of those laws is not subject to public criticism will not be accepted as an
excuse for noncompliance. In addition, we expect employees to comply with U.S.
laws, rules and regulations governing the conduct of business by its citizens
and corporations outside the U.S. These U.S. laws, rules and regulations, which
extend to all our activities outside the U.S., include:
The Foreign Corrupt Practices Act, which prohibits directly or indirectly giving
anything of value to a government official to obtain or retain business or
favorable treatment, and requires the maintenance of accurate books of account,
with all company transactions being properly recorded;
U.S. Embargoes or Sanctions Programs, which restrict or, in some cases, prohibit
companies, their subsidiaries and certain employees from trading with, investing
in or traveling to certain countries identified on a list that changes
periodically (including, for example, Angola (partial), the Balkans, Burma
(partial), Cuba, Iran, Liberia, North Korea, Sudan, Syria and Zimbabwe),
specific companies or individuals, or being involved in specific activities such
as certain diamond trading and proliferation activities;
Export Controls, which prohibit or restrict the export of goods, services and
technology to designated countries, denied persons or denied entities from the
U.S., the re-export of U.S. origin goods from the country of original
destination to such designated countries, and the export of foreign origin goods
made with U.S. technology; and
Antiboycott Compliance, which prohibits U.S. companies from taking any action
that has the effect of furthering or supporting a restrictive trade practice or
boycott that is fostered or imposed by a foreign country against a country
friendly to the U.S. or against any U.S. person, and requires the reporting of
any boycott receipts.
If you have a question as to whether an activity is restricted or prohibited,
seek assistance before taking any action, including giving any verbal assurances
that might be regulated by international laws.
6. CORPORATE OPPORTUNITIES
You may not take personal advantage of opportunities that are presented to you
or discovered by you as a result of your position with us or through your use of
corporate property or information, unless authorized by your supervisor, a
Managing Director, the General Counsel or the Chairperson of the Audit
Committee.
-23-
Even opportunities that are acquired privately by you may be questionable if
they are related to our existing or proposed lines of business.
Participation in an investment or outside business opportunity that is related
to our existing or proposed lines of business must be pre-approved. You cannot
use your position with us or corporate property or information for improper
personal gain, nor can you compete with us in any way.
7. MISUSE OF COMPANY COMPUTER EQUIPMENT
You may not, while acting on behalf of ICTS or while using our computing or
communications equipment or facilities, either:
access the internal computer system (also known as "hacking") or other resource
of another entity without express written authorization from the entity
responsible for operating that resource; or
commit any unlawful or illegal act, including harassment, libel, fraud, sending
of unsolicited bulk email (also known as "spam") in violation of applicable law,
trafficking in contraband of any kind, or espionage.
If you receive authorization to access another entity's internal computer system
or other resource, you must make a permanent record of that authorization so
that it may be retrieved for future reference, and you may not exceed the scope
of that authorization.
Unsolicited bulk email is regulated by law in a number of jurisdictions. If you
intend to send unsolicited bulk email to persons outside of ICTS, either while
acting on our behalf or using our computing or communications equipment or
facilities, you should contact your supervisor, a Managing Director, the General
Counsel or the Chairperson of the Audit Committee for approval.
All data residing on or transmitted through our computing and communications
facilities, including email and word processing documents, is the property of
ICTS and subject to inspection, retention and review by ICTS in accordance with
applicable law.
Environment Compliance
Federal law imposes criminal liability on any person or company that
contaminates the environment with any hazardous substance that could cause
injury to the community or environment. Violation of environmental laws can be a
criminal offense and can involve monetary fines and imprisonment. We expect
employees to comply with all applicable environmental laws.
It is our policy to conduct our business in an environmentally responsible way
that minimizes environmental impacts. We are committed to minimizing and, if
possible, eliminating the use of any substance or material that may cause
environmental damage, reducing waste generation and disposing of all waste
through safe and responsible methods, minimizing environmental risks by
employing safe
-24-
technologies and operating procedures, and being prepared to
respond appropriately to accidents and emergencies.
8. MAINTENANCE OF CORPORATE BOOKS, RECORDS, DOCUMENTS AND ACCOUNTS; FINANCIAL
INTEGRITY; PUBLIC REPORTING ICTS is committed to producing full, fair, accurate,
timely and understandable disclosure in reports and documents that it files
with, or submits to, the Securities and Exchange Commission (the "SEC") and
other regulators. Accordingly, ICTS requires honest and accurate recording and
reporting of information. All of ICTS's books, records, accounts and financial
statements must be maintained in reasonable detail, must appropriately reflect
ICTS's transactions and must conform both to applicable legal requirements and
to ICTS's system of internal controls. By way of example, unrecorded or "off the
books" funds or assets should not be maintained, only the true and actual number
of hours should be reported, and business expense accounts must be documented
and recorded accurately.
Business records and communications sometimes become public. Accordingly, we
should avoid exaggeration, derogatory remarks, guesswork, or inappropriate
characterizations of people and companies that may be misunderstood. This
applies equally to e-mail, internal memos, and formal reports. Records should
always be retained or destroyed according to ICTS's record retention policies.
Inappropriate access or modifications to, or unauthorized destruction of,
accounting or other business records is prohibited. These prohibitions apply to
all business records and data, regardless of whether such data and records are
in written form or electronically stored.
9. FAIR DEALING
We seek to outperform our competition fairly and honestly. We seek competitive
advantages though superior performance and never through unethical or illegal
business practices. Stealing proprietary information, possessing trade secret
information that was obtained without the owner's consent, or inducing such
disclosures by past or present employees of other companies is prohibited. Each
director, officer and employee should endeavor to respect the rights of and deal
fairly with ICTS's customers, suppliers, competitors and employees. No unfair
advantage should be taken of anyone through manipulation, concealment, abuse of
privileged information, misrepresentation of material facts, or any other unfair
dealing practice.
10. GIFTS AND ENTERTAINMENT
Business entertainment and gifts are meant to create goodwill and sound working
relationships and not to gain improper advantage with customers or facilitate
approvals from government officials. Unless express permission is received from
a supervisor, a Managing Director, the General Counsel or the Chairperson of the
Audit Committee, entertainment and gifts cannot be offered, provided or accepted
by any employee unless) consistent with customary business practices and not (a)
excessive in value, (b) in cash, (c) susceptible of being construed as a bribe
or kickback or (d) in violation of any laws. This principle applies to our
transactions everywhere in the world, even where the practice is widely
considered "a way of doing business." Under some statutes, such as the U.S.
Foreign Corrupt Practices Act (further described in Section 5), giving anything
of value to a government official to obtain or retain business or favorable
treatment is a criminal act subject to prosecution and conviction. Discuss with
your supervisor, a Managing Director, the General Counsel or the Chairperson of
the Audit Committee any proposed entertainment or gifts if you are uncertain
about their appropriateness.
-25-
11. ANTITRUST
Antitrust laws are designed to protect the competitive process. These laws
generally prohibit: agreements, formal or informal, with competitors that harm
competition or customers, including price fixing and allocations of customers,
territories or contracts; agreements, formal or informal, that establish or fix
the price at which a customer may resell a product; and the acquisition or
maintenance of a monopoly or attempted monopoly through anti-competitive
conduct.
Certain kinds of information, such as pricing, production and inventory, should
not be exchanged with competitors, regardless of how innocent or casual the
exchange may be and regardless of the setting, whether business or social.
Understanding the requirements of antitrust and unfair competition laws of the
various jurisdictions where we do business can be difficult, and you are urged
to seek assistance from your supervisor, a Managing Director, the General
Counsel or the Chairperson of the Audit Committee whenever you have a question
relating to these laws.
12. PROTECTION AND PROPER USE OF COMPANY ASSETS
All employees are expected to protect our assets and ensure their efficient use.
Theft, carelessness and waste have a direct impact on our profitability. Our
property, such as office supplies, computer equipment, buildings, and products,
are expected to be used only for legitimate business purposes, although
incidental personal use may be permitted. Employees should be mindful of the
fact that we retain the right to access, review, monitor and disclose any
information transmitted, received or stored using our electronic equipment, with
or without an employee's or third party's knowledge, consent or approval. Any
misuse or suspected misuse of our assets must be immediately reported to your
supervisor, a Managing Director, the General Counsel or the Chairperson of the
Audit Committee.
13. CONFIDENTIALITY
One of our most important assets is our confidential information. Employees who
have received or have access to confidential information should take care to
keep this information confidential. Confidential information may include
business, technical, marketing, and service plans, financial information,
product specifications or architecture, source codes, engineering, and
manufacturing ideas, designs, databases, customer lists, pricing strategies,
personnel data, personally identifiable information pertaining to our employees,
customers or other individuals (including, for example, names, addresses,
telephone numbers and social security numbers), and similar types of information
provided to us by our customers, suppliers and partners. This information may be
protected by privacy, patent, trademark, copyright and trade secret laws.
You should also take care not to inadvertently disclose confidential
information. Materials that contain confidential information, such as memos,
notebooks, computer disks and laptop computers, should be stored securely.
Unauthorized posting or discussion of any information concerning our business,
information or prospects on the Internet is prohibited. You may not discuss our
business, information or prospects in any "chat room," regardless of whether you
use your own name or a pseudonym. Be cautious when discussing sensitive
information in public places like elevators, airports, restaurants and
"quasi-public" areas within ICTS[, suchICTS, [such as cafeterias]. All ICTS emails,
voicemails and other communications are presumed confidential and should not be
forwarded or otherwise disseminated outside of ICTS, except where required for
legitimate business purposes.
-26-
In addition to the above responsibilities, if you are handling information
protected by any privacy policy published by us, such as our website privacy
policy, then you must handle that information solely in accordance with the
applicable policy.
14. MEDIA/PUBLIC DISCUSSIONS
It is our policy to disclose material information concerning ICTS to the public
only through specific limited channels to avoid inappropriate publicity and to
ensure that all those with an interest in the company will have equal.equal access to
information. All inquiries or calls from the press and financial analysts should
be referred to a Managing Director.
15. WAIVERS
There will be no waivers of this Code.
16. COMPLIANCE STANDARDS AND PROCEDURES Compliance Resources
Your most immediate resource for any matter related to the Code is your
supervisor. He or she may have the information you need, or may be able to refer
the question to another appropriate source. There may, however, be times when
you prefer not to go to your supervisor. In these instances, you should feel
free to discuss your concern with a Managing Director, the General Counsel or
the Chairperson of the Audit Committee.
Clarifying Questions and Concerns; Reporting Possible Violations
If you encounter a situation or are considering a course of action and its
appropriateness is unclear, discuss the matter promptly with your supervisor, a
Managing Director, the General Counsel or the Chairperson of the Audit
Committee; even the appearance of impropriety can be very damaging and should be
avoided.
If you are aware of a suspected or actual violation of Code standards by others,
you have a responsibility to report it. You are expected to promptly provide a
compliance resource with a specific description of the violation that you
believe has occurred, including any information you have about the persons
involved and the time of the violation. Whether you choose to speak with your
supervisor, a Managing Director, the General Counsel or the Chairperson of the
Audit Committee, you should do so without fear of any form of retaliation. We
will take prompt disciplinary action against any employee who retaliates against
you, up to and including termination of employment.
Supervisors must promptly report any complaints or observations of Code
violations to a Managing Director, the General Counsel or the Chairperson of the
Audit Committee. A Managing Director, the General Counsel or the Chairperson of
the Audit Committee will investigate all reported possible Code violations
promptly and with the highest degree of confidentiality that is possible under
the specific circumstances. Your cooperation in the investigation will be
expected.
IF THE INVESTIGATION INDICATES THAT A VIOLATION OF THE CODE HAS PROBABLY
OCCURRED, WE WILL TAKE SUCH ACTION AS WE BELIEVE TO BE APPROPRIATE UNDER THE
CIRCUMSTANCES. IF WE DETERMINE THAT AN EMPLOYEE IS RESPONSIBLE FOR A CODE
VIOLATION, HE OR SHE WILL BE SUBJECT TO DISCIPLINARY ACTION UP TO, AND
INCLUDING, TERMINATION OF EMPLOYMENT AND, IN APPROPRIATE CASES, CIVIL ACTION OR
REFERRAL FOR CRIMINAL
-27-
PROSECUTION. APPROPRIATE ACTION MAY ALSO BE TAKEN TO DETER ANY FUTURE CODE
VIOLATIONS.
Acknowledgement Form
All employees, officers and directors of ICTS are required to sign this
acknowledgement form at the time their employment commences and annually
thereafter.
This Code describes important information regarding values and ethical behavior
at ICTS, and I understand that I should consult the General Counsel or a
Managing Director, the Chairperson of the Audit Committee regarding any
questions not answered in this Code.
Since the information described here is necessarily subject to change, I
acknowledge that revisions to this Code may occur. All such changes will be
communicated through official notices, and I understand that revised information
may supersede, modify or eliminate the existing Code. This Code may only be
changed as provided herein.
I have received this Code and I understand that it is my responsibility to read
and comply with the principles contained in this Code and any revisions made to
it. I understand that by signing this I am acknowledging that I have read this
Code and any violations of this Code will be subject to disciplinary action, up
to and including dismissal.
NAME (printed):
SIGNATURE:
DATE:
-28-
POWER OF ATTORNEY AND PROXY
The undersigned, hereby grants power of attorney and proxy, jointly and
severallyeverally to:
AvramAvraham Dan
Ran Langer
for and in name, place and stead of the undersigned to attend the Annual General
Meetingmeeting of Shareholders of ICTS International N.V., a public company whose
statutory seat and registered office is in Amstelveen, The Netherlands, which
Annual General Meeting to be held at 10:00, local time, on Wednesday, September
21, 2005,December
6, 2006, at the offices of the Company, located at Biesbosch 225, 1181 JC,
Amstelveen, The Netherlands or any adjournment or adjournments thereof, and for
and in name, place and stead of the undersigned to sign at that Annual General
Meeting the attendance register, to take part in all discussions, to make such
proposals as the attorney may deem expedient, and to exercise the right to vote
attached to the shares of the undersigned as well as all other rights which may
be exercised at the Annual General Meeting on behalf of the undersigned, , and
further to do and perform any and all acts relating to the foregoing which may
be useful or necessary and which the undersigned might or could or should do if
personally present, all this with full power of substitution.
Signed in , this day of 2005.
If a natural person insert: surname, forenames, full
residential address and date of birth. If a body corporate insert:
corporate name, place of registered office, full business
address. A power of attorney given by a body corporate must be signed by an
officer / officers duly authorized to represent the body corporate. If necessary
inspect the records of the Chamber of Commerce where the body corporate is
registered, and/ or its articles of association or by-laws.
The Proposed Resolutions
Unless otherwise indicated, this Power of Attorney and Proxy confers authority
to vote "FOR" for the resolutions contained herein. The Management Board and the
Supervisory Board recommends a vote of "FOR" for the resolutions contained
herein. This proxy is solicited on behalf of the Management Board of ICTS
International N.V. and may be revoked prior to its exercise by a written notice
to the Chief Executive Officer of the Company.
1. Adoption of the English language to be used for the annual accounts and
annual reports of the Company.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Adoption of the annual accounts of the fiscal year 2004.2005.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Election of two Managing DirectorsDirectors.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. Election of sevensix Supervisory Directors.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. Authorization for the Supervisory Board, for a period of five years from the
date of the Meeting, to issue up to 17,000,000 shares, representing all of the
authorized shares of the Company's Common Stock, for any lawful corporate
purpose without further shareholder approval.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
-29-
6. Authorization to purchase shares of common stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Signed in Amstelveen, The Netherlands this 6th day of November 2006.
If a natural person insert: surname, forenames, full residential address and
date of birth. If a body corporate insert:
corporate name, place of registered office, full business address. A power of
attorney given by a body corporate must be signed by an officer/officers duly
authorized to represent the body corporate. If necessary inspect the records of
the Chamber of Commerce where the body corporate is registered, and/or its
articles of association or by-laws.
NOTE: Signature(s) should follow exactly the name(s) on the stock certificate.
Executor, administrator, trustee or guardian should sign as such. If more than
one trustee, all should sign. ALL JOINT OWNERS MUST SIGN.
Dated: , 2006
- ------------------------------
By:
- ------------------------------
Name:
- ------------------------------
Title:
- ------------------------------
-30-
ICTS INTERNATIONAL, N.V.
Chairman's Message
Annual Report
Year Ended December 31, 2005
-31-
Letter to the Shareholders
November 6, 2006
Dear Shareholder,
Since my last letter to you, the Company had a turbulent period that touched all
aspects, the past, present and the future.
At present the most dramatic change was the act of delisting the Company's
shares from the NASDAQ National Market. This unfortunate act by NASDAQ will be
appealed by the Company, an appeal that will demonstrate the ability of the
Company to comply with the NASDAQ requirements. In the meantime the Company has
taken all the steps to enable a smooth trading in the Company's shares. This
unexpected decision by NASDAQ caused a severe drop in the share price, a price
which was already low beyond any reasonable level.
During this period Management's attention was largely devoted to resolving past
investments and litigation relating to events arising from the post September
11, events. The Company has ceased the operation of Passport USA and accordingly
written off the investment. The accounting impact of this action created an
additional loss of US $9 Million representing the remaining liability under the
lease. The Company is negotiating to reach an amicable agreement on this issue,
an agreement that we anticipate will reduce this loss substantially.
The Company is litigating the taking of its Aviation security business in the
US. The process that lasted for three years created heavy financial pressure and
consumed valuable management time, will reach its court hearing on November 13,
2006. Management, based on its legal advisers, is assuming that it will win this
court hearing. The Company is also litigating its claims against the TSA in the
Administrative Court, claims arising from the contract the Company had with the
TSA during the interim period up to November 2002. Also in this case Management
is of the opinion that it will win its claim. This claim against the TSA
triggered additional actions through other Government Agencies, the DOL and the
IRS, both actions have been defended and counter acted by the Company.
Management is of the opinion that all these actions by the Government have no
factual basis nor legal grounds, it represents an act of weakness on behalf of
the Government.
During the reporting period, the Company made headways in its core business, the
Security Business. The Aviation Security activity, operated by I Sec
International Security BV has opened eight new stations in eight major European
Airports, Paris, London, Frankfurt and others, in addition to the two present
operations in Amsterdam and Russia. The estimated revenues of this operation in
2006 will reach Euro 36 Million, with profit after start up costs of
approximately Euro 3 Million. Management sees further growth in this business
involving present locations, new locations and new markets. The Company has
fierce competition from ICTS Europe, a competition followed by legal claims
relating to the sale contract of January 2001. Management considers these legal
actions as futile with no serious legal or financial impact on the Company.
The Mass Transport Security activity started by the Company last year, operated
by, I Sec Home Land Security BV has signed its first contract with the city of
Rotterdam. This fully owned Subsidiary is in the process of signing additional
contracts with other cities and regions in
-32-
Europe. I Sec HLS was able to position itself as an authoritative body with the
regulators and the major international mass transportation association. I Sec
HLS was and still requires the financial support of the parent company. The
management of I Sec HLS estimates that it will be self sufficient in the
financial year 2007. Management is of the opinion that the Mass Transportation
Security Market represents a vast growth market; I Sec HLS present position
could make it into a major player in this market.
I Sec Technology BV continued to provide valuable services to I Sec Aviation BV,
The technology edge enabled I Sec International BV to penetrate the market and
to provide high standard of services to its customers. During the said period I
Sec Technology, developed a new product for Banks, a front end solution to
handle anti money laundering. Management is of the opinion that this new product
has great potential in the worldwide banking world.
The emergency preparedness business operated by its subsidiary Demco operated
successfully a prestigious contract, but a contract with little economical
value. The company believes that it can capitalize on its quality of performance
and more contracts will follow in the near future.
Management is of the opinion that in spite of the various fronts it is dealing,
some willingly, the business one and some unwillingly the litigations, it will
win all the legal battles, either in court or outside the court within the near
future. Winning or settling these legal proceedings will enable Management to
focus on it core business and deliver good results.
We thank our employees for the good work and loyalty.
Respectfully,
Menachem Atzmon
Chairman of the Supervisory Board
-33-
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF
THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28542
ICTS INTERNATIONAL N.V.
-----------------------
(Exact Name of Registrant as specified in its charter)
Not Applicable
--------------
(Translation of Registrant's name into English)
The Netherlands
---------------
(Jurisdiction of incorporation or organization)
Biesbosch 225, 1181 JC Amstelveen, The Netherlands
--------------------------------------------------
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each Class: Name of each exchange on which registered:
None None
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, par value .45 Euro per share
--------------------------------------------------------
Title of Class
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
Title of Class
-34-
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of December 31, 2005: 6,672,980
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [ ] Item 18 [X]
When used in this Form 20-F, the words "may", "will", "expect", "anticipate",
"continue", "estimates", "project", "intend" and similar expressions are
intended to identify Forward-Looking Statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, operating results and
financial position. Prospective investors are cautioned that any Forward-Looking
Statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the Forward-Looking Statements as a result of various factors.
-35-
Table of Contents
Part I
- --------
Item 1 Identity of Directors, Senior Management and Advisers
Item 2 Offer Statistics and Expected Timetable
Item 3 Key Information
Item 4 Information on the Company
Item 5 Operating and Financial Review and Prospects
Item 6 Directors, Senior Management and Employees
Item 7 Major Shareholders and Related Party Transactions
Item 8 Financial Information
Item 9 The Offer and Listing
Item 10 Additional Information
Item 11 Quantitative and Qualitative Disclosures about Market Risk
Item 12 Description of Securities other than Equity Securities
Part II
- --------
Item 13 Defaults, Dividend Arrearages and Delinquencies
Item 14 Material Modifications to the Rights of Security Holders
and the Use of Proceed
Item 15 Controls and Procedures
Item 16A Audit Committee Financial Expert
Item 16B Code of Ethics
Item 16C Principal Accountant Fees and Services
Item 16D Exceptions from Listing Standards for Audit Committees
Part III
- --------
Item 17 Financial Statements
Item 18 Financial Statements
Item 19 Exhibits
Exhibits
- --------
Exhibit 8 List of Subsidiaries (incorporated by reference to Item 4
-Information on the Company-Organizational
Structure)
Exhibit 10 Reports of independent auditors of associated companies, as
referred to investment in certain associated companies in the
report of independent auditors for the year ended December 31,
2005
Exhibit 12.1 Certification of Chief Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350
Exhibit 14.1 Report of independent registered public accounting firm -
Deloitte
Exhibit 15.1 Independent Auditor's Report - Lazar Levine & Felix, LLP
-36-
PART I
Item 1. Identity of Directors, Senior Management and Advisers
Not Applicable
Item 2. Offer Statistics and Expected Timetable
Not Applicable
Item 3. Key information.
Operations
ICTS International, N.V., including its subsidiaries (collectively
referred to herein as "ICTS" or "the Company"), is a provider of aviation
security and other aviation related services through service contracts with
airline companies and airport authorities. In 2002 one of the company's
subsidiaries, Huntleigh USA Corporation ("Huntleigh") derived a substantial
portion of its revenues from providing aviation security services to the United
States Transportation Security Administration ("TSA"). Commencing November 2002
the Company ceased providing such services to the TSA but continues to provide
such services to aviation companies and others.
Discontinued Operations
In December 2005, the company's management decided to cease two of its
segments operations and to focus on the main core business of the company - the
security activities.
Following the decision, the company ceased its operations in the Leasing
and Entertainment segments. The leased equipment was sold to the lessee and the
entertainments sites were closed.
Selected Financial Data
Selected Consolidated Statements of Income Data set forth below have been
derived from ICTS Consolidated Financial Statements which were prepared in
accordance with US GAAP. The Selected Consolidated Financial Data set forth
below should be read in conjunction with Item 5 Operating and Financial Review
and ICTS Consolidated Financial Statements and the Notes to those financial
statements included in Item 18 in this Annual Report.
The data reflects the results of operations and net assets of continuing
operations, while details of the discontinued operations are presented
separately.
(U.S Dollars in thousand)
- --------------------------------------------------------------------------------
Continuing Operations 2005 2004 2003 2002
- --------------------- ---- ---- ---- ----
Cash and cash equivalents $ 5,927 $ 3,224 $ 7,404 $ 32,378
Current Assets 24,962 23,529 30,002 72,606
Total Assets 31,676 37,507 55,914 97,763
Current Liabilities (25,435) (20,395) (24,747) (55,920)
Shareholders (Equity) 5,148 (21,506) (46,961) (61,378)
Deficiency
Discontinued Operations
- -----------------------
Total Assets $ 537 $ 17,455 $ 28,586 $ 27,681
Total Liabilities (11,424) (8,786) (8,601) (7,817)
- --------------------------------------------------------------------------------
-37-
Selected Financial Data Statement of Operations
The following table summarizes certain statement of operations data for
ICTS for the years ended December 31, 2005, 2004, 2003, 2002 and 2001:
(U.S Dollars in thousand except per share data)
Year ended December 31,
2005 2004 2003 2002 2001
----------- ----------- -------- ----------- -----------
REVENUES $ 57,713 $ 57,993 $ 67,933 $ 278,561 $ 212,137
COST OF REVENUES 53,721 52,825 52,557 212,439 189,925
----------- ----------- ----------- ----------- -----------
GROSS PROFIT 3,992 5,168 15,376 66,122 22,212
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 11,690 12,201 8,547 25,635 18,641
IMPAIRMENT OF ASSETS AND GOODWILL 797 9,156 820
----------- ----------- ----------- ----------- -----------
OPERATING INCOME (LOSS) (7,698) (7,033) 6,032 31,331 2,751
FINANCIAL INCOME (EXPENSES) - net (908) (452) 4,118 3,046 1,977
OTHER INCOME (EXPENSES) - net 147 (2,907) (353) 41,229 29,520
INCOME (LOSS) BEFORE TAXES (8,459) (10,392) 9,797 75,606 34,248
INCOME TAXES BENEFIT (EXPENSE) (2,387) 1,529 (3,910) (16,442) (4,919)
SHARE IN LOSSES OF ASSOCIATED
COMPANIES - net (486) (1,625) (6,661) (1,807) (395)
MINORITY INTERESTS IN PROFIT OF
SUBSIDIARIES (2,735)
----------- ----------- ----------- ----------- -----------
PROFIT (LOSS) FROM CONTINUING OPERATIONS (11,332) (10,488) (744) 57,357 26,198
DISCONTINUED OPERATIONS:
Loss from discontinued operations,
net of tax Benefit of $2,525,
$1,655 and $795 in 2005, 2004
and 2003, respectively Includes
loss of $4,7774 on sale of
assets to a related party
on 2005, and after share in
loss of associated company of
$36 and $81 in 2005 and 2004,
respectively (13,548) (15,474) (18,130) (542)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS) FOR THE YEAR (24,880) (25,962) (18,904) $ 56,815 $ 26,198
----------- ----------- ----------- ----------- -----------
OTHER COMPREHENSIVE INCOME:
Translation adjustments (1,560) 1,043 3,456 710 (1,811)
Unrealized gains (losses) on
marketable securities (214) (616) 794 731 (345)
Reclassification adjustment
for losses for available
for sale securities included
in net income 237 (771) 368
(1,774) 427 4,487 670 (1,788)
----------- ----------- ----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR $ (26,654) $ (25,535) $ (14,417) $ 57,485 $ 24,410
=========== =========== =========== =========== ===========
LOSSES PER SHARE:
Profit (Loss) from continued operations:
Profit (Loss) per common share - basic $ (1.74) $ (1.61) $ (0.12) $ 8.93 $ 4.18
=========== =========== =========== =========== ===========
Profit (Loss) per common share - diluted $ (1.74) $ (1.61) $ (0.12) $ 8.88 $ 4.09
=========== =========== =========== =========== ===========
(Loss) from discontinued operations:
(Loss) per common share - basic $ (2.07) $ (2.37) $ (2.78) $ (0.08)
=========== =========== =========== ===========
(Loss) per common share - diluted $ (2.07) $ (2.37) $ (2.78) $ (0.08)
=========== =========== =========== ===========
NET INCOME (LOSS):
Profit (Loss) per common share - basic $ (3.81) $ (3.98) $ (2.90) $ 8 .85 $ 4.18
=========== =========== =========== =========== ===========
Profit (Loss) per common share - diluted $ (3.81) $ (3.98) $ (2.90) $ 8.80 $ 4.09
=========== =========== =========== =========== ===========
Weighted average shares of common stock
outstanding 6,528,100 6,524,250 6,513,100 6,419,575 6,263,909
Adjusted diluted weighted average shares of
Common stock outstanding 6,528,100 6,524,250 6,513,100 6,453,447 6,412,535
=========== =========== =========== =========== ===========
-38-
Risk Factors
You should carefully consider the risks described below regarding the
business and the ownership of our shares. If any of the risks actually occur,
our business, financial condition or results of operations could be adversely
affected, and the price of our common stock could decline significantly.
Developments that have had a significant impact on our operations.
Two major events in 2001 and early 2002 significantly changed our business
operations: (i) the sale of substantially all of our European operations and
(ii) the passage of the Aviation and Transportation Security Act (the "Security
Act") by the United States Congress in response to the terrorist attacks on
September 11, 2001 pursuant to which the Federal government through the
Transportation Security Administration (the "TSA") took over aviation security
services in the U.S. in November 2002. As a result of these events, we have
limited aviation security operations in Europe and in the U.S. We previously
derived most of our revenues from the provision of aviation security services
and we have developed substantial experience and expertise in that field. If we
are unable to increase revenues from aviation security services, our financial
condition and results of operations will be adversely affected.
If we are unsuccessful in resolving our disagreements with the TSA there
may be a significant material adverse effect on our financial condition.
In February 2002, we entered into an aviation security services contract
with the TSA to continue to provide aviation security services in all of our
current airport locations until the earlier of either the completed transition
of these security services on an airport by airport basis to the U.S. Federal
Government or November 2002.
In connection with payments made by the TSA to Huntleigh USA, a wholly
owned subsidiary of the Company, for aviation security services provided in
2002, the Defense Contract Management Agency has indicated that it believes that
Huntleigh should not have been paid on a fixed price basis as believed by
Huntleigh, but on an actual costs plus what the TSA would consider a reasonable
profit. On that later basis Huntleigh may be required to repay to the TSA the
difference between such amount and the actual amounts paid to it. Huntleigh
however has various claims for additional amounts it considers are due to it for
the services provided to the TSA.
If the TSA will claim such difference from Huntleigh and will prevail in
all of its contentions, and none of Huntleigh's claims will be recognized, then
the Company may suffer a loss in an amount of about $59 Million. The Company is
engaged in litigation with the FAA/TSA. No provisions have been made by the
Company with respect to the above potential claims.
Claim for Loss of Business
The Security Act provides that all aviation security services in the U.S.
will be handled by the federal government through the TSA. As a result of the
passage of the Security Act the TSA took over aviation security in the U.S. For
the year ended December 31, 2002, the TSA accounted for 73% of all our
consolidated revenues at that year. For the years ended December 31, 2005, 2004
and 2003 the TSA accounted for -0-% of our revenues. Our failure to be able to
meet the TSA's requirements or to secure contracts from the TSA will have a
material adverse affect on our business.
As a foreign corporation, the Company is not eligible to bid for security
service contracts with the TSA.
Huntleigh's main business was providing airport security services to
airlines and airports as a result of the creation of the TSA and the requirement
that the TSA take over airport security, Huntleigh has lost its principal
business. Huntleigh has commenced legal action against the U.S. Government for
the "Taking" of its business and to protect its rights under the Fifth Amendment
of the U.S. Constitution. Huntleigh seeks to recover the going concern value of
the lost business. The suit was brought in the U.S Court of Claim and is in the
early stages. The Court has rejected the U.S. Governments motion to dismiss the
Complaint for failure to state a cause of action. A motion for reconsideration
has been filed by the defendant, but denied. There can be no assurance as to the
ultimate outcome of such claim and whether or not Huntleigh will be successful
in prosecuting the same.
We face significant potential liability claims.
As a result of the September 11th terrorists attacks numerous lawsuits
have been commenced against us and our U.S. subsidiary. The cases arise out of
airport security services provided for United Flight 175 out of Logan Airport in
Boston, Massachusetts which crashed into the World Trade Center. In addition, to
the present claims additional claims may be asserted. The outcome of these or
additional cases is uncertain. If there is an adverse outcome with respect to
any of these claims which is not covered by insurance, then there may be a
significant adverse impact on us.
We have incurred major losses in recent years.
-39-
We incurred net losses of approximately $25, $26 and $19 million in 2005,
2004 and 2003 respectively. We cannot assure you that we can achieve
profitability. The losses were accompanied by net cash used in operating
activities of $5.2, $1.2 million and $19.3 million in 2005, 2004 and 2003
respectively, and at December 31, 2005 the Company had a working capital
deficiency of $2.7 million. If we do not achieve new service contracts and
profitability, the viability of our company will be in question and our share
price will likely decline.
Our auditors have expressed an opinion that there is substantial doubt
about our ability to continue as a going concern.
In its report, our auditors have expressed an opinion that there is
substantial doubt about our ability to continue as a going concern. As discussed
in the accompanying audited financial statements at the year ended December 31,
2005, the Company had revenue of $57,713,000 and a net loss of $24,880,000.
We are reliant on loans made by our principal stockholder.
Our financing activities have consisted primarily of loans from our
principal stockholder. We do not have any other continual commitments or
identified sources of additional capital from third parties. There is no
assurance that our principal stockholder will continue making loans to us and
even if loans are made, there is no assurance that the terms will be favorable
to the Company.
Internal Revenue Service Investigation.
Last year the Company's subsidiary ICTS USA, Inc. filed a refund claim
with the Internal Revenue Service ("IRS") in an amount in excess of $2 million.
The refund has not yet been received by the Company. The Company made a demand
to the IRS for the refund. Thereafter, by letter dated August 15, 2006, the
Company was advised that a criminal investigation by the United States
Department of Justice, Tax Division is ongoing by a grand jury regarding
possible criminal tax violations by the subsidiary for the tax years 2002 and
2003 regarding certain royalty payment made to the Company. As a result of the
investigation the Company believes that the refund had been put on hold.
Although it is not possible at this time to determine the outcome of this
matter, should the result of the IRS investigation prove unsatisfactory to the
Company, will have a material adverse effect on the Company.
We are dependent on our key personnel.
Our success will largely depend on the services of our senior management
and executive personnel. The loss of the services of one or more of such key
personnel could have a material adverse impact on our operations. Our success
will also be dependent upon our ability to hire and retain additional qualified
executive personnel. We cannot assure you that we will be able to attract,
assimilate and retain personnel with the attributes necessary to execute our
strategy. We cannot assure you that one or more of our executives will not leave
our employment and either work for a competitor or otherwise compete with us.
We will be dependent on major customers.
If our relationship with our major customers is impaired, then there may
be a material adverse affect on our results of operations and financial
condition. Our major customers consist of the major airlines servicing the
United States. If such airlines encounter financial difficulty this may have a
material adverse impact on our business.
Our success will be dependent upon our ability to change our business
strategy.
Under our new business strategy we intend to develop technological
solutions and systems for the aviation security industry, develop or acquire
security activities other than aviation security, invest in security related
businesses, and seek other revenue producing businesses and business
opportunities.
We cannot assure you that we will be able to develop new systems or
develop systems that are commercially viable. Our success in developing and
marketing our systems will also depend on our ability to adapt to rapid
technology changes in the industry and to integrate such changes into our
systems.
We cannot assure you that we will be successful in our attempts to change
or implement our business strategy. We may not have the expertise to be
successful in developing our business in areas that are not related to the
security industry. Our failure to change our business strategy or implement it
successfully will have a material adverse affect on our financial condition and
results of operations.
We compete in a highly competitive industry and our competitors, who may
have many more resources than us, may be more successful in developing new
technology and achieving market acceptance of their products.
-40-
Competition in the aviation security industry as well as in the
non-security related aviation services industry is intense. Many of our
competitors have greater financial, technical and marketing resources. We expect
that our competitors will develop and market alternative systems and
technologies that may have greater functionality or be more cost effective than
the services we provide or the systems that we may develop. If our competitors
develop such systems we may not be able to successfully market our systems. Even
if we are able to develop systems with greater functionality which are more cost
effective than those developed by our competitors, we may not be able to achieve
market acceptance of our systems because our competitors have greater financial
and marketing resources.
The aviation security industry is subject to extensive government
regulation, the impact of which is difficult to predict.
The Security Act has had a significant negative impact on our aviation
security business. In addition, our ability to successfully market new systems
will be dependent upon government regulations over which we have no control. Any
existing or new regulation may cause us to incur increased expenses or impose
substantial liability upon us. The likelihood of such new legislation is
difficult to predict.
The markets for our products and services may be adversely affected by
legislation designed to protect privacy rights.
From time to time, personal identity data bases and technologies utilizing
such data bases have been the focus of organizations and individuals seeking to
curtail or eliminate the use of personal identity information technologies on
the grounds that personal information and these technologies may be used to
diminish personal privacy rights. In the event that such initiatives result in
restrictive legislation, the market for our products may be adversely affected.
Our operations are dependent upon obtaining required licenses.
A license to operate is required from the airport authority in the
airports in which we currently operate. Our licenses are usually issued for a
period of 12 months and are renewable. The loss of, or failure to obtain, a
license to operate in one or more of such airports could result in the loss of
or the inability to compete for contracts in the airports in which we have
licenses.
Our contracts with airports or airlines may be canceled.
Our revenues are primarily provided from services pursuant to contracts,
which are cancelable on short notice at any time, with or without cause. We
cannot assure you that an existing client will decide not to terminate us or
fail to renew a contract. Any such termination or failure to renew a contract
with us could have a material adverse effect on our results of operations or
financial condition.
Litigation.
We are currently a plaintiff and defendant in several significant
lawsuits, the outcome of which could have a material adverse effect on the
Company.
Our financial condition is subject to currency risk.
Part of our income is derived in foreign countries. We generally retain
our income in local currency at the location the funds are received. Since our
financial statements are presented in United States dollars, any significant
fluctuation in the currency exchange rate between such currency and the United
States dollar would affect our results of operations and our financial
condition.
The market price of our common stock may be volatile, which may make it
more difficult for you to resell your shares when you want at prices you find
attractive.
The market price of our common stock may from time to time be
significantly affected by a large number of factors, including, among others,
variations in our operating results, the depth and liquidity of the trading
market for our shares, and differences between actual results of operations and
the results anticipated by investors and securities analysts. Many of the
factors which affect the market price of our common stock are outside of our
control and may not even be directly related to us.
Certain shareholders own approximately 63% of our shares; their interests
could conflict with yours; significant sales of shares held by them could have a
negative effect on our stock price.
Mr. Menachem Atzmon, a director and chairman of the board of the Company,
as a representative of the Atzmon Family Trust owns or controls 63% of our
issued and outstanding common stock. As a result of such ownership, and or
-41-
control, the Atzmon Family Trust is able to significantly influence all matters
requiring shareholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration may also have the
effect of delaying or preventing a change in control. In addition, sales of
significant amounts of shares controlled by the Atzmon Family Trust or the
prospect of these sales, could adversely affect the market price of our common
stock.
We cannot assure you that we will pay dividends.
Although we have paid cash dividends in the past, we cannot assure you
that any future dividends will be declared or paid.
We are subject to the laws of The Netherlands.
As a Netherlands "Naamloze Vennootschap" (N.V.) public limited company, we
are subject to certain requirements not generally applicable to corporations
organized under the laws of jurisdictions within the United States. Among other
things, the authority to issue shares is vested in the general meeting of
shareholders, except to the extent such authority to issue shares has been
delegated by the shareholders or by the Articles of Association to another
corporate body for a period not exceeding five years. The issuance of the common
shares is generally subject to shareholder preemptive rights, except to the
extent that such preemptive rights have been excluded or limited by the general
meeting of shareholders (subject to a qualified majority of two-thirds of the
votes if less than 50% of the outstanding share capital is present or
represented) or by the corporate body designated to do so by the general meeting
of shareholders or the Articles of Association. Such a designation may only take
place if such corporate body has also been designated to issue shares.
In this regard, the general meeting of shareholders has authorized our
Supervisory Board to issue any authorized and unissued shares at any time up to
five years from June 26, 2001 the date of such authorization and has authorized
the Supervisory Board to exclude or limit shareholder preemptive rights with
respect to any issuance of common shares prior to such date. Such authorizations
may be renewed by the general meeting of shareholders from time to time, for up
to five years at a time. This authorization would also permit the issuance of
shares in an acquisition, provided that shareholder approval is required in
connection with a statutory merger (except that, in certain limited
circumstances, the board of directors of a surviving company may resolve to
legally merge the company). Shareholders do not have preemptive rights with
respect to shares which are issued against payment other than in cash.
Our corporate affairs are governed by our Articles of Association and by
the laws governing corporations incorporated in The Netherlands. Our public
shareholders may have more difficulty in protecting their interests in the face
of actions by the Supervisory Board or the Management Board, or their members,
or controlling shareholders, than they would as shareholders of a company
incorporated in the United States. Under our Articles of Association, adoption
of our annual accounts by the shareholders discharges the Supervisory Board, the
Management Board and their members from liability in respect of the exercise of
their duties for the particular financial year, unless an explicit reservation
is made by the shareholders and without prejudice to the provisions of
Netherlands law, including provisions relating to liability of members of
supervisory boards and management boards upon the bankruptcy of a company
pursuant to the relevant provisions of The Netherlands Civil Code. However, the
discharge of the Supervisory Board and the Management Board and their members by
the shareholders is not absolute and will not be effective as to matters
misrepresented or not disclosed to the shareholders. An individual member of the
Supervisory Board or the Management Board who can prove that he is not at fault
for such an omission or misrepresentation would not be liable.
A U.S. judgment may not be enforceable in The Netherlands.
A significant number of our assets are located outside the United States.
In addition, members of the Management and Supervisory Boards [and certain
experts named herein are residents of countries other than the United States].
As a result, it may not be possible for investors to effect service of process
within the United States upon such persons or to enforce against such persons
judgments of courts of the United States predicated upon civil liabilities under
the United States federal securities laws.
There is no treaty between the United States and The Netherlands for the
mutual recognition and enforcement of judgments (other than arbitration awards)
in civil and commercial matters. Therefore, a final judgment for the payment of
money rendered by any federal or state court in the United States based on civil
liability, whether or not predicated solely upon the federal securities laws,
would not be directly enforceable in The Netherlands. In order to enforce any
United States judgment obtained against us, proceedings must be initiated before
a court of competent jurisdiction in The Netherlands. A court in The Netherlands
will, under current practice, normally issue a judgment incorporating the
judgment rendered by the United States court if it finds that (i) the United
States court had jurisdiction over the original proceeding, (ii) the judgment
was obtained in compliance with principles of due process, (iii) the judgment is
final and conclusive and (iv) the judgment does not contravene the public policy
or public order of The Netherlands. We cannot assure you that United States
investors will be able to enforce any judgments in civil and commercial matters,
including judgments under
-42-
the federal securities laws against us or members of the Management or
Supervisory Board [or certain experts named herein] who are residents of The
Netherlands or countries other than the United States. In addition, a court in
The Netherlands might not impose civil liability on us or on the members of the
Management or Supervisory Boards in an original action predicated solely upon
the federal securities laws of the United States brought in a court of competent
jurisdiction in The Netherlands.
Item 4. Information on the Company
History and Development of the Company.
Unless the context indicates otherwise, all references herein to the
"Company" include ICTS International N.V. ("ICTS" or the "Company"), and its
consolidated subsidiaries.
ICTS is a public limited liability company organized under the laws of The
Netherlands in 1992. ICTS's offices are located at Biesboch 225, 1181 JC
Amstelveen, The Netherlands and its telephone number is +31-20-347-1077.
The Company's predecessor, International Consultants on Targeted Security
Holland B.V. ("ICTS Holland"), was founded in The Netherlands in 1987. Until
1994, subsidiaries and affiliates of ICTS Holland conducted similar business in
which the Company is currently engaged. As of January 1, 1994, ICTS Holland's
interest in its subsidiaries (other than three minor subsidiaries) was
transferred to ICTS International B.V. ("ICTS International"). Thereafter, ICTS
International purchased from a third party all of the outstanding shares of
ICTS, incorporated in The Netherlands in 1992 without any operations prior to
its acquisition by ICTS International. As of January 1, 1996, the Company
acquired all of the assets and assumed all of the liabilities of ICTS
International.
As of January 1, 1999 the Company acquired 80% of the issued and
outstanding capital stock of Huntleigh and in January 2001 the Company exercised
its option to acquire the remaining 20% at an agreed upon price formula making
Huntleigh a wholly owned subsidiary. Huntleigh is a provider of aviation
services in the United States.
In 2001 and 2002 ICTS sold substantially all of its European operations in
two stages, for an aggregate purchase price of $103 million. As a result of the
sale, ICTS fully divested itself from its European operations, except for its
operations in The Netherlands and Russia.
In the wake of the events which occurred on September 11, 2001, the
federal government of the United States, in November, 2001, enacted the Aviation
and Transportation Security Act (the "Security Act") Public Law 107-71. Under
the Security Act, entities may provide aviation security services in the United
States only if they are owned and controlled at least 75% by U.S. citizens. As a
company organized under the laws of The Netherlands ICTS may be unable to comply
with the ownership requirements under the Security Act. The Security Act is
administered through the Transportation Security Administration (the "TSA").
In the fourth quarter of 2002, pursuant to the Security Act the Federal
government through the TSA took over substantially all of the aviation security
operations in U.S. airports. As a result, ICTS through its wholly owned
subsidiary, Huntleigh, provides limited aviation services in the United States.
In the second quarter of 2002 the company purchased equipment in the
amount of $23.5 million and leased it back to the sellers an affiliated private
Dutch company, for 7 years in an operating lease agreement.
On December 23, 2003 the Company through wholly owned subsidiaries
purchased from ITA International Tourist Attractions, Ltd., ("ITA") (a company
under the control of one of ICTS's shareholders) certain assets owned by ITA and
used by it in the development, establishment and operation of motion-based
entertainment theaters. The assets purchased consist primarily of intangible
property and certain equipment. ITA is a company in which a principal
shareholder of the Company owned in the aggregate in excess of 50% of the
shares. The purchase price for the assets purchased was $5.4 million. The
purchase price was paid by set-off against certain debts owed by ITA to the
Company, cash and notes. As a part of the transaction, certain agreements made
between the Company and ITA in 2001 were terminated, with the result that the
Company is no longer committed to involve ITA in its existing and future
entertainment projects. Prior to entering into the transaction the Company
obtained a fairness opinion as to the fairness of the consideration and the
transaction to the Company.
Shortly after the facilities were opened and based on its performances,
the Company's management revaluated these three investments and determined that
the forecasted cash flows from these projects will not cover the investments.
Based on the fair value using discounted cash flows model, the Company had
recognized impairment losses in 2003 and 2004 totaled $20.8 million in respect
of its entertainment investments.
-43-
In December 2004, ICTS determined that the future cash flows from the
leased equipment will not recover its investment and as a result recorded an
impairment loss of $2.2 million, in addition to an impairment loss of $6 million
that was recorded in 2003.
In June 2005, the company granted the lessee an option to purchase the
equipment for an amount of $5 million, plus an amount equal to a related loan
balance. The option was exercised on December 2005, and by that time the leasing
activities of the company were terminated.
In February 2005, as the non-competition restrictions, related to the sale
of the European aviation security operations as mentioned above, expired, the
Company made a strategic decision to reenter the European aviation security
market. In March 2005 the Company established a wholly owned subsidiary, I-SEC
International Security B.V, under which all the European aviation security
activities provided by ICTS are operated.
During 2005 and 2006 the company re-entered into aviation security
business in Europe by signing contracts with U.S. carriers. Following these
contracts I-SEC established new subsidiaries throughout Europe, in France,
England, Spain, Germany and other countries.
In 2005 the company decided to cease its operations in the entertainment
segment. In early 2006, the Company closed its motion-based entertainment
theater in Baltimore, MD and its multi-experience motion-based entertainment
theater in Atlantic City, NJ. The Company is also a partner (42.5%) in a
movie-based entertainment facility in Niagara Falls, NY.
Business Overview
General
ICTS had specialized until 2002 in the provision of aviation security
services. Following the sale of its European operations in 2002 and the taking
of its aviation security business in the United States by the TSA in 2002, ICTS
engages primarily in non-security related activities. These activities consist
of non-aviation security services, and the development of technological
services. In addition, ICTS provides non-security related aviation services and
develops technological systems and solutions for the security market.
ICTS through I-SEC International Security B.V., supplies aviation security
services at airports; through I-SEC Homeland Security B.V. provides mass transit
security services; through Huntleigh, supplies aviation security services in the
USA.
Business Strategy
ICTS is currently pursuing the following business strategy:
Developing Security Related Technology.
ICTS is focusing on developing security systems and technology for the
aviation security and non-aviation security markets. ICTS is using the know-how
and expertise it has acquired in the provision of enhanced aviation security
services to develop such security systems and technology.
Aviation Security Operations in Europe and Asia -Pacific Region.
ICTS, through I-SEC International Security B.V., supplies aviation
security at airports. Huntleigh supplies aviation security services in the USA.
In 2002 ICTS increased its stake in its Dutch affiliate, ProCheck International
to 100%. ICTS also formed a partnership with ICTS Europe through which it
further expanded its aviation security operations in The Netherlands. ICTS
Europe was sold by ICTS in 2002 to an unaffiliated third party. The Company is
entering into the aviation security business in Europe since its restrictive
covenant expired, which was part of the terms of the sale of ICTS Europe. The
company, though its subsidiary, I-SEC International Security B.V., has been
awarded contracts in Europe and in the Asia-Pacific region, by various carriers,
in various airports. In 2005, ProCheck International shares were transferred to
I-SEC International Security, B.V., which kept its share of the partnership with
ICTS Europe in ICTS-NAS "v.o.f." - a company whose volume of operations has
significantly increased.
U.S. Operations.
ICTS continues to provide limited security services and non-security
aviation services in the U.S.
Other Investments.
-44-
ICTS has made investments in companies and properties which management
believes have long-term benefits. It is anticipated that future investments will
be in industries related to the security industry.
Services
Services Offered in Europe. Prior to the sale of its European operations,
ICTS primarily provided aviation security services, operated airport
checkpoints, verified travel documents, provided baggage reconciliation
services, operated electronic equipment, such as x-ray screening devices, and
operated manual devices. Following the sale, ICTS primarily provides advanced
passenger-screening services in The Netherlands and Russia. With its reentry
into the aviation security market, I-SEC International Security B.V. is offering
the same types of services as those listed above to interested clients, as well
as additional, new services. The Company has completed the initial phase of its
reentry and penetration into the international aviation security market. This
phase, executed in parallel to the expansion of I-SEC's existing operations in
the Netherlands and in Russia, includes the establishment of new subsidiaries
and the provision of services at international airports in London, UK (Gatwick);
Paris, France (Charles de Gaulle); Cologne, Germany; Barcelona, Spain; Budapest,
Hungary; and Edinburgh, Scotland. I-SEC is supplying a range of aviation
security services and implementing state-of-the-art technologies at these
locations within the framework of long-term contracts signed with various
airlines. Following this recent expansion, I-SEC is providing services at a
total of 9 locations in Europe, through 9 subsidiaries. Additionally, I-SEC is
providing aviation security consulting services at airports in the Asia Pacific
region.
The Company is currently doing an evaluation in Rotterdam, The
Netherlands, with respect to railroad security. The Company plans to utilize its
security technology for the railroad industry.
Services Offered in the United States. Prior to the enactment of the
Security Act, Huntleigh was one of the leading providers of non-security
aviation services in the United States. Immediately following the enactment of
the Security Act, but prior to the TSA taking over aviation security services in
the United States, in November 2002, Huntleigh experienced a substantial
increase in its aviation security services.
Huntleigh currently provides limited aviation security services and nine
other separate services at approximately 35 airports in 26 states which were not
affected by the enactment of the Security Act.
The limited security services provided by Huntleigh involves the
following:
o Charter Flights Screening for Airlines - which includes
security check of passenger's body and carry-on.
o Ticket Checks - checks the boarding authorization of
passengers and compare them to passenger ID before allowing
the passenger to pass through the checkpoint.
o Cargo Security Screening - for some international carriers.
Each of the non-aviation security services involves one of the following
specific job classifications:
Agent Services For Airlines.
Agent services include: Passenger Service and Baggage Service. Although an
agent is a Huntleigh employee, the employee is considered a representative of
specific airlines.
Guard Services.
Guard services involve guarding secured areas, including aircraft.
Janitorial Services.
Huntleigh provides cleaning services for aircraft cabins and portions of
airports.
Maintenance.
Huntleigh provides workers to maintain equipment in one airport.
Aircraft Search.
Search of entire aircraft to detect dangerous objects.
Ramp Services.
Ramp services include:
o directing aircraft into the arrival gate and from the
departure gate
-45-
o cleaning the aircraft
o conducting cabin searches
o stocking supplies
o de-icing the aircraft and
o moving luggage from one airplane to another.
Shuttle Service. Huntleigh shuttles airline crews from their hotels to the
aircraft in one airport.
Skycap Services Provider. A skycap assists passengers with their luggage.
Located at the curbside of the check-in at airports, a skycap checks in
passengers' luggage and meets security requirements established by the TSA to
screen passengers. A skycap also assists arriving passengers with transporting
luggage from the baggage carousel to ground transportation or other designated
areas.
A skycap also may transport checked baggage from the curbside check-in to
the airline counter. Concierge Service involves a skycap monitoring the baggage
carousel to ensure that passengers do not remove luggage not belonging to them.
In many airports, a skycap at the baggage claim area checks to see if the
passengers' luggage tags match those on the specific luggage to ensure that a
passenger is only removing his or her own luggage from the claim area.
Wheelchair attendants. Wheelchair attendants transport passengers through
the airport in airline and/or Company owned wheelchairs and may also operate
electricians for transporting passengers through the airport. Working closely
with the attendants are dispatch agents who monitor requests and assignments for
wheelchairs and dispatch the attendants as needed.
Aviation Security Services
ICTS, through its subsidiary I-SEC International Security, B.V., provides
pre-departure screening services at airports in the Netherlands and Russia, as
well as at London Gatwick International Airport, UK and at Charles de Gaulle
International Airport, Paris France. It also provides aviation security
consulting services at 11 airports in the Asia-Pacific region, and has signed
new contracts with carriers to supply aviation security services at additional
locations starting in 2006. Prior to the enactment of the Security Act,
Huntleigh provided such services in the U.S. Such services are designed to
prevent or deter the carriage of any explosive, incendiary device, weapon or
other dangerous objects into the sterile area of an airport concourse and aboard
the aircraft. In 2002 Huntleigh provided such services in the United States
exclusively to the TSA.
Technological Systems and Solutions
The accumulated know-how and expertise of ICTS in the implementation of
computer based processors for advanced passenger screening enabled ICTS to
develop its APS technology and system. The APS system is an automated
computerized system that enables the pre-departure analysis of passenger
information and is designed to screen airline passengers in a faster and more
efficient manner. The APS system is currently being operated by ICTS under
contract for services provided by ICTS Europe, an unaffiliated third party, to
major United States airlines on flights from Europe to the United States.
New Technology Initiatives.
IP@SS
ICTS, through its subsidiaries, ICTS Technologies USA, Inc. launched a
trial phase of its IP@SS project in 2003. IP@SS is a technological system
integrating various components (Smart Document Reader, biometric unit, smart
card unit, rule engine, watch lists and more), which enhances security while
accelerating security check processes, thus improving operational efficiency and
customer service to passengers. IP@SS operates in compliance with strict
confidentiality and privacy standards. Basic and technologically upgraded IP@SS
systems were tested within the framework of pilot trials, which were carried out
at several airports, including London Gatwick (UK), Newark Liberty (USA),
Amsterdam Airport Schiphol (the Netherlands) and Ezeria (Buenos Aires,
Argentina). Automated TravelDoc
Automated Travel Doc is a technologically upgraded version of TravelDoc
offered either as software only, or as a complete software and hardware package.
It verifies the passengers' travel documents fully comply wit the requirements
of countries of destination and transit prior to embarkation, and also
facilitates the detection of forged travel documents. Automated TravelDoc
enhances the level of security, assists in combating illegal immigration and
reduces or mitigates associated civil penalties for airlines.
-46-
APIS+
APIS+ is a technologically upgraded version of APRIS. It facilitates
compliance with all requirements of Advance Passenger information programs
implemented by various countries worldwide (USA, Australia, Mexico and more),
including the new mandatory Arrival-Departure Record data (Address in the USA).
The required data is extracted from passports and handwritten US address is
extracted from the relevant form - through use of advanced proprietary
performance-enhancing algorithms. The data is then prepared for transmission to
the relevant authorities in the specified format. ICTS's subsidiary, ICTS
Technologies USA, Inc. has been authorized to submit. APIS data in UN/EDIFACT
format to the USA's Bureau of Customs and Border Protection (CBP). APIS+ is
offered as software only, or a complete software and hardware package.
Smart Document reader (SDR)
SDR is a proprietary state-of-the-art software solution that automatically
extracts data from a variety of standard and non-standard travel documents, ID
documents, e-ID documents, driver's licenses, airline boarding passes and
various mass transit tickets at extremely high levels of accuracy and speed. SDR
also implements various advanced means and proprietary checks to detect forged
documents. It comprises a main component in many of the advanced technological
systems offered by ICTS through its subsidiary ICTS Technologies USA, such as
IP@SS, Automated TravelDoc, APIS+, the Company's solution for banks, and more.
Bank Client Security and regulatory Compliance Solution
ICTS, through its subsidiary ICTS Technologies USA, Inc., offers a unique
front-end solution meeting the banking industry's security and regulatory
compliance requirements, including Section 326 of the USA Patriot Act, while
also ensuring that bank clients are provided with a high level of customer
service. Contrary to back-end systems offered by the competitors, our front-end
solution that incorporates unique features, such as a dynamic questionnaire,
developed on the basis of ICTS numerous years of experience in the detection of
suspicious signs and in advanced document checks.
Consulting, Auditing and Training
ICTS, through its subsidiary I-SEC International Security, B.V., provides
consulting services to airlines and airports. ICTS recommends the adoption of
specified security procedures develops recruitment and training programs for
clients to hire necessary security personnel and works with airport authorities
to ensure that they comply with applicable local requirements. ICTS trains
airline employees to screen passengers and to perform other security measures
through extensive courses and written training manuals. ICTS provides these
services in The Netherlands and Russia, as well as at London Gatwick
International Airport, UK, at Charles de Gaulle International Airport, France
and at airports in the Asia-pacific region.
Airline and Airport Customers
In 2002, the TSA accounted for 73% of ICTS's total revenues. In 2005,
2004, and 2003, ICTS had over eight main clients, which clients accounted for
over 50% of ICTS's aviation services revenues, in over 40 locations worldwide.
Entertainment Projects
In 2005, the Company closed its motion-based entertainment theaters in
Baltimore, MD and in Atlantic City, NJ. The Company is still a partner in a
movie-based entertainment facility in Niagara Falls, NY. No discussion has been
made as to whether the Niagra Falls location should be closed as well.
Marketing and Sales
Marketing and Sales in the U.S. In 2005, 84% of the revenues of ICTS from
continuing operations were derived in the U.S. ICTS derived most of its revenues
through contracts with airlines which were secured by ICTS as a result of
competitive bidding.
Marketing and Sales in Europe and the Asia-Pacific Region. Contracts for
aviation security services in various locations are obtained through competitive
bids that are issued by the applicable airport authorities, airlines or
agencies.
Marketing of Security Systems and Technology. ICTS intends to market its
new technology systems and technologies by establishing pilot projects with
airports and airlines. Upon the demonstration of the viability of the systems or
technology ICTS intends to develop a marketing plan to distribute the systems
and technology.
Leasing Operation
-47-
In June 2002 ICTS purchased equipment for an aggregate purchase price of
$23.5 million. The purchase price payable was $14.5 million in cash and the
balance subject to an $9 million self amortizing non-recourse promissory note
payable over five years. Pursuant to an operating lease, the equipment was
leased to related party, private Dutch company. The lease payments provided for
2005 totaled in the amount of (euro)2.3 million (at December 31, 2005 - $2.8
million) and an option to purchase the equipment after five or seven years based
upon the then fair market value. In the event that the lessee does not exercise
the option to purchase the equipment upon the expiration of the lease term, then
ICTS will be obligated to pay license fees in connection with intellectual
property associated with the equipment in an amount equal to 5% of the revenue
derived from the use of the equipment if ICTS exercises its option to operate
the equipment.
In 2003 and 2004, ICTS determined that the future cash flows from the
leased equipment will not recover its investment, and as a result recorded in
2004 and 2003 impairment losses totaled $8 million. The value of the equipment
at the option exercise date was based on an external assessment.
In June 2005, the Company granted the lessee an option to purchase the
leased equipment for an amount of $5 million plus an amount equal to the related
loan balance at the exercise date thus providing for the possibility of the
early termination of the leasing agreement. The option can be exercised from
June 1, 2005 until September 30, 2006. As consideration for granting the option
the lessee will pay to ICTS advanced lease installments of $1millon. The payment
of the purchase price will be reduced by advance payments on lease installments
of $1million received in July 2005 and an additional advance payment of $500
thousand due in January 2006 covering the lease periods from June 2005 forward.
As of June 30, 2005 the depreciated value of the leased equipment was $13.5
million. On December 28, 2005, the lessee exercised the option and paid the
Company $5 million. As part of the agreement the Company loaned to the Lessee $1
million Euros to be repaid on or before June 30, 2006. All the loan was repaid
until May 18, 2006. The selling of the leasing equipment terminates the leasing
activities of ICTS.
Competition
Competition in the aviation security industry as well as in the
non-security related aviation services industry is intense. Many of our
competitors have greater financial, technical and marketing resources.
We expect that our competitors will develop and market alternative systems
and technologies that may have greater functionality or be more cost effective
than the services we provide or the systems that we may develop. If our
competitors develop such systems we may not be able to successfully market our
systems. Even if we are able to develop systems with greater functionality which
are more cost effective than those developed by our competitors, we may not be
able to achieve market acceptance of our systems because our competitors have
greater financial and marketing resources.
Restrictions on Competition
Pursuant to an agreement dated as of July 1, 1995 with ICTS Global
Security (1995) Ltd. ICTS may not provide non-aviation security services in
Latin America, Turkey or Russia. ICTS Global Security is partially owned by Lior
Zouker, the former Managing Director of the Company and the Estate of Ezra
Harel, the former Chief Executive Officer and the former Chairman of Supervisory
Board of ICTS and a principal shareholder.
Aviation Security Regulatory Matters
ICTS aviation security activities are subject to various regulations
imposed by authorities and various local and federal agencies having
jurisdiction in the serviced area. ICTS on behalf of its clients was responsible
for adherence to such regulations relating to certain security aspects of their
activities. ICTS is also responsible to prevent passengers without proper travel
documentation from boarding a flight, thereby avoiding fines otherwise imposed
on its clients by immigration authorities.
ICTS is subject to random periodic tests by government authorities with
regard to the professional level of its services and training. Any failure to
pass such a test may result in the loss of a contract or a license to perform
services or a fine or both.
In the airports in which ICTS operates in The Netherlands and Russia, a
license to operate is required from the respective airport authority. ICTS
currently holds the licenses required to operate in such locations.
Prior to the enactment of the Security Act, the FAA regulated the
activities of Huntleigh with respect to security services offered at U.S.
airports. Presently such activities are regulated by the FAA and the TSA.
In order for ICTS to engage in aviation activities in the U.S. it may be
necessary for ICTS to demonstrate that it meets the TSA requirement of being at
least 75% owned and controlled by U.S. citizens.
Organizational Structure.
-48-
The following are the significant subsidiaries of ICTS (Exhibit 8):
ICTS USA, Inc., New York - 100%
Huntleigh USA Corporation. (Missouri - 100%)
Explore USA, Inc. (Delaware - 100%) - discontinued
operation since 2005
(i) Explore Atlantic City, LLC (Delaware - 100%) -
discontinued operation since 2005
(ii) Explore Baltimore, LLC (Delaware - 100%) -
discontinued operation since 2005
(iii) Explore Niagara, LLC (New York - 100%) -
discontinued operation since 2005
ICTS Technologies B.V. (The Netherlands - 100%)
ICTS Technologies USA, Inc. (Delaware - 100%)
ICTS Leasing B.V. (The Netherlands - 100%) - discontinued operation
since 2005
Procheck International B.V. (The Netherlands - 100%)
I-SEC International Security B.V. (The Netherlands - 100%)
HLS, B.V. (The Netherlands - 100%)
Property, Plant and Equipment.
The Company leases premises under long-term operating leases, in most
cases with renewal options. Lease expenses for the years ended December 31,
2005, 2004 and 2003 were $849, $809, $994 thousand from continuing operations
and $984, $596 and $172 from discontinued operations, respectively. The increase
in the lease expenses is primarily attributable to the entertainment sites.
Future minimum lease payments under long-term leases are as follows:
December 31, 2005
(in thousand)
--------------------------------------
Continuing Discontinued
Year Operations Operations
---------- ------------ ----------
2006 $ 708 $ 1,008
2007 297 1,053
2008 95 1,099
2009 27 1,099
2010 22 1,148
2011 and thereafter 10,289
------- -------
$ 1,149 $15,696
======= =======
During 2002 subsidiaries from the Entertainment segment signed rent contracts
for 15 years. As of December 2005, the company decided to discontinue the
operations of the Entertainment segment. The future lease payments from
discontinued operations stems from this liability. The Company aggregated and
capitalized the whole liability using an interest rate of 7.25%. Thus the
liability totaled to $9,701. The current maturities for this amount total at
December 31, 2005 to $942. Although the amount was fully allocated, the Company
is looking for alternative solutions regarding the contracts terms. ICTS is
guaranteeing those contracts.
Item 5. Operating and Financial Review and Prospects
Operating Results
General
-49-
This section contains forward-looking statements within the meaning of the
U.S. Private Securities Litigation Reform Act of 1995 concerning ICTS's
business, operations and financial condition. All statements other than
statements of historical facts included in this annual report on Form 20-F
regarding ICTS's strategy, future operations, financial position, costs,
prospects, plans and objectives of management are forward-looking statements.
When used in this annual report on Form 20-F the words "expect", "anticipate",
"intend", "plan", "believe", "seek", "estimate", and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. Because these
forward-looking statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these forward-looking
statements for a number of important reasons, including those discussed under
"Risk Factors" and elsewhere in this annual report on Form 20-F.
ICTS cannot guarantee any future results, levels of activity, performance
or achievements. The forward-looking statements contained in this annual report
on Form 20-F represent management's expectations as of the date of this annual
report on Form 20-F and should not be relied upon as representing ICTS's
expectations as of any other date. Subsequent events and developments will cause
management's expectations to change. However, while ICTS may elect to update
these forward-looking statements, ICTS specifically disclaims any obligation to
do so, even if its expectations change.
ICTS had specialized until 2002 in the provision of aviation security
services. Following the sale of its European operations in 2002 and the taking
of its aviation security business in the United States by the TSA in 2002, ICTS
engages primarily in non-security related activities. These activities consist
of non-security aviation security services and the development of technological
services. In addition, ICTS provides non-security related aviation services and
develops technological systems and solutions for the security market. ICTS also
was engaged in certain other activities, including constructing and developing
entertainment related projects.
In 2001 and 2002 ICTS sold substantially all of its European operations in
two stages, for an aggregate purchase price of $103 million. As a result of the
sale, and because of non-competitions restrictions in the sale agreement, ICTS
has fully divested itself from its European operations, except for its
operations in The Netherlands and Russia.
In February 2005, as the non-competition restrictions expired, the company
made a strategic decision to re-enter the European aviation security market.
Since then the company has signed few contracts throughout Europe with US
carriers and has established some subsidiaries in different locations.
In the fourth quarter of 2002, pursuant to the Security Act the Federal
government through the TSA took over substantially all of the aviation security
operations in U.S. airports. As a result, ICTS through its wholly owned
subsidiary Huntleigh USA Corp. ("Huntleigh") provides limited aviation security
services in the United States.
Critical Accounting Policies
The preparation of ICTS's consolidated financial statements in conformity
with accounting principles generally accepted in the United States requires
management to make estimates and assumptions in certain circumstances that
affect amounts reported in the accompanying consolidated financial statements
and related footnotes. Actual results may differ from these estimates. To
facilitate the understanding of ICTS's business activities, described below are
certain ICTS accounting policies that are relatively more important to the
portrayal of its financial condition and results of operations and that require
management s subjective judgments. ICTS bases its judgments on its experience
and various other assumptions that it believes to be reasonable under the
circumstances. Please refer to Note 2 to ICTS's consolidated financial
statements included in this Annual Report on Form 20-F for the year ended
December 31, 2005 for a summary of all of ICTS's significant accounting
policies.
The Company considers its most significant accounting policies to be those
discussed below.
Contract with the TSA
In February 2002, we entered into an aviation security services contract
with the TSA to continue to provide aviation security services in all of its
current airport locations until the earlier of either the completed transition
of these security services on an airport by airport basis to the U.S. Federal
Government or November 2002.
In connection with payments made by the TSA to Huntleigh USA, a wholly
owned subsidiary of the Company, for aviation security services provided in
2002, the Defense Contract Management Agency has indicated that it believes that
Huntleigh should not have been paid on a fixed price basis as believed by
Huntleigh, but on an actual costs plus what the TSA would consider a reasonable
profit. On that later basis Huntleigh may be required to repay to the TSA the
difference between such amount and the actual amounts paid to it. Huntleigh
however has various claims for additional amounts it considers are due to it for
the services provided to the TSA.
-50-
The Company estimates that if the TSA will claim such difference from
Huntleigh and will prevail in all of its contentions, and none of Huntleigh's
claims will be recognized, then the Company may suffer a loss in an amount of
about $59 million. In view of the nature of the above potential claims and
counter-claims management could not determine if, or to what extent, the TSA may
be successful in any claim it may assert. Therefore, no provisions have been
made by the Company with respect to the above potential claims. In addition, the
accounts receivable - trade includes $3 million as of December 31, 2005, 2004
which are due from the TSA and relate to the dispute.
Labor Department Issue
In a letter dated November 21, 2003, the U.S. Department of Labor ("DOL")
advised Huntleigh that it had failed to comply with a clause included in its
contract with the TSA under which Huntleigh had supposedly been required to pay
its employees certain minimum wages. The DOL claims that under this clause
Huntleigh owes such employees an amount of approximately $7.3 million and has
requested that Huntleigh makes such payment forthwith. On any amount so due,
Huntleigh will also be required to pay certain employment taxes of approximately
20%.
In March 2006, the DOL filed a complaint against Huntleigh stating that
underpayments amounted to $7.1 million. Huntleigh has filed a motion for summary
judgment and the DOL's response is due on September 30, 2006. No assurance can
be given as to the ultimate outcome or success to Huntleigh with the position it
is taking. The Company has made a provision in its financial statements in an
amount the Company deemed sufficient to account for its exposure for the above
claim.
Legal Proceedings
As a result of the September 11th terrorists attacks numerous lawsuits
have commenced against Huntleigh and ICTS. Huntleigh has been named in
approximately 70 lawsuits and ICTS in approximately 70 lawsuits. All of the
cases were filed in the United States District Court, Southern District of New
York. The cases arise out of Huntleigh's airport security service for United
Flight 175 out of Logan Airport in Boston, Massachusetts. At the present time
Huntleigh and ICTS are in 65 remaining cases. All of the cases involve wrongful
death except 16 which involve property damage. The cases are in their early
stages with depositions to begin on September 12, 2006.
Although these are the only claims brought against Huntleigh and ICTS with
respect to the terrorist attacks of September 11, 2001, Huntleigh and ICTS
anticipate additional related claims. See "Risk Factors-Potential For Liability
Claims."
Under current legislation Huntleigh and one other security company have
their liability limited to the amount of insurance coverage that they carry. The
legislation applies to Huntleigh, but not ICTS.
The Company has commenced an action against the U.S. Government with
regard to the Fifth Amendment rights relating to the taking of its business. In
December 2004 the Court denied the Government's Motion to Dismiss the case. A
motion for reconsideration was filed by the defendant and denied. Fact and
expert discovery have been completed and the U.S. Government has filed a motion
for summary judgment which is scheduled to be argued on October 12, 2006. The
trial for this action has been scheduled to commence on November 13, 2006.
The company is in dispute with Fraport A.G. International Airport Services
Worldwide in relation to alleged unlawful use of the letter combination "ICTS"
by the company. Fraport initiated proceedings before the district court of
Amsterdam, which are still pending. The principal amount claimed is (euro)57.65
million ($68.1 million as of December 31, 2005). However, this claim is based on
an alleged incorrect interpretation of the underlying contractual obligation. If
the court follows the Company's interpretation, the maximum liability is
(euro)700 thousand. ($827 thousand as of December 31, 2005). The Company filed a
counter claim of (euro)2.45 million ($2.9 million as of December 31, 2005) (or,
under the condition that Fraport's interpretation is followed, (euro)73.5
million ($86.9 million as of December 31, 2005)). Currently, this action is
stayed, pending settlement discussions between the parties.
In September 2005, Avitecture, Inc, (f/k/a Audiovisual-Washington, Inc.)
("Avitecture"), filed a Demand for Arbitration and Mediation against
ITA-Atlantic City, LLC ("ITA") with the American Arbitration Association in
Somerset, NJ. The Demand for Arbitration alleges that pursuant to a written
agreement dated March 20, 2003, ITA owes Avitecture $222 thousand for audio,
video and control systems it provided for ITA's use in a tourist attraction in
Atlantic City, New Jersey, but for which Avitecture claims it has not been paid.
The case is currently pending in a New Jersey arbitration proceeding before an
arbitrator assigned by the American Arbitration Association. In October 2005,
ITA filed its answer, generally denying the allegations in the Demand and
asserting numerous affirmative defenses. This action is currently in discovery.
-51-
In November 2005, Turner Construction Company ("Turner") filed a Demand
for Arbitration and Mediation against Explore Atlantic City, LLC ("Explore")
with the American Arbitration Association in Somerset, NJ. The Demand for
Arbitration alleges that pursuant to a written agreement dated October 28, 2003,
Explore owes Turner $948 thousand for work and/or services performed pursuant to
the contract, but for which Explore has not paid Turner. The case is currently
pending in a New Jersey arbitration proceeding. An arbitrator has been assigned
to the case so the parties can explore settling the matter. At this time,
Explore has responded to the demand by denying any liability, and has asserted
defenses to the amount of the claim and to challenge Turner's right to make any
demand for payment. A motion for summary judgment has been made by Turner and
the action is currently in discovery, with several depositions having been
taken. Based on the discovery taken place thus far, Explore is of the opinion
that there are several material factual disputes which it believes should defeat
this motion.
In December 2005, Barlo & Associates ("Barlo") filed a Demand for
Arbitration and Mediation against Explore with the American Arbitration
Association in Somerset, NJ. The Demand for Arbitration alleges that pursuant to
a written agreement dated April 16, 2002, Explore owes Turner $21 thousand for
architectural work and/or services performed pursuant to the contract, but for
which Explore has not paid Barlo. The case is currently pending in a New Jersey
arbitration proceeding. An arbitrator has been assigned to the case so the
parties can explore settling the matter. Explore has served discovery requests
on Barlo's counsel and Explore anticipates taking a number of depositions to
develop the factual support for its opposition to Barlo's claim and to support a
potential motion for summary judgment.
The TSA filed with the Office of Dispute Resolution for Acquisition
("ODRA") a contract dispute in connection with the contract entered into in
February 2002 by Huntleigh seeking reimbursement of an alleged overpayment of
principal in the amount of $59.2 million. This claim follows the lawsuit which
Huntleigh has already filed against the TSA for its breaches of its contract
with Huntleigh. Both claims are now pending before ODRA
Huntleigh intends to vigorously challenge the TSA's claim which it asserts
is devoid of any factual or legal merit. The TSA's filing comes on the heels of
a recent decision by ODRA granting Huntleigh's motion for partial Summary
Judgment against the TSA. ODRA has granted Huntleigh's motion for partial
Summary Judgment on Huntleigh's claim that the TSA breached the contract by
failing to give appropriate notice for transitioning airport locations. A
separate hearing will be held to determine the amount of damages due to
Huntleigh on this claim. With regards to the claim for the $59,2 million
overpayment, Huntleigh has filed a motion to dismiss the action. The TSA's
response to this motion is due on September 15, 2006 and Huntleigh's reply brief
is due on September 29, 2006.
The company's 40% owned subsidiary, Ramasso, which operated the Time
Elevator in Rome filed for bankruptcy. The receiver in the bankruptcy has filed
a proceeding against the financial institution which provided loans to Romasso
to recover a security deposit in the amount of (euro)866 thousand ($1 million as
of December 31, 2005) which the financial institution held as security and
applied against its outstanding indebtedness as a result of Romasso's defaults.
The financial institution has impleaded the company on its guarantee to the
financial institution if the financial institution is required to return the
security deposit to the receiver in the bankruptcy.
Last year the Company's subsidiary ICTS USA, Inc. filed a refund claim
with the Internal Revenue Service ("IRS") in an amount in excess of $2 million
which was to be reflected on the December 31, 2005 year end financial statements
as a receivable. The refund has not yet been received by the Company. The
Company made a demand to the IRS for the refund. Thereafter, by letter dated
August 15, 2006, the Company was advised that a criminal investigation by the
United States Department of Justice, Tax Division is ongoing by a grand jury
regarding possible criminal tax violations by the subsidiary for the tax years
2002 and 2003 regarding certain royalty payment made to the Company. As a result
of the investigation the Company believes that the refund had been put on hold.
Although it is not possible at this time to determine the outcome of this
matter, should the result of the IRS investigation prove unsatisfactory to the
Company, this will have a material adverse effect on the Company.
On August 30, 2006 the Company filed a complaint in the United States
District Court for the Southern District of New York against the United States
and Area Director - Technical Compliance, Internal Revenue Service to recover
the refund in the amount of $2,470,365. In addition, the Company has filed an
administrative claim against the IRS in order to recover the same refund as well
as damages. The Company is currently waiting for a response from the defendants.
Two of the Company's subsidiaries have been sued by their landlord (which
is the same entity for both properties) alleging breach of the respective
leases. One suit is in Circuit Court for Baltimore City affecting the Company's
Explore Baltimore facility, and the other is in the Superior Court of New Jersey
affecting the Company's Explore Atlantic City facility. Through legally
defective service, the landlord was able to obtain orders for possession of both
of these locations. A petition to open the Atlantic City action has been filed
and one is being prepared for the Baltimore action. In addition to seeking
possession, in both the cases the landlord is seeking unpaid rent for the entire
term of the leases. In the Atlantic
-52-
City case the amount sought is $5,970.197 and in the Baltimore case, the amount
is $ 4,443,513.01. While a resolution of both actions is being discussed, a
standstill of the proceedings is being negotiated.
On August 2006 the Company was informed that Rogozin Industries Ltd (in
liquidation) filed a litigation regarding a payment of $340 it paid during 2001,
which according to the litigation ICTS is guaranteeing.
Discontinued Operations:
1) On December 28, 2005 the Company sold its lease equipment to the
lessee and by that terminated its business in the Lease segment. The
loss associated with the selling of the equipment totaled to $4,774.
The cost of the equipment was $23.5 million and impairment losses
were recorded in 2004 and 2003 of $2,247 and $6,042 respectively.
2) After reviewing the financial results of the Entertainment segment,
the Company decided in December 2005 to cease its operations in this
field. As a result of this decision the company recorded an expense
of $9,701 associated with rent expenses that the company is
obligated to pay until the year 2019. ICTS is guarantying this
commitment.
Pursuant to Statement of Financial Accounting Standard ("FAS") No.144 of
the Financial Accounting Standard Board of the United States "Accounting for the
impairment or Disposal of Long Lived Assets" in a case of discontinued
operations there has to be a separation in the Financial Statements between
continuing operations and the discontinued operations - see note 2 (u) in the
financial statements.
Following this statement all the amounts that represent the discounting
operations were presented separately from the continuing operations, including
the comparative numbers of the last years.
Goodwill
As from January 1, 2002, pursuant to Statement of Financial Accounting
Standard ("FAS") No.142 of the Financial Accounting Standards Board of the
United States (the "FASB"), "Goodwill and Other Intangible Assets", goodwill is
no longer amortized but rather is tested for impairment annually. During 2002,
the Company identified its various reporting units, which consist of its
operating segments. The Company has utilized expected future discounted cash
flows to determine the fair value of the reporting units and whether any
impairment of goodwill existed as of the date of adoption of FAS 142. As a
result of the application of the transitional impairment test, the Company does
not have to record a cumulative effect of accounting change for the estimated
impairment of goodwill. The Company has designated December 31 of each year as
the date on which it will perform its annual goodwill impairment test.
In 2004, as a result of the impairment of the entertainment projects,
management has decided to write off the goodwill related to the entertainment
acquisition amounted to $5.3 million.
On December 31, 2003, an impairment test was conducted on the unamortized
goodwill pursuant to which it was determined that, as of the date of the
impairment test, an impairment existed concerning Demco of $797 thousand.
Changes in the fair value of the reporting units following material
changes in the assumptions as to the future cash flows and/or discount rates
could result in an unexpected impairment charge to goodwill.
Functional and reporting currency
As of January 1, 2002, subsequent to the sale of ICTS's interest in ICTS
Europe, the functional currency of ICTS and its U.S. operations is the U.S.
Dollar because substantially all of the revenues and operating costs are in
dollars. Prior to January 1, 2002 the functional currency was primarily the
Euro. The financial statements of subsidiaries whose functional currency is not
the Dollar are translated into Dollars in accordance with the principles set
forth in Statement of Financial Accounting Standards ("FAS") No. 52 of the
Financial Accounting Standards Board of the USA ("FASB"). Assets and liabilities
are translated from the local currencies to dollars at year-end exchange rates.
Income and expense items are translated at average exchange rates during the
year.
Revenue recognition
Revenue is recognized when services are rendered to customers, which are
performed based on terms contracted in a contractual arrangement provided the
fee is fixed and determinable, the services have been rendered and collection of
the related receivable is probable. Revenue from leased equipment is recognized
ratably over the year.
Impairment in value of long-lived assets
-53-
ICTS has adopted FAS 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", effective January 1, 2002. FAS 144 require that long-lived
assets, held and used by an entity be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable. Under FAS 144, if the sum of the expected future cash flows
(undiscounted and without interest charges) of the long-lived assets is less
than the carrying amount of such assets, an impairment loss would be recognized,
and the assets would be written down to their estimated fair values.
During 2004 impairment tests were conducted on the carrying amount of the
long-lived assets of the Company pursuant to which it was determined that, as of
the date of the impairment test, an impairment existed in connection with the
leased equipment in an amount of $2 million and with the entertainment sites in
the amount of $8.1 million, as a result an impairment loss totaled to $10.1
million was recognized (all discontinued operations).
On December 31, 2003 an impairment test was conducted on the carrying
value of long-lived assets of the Company pursuant to which it was determined
that, as of the date of the impairment test, the impairment existed in
connection with equipment at Explores' facilities in Baltimore, Maryland and
Atlantic City, New Jersey in the amount of $7.5 million and leased equipment of
$6 million, as a result an impairment loss totaled $13.5 million was recognized
(all discontinued operations).
-54-
Discussion and Analysis of Results of Operations
The following table summarizes certain statement of operations data for
ICTS for the years ended December 31, 2005, 2004, 2003, 2002 and 2001:
(U.S Dollars in thousand except per share data)
Year ended December 31,
--------------------------------------------------------------
2005 2004 2003 2002 2001
--------- --------- --------- --------- ---------
REVENUES $57,713 $57,993 $67,933 $278,561 $212,137
COST OF REVENUES 53,721 52,825 52,557 212,439 189,925
--------- --------- --------- --------- ---------
GROSS PROFIT 3,992 5,168 15,376 66,122 22,212
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 11,690 12,201 8,547 25,635 18,641
IMPAIRMENT OF ASSETS AND GOODWILL 797 9,156 820
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (7,698) (7,033) 6,032 31,331 2,751
FINANCIAL INCOME (EXPENSES) - net (908) (452) 4,118 3,046 1,977
OTHER INCONE (EXPENSES) - net 147 (2,907) (353) 41,229 29,520
INCOME (LOSS) BEFORE TAXES (8,459) (10,392) 9,797 75,606 34,248
INCOME TAXES BENEFIT (EXPENSE) (2,387) 1,529 (3,910) (16,442) (4,919)
SHARE IN LOSSES OF ASSOCIATED
COMPANIES - net (486) (1,625) (6,661) (1,807) (395)
MINORITY INTERESTS IN PROFIT OF
SUBSIDIARIES (2,735)
--------- --------- --------- --------- ---------
PROFIT (LOSS) FROM CONTINUING OPERATIONS (11,332) (10,488) (744) 57,357 26,198
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of tax benefit
of $2,525, $1,655 and $795 in 2005, 2004 and
2003, respectively Includes loss of $4,774 on
sale of assets to a related party on 2005 and
after share in loss of associated company of $36
and $81 in 2005 and 2004, respectively (13,548) (15,474) (18,130) (542)
--------- --------- --------- --------- ---------
INCOME (LOSS) FOR THE YEAR (24,880) (25,962) (18,904) $56,815 $26,198
--------- --------- --------- --------- ---------
OTHER COMPREHENSIVE INCOME:
Translation adjustments (1,560) 1,043 3,456 710 (1,811)
Unrealized gains (losses)
on marketable securities (214) (616) 794 731 (345)
Reclassification adjustment
for losses for available
for sale securities included
in net income 237 (771) 368
(1,774) 427 4,487 670 (1,788)
--------- --------- --------- --------- ---------
TOTAL COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR $(26,654) $(25,535) $(14,417) $57,485 $24,410
========= ========= ========= ========= =========
LOSSES PER SHARE:
Profit (Loss) from continued operations:
Profit (Loss) per common share - basic $(1.74) $(1.61) $( 0.12) $8.93 $4.18
========= ========= ========= ========= =========
Profit (Loss) per common share - diluted $(1.74) $(1.61) $( 0.12) $8.88 $4.09
========= ========= ========= ========= =========
(Loss) from discontinued operations:
(Loss) per common share - basic $(2.07) $(2.37) $(2.78) $(0.08)
========= ========= ========= =========
(Loss) per common share - diluted $(2.07) $(2.37) $(2.78) $(0.08)
========= ========= ========= =========
NET INCOME (LOSS):
Profit (Loss) per common share - basic $(3.81) $(3.98) $( 2.90) $8 .85 $4.18
========= ========= ========= ========= =========
Profit (Loss) per common share - diluted $(3.81) $(3.98) $( 2.90) $8.80 $4.09
========= ========= ========= ========= =========
Weighted average shares of common stock
outstanding 6,528,100 6,524,250 6,513,100 6,419,575 6,263,909
Adjusted diluted weighted average shares of
Common stock outstanding 6,528,100 6,524,250 6,513,100 6,453,447 6,412,535
========= ========= ========= ========= =========
-55-
The following table sets forth, for the annual periods indicated, certain
statement of operations data as a percentage of revenues:
Year Ended December 31,
-----------------------------------------
2005 2004 2003
------ ------ ------
Revenues ........................................ 100% 100% 100%
Cost of revenues................................. 93.1% 91.1% 77.4%
Gross profit..................................... 6.9% 8.9% 22.6%
Selling, general and
administrative expenses..................... 20.3% 21.0% 12.6%
Operating income (loss).......................... (13.3)% (12.1)% 8.9%
Loss from continuing operations.................. (19.6)% (18.0)% (1.1)%
Loss from discontinued operations................ (23.5)% (26.7)% (26.7)%
Loss for the year................................ (43.1)% (44.8)% (27.8)%
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
The following information represents only the results of the company from
continuing operations (not including the results of the discontinued
operations), unless mentioned otherwise.
Revenues. Revenues for the year ended December 31, 2005 were $57.7 million
(2004: $58 million), and consisted of $48.3 million (2004: $48.2 million) from
U.S. operations, and $9.4 million (2004: $9.8 million) from other operations.
Almost all revenues in the U.S. ($48.3 million) are derived from other
than aviation security services.
Gross Profit. Gross profit is defined as revenues less costs directly
related to such revenues as well as certain indirect expenses such as airport
offices, airport fees, local training and other direct labor related expenses
such as uniforms and transportation.
Gross profit for the year ended December 31, 2005 was $4 million, 7%, as a
percentage of revenue (2004: $5.2 million, 9% as a percentage of revenue). The
decrease in gross profit as a percentage of revenues is primarily attributable
to the fact that the gross profit for the year 2005 include expenses of $1.1
million regarding the new activities of operations in the aviation field by
I-SEC and its subsidiaries, mainly establishing costs.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $11.7 million for the year ended December 31, 2005,
20.3% as a percentage of revenues, as compared to $12.2 million, 21% as a
percentage of revenues for the year ended December 31, 2004. The expenses as a
percentage of revenues are similar to last year. The improvement is a result of
efforts done by management to reduce the company expenses.
Operating Loss. Operating loss for the year ended December 31, 2005 was
$7.7 million as compared to an operating loss of $7 million for the year ended
December 31, 2004.
Financial Expenses. Financial expenses in 2005 were $908 compared to $452
in 2004. The increase mainly regards to new loans that were taken by one of the
subsidiaries to purchase new operating equipment and interest expenses form
short-term bank credit.
Other Income (Expense), Net. Other income for the year ended December 31,
2005 was $147 thousand compared to expense of $2.9 million for the year ended
December 31, 2004. $2.7 million in 2004 were attributable to a write-off of the
Company's investment in Bilu. The other income in 2005 was due mainly to one
time payments in the amount of $110 received from investments that were written
off in the past.
Taxes On Income. In 2005 the Company recorded tax expenses of $2,387
thousand attributable mainly to tax accruals regarding tax years 2002 and 2003.
Share in Losses of Associated Companies. $486 thousand in 2005 as compared
to a loss of $1.6 million for the year ended December 2004. The high loss is
according to our investments in Inksure (loss of 1.2 million during 2005
compared to $1 million in 2004) and NAS (profit of $705 during 2005 compared to
$1.2 million profit in 2004). During 2004, a $1.8 million write-off of Bilu was
also included in the loss of associated companies.
Loss from Continuing Operations. ICTS loss from continuing operations
total in 2005 to $11.3 million compared to $10.5 million in 2004.
-56-
Loss from Discontinued Operations. ICTS loss from discontinued operations
in 2005 totaled $13.5 million compared to $15.5 million in 2004. The loss of
2005 includes a capital loss of $4,774 from the selling of the leasing
equipment. The loss in 2004 includes write off losses of $15,422. During 2005 an
expense of $9.7 million was recognized regarding rent contract that should be
paid until 2019.
Net loss. As a result of the foregoing, ICTS's loss amounted to $25
million for the year ended December 31, 2005, as compared to $26 million loss
for the year ended December 31, 2004.
As to the geographical segments please see note 19(a) in the financial
statements.
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
The following information represents only the results of the company from
continuing operations (not including the results of the discontinued
operations), unless mentioned otherwise.
Revenues. Revenues for the year ended December 31, 2004 were $58 million
(2003: $67.9 million), and consisted of $48.2 million (2003: $58.5 million) from
U.S. operations, and $9.8 million (2003: $9.4 million) from other operations.
The decrease in revenues from U.S. operations is primarily the result of
tough competition and the weakness of the aviation industry. As a result of the
Security Act since November 2002, ICTS provides limited aviation security
services within the United States. In 2003 the Company did not generate any
revenues pursuant to a contract with the TSA.
Almost all revenues in the U.S. $48.2 million are derived from other than
aviation security services.
Gross Profit. Gross profit is defined as revenues less costs directly
related to such revenues as well as certain indirect expenses such as airport
offices, airport fees, local training and other direct labor related expenses
such as uniforms and transportation.
Gross profit for the year ended December 31, 2004 was $5.2 million, 9%, as
a percentage of revenue (2003: $15.4 million, 22.6% as a percentage of revenue).
The decrease in gross profit as a percentage of revenues is primarily
attributable to the fact that the gross profit for the year 2003 was positively
impacted by a non-recurring contribution of $8.6 million. The non-recurring
contribution is primarily the result of a reversal in the amount of $17.8
million of Warn Act related accrual made in 2002. This was partly offset by an
accrual concerning a dispute with the U.S. Department of Labor totaling $7.3
million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $12.2 million for the year ended December 31, 2004,
21% as a percentage of revenues, as compared to $8.5 million, 12.6% as a
percentage of revenues for the year ended December 31, 2003. The increase in
selling, general and administrative expenses is primarily attributable to the
implementation of restructuring measures imposed by the new management of the
Company aiming into focusing to the main core business of security and disposing
of non core segments. These measures increased costs such as compensation to
previous employees, hiring new professional personnel and legal fees.
Operating Loss. Operating loss for the year ended December 31, 2004 was $7
million as compared to an operating income of $6 million for the year ended
December 31, 2003.
Financial Income (Expenses). Financial expenses in 2004 was $452 thousand
compared to $4.1 million income. Exchange rates totaled an expense of $84
thousand in 2004 compared to $2.6 million income in 2003. The decline in
interest income is due to decrease of interest bearing deposits and marketable.
Other Income (Expense), Net. Other income for the year ended December 31,
2004 was $2.9 million negative as compared to $353 thousand for the year ended
December 31, 2003. $2.7 million were attributable to a write-off of the
Company's investment in Bilu.
Taxes On Income. In 2004 the Company recorded tax benefit of $1.5 million
attributable mainly to tax refunds on carried back losses against tax paid on
income in 2002 in the USA.
Share in Losses of Associated Companies. $1.6 million in 2004 consists
mainly of write-off of the equity investment in Pioneer ($1.8 million), loss in
Inksure ($1 million) and income in NAS ($1.2 million).
Loss from Continuing Operations. ICTS loss from continuing operations
totaled in 2004 to $10.5 million compared to $744 thousand in 2003.
Loss from Discontinued Operations. Loss from discontinued operations total
in 2004 of $15.5 million compared to $18.1 million in 2003. Write-off expenses
totaled o $15,422 and $13,555 in 2004 and 2003, respectively. Financial
-57-
expenses reduced from $3,334 in 2003 to $321 in 2004 mainly because exchange
rates expenses that totaled $0 and $2,877 in 2004 and 2003, respectively.
Net loss. As a result of the foregoing, ICTS's loss amounted to $26
million for the year ended December 31, 2004, as compared to $18.9 million loss
for the year ended December 31, 2003.
As to the geographical segments please see note 19(a) in the financial
statements.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
The following information represents only the results of the company from
continuing operations (not including the results of the discontinued
operations), unless mentioned otherwise.
Revenues. Revenues for the year ended December 31, 2003 were $67.9 million
(2002: $278.6 million), and consisted of $58.5 million (2002: $272.7 million)
from U.S. operations, and $9.4 million (2002: $5.9 million) from other
operations.
The decrease in revenues from U.S. operations is primarily the result of
decreased sales of aviation security services pursuant to contracts with the TSA
following the September 11th events. Revenues derived from such services in 2002
were $205.7 million (74% of ICTS's revenues in that year). As a result of the
Security Act since November 2002, ICTS provides limited aviation security
services within the United States. Therefore, in 2003 the Company did not
generate any revenues pursuant to a contract with the TSA.
Almost all revenues in the U.S. ($58.5 million), are derived from other
than aviation security services, compared with $37.6 million for 2002. Such
increase is primarily attributable to an increase in sales to existing airline
customers through expanding ICTS's location base and the offering of new
services.
Gross Profit. Gross profit is defined as revenues less costs directly
related to such revenues as well as certain indirect expenses such as airport
offices, airport fees, local training and other direct labor related expenses
such as uniforms and transportation.
Gross profit for the year ended December 31, 2003 was $15.4 million,
22.6%, as a percentage of revenue (2002: $66.1 million, 23.7% as a percentage of
revenue). Management believes that the decrease in gross profit as a percentage
of revenues is primarily attributable to the decrease in aviation security
services as per the TSA contract. Gross profit was positively impacted by a
non-recurring contribution of $8.6 million in the third quarter. The
non-recurring contribution is primarily the result of a reversal in the amount
of $17.8 million of Warn Act related accrual made in 2002. This was partly
offset by an accrual concerning a dispute with the US Department of Labor
totaling $7.3 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $8.5 million for the year ended December 31, 2003,
12.6% as a percentage of revenues, as compared to $25.6 million, 9.2% as a
percentage of revenues for the year ended December 31, 2002. The decrease in
selling, general and administrative expenses is primarily attributable to the
decrease in aviation security services.
Operating Profit. Operating profit for the year ended December 31, 2003
was $6 million as compared to an operating profit of $31.3 million for the year
ended December 31, 2002.
Financial Income, Net. Financial income, net includes interest income (net
of interest expense), and adjustments due to the impact of exchange rate
fluctuations. The interest and financial income increased to $1.5 million income
from $689 thousand in 2002, due the sale of certain traded shares during 2003.
Other Income (Expense), Net. Other income for the year ended December 31,
2003 was $353 thousand negative as compared to $41.2 million for the year ended
December 31, 2002. Other expenses during 2003 included mainly accounting
provisions related to the Companies' investments in Artlink. Other income for
the year ended December 31, 2002 includes the profit on the sale of 55% interest
in ICTS Europe which resulted in gross proceeds, in the amount of $41.2 million.
Share in Profits and (Losses) of Associated Companies. The share in losses
of associated companies which includes amortization of intangible assets for the
year ended December 31, 2003 was $6.7 million.
Profit (Loss) from Continuing Operations. ICTS loss from continuing
operations totaled in 2003 was $744 compared to $57.4 profit in 2002.
Loss From Discontinued Operations. Loss from discontinued operations
totaled in 2002 $18.1 million compared to 0.5 million in 2002. The leasing
activities started on the second half of 2002 and its activities during 2002
were almost balanced comparing to loss of $8 million in 2004, including $6
million impairment of equipment. In 2003 the loss
-58-
regarding the entertainment segment totaled $10.1 million, including $7.5
million impairment compared to 2002 in which the loss amounted to $0.5 million -
establishing expenses.
Net income (Loss). As a result of the foregoing, ICTS's loss totaled
approximately $18.9 million in the year ended December 31, 2003, as compared to
approximately $56.8 million profit for the year ended December 31, 2002.
As to the geographical segments please see note 19(a) in the financial
statements. Revenues in the USA were negatively impacted by loss of the TSA
contract. Revenues in The Netherlands increased due to a favorable exchange rate
of the euro to the dollar and first full year of operation leasing segment.
Liquidity and Capital Resources
The following information refers to the continuing operations results of
the company:
ICTS's principal cash requirement for its operations is the payment of
wages. Working capital is financed primarily by cash from operating activities,
liquidations of long-term assets and by short-term borrowings. As of December
31, 2005, we had cash and cash equivalents of $5.9 million as compared to $3.2
million on December 31, 2004, and restricted cash and short-term investments of
$3.7 million as compared to $4.8 million on December 31, 2004.
During the years ended December 31, 2005 and 2004, the Company has
incurred $25 million and $26 million net losses, respectively, which were
accompanied by net cash used in operating activities of $5.2 million and $1.2
million, respectively. As of December 31, 2005 the Company had a working capital
deficiency of $2.7 million. In 2005, the Company's management commenced
liquidating its position in several long- term assets. In addition, during 2005
management has ceased its operations in non core business and is re-entering to
the Security European market. Management anticipates that continuing that
program will provide the Company with the sufficient funds to operate its
business in 2006. The Company's activity, for the long term, depends on entering
into additional service contracts.
The Company's cash and cash equivalents increase in 2005 by $2.7 million
as a result of the following:
Net cash used in operating activities for the year ended December 31, 2005
was $5.2 million as compared to net cash used in operating activities of $1.2
million for the year ended December 31, 2004 and net cash used by operating
activities of $19.3 for the year ended December 31, 2003. The increase in cash
for the year ended December 31, 2005 was primarily attributable to the selling
of the leasing equipment in December 28, 2005 for an amount of $5 million in
cash plus taking over from ICTS a related loan amounted $2.1 million as of the
exercise date. The net loss during 2005 totaled to $25 million offset by non
cash expenses as write-off investments of $1.1 million and share in losses of
associated companies of $486 thousand. Changes in operating assets and
liabilities amounting to $4.6 million. The changes in operating assets and
liabilities were primarily attributable to $1.8 million increase in accounts
receivable ,an increase of $3.5 million in other accrued expenses and an
increase of $1.7 million in accounts payable. Net of cash used by discontinued
operations totaled $0.3 million.
Net cash provided by investing activities was $8.3 million for the year
ended December 31, 2005 as compared to net cash used in investing activities of
$0.3 for the year ended December 31, 2004 and net cash used in investing
activities of $3.2 million for the year ended December 31, 2003. Net cash
provided by investing activities was primarily attributable to the discontinued
operations of $5.3 million, $1.3 million decrease in restricted cash and $2.2
million proceeds from sale of time deposit and investments, Total cash used for
purchase of equipment totaled $0.3 million.
Net cash provided by financing activities was $22 thousand for the year
ended December 31, 2005 as compared to net cash used in financing activities of
$3.1 million for the year ended December 31, 2004 and $2.4 million for the year
ended December 31, 2003. In 2005, net cash provided by financing activities was
attributed primarily to long- tern loans and decrease in short- term bank
credit.
In April, 2005, a Company's subsidiary in the U.S entered into a Loan and
Security Agreement with a financial institution which replaces the revolving
line of credit which has expired in January 2005. The new agreement provides for
revolving loans up to $8 million limited by 85% of defined eligible accounts
receivable plus 95% of the balance of required certificates of deposit less
letter of credit obligations. The line of credit is secured by the Company
guaranty; by a first priority security interest in all existing and future
property of the subsidiary and the subsidiary has undertaken to comply with
financial covenants and non-financial provisions. In June 2005, the subsidiary
was notified by the financial institution that it is in default in three
covenants of its loan agreement. The subsidiary failed to maintain the tangible
net worth, as defined in the loan agreement, of $654, failed to maintain the
minimum interest coverage ratio of 1.50 and that the subsidiary chief executive
officer did not remain in office, due to his resignation. The financial
institution provided notice of these defaults, but did not accelerate the loan
nor provided a waiver. In December 2005, an amended agreement was signed which
adjust the minimum tangible net worth covenant, the Interest Coverage covenant
and the annual Capital
-59-
Expenditure Limitation covenant. As of December 31, 2005, the Company met all of
the financial covenants in the Amended Agreement except for the Interest
Coverage covenant. In December 31, 2005, $3.9 million was outstanding and $1.2
million was available under the revolving credit facility for additional
borrowings. The borrowing agreement also provides for an additional commitment
guarantee of up to a maximum of $3.5 million for letters of credit and requires
a per annum fee equal to 3 percent. The Company had letters of credit
outstanding of approximately $2.5 million and $3.2 million at December 31, 2005
and 2004, respectively.
In June 2002 ICTS purchased equipment for an aggregate purchase price of
$23.5 million. The purchase price was payable $14.5 million in cash and the
balance subject to an $9 million self amortizing non-recourse promissory note
payable over five years. Pursuant to an operating lease, the equipment was
leased to a private Dutch company. The lease provides for annual lease payments
in the amount of Euro 2.6 million and an option to purchase the equipment after
five or seven years based upon the then fair market value. In the event that the
lessee does not exercise the option to purchase the equipment upon the
expiration of the lease term, then ICTS will be obligated to pay license fees in
connection with intellectual property associated with the equipment in an amount
equal to 5% of the revenue derived from the use of the equipment if ICTS
exercises its option to operate the equipment. In June 2005, the Company granted
the lessee an option to purchase the leased equipment for an amount of $5
million plus an amount equal to the related loan balance at the exercise date
thus providing for the possibility of the early termination of the leasing
agreement. The option can be exercised from June 1, 2005 until September 30,
2006. As consideration for granting the option the lessee paid to ICTS by
advance lease payments of $1million received in July 2005. On December 2005 the
lessee decided to exercise the option and paid and amount of $5 million, plus
took responsibility on the related loan amounted to $2 million.
On February 17, 2002, ICTS entered into an aviation security services
contract with the TSA to continue to provide aviation security services in all
of its current airport locations until the earlier of either the completed
transition of these security services on an airport by airport basis to the U.S.
Federal Government or November 2, 2002. The TSA, in accordance with standard
practices of auditing ICTS's billings pursuant to the contract, has sent the
Company a notice indicating that it believes that the Company should not have
been paid on fixed cost basis but on an actual cost plus what the TSA would
consider a reasonable profit and thereof stated that the Company owed
approximately $59 million. ICTS however has various claims for additional
amounts it considers are due to it for the services provided to the TSA. The
Company estimates that if the TSA will prevail in all of its contentions, and
none of the Company's claims will be recognized, then there may be a material
adverse effect on ICTS's financial condition.
As a result of the September 11th terrorists attacks numerous lawsuits
have been commenced against ICTS and its U.S. subsidiary. The cases arise out of
airport security services provided for United Flight 175 out of Logan Airport in
Boston, Massachusetts which crashed into the World Trade Center. In addition, to
the present claims additional claims may be asserted. The outcome of these or
additional cases is uncertain. If there is an adverse outcome with respect to
any of these claims which is not covered by insurance, then there may be a
significant adverse impact on us.
The following table summarizes ICTS's obligations from continuing
operations to make future payments under contracts as of December 31, 2005:
Contractual Obligations Payments due by Period (in thousand)
- ----------------------- ------------------------------------------------------------
more
Less than 1-3 4-5 than
Total a year years years 5 years
----- --------- ----- ----- -------
Long-term debt $ 463 $150 $301 $12
Accrued severance pay 189 189
Operating lease obligations (1) 1,149 708 419 22
------ ---- ---- --- ----
$1,801 $858 $720 $34 $189
The Company has also a liability for rent regarding its discontinued
operations of $9,701 which is supposed to be paid until 2019.
(1) The Company leases premises under long-term operating leases, in most
cases with renewal options. Lease expenses from continuing operations, for the
years ended December 31, 2005, 2004 and 2003 were $849, $809, $984,
respectively, and $984, $596 and $172 from discontinued operations respectively.
ICTS's guarantees regarding Bilu:
-60-
The Company has renewal outstanding bank guaranties to Bilu Investments,
Ltd. ("Bilu") in the amount of $2,515, as collateral to these guaranties the
Company has long-term restricted deposits in equivalent amounts. In December 31,
2004, as a result of continuance deterioration in the financial results of Bilu,
the Company has determined to write off its investment in Bilu and to fully
provide of its bank guaranties.
Off- balance sheet arrangements
The Company is not a party to any material off -balance sheet
arrangements. In addition, ICTS has no unconsolidated special purpose financing
or partnership entities that are likely to create material contingent
obligation.
Our future capital requirements, the timing and amount of expenditures
will depend on our success in developing and implementing our new business
strategy. Based on our current plans, we believe that our existing cash
balances, cash flows from operating and available borrowing will be sufficient
to satisfy our capital requirements for year 2006.
Research and development, patents and licenses, etc.
ICTS has recently launched a trial phase of its IP@SS project. IP@SS
consists of a computerized platform integrating various technologies, including
document readers, biometrics identification systems and a smart card. The system
is modular and may be used on a stand-alone basis or integrated into an existing
check-in system. The system has been designed to protect passenger privacy. The
system is designed to speed up and simplify the processes of identification and
security checks of passengers at airports. The system enhances customer service
provided by airlines and airports to outbound passengers.
Basic and technologically upgraded IP@SS systems were tested with the
frameworks of pilot trials which were carried out at several airports.
Trend information
Labor market conditions at a particular airport location may require the
Company to increase its prices. Cost of labor is the most important variable in
determining any cost increases.
Item 6. Directors, Senior Management and Employees
The following table lists the directors and executive officers of ICTS:
Age Position
--- --------
Menachem Atzmon 62 Chairman of the Supervisory Board
M. Albert Nissim 72 Member of the Supervisory Board
Elie Housman 69 Member of the Supervisory Board
Gordon Hausmann 61 Member of the Supervisory Board
David W. Sass 70 Member of the Supervisory Board
Philip M. Getter 69 Member of the Supervisory Board and
Chairman of the Audit Committee
Avraham Dan 61 Managing Director and Chief Financial Officer
Ran Langer 60 Managing Director
Alon Raich 30 Financial Controller
Menachem J. Atzmon is a CPA (Isr). Mr. Atzmon is a controlling shareholder
of Harmony Ventures B.V. Since 1996 he has been the managing director of
Albermale Investment Ltd. and Kent Investment Holding Ltd., both investment
companies. Since January 1998 he has served as CEO of Seehafen Rostock. He has
been a member of the Supervisory Board of ICTS since 1999.
M. Albert Nissim has served as Secretary of ICTS since January 1994 and
became a member of the Supervisory Board in 2002. Mr. Nissim also serves as
President of ICTS - USA, Inc. From 1994 to 1995, he worked as the managing
director of ICTS and from 1990 to the present, he has been Vice-President and a
director of Tuffy Associates. Mr. Nissim has been the President of Pioneer
Commercial Funding Corp. ("Pioneer") since January 1997 and also serves as the
Chairman.
Elie Housman has served as Chairman of Inksure Technologies, Inc. since
February 2002. Mr. Housman was a principal at Charterhouse Group International,
a privately held merchant bank, from 1989 until June 2001. At Charterhouse, Mr.
Housman was involved in the acquisition of a number of companies with total
sales of several hundred million dollars. Mr. Housman was the Chairman of Novo
Plc. in London, a leading company in the broadcast storage and services
industry.
-61-
He is also a director of EUCI Career Colleges, Incorporated, which is listed on
the NASDAQ Small Cap Market and the Boston Stock Exchange and Top Image System,
Ltd. At present, Mr. Housman is a director of a number of privately held
companies in the United States. He became a member of the Supervisory Board of
ICTS in 2002.
Gordon Hausmann is the senior partner of his own law firm which he founded
in London 25 years ago. He specializes in business finance and banking law. He
holds office as a Board Member of the UK subsidiaries of various quoted
companies, Company Secretary of Superstar Holidays Ltd., a subsidiary of El Al
Airlines Ltd., Director of Dominion Trust Co. (UK) Ltd., associated with a
private Swiss banking group, and a Governor of the Hebrew University.
David W. Sass for the past 45 years has been a practicing attorney in New
York City and is currently a senior partner in the law firm of McLaughlin &
Stern, LLP. He has been a director of ICTS since 2002. He is also corporate
secretary and a director of Pioneer Commercial Funding Corp. Mr. Sass became a
director of Inksure Technologies, Inc. in 2003, a company which develops,
markets and sells customized authentication systems designed to enhance the
security of documents and branded products and to meet the growing demand for
protection from counterfeiting and diversion. He is also a director of several
privately held corporations. He is the honorary Trustee of Ithaca College.
Philip M. Getter is currently the managing member of GEMPH Development
LLC. From 2000 to 2005 he was a partner of DAMG Capital, LLC Investment Bankers.
Prior thereto he was most recently head of Investment Banking and a member of
the board of directors of Prime Charter, Ltd. He has more than thirty years of
corporate finance experience. Having served as Administrative Assistant to the
Director of United States Atomic Energy Commission from 1958 to 1959, he began
his Wall Street career as an analyst at Bache & Co. in 1959. He was a partner
with Shearson, Hammill & Company from 1961 to 1969 and a Senior Partner of Devon
Securities, an international investment banking and research boutique from 1969
to 1975. Mr. Getter was a member of the New York Society of Security Analysts.
From 1975 to 1983 he was President and CEO of Generics Corporation of America, a
public company that was one of the largest generic drug manufacturers in the
United States. As Chairman and CEO of Wolins Pharmacal from 1977 to 1983 he led
the reorganization and restructuring one of the oldest and largest direct to the
profession distributors of pharmaceuticals. Mr. Getter became a director of
Inksure Technologies, Inc. in 2003, a company which develops, markets and sells
customized authentication systems designed to enhance the security of documents
and branded products and to meet the growing demand for protection from
counterfeiting and diversion. He has been a member of the League of American
Theatres and Producers, Advisory Board of the American Theatre Wing, Trustee of
The Kurt Weill Foundation for Music, a member of the Tony Administration
Committee and has produced for Broadway, television and film. He writes
frequently concerning the communications, education and entertainment
industries. Mr. Getter received his B.S. in Industrial Relations from Cornell
University. He is a member of several industry organizations and serves on
various boards of both public and private organizations and is Chairman of the
Audit Committees of EVCI Career Colleges, Inksure Technologies, Inc. as well as
the Company.
Avraham Dan is a CPA (Isr). joined ICTS in June 2004 as Chief Financial
Officer. In September 2004 to the present he became a Managing Director. From
1995 to 2001 he was Chief Executive Office and a Director of Pazchem Limited, an
Israeli chemical company. Mr. Dan holds an MBA degree from Pace University, NY,
Ran Langer joined ICTS in 1988 through 1998 as General Manager of the
German subsidiaries of ICTS. From 1998 to the present, he serves as General
Manager of Seehafen Rostock Umschlagsgesellschaft mbH, the operator of the
Seaport in Rostock, Germany. Mr. Langer became a Managing Director of ICTS in
September 2004.
Alon Raich is a CPA (Isr), joined ICTS in September 2005 as Financial
Controller. From 2001 to 2005 he worked in the accounting firm, Kesselman &
Kesselman, PriceWaterhouseCoopers (PWC). Mr. Raich holds a BA degree in
economics and accounting and a MA degree in law from Bar-Ilan University,
Israel.
Compensation
Each member of the Supervisory Board who is not an employee of the Company
receives an annual fee of $10,000 and a fee for each Board or committee meeting
attended of $1,000 and the Chairman of the Audit Committee receives an
additional $20,000 per year.
Mr. Dan has been employed as a Managing Director under a five year
employment agreement commencing September 1, 2004, at monthly compensation of
$15,000.
-62-
The following table sets forth information concerning the aggregate
compensation paid or accrued on behalf of all of our directors and executive
officers as a group for the year ended December 31, 2005
Salaries, fees, Pension, retirement
commissions and other
and bonuses similar benefits
--------------- ----------------------
(in thousand)
All directors and officers -------------------------------------------------
as a group (17 persons) $1,567 $127
Board practices
ICTS has a Supervisory Board and a Management Board. The Supervisory Board
has the primary responsibility for supervising the policies of the Management
Board and the general course of corporate affairs and recommending the adoption
of the annual financial statements of ICTS by its shareholders. The Management
Board is responsible for the day-to-day operations of ICTS. Members of the
Supervisory Board and the Management Board are appointed by the shareholders for
a term of one year. Non-executive officers are appointed by and serve at the
pleasure of the Management Board.
The members of the Supervisory Board and their period of service on the
Supervisory Board are as follows: Menachem Atzmon (1999), M. Albert Nissim
(2003), Elie Housman (2002), Gordon Hausmann (2005), David W. Sass (2002) and
Philip M. Getter (2003).
The Audit Committee consists of Philip M. Getter, Chairman and Gordon
Hausmann, all of whom are independent. Mr. Getter has financial expertise. The
audit committee evaluates ICTS's accounting policies and practices and financial
reporting and internal control structures, selects independent auditors to audit
the financial statements and confers with the auditors and the officers. The
Audit Committee has an Operating Charter as well.
ICTS's Compensation Committee consists of Elie Housman. The compensation
committee determines salaries, incentives and other forms of compensation for
ICTS's executive officers and administrators stock plans and employee benefit
plans.
The Supervisory Board of the Company has adopted a Code of Ethics for
principal Executive Officers and senior financial Officers.
The Articles of Association of ICTS require at least one member for both
the Management Board and the Supervisory Board, but do not specify a maximum
number of members for such boards. The general meeting of shareholders
determines the exact number of members of both the Management Board and the
Supervisory Board. Under the laws of The Netherlands and the Articles of
Association, each member of the Supervisory Board and Management Board holds
office until such member's resignation, death or removal, with or without cause,
by the shareholders or, in the case of members of the Supervisory Board, upon
reaching the mandatory retirement age of 72.
Employees
The number of employees in Europe is approximately 110.
In the United States, prior to the enactment of the Security Act, ICTS
employed approximately 5,000 people, of which approximately 1,300 were
unionized. Subsequent to the enactment of the Security Act, but prior to
November 2002 ICTS employed approximately 11,000 people, of which approximately
1,300 were unionized. Most of the unionized employees are skycaps and screeners.
ICTS believes that its relationships with employees are generally good. As a
result of the TSA taking over airport security, ICTS currently employees
approximately 3,300 persons in the U.S.
Share ownership.
See tables under Item 7: "Major Shareholders" and "Related Party
Transactions" below.
Options to Purchase Securities.
On June 22, 1999 shareholders adopted the 1999 Equity Incentive Plan (the
"Plan"). The Plan provides a means whereby employees, officers, directors, and
certain consultants and independent contractors of the Company ("Qualified
Grantees") may acquire the Common Shares of the Company pursuant to grants of
(I) Incentive Stock Options ("ISO") and (ii) "non-qualified stock options". A
summary of the significant provisions of the Plan is set forth below. The
following description of the Plan is qualified in its entirety by reference to
the Plan itself.
-63-
The purpose of the Plan is to further the long-term stability, continuing
growth and financial success of the Company by attracting and retaining key
employees, directors and selected advisors through the use of stock incentives,
while stimulating the efforts of these individuals upon whose judgment and
interest the Company is and will be largely dependent for the successful conduct
of its business. The Company believes that the Plan will strengthen these
individuals' desire to remain with the Company and will further the
identification of their interests with those of the Company's shareholders.
The Plan provides that options to purchase up to 600,000 Common Shares of
the Company may be issued to the employees and outside directors. All present
and future employees shall be eligible to receive incentive awards under the
Plan, and all present and future non-employee directors shall be eligible to
receive non-statutory options under the Plan. An eligible employee or
non-employee director shall be notified in writing, stating the number of shares
for which options are granted, the option price per share, and conditions
surrounding the grant and exercise of the options.
The exercise price of shares of Company Stock covered by an ISO shall not
be less than 100% of the fair market value of such shares on the date of grant;
provided that if an ISO is granted to an employee who, at the time of the grant,
is a 10% shareholder, then the exercise price of the shares covered by the
incentive stock option shall not be less than 110% of the fair market value of
such shares on the date of the grant. The exercise price of shares covered by a
non-qualified stock option shall be not less than 85% of the fair market value
of such shares on the date of the grant. The Plan shall be administered by the
Compensation Committee.
As of June 30, 2006 ICTS has granted options to purchase 253,500 Common
Shares, all of which have been granted to directors and executive officers of
the Company as a group, at exercise prices ranging from $4.50 to $8.50 per share
under the Plan. These options vest over various terms, ranging from immediately
to five years. Outstanding options expire at various times, but not later than
January 2007. As of June 30, 2006, 176,000 options expired and 15,000 were
bought back the Company. There remains available for grant under the Plan
347,500 shares. The Plan expires by its terms in June 2009.
The Management Board and the Supervisory Board on November 30, 2004 have
approved and the shareholders have adopted on February 12, 2005 the 2005 Equity
Incentive Plan, (the "Plan").
The Plan provides a means whereby employees, officers, directors, and
certain consultants and independent contractors of the Company ("Qualified
Grantees") may acquire the Common Shares of the Company pursuant to grants of
(i) Incentive Stock Options ("ISO"), (ii) non-qualified stock options (the
ANQSO@) and (iii) restricted stock. A summary of the significant provisions of
the Plan is set forth below. The following description of the Plan is qualified
in its entirety by reference to the Plan itself.
The purpose of the Plan is to further the long-term stability, continuing
growth and financial success of the Company by attracting and retaining key
employees, directors and selected advisors through the use of stock incentives,
while stimulating the efforts of these individuals upon whose judgment and
interest the Company is and will be largely dependent for the successful conduct
of its business. The Company believes that the Plan will strengthen these
persons' desire to remain with the Company and will further the identification
of those persons' interests with those of the Company's shareholders.
The Plan shall be administered by the Compensation Committee of the
Supervisory Board, which shall be appointed by the Supervisory Board of the
Company, and which shall consist of a minimum of three members of the
Supervisory Board of the Company.
The Plan provides that options to purchase up to 1,500,000 Common Shares
of the Company may be issued to the employees, certain consultants and
directors. All present and future employees shall be eligible to receive
incentive awards under the Plan, and all present and future non-employee
directors shall be eligible to receive non-statutory options under the Plan. An
eligible employee or non-employee director shall be notified in writing, stating
the number of shares for which options are granted, the option price per share,
and conditions surrounding the grant and exercise of the options.
The exercise price of shares of Company Stock covered by an ISO and NQSO
shall be not less than 100% of the fair market value of such shares on the date
of grant; provided that if an ISO is granted to an employee who, at the time of
the grant, is a 10% shareholder, then the exercise price of the shares covered
by the incentive stock option shall be not less than 110% of the fair market
value of such shares on the date of grant. The Plan also provides for cashless
exercise of Options at the discretion of the Compensation Committee. In such
event, there may be a charge to the earnings of the Company with respect to the
cashless exercise of the Options.
The Compensation Committee may determine the number of shares that may be
awarded to a participant as restricted stock and the provisions relating to risk
of forfeiture and may determine that the restricted stock is only earned
-64-
upon the satisfaction of performance goals established by the Committee. The
Committee shall also determine the nature, length and starting date of any
performance period and the terms thereof.
The Compensation Committee, in November 2004, recommended and the
Supervisory Board and the Management Board have approved the granting of the
following options under the 2005 Equity Incentive Plan as follows:
1. Menachem Atzmon (Chairman of the Board) - 550,000 options of which
250,000 shall be immediately vested and 300,000 options to be vested equally
over the next three years. With respect to the Options for 200,000 shares they
are granted in lieu of a current salary for Mr. Atzmon. Options are exercisable
at $1.35 per share representing the fair market value on the date of grant.
2. Doron Zicher (Key Employee) - 45,000 options to be vested equally over
the next three years. Options are exercisable at $1.35 per share representing
the fair market value on the date of grant.
3. Ran Langer (Managing Director) - 65,000 options to be vested equally in
the next three years. Options are exercisable at $1.35 per share representing
the fair market value on the date of grant.
4. Avraham Dan (Managing Director) - 55,000 options to be vested equally
in the next three years. Options are exercisable at $1.35 per share representing
the fair market value on the date of grant.
5. Udi Bechor (Key Employee) - 45,000 options to be vested equally in the
next three years. Options are exercisable at $1.35 per share representing the
fair market value on the date of grant.
6. Oded Shoam (Key Employee) - 50,000 options to be vested equally in the
next three years. Options are exercisable at $1.35 per share representing the
fair market value on the date of grant.
7. (Directors) There be granted 30,000 options each to the Directors,
namely, Elie Housman, Philip Getter, Lynda Davey, M. Albert Nissim and David W.
Sass. The Options shall be immediately vested as to 10,000 shares and shall vest
10,000 shares on each anniversary in the event such person is a Director of the
Company at that time. The options are exercisable at $1.35 per share
representing the fair market value on the date of grant.
8. (Committee Chairs) The Chairman of the Audit Committee and the Chairman
of the Compensation Committee should each be granted 30,000 additional Options.
The Options shall be immediately vested as to 10,000 shares and shall vest
10,000 shares on each anniversary in the event such person is a Director of the
Company at that time. The options are exercisable at $1.35 per share
representing the fair market value on the date of grant.
A summary of the Options granted is as follows:
All current executive officers (Managing Directors) (2 persons) as a
group: 120,000 Options
All current directors (6 persons) as a group: 760,000 Options
All current employees and non-executive officers (3 persons) as a group:
140,000 Options
U.S. Federal Income Tax Consequences
The rules governing the U.S. federal tax treatment of stock options,
restricted stock and shares acquired upon the exercise of stock options are
quite technical. Therefore, the description of U.S. federal income tax
consequences set forth below is necessarily general in nature and does not
purport to be complete. Moreover, the statutory provisions are subject to
change, as are their interpretations, and their application may vary in
individual circumstances. In particular, the "American Jobs Creation Act of
2004" imposed new rules concerning the taxation of various deferred compensation
arrangements. It is not clear whether, and to what extent, these new rules apply
to awards under the Plan. Although the Company does not believe that awards
under the Plan are affected by the new rules, there can be no assurance to that
effect until adequate guidance is forthcoming from the U.S. Treasury Department.
Finally, the tax consequences under applicable state, local and foreign income
tax laws may not be the same as under the U.S. federal income tax laws.
INCENTIVE STOCK OPTIONS. ISOs granted pursuant to the Plan are intended to
qualify as incentive stock options within the meaning of Section 422A of the
Internal Revenue Code. If the participant makes no disposition of the shares
acquired pursuant to exercise of an ISO within one year after the transfer of
shares to such participant and within two years from grant of the option, such
participant will realize no taxable income as a result of the grant or exercise
of such option, and any gain or loss that is subsequently realized may be
treated as long-term capital gain or loss, as the case may be. Under these
circumstances, neither the Company nor any subsidiary will be entitled to a
deduction for federal income tax purposes with respect to either the issuance of
the ISOs or the issuance of shares upon their exercise.
-65-
If shares acquired upon exercise of ISOs are disposed of prior to the
expiration of the above time periods, the participant will recognize ordinary
income in the year in which the disqualifying disposition occurs, the amount of
which will generally be the lesser of (i) the excess of the fair market value of
the shares on the date of exercise over the option price, or (ii) the gain
recognized on such disposition. Such amount will ordinarily be deductible for
federal income tax purposes by the Company or subsidiary for whom the
participant performs services ("service recipient") in the same year, provided
that the amount constitutes reasonable compensation for services that would
result in a deduction for U.S. federal income tax purposes and that certain
federal income tax withholding requirements are satisfied. In addition, the
excess, if any, of the amount realized on a disqualifying disposition over the
market value of the shares on the date of exercise will be treated as capital
gain.
The foregoing discussion does not consider the impact of the alternative
minimum tax, which may be particularly applicable to the year in which an ISO is
exercised.
NON QUALIFIED STOCK OPTIONS. A participant who acquires shares by exercise
of a NQSO generally realizes as taxable ordinary income, at the time of
exercise, the difference between the exercise price and the fair market value of
the shares on the date of exercise. Such amount will ordinarily be deductible by
the service recipient for federal income tax purposes in the same year, provided
that the amount constitutes reasonable compensation for services that would
result in a deduction for U.S. federal income tax purposes and that certain
federal income tax withholding requirements are satisfied. Subsequent
appreciation or decline in the value of the shares on the sale or other
disposition of the shares will generally be treated as capital gain or loss.
RESTRICTED STOCK. A participant granted shares of restricted stock under
the Plan is not required to include the value of such shares in ordinary income
until the first time such participant's rights in the shares are transferable or
are not subject to substantial risk of forfeiture, whichever occurs earlier,
unless such participant timely files an election under Section 83(b) of the
Internal Revenue Code to be taxed on the receipt of the shares. In either case,
the amount of such income will be equal to the excess of the fair market value
of the stock at the time the income is recognized over the amount (if any) paid
for the stock. The service recipient will ordinarily be entitled to a deduction,
in the amount of the ordinary income recognized by the participant, for the
service recipient's taxable year in which the participant recognizes such
income, provided that the amount constitutes reasonable compensation for
services that would result in a deduction for U.S. federal income tax purposes
and that certain federal income tax withholding requirements are satisfied.
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders.
The following table sets forth certain information regarding ownership of
the Company's Common Shares as of June 30, 2006 (including options exercisable
within 60 days from June 30, 2006) with respect to:
(1) Each person who is known by the Company to own beneficially more than
five percent of the Company's outstanding Common Shares.
(2) Each director or officer who holds more than 1% of the Common shares.
(3) All directors and officers as a group. None of the directors or
officers, excluding Mr. Menacham Atzmon, owns 1% or more of ICTS outstanding
share capital.
- --------------------------------------------------------------------------------
Percent of
Amount Beneficially Common Shares
Name of Five Percent Shareholders Owned (a) Outstanding (b)
- --------------------------------------------------------------------------------
Atzmon Family Trust (b) (1)(2) 4,298,500 62.5%
- --------------------------------------------------------------------------------
All officers and directors as a group 4,548,836 66.3%
(17 persons)
- --------------------------------------------------------------------------------
(a) The amount includes common shares owned by each of the above, directly
or indirectly and options immediately exercisable or that exercisable within 60
days from August 31, 2006.
(b) As to each shareholder, the percentage is calculated using the amount
beneficially owned by such shareholder (as determined in accordance with (a)
above) divided by the number of total outstanding common shares and the shares
-66-
issuable pursuant to the exercise of options exercisable within 60 days from
August 31,2006, if any held by such shareholder. Common shares subject to
options that are immediately exercisable or exercisable within 60 days of August
31, 2006 are deemed outstanding for computing the ownership percentage of the
shareholder holding such options, but are not deemed outstanding for computing
the ownership of any other shareholder.
1. Harmony Ventures BV, owns directly and indirectly approximately 62.5%
of the issued and outstanding Common Shares. A family trust for the benefit of
the family of Mr. Menachem J. Atzmon (the Atzmon Family Trusts) owns 90% of
Harmony Ventures BV and the Estate of Ezra Harel owns 10% of the outstanding
shares of Harmony Ventures BV and both may be deemed to control Harmony Ventures
BV. Mr. Atzmon disclaims any beneficial interest in the Atzmon Family Trust.
Harmony Ventures BV and the Atzmon Family Trust may be able to appoint all the
directors of ICTS and control the affairs of ICTS.
2. Of the 550,000 options to Menachem Atzmon (Chairman of the Board),
350,000 are currently exercisable and 200,000 options to be vested equally over
the next two years. With respect to the Options for 200,000 shares they are
granted in lieu of a current salary for Mr. Atzmon. Options are exercisable at
$1.35 per share representing the fair market value on the date of grant.
Related Party Transactions.
In August 1997, ICTS, as part of a group consisting of Leedan Systems and
Properties Enterprises (1993) Ltd. and Rogosin Development and Holdings Ltd.
("Rogosin"), each at the time, an affiliate of Leedan, invested in a joint
venture, Bilu Investments Ltd. ("Bilu"). Bilu is engaged in the financing of
real estate projects in Israel, primarily in the residential market. In
consideration for a 9.3% equity interest in Bilu, ICTS contributed $259,000 and
has guaranteed $2,915,000 of debt obligations of Bilu. In 2000 Bilu issued 25%
of its shares to an unaffiliated party in consideration for an equity investment
of US $2,000,000 and the provision of guarantees for debt obligations of Bilu in
an amount of US $3,800,000. As a result, ICTS's equity interest in Bilu has been
diluted to 7% and ICTS's guarantee was reduced to $2,515,000 of which $700,000
is on behalf of each of Leedan and Rogosin, respectively. Rogosin became an
unaffiliated party in 2002. In December 31, 2004, as a result of continuance
deterioration in the financial results of Bilu and the financial position of
Leedan and Rogosin, the Company has determined to write off its investment in
Bilu and to fully provide of its bank guaranties.
During 1998, ICTS purchased 150,000 shares of common stock of Pioneer from
Leedan for a purchase price of $5.00 per share. Pioneer is a sister corporation
through common ownership through Harmony. ICTS purchased 29,000 additional
shares on October 10, 2001 at $2.25 per share. In addition, on February 1, 2002,
ICTS subscribed for an additional 260,000 shares at $2.00 per share. In January
2003, ICTS purchased 235,300 shares of common stock of Pioneer Commercial
Funding Corp. at a purchase price of $0.90 per share in a private placement. Mr.
Albert Nissim, the secretary and member of the ICTS Board is the president of
Pioneer, Mr. Boaz Harel, a former chairman of the ICTS Supervisory Board is the
Chairman of Pioneer, Lynda Davey, a former member of the ICTS Supervisory Board
was a director of Pioneer and David W. Sass, a member of the ICTS Supervisory
Board is secretary of Pioneer and currently a director of that company along
with Mr. Boaz Harel and M. Albert Nissim. The Estate of Ezra Harel and the
Atzmon Family Trust are also principal shareholders of Pioneer.
In connection with release of certain guarantees of various debt
obligations of a third party procured by ICTS in 1997, in 2000 ICTS purchased
from unaffiliated parties a $1 million debenture bearing interest at 10% per
annum, due November 26, 2004, issued by Pioneer. Pioneer defaulted on the Note
and the Company wrote off its entire investment in Pioneer in 2004 totaled $1.8
million. The debenture is guaranteed by Leedan, an affiliate of the Estate of
Ezra Harel and Mr. Atzmon. Due to the financial position of Leedan the Company
did not enforce the guaranty granted by Leedan in connection with its investment
in Pioneer.
In July 2000, each of ICTS and International Tourist Attractions Ltd.
("ITA), a company under the control of ICTS's principal shareholders, purchased
16 common shares for $16,000 each of Ramasso Holding B.V ("Ramasso") from
Leedan, representing 40% each of the outstanding share capital of Ramasso. The
remaining 20% shares in Ramasso are held by a company controlled by Leedan. ICTS
provided loans to Ramasso from time to time until December 2003 aggregating
approximately $3 million bearing an annual interest rate of 4.25% which has no
fixed repayment. Ramasso owns and operates, a Time Elevator in Rome, Italy.
Through December 31, 2002, ICTS has accounted for its share in Ramasso's
losses, in the total amount of $1.4 million, in view of these losses; the
Company wrote off the balance of the investment in Ramasso at December 31, 2002,
in the amount of $1 million. In April, 2003 the Company provided a financial
institution that financed the Time Elevator in Rome, with a guaranty securing
the repayment of such financing. At the time the guaranty was provided the
amount of the financing provided by such financial institution to Time Elevator
in Rome has been net 1,838,390 Euro's. In December 31,
-67-
2003 ICTS has fully provided for the guaranty in the amount of $1.1 million.
Subsequent to December 31, 2003 ICTS was required by the financial institution
to cover its guaranty and the Company have reached a agreement with the
financial institution for the repayment terms. All the debt was paid until
December 31, 2005. Ramasso, which operated the Time Elevator in Rome filed for
bankruptcy. The receiver in the bankruptcy has filed a proceeding against the
financial institution which provided loans to Romasso to recover a security
deposit in the amount of (euro)866 thousand ($1 million as of December 31, 2005)
which the financial institution held as security and applied against its
outstanding indebtedness as a result of Romasso's defaults. The financial
institution has impleaded the company on its guarantee to the financial
institution, and the financial institution is required to return the security
deposit to the receiver in the bankruptcy.
In December 2000, ICTS exercised an option to purchase 100 common shares
of ITA for $600,000, representing 10% of the outstanding share capital of ITA.
On October 14, 2001, ICTS agreed to increase its investment in ITA under the
following principal terms: (a) ICTS provided ITA with a $3,000,000 loan [which
released a $1,000,000 bank guaranty previously provided by ICTS in favor of
ITA]; (b) ICTS was granted with a warrant to purchase 12% of ITA shares
exercisable during a period of three years, at an exercise price that shall be
determined according to an evaluation of ITA to be made by an independent
consultant; (c) ICTS was granted [a right of first refusal] to establish and
own, on its own account, any Time Elevator project to be initiated by ITA in the
United States and Europe, (d) ITA will supervise and manage the establishment of
such projects for a fee that shall be equal to 20% of the projects costs; (e)
ICTS has the option to acquire from ITA 20% of ITA's stake in each Time Elevator
project of ITA in Europe for a period of two years from the start of such
project; and (f) ITA has the option to acquire from ICTS 20% of ICTS's stake in
each Time Elevator project of ICTS for a period of two years from the start of
such project. The first project for which ICTS exercise its right of first
refusal is in Atlantic City, New Jersey. The second project, in which ICTS
exercised its right of first refusal, was in Baltimore, Maryland. In December
2003, based on the entertainment projects performances, the Company revaluated
the two facilities and determined that the forecasted cash flows from them will
not cover the investments and based on their fair value which was calculated
using discounted cash flows model, wrote off $7.5 million of its investments in
the two sites.
On December 23, 2003 the Company through wholly owned subsidiaries
purchased from ITA certain assets owned by ITA and used by it in the
development, establishment and operation of motion-based entertainment theaters.
The assets purchased consist primarily of intangible property and certain
equipment. The purchase price for the assets purchased was $5.4 out of which
$5.2 million was allocated to goodwill. The purchase price was paid by set-off
against certain debts owed by ITA to the Company, cash and notes. As a part of
the transaction, certain agreements made between the Company and ITA in 2001
were terminated, with the result that the Company is no longer committed to
involve ITA in its existing and future entertainment projects. Prior to entering
into the transaction the Company obtained a fairness opinion as to the fairness
of the consideration and the transaction to the Company. Subsequent to December
31, 2003, as a result of the poor results of the entertainment projects and
their impairment, management resolved to cease the development of this business
and not to start the new projects in the foreseeable future. As a result, the
Company has written off the entire amount of the goodwill $5.2 million. In
addition, during 2004 the Company recognized impairment losses on its
entertainment tangible assets amounted to $8.1 million, in addition to the
impairment loss of $7.5 million in 2003. In December 2005 all the entertainment
locations were closed and it has become a discontinued activities segment.
During the period from April to September 2002, ICTS purchased 4,106,895
shares of Inksure Technologies Inc. ("Inksure"), which represents 34.3% of
Inksure's outstanding shares for a purchase price of $5,986,000. In October
2002, Mr. Elie Housman, the Chairman of the Board of Inksure, was appointed to
the ICTS Supervisory Board. Mr. Sass, a member of the ICTS Supervisory Board and
one of our directors was elected to the Board of Inksure. Mr. Getter is also a
member of the Board of Inksure. Messrs. Housman, Getter and Sass, as well as an
entity associated with the Atzmon Family Trust, own shares and warrants in
Inksure. In addition, Messrs. Housman, Getter and Sass hold options to purchase
Inksure securities. Inksure develops markets and sells customized
authentications systems designed to enhance the security of documents and
branded products and to meet the growing demand for protection from
counterfeiting and diversion. In June 2003 and April 2004 the Company
participated in Inksure's private placements purchasing 174,542 and 544,118
additional shares, respectively at an aggregate purchase price of $192,000 and
$370,000, respectively. As of December 31, 2005 the Company owns approximately
32% of the outstanding shares of Inksure. In 2006 the supervisory board
authorized the management to sell its investment in Inksure. The market value as
of August 31, 2006 is approximately $9 million.
On July 7, 2005, the Company has signed an agreement, with a related
party, to sell its rights of ownership in a long-term deposit, and to transfer
the related long-term loan which was received as part of the arrangement with a
bank, for consideration of $1 million. As of June 30, 2005 the net book value of
the deposit and the long-term loan was $1.2 million. The total loss from the
selling amounted to $316 thousand.
In June 2002 equipment in the amount of $23.5 million was purchased and
leased back to the seller, an unaffiliated private Dutch company for, 7 years in
an operating lease agreement (with respect to equipment in an amount of $12.5
-68-
million, the Company entered into a purchase and lease agreement that replaced a
predecessor acquirer, see below). The seller had the option to buy back the
assets after 5 or 7 years, at their fair value, which would have been determined
by an appraiser. The Company has undertaken to repay the predecessor acquirer's
liability to a bank, in an amount of $8.7 million, and issued him a promissory
note. The loan was non-recourse.
In December 2004, ICTS determined that the future cash flows from the
lease equipment will not recover its investment, and as a result recorded an
impairment loss of $2,247 in addition to an impairment loss of $6,042 that was
recorded in 2003. The value of the equipment was based on a cash flow projection
that incorporated an external appraisal of the equipment terminal value at the
option exercise date.
In June 2005, the company granted the lessee an option to purchase the
leased equipment for an amount of $5 million plus an amount equal to the related
loan balance on the exercise date, thus providing for the possibility of the
early termination of the leasing agreement. The validity of the option started
on June 1, 2005 until September 30m 2006. As a consideration for granting the
option fee the lessee had to pay ICTS an option fee of $20 per month, which will
be reduced from the $5 million in case of exercising the option.
In July 2005 the company received an advanced payment of $1 million on
lease installments which will be reduced from the purchase price of $5 million
in case that the option will be exercised.
On December 28, 2005 the lessee exercised the option. The net value of the
equipment as of the purchase date was (euro)9,775 (equal to $11,554 on that
date). The loss from the selling total to $4,774. On January 2006 the company
signed a loan agreement with the owner of the lease company in which he received
a loan of $1.2 million for 6 months bearing an interest of 5.45%. The entire
loan was repaid by May 17, 2006.
As of August 30, 2006, the company received loans in an aggregate amount
of $2,050,000 million from a related party as bridging finance. These loans are
evidenced by secured Promissory Note. $1 million of principle is due and payable
on January 1, 2007 and the balance and all accrued but unpaid interest is due
and payable on April 1, 2007. Interest accrues at prime rate plus 1/2 percent
and the obligations are secured by the pledge of 2,157,895 shares of common
stock of Inksure Technologies Inc. The amount of shares represent two times the
value of the loan. The related party lender has also committed to lending the
Company up to an additional $1 million These future loans shall be payable on
demand and shall also be secured by the pledge of the Inksure stock.
Item 8. Financial Information
Consolidated Statements and Other Financial Information.
See pages F-1 through F-64 incorporated herein by reference.
Legal Proceedings
As a result of the September 11th terrorists attacks numerous lawsuits
have commenced against Huntleigh and ICTS. Huntleigh has been named in
approximately 70 lawsuits and ICTS in approximately 70 lawsuits. All of the
cases were filed in the United States District Court, Southern District of New
York. The cases arise out of Huntleigh's airport security service for United
Flight 175 out of Logan Airport in Boston, Massachusetts. At the present time
Huntleigh and ICTS are in 65 remaining cases. All of the cases involve wrongful
death except 16 which involve property damage. The cases are in their early
stages.
Although these are the only claims brought against Huntleigh and ICTS with
respect to the terrorist attacks of September 11, 2001, Huntleigh and ICTS
anticipate additional related claims. See "Risk Factors-Potential For Liability
Claims."
Under current legislation Huntleigh and one other security company have
their liability limited to the amount of insurance coverage that they carry. The
legislation applies to Huntleigh, but not ICTS.
The Company has commenced an action against the U.S. Government with
regard to the Fifth Amendment rights relating to the taking of its business. In
December 2004 the Court denied the Government's Motion to Dismiss the case. A
motion for reconsideration was filed by the defendant and denied. Fact and
expert discovery have been completed and the U.S. Government has filed a motion
for summary judgment which is scheduled to be argued on October 12, 2006. The
trial for this action has been scheduled to commence on November 13, 2006.
The company is in dispute with Fraport A.G. International Airport Services
Worldwide in relation to alleged unlawful use of the letter combination "ICTS"
by the company. Fraport initiated proceedings before the district court of
Amsterdam, which are still pending. The principal amount claimed is (euro)57.65
million. However, this claim is based on an alleged incorrect interpretation of
the underlying contractual obligation. If the court follows the Company's
-69-
interpretation, the maximum liability is (euro)700 thousand ($827 thousand as of
December 31, 2005). The Company filed a counter claim of (euro)2.45 million ($3
million as of December 31, 2005) (or, under the condition that Fraport's
interpretation is followed, (euro)73.5million equal to $86.9 million as of
December 31, 2005). Currently this action is stayed pending settlement
discussions between the parties.
In September 2005, Avitecture, Inc. (f/k/a Audiovisual-Washington, Inc.)
("Avitecture"), filed a Demand for Arbitration and Mediation against
ITA-Atlantic City, LLC ("ITA") with the American Arbitration Association in
Somerset, NJ. The Demand for Arbitration alleges that pursuant to a written
agreement dated March 20, 2003, ITA owes Avitecture $222 thousand for audio,
video and control systems it provided for ITA's use in a tourist attraction in
Atlantic City, New Jersey, but for which Avitecture claims it has not been paid.
The case is currently pending in a New Jersey arbitration proceeding before an
arbitrator assigned by the American Arbitration Association. In October 2005 ITA
filed its answer, generally denying the allegations in the Demand and asserting
numerous affirmative defenses. This action is currently in discovery.
In November 2005, Turner Construction Company ("Turner") filed a Demand
for Arbitration and Mediation against Explore Atlantic City, LLC ("Explore")
with the American Arbitration Association in Somerset, NJ. The Demand for
Arbitration alleges that pursuant to a written agreement dated October 28, 2003,
Explore owes Turner $948 thousand for work and/or services performed pursuant to
the contract, but for which Explore has not paid Turner. The case is currently
pending in a New Jersey arbitration proceeding. An arbitrator has been assigned
to the case so the parties can explore settling the matter. At this time,
Explore has responded to the demand by denying any liability and has asserted
defenses to the amount of the claim and to challenge Turner's right to make any
demand for payment. A motion for summary judgment has been made by Turner and
the action is currently in discovery, with several depositions having been
taken. Based on the discovery taken thus far, Explore is of the opinion that
there are several material factual disputes which it believes should defeat this
motion.
In December 2005, Barlo Associates, P.A. ("Barlo") filed a Demand for
Arbitration and Mediation against Explore Atlantic City, LLC with the American
Arbitration Association in Somerset, NJ. The Demand for arbitration alleges that
pursuant to a written agreement dated April 16, 2002, Explore owes Turner $21
thousand for architectural work and/or services performed pursuant to the
contract, but for which Explore has not paid Barlo. The case is currently
pending in a New Jersey arbitration proceeding. An arbitrator has been assigned
to the case so the parties can explore settling the matter. Explore has served
discovery requests on Barlo's counsel and Explore anticipates taking a number of
depositions to develop the factual support for its opposition to Barlo's claim
and to support a potential motion for summary judgment.
The TSA filed with the Office of Dispute Resolution for Acquisition
("ODRA") a contract dispute in connection with the contract entered into in
February, 2002 by Huntleigh seeking reimbursement of an alleged overpayment of
principal in the amount of $59.2 million. This claim follows the lawsuit which
Huntleigh has already filed against the TSA for its breaches of its contract
with Huntleigh. Both claims are now pending before ODRA.
Huntleigh is vigorously challenging the TSA's claim which it asserts is
devoid of any factual or legal merit. The TSA's filing comes on the heels of a
recent decision by ORDA granting Huntleigh's motion for partial Summary Judgment
against the TSA. ODRA has granted Huntleigh's motion for partial Summary
Judgment on Huntleigh's claim that the TSA breached the contract by failing to
give appropriate notice for transitioning airport locations. A separate hearing
will be held to determine the amount of damages due to Huntleigh on this claim.
With regards to the claim for the $59.2 million overpayment, Huntleigh has filed
a motion to dismiss the action. The TSA's response to this motion is due on
September 15, 2006 and Huntleigh's reply brief is due on September 29, 2006.
The company's 40% owned subsidiary, Romasso, which operated the Time
Elevator in Rome filed for bankruptcy. The receiver in the bankruptcy has filed
a proceeding against the financial institution which provided loans to Romasso
to recover a security deposit in the amount of (euro)866 thousand ($1 million as
of December 31, 2005) which the financial institution held as security and
applied against its outstanding indebtedness as a result of Romasso's defaults.
The financial institution has impleaded the company on its guarantee to the
financial institution, if the financial institution is required to return the
security deposit to the receiver in the bankruptcy.
Last year the Company's subsidiary ICTS USA, Inc. filed a refund claim
with the Internal Revenue Service ("IRS") in an amount in excess of $2 million.
The refund has not yet been received by the Company. The Company made a demand
to the IRS for the refund. Thereafter, by letter dated August 15, 2006, the
Company was advised that a criminal investigation by the United States
Department of Justice, Tax Division is ongoing by a grand jury regarding
possible criminal tax violations by the subsidiary for the tax years 2002 and
2003 regarding certain royalty payment made to the Company. As a result of the
investigation the Company believes that the refund had been put on hold.
Although it is not possible at this time to determine the outcome of this
matter, should the result of the IRS investigation prove unsatisfactory to the
Company, this will have a material adverse effect on the Company.
-70-
On August 30, 2006 the Company filed a complaint in the United States
District Court for the Southern District of New York against the United Stated
and Area Director - Technical Compliance, Internal Revenue Service to recover
the refund in the amount of $2,470,365. In addition, the Company has filed an
administrative claim against the IRS in order to recover the same refund as well
as damages. The Company is currently waiting for a response from the defendants.
Two of the Company's subsidiaries have been sued by their landlord (which
is the same entity) alleging breach of the respective leases. One suit is in
Baltimore effecting the Company's Explore Baltimore facility, and the other is
in the Superior Court of New Jersey affecting the Company's Explore Atlantic
City facility. Through legally defective service, the landlord was able to
obtain orders for possession of both of these locations. A petition to open the
Atlantic City action has been filed and one is being prepared for the Baltimore
action. In both the cases the landlord is seeking unpaid rent for the entire
term of the leases. In the Atlantic City case the amount sought is $5,970.197
and I the Baltimore case the amount is $4,443,513.01. With a resolution of both
actions being discussed, a standstill of the proceedings is being negotiated.
Dividend Policy
The declaration of dividends will be at the discretion of our board of
directors and will depend upon our earnings, capital requirements, financial
position, general economic conditions, and other pertinent factors. We cannot
assure you that dividends will be paid in the future.
Significant Changes.
As of the management decision to cease the operations of the Leasing and
the Entertainment activities, all the presentation of the financial statements
was changed, including the comparative numbers. The new presentation is
according to FAS 144 and it separates the financial information of the
discontinued operations from the continuing operation
Item 9. The Offer and Listing
ICTS's shares of common stock have traded on the NASDAQ National Market
since 1996 under the symbol ICTS.
The reported high and low closing sales prices per share during each
quarter as reported on NASDAQ were as follows:
2003 High Low
- ---- ---- ---
First quarter $6.14 $5.08
Second quarter $5.10 $3.99
Third quarter $4.42 $3.12
Fourth quarter $3.63 $2.49
2004 High Low
- ---- ---- ---
First quarter $3.98 $3.03
Second quarter $8.42 $3.25
Third quarter $3.47 $1.37
Fourth quarter $2.07 $1.35
2005 High Low
- ---- ---- ---
First quarter $3.23 $1.58
Second quarter $2.89 $1.81
Third quarter $3.08 $2.11
Fourth quarter $2.81 $2.39
2006 High Low
- ---- ---- ---
First quarter $2.54 $2.18
Second quarter $2.33 $1.65
-71-
Item 10. Additional Information
Memorandum and Articles of Association
Introduction
The material provisions of the Company's Articles of Association are
summarized below. Such summaries do not purport to be complete statements of
these provisions and are qualified in their entirety by reference to such
exhibit. The Company was established by the Department of Justice at Amstelveen,
The Netherlands on October 9, 1992. The objectives of the Company are generally
to manage and finance businesses, extend loans and invest capital as described
in greater detail in Article 2 of the Company's Articles of Association.
Shares
The Company's authorized share capital is currently divided into
17,000,000 common shares, per value 0.45 Euro per common share. The common
shares may be in bearer or registered form.
Dividends
Dividends on common shares may be paid out of annual profits shown in the
Company's annual accounts, which must be adopted by the Company's Supervisory
Board.
The Management Board, with the prior approval of the Supervisory Board,
may decide that all or part of the Company's profits should be retained and not
be made available for distribution to shareholders. Those profits that are not
retained shall be distributed to holders of common shares, provided that the
distribution does not reduce shareholders' equity below the issued share capital
increased by the amount of reserves required by Netherlands law. At its
discretion, subject to statutory provisions, the Management Board may, with the
prior approval of the Supervisory Board, distribute one or more interim
dividends on the common shares before the annual accounts have been approved by
the Company's shareholders. Existing reserves that are distributable in
accordance with Netherlands law may be made available for distribution upon
proposal by the Management Board, subject to prior approval by the Supervisory
Board. With respect to cash payments, the rights to dividends and distributions
shall lapse if such dividends or distributions are not claimed within five years
following the day after the date on which they were made available.
Voting Rights
Members of the Company's Supervisory Board are appointed by the general
meeting. The Company's Articles of Association provide that the term of office
of each Supervisory Director will expire no later than June in each calendar
year. Members of the Supervisory Board may be re-appointed.
General Meetings of Shareholders
The Company's general meetings of shareholders will be held at least once
a year, not later than six months after the end of the fiscal year. Notices
convening a general meeting will be mailed to holders of registered shares at
least 15 days before the general meeting and will be published in national
newspapers in The Netherlands and abroad in countries where the Company's bearer
shares are admitted for official quotation. In order to attend, address and vote
at the general meeting of shareholders, the holders of the Company's registered
shares must notify it in writing of their intention to attend the meeting and
holders of the Company's bearer shares must direct the depository to their
bearer shares, each as specified in the published notice. The Company currently
does not solicit from or nominate proxies for its shareholders and is exempt
from the proxy rules of the Securities Exchange Act of 1934. However,
shareholders and other persons entitled to attend the general meetings of
shareholders may be represented by proxies with written authority.
Other general meetings of shareholders may be held as often as deemed
necessary by the Supervisory Board or the Management Board and must be held if
one or more shareholders or other persons entitled to attend the general meeting
of shareholders jointly representing at least 10% of the Company's issued share
capital make a written request to the Supervisory Board or the Management Board
that a meeting must be held and specifying in detail the business to be dealt
with at such meeting. Resolutions are adopted at general meetings of
shareholders by a majority of the vote's cast, except where a different
proportion of votes are required by the Articles of Association or Netherlands
law, in a meeting in which holders of at least one-third of the outstanding
common shares are represented. Each share carries one vote.
Amendment of Articles of Association and Winding Up
A resolution presented to the general meeting of shareholders amending the
Company's Articles of Association or winding up the Company may only be taken
after a proposal made by the Management Board and approved by the
-72-
Supervisory Board. A resolution to dissolve the Company must be approved by at
least a three-fourths majority of the votes cast.
Approval of Annual Accounts
The Company's annual Netherlands statutory accounts, together with a
certificate of its auditors, will be submitted to the general meeting of
shareholders for approval. Consistent with business practice in The Netherlands
and as provided by the Company's Articles of Association, approval of the annual
accounts by the shareholders discharges the Management Board and the Supervisory
Board from liability for the performance of their respective duties for the past
financial year. Under Netherlands law, this discharge is not absolute and will
not be effective with respect to matters which are not disclosed to the
shareholders.
Liquidation Rights
In the event of the Company's dissolution and liquidation, the assets
remaining after payment of all debts and liquidation expenses are to be divided
proportionately among the holders of the common shares.
Issues of Shares; Pre-emptive Rights
The Company's Supervisory Board has the power to issue shares. The
shareholders have by a authorizing resolution provided such authority for a five
year period ending June 30, 2006. The number of shares the Supervisory Board is
authorized to issue must be set at the time of the resolution and may not exceed
17,000,000 shares of the common shares then outstanding.
Shareholders have a pro rata pre-emptive right of subscription to any
common shares issued for the purpose of raising capital, which right may be
limited or eliminated. If designated for this purpose by the general meeting of
shareholders (whether by means of any authorizing resolution or an amendment to
the Company's Articles of Association).
Repurchase and Cancellation of Shares
The Company may repurchase its common shares, subject to compliance with
the requirements of certain laws of The Netherlands (and provided the aggregate
nominal value of the Company's common shares acquired by it at any one time
amounts to no more than one-tenth of its issued share capital). Common shares
owned by the Company may not be voted or counted for quorum purposes. Any such
purchases are subject to the approval of the Supervisory Board and the
authorization of the general meeting of shareholders. Authorization is not
effective for more than 18 months. The Company may resell shares it purchases.
Upon a proposal of the Management Board and approval of the Supervisory Board,
the Company's shareholders at the general meeting shall have the power to decide
to cancel shares acquired by the Company or to reduce the nominal value of the
common shares. Any such proposal is subject to general requirements of
Netherlands law with respect to reduction of share capital.
Shares may only be cancelled by vote of the shareholders at the general
meeting. Only shares which the Company holds or for which it holds the
depository receipts may be cancelled. However, an entire class may be cancelled
provided the Company repays the par value to the holders of such shares.
Material contracts
For material contracts See "Item 8 - Financial Information, B. Significant
Changes".
Exchange controls
There are no governmental laws, decrees or regulations in The Netherlands,
the Company's jurisdiction of organization, that restrict the Company's export
or import of capital in any material respect, including, but not limited to,
foreign exchange controls.
There are no limitations imposed by Netherlands law or the Company's
charter documents on the right of nonresident or foreign owners to hold or vote
Common Shares.
Taxation
United States Federal Income Tax Consequences
The following discussion summarizes the material anticipated U.S. federal
income tax consequences of the acquisition, ownership and disposition of shares
by a U.S. Holder (as defined below). This summary deals only with shares held as
capital assets and does not deal with the tax consequences applicable to all
categories of investors some of which (such as tax-exempt entities, banks,
broker-dealers, investors who hold shares as part of hedging or conversion
transactions
-73-
and investors whose functional currency is not the U.S. dollar) may be subject
to special rules. This summary does not deal with the tax consequences for U.S.
Holders who own at any time directly or indirectly through certain related
parties 10% or more of the voting stock or nominal paid-in capital of the
Company.
The summary does not purport to be a complete analysis or listing of all
the potential tax consequences of holding shares, nor does it purport to furnish
information in same detail or with attention to an investor's specific tax
circumstances that would be provided by an investor's own tax adviser.
Accordingly, prospective purchasers of shares are advised to consult their own
tax advisers with respect to their particular circumstances and with respect to
the effects of U.S. federal, state, local, or other laws to which they may be
subject.
As used herein, the term "U.S. Holder" means a beneficial owner of shares
that is (I) for United States federal income tax purposes a citizen or resident
of the United States, (ii) a corporation or other entity created or organized in
or under the laws of the United States or any political subdivision thereof, or
(iii) an estate or trust the income of which is subject to United States federal
income taxation regardless of its source.
The summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), judicial decisions, administrative pronouncements, and existing and
proposed Treasury regulations, changes to any of which after the date of this
Annual Report on Form 20-F could apply on a retroactive basis and affect the tax
consequences described herein.
Taxation of Dividends
For U.S. federal income tax purposes, the gross amount of distributions
(including any withholding tax thereon) made by the Company out of its current
or accumulated earnings and profits (as determined under U.S. federal income tax
principles) will be included in the gross income of a direct U.S. Holder as
foreign source dividend income on the date of receipt but will not be eligible
for the dividends received deduction generally allowed to U.S. corporations.
Distributions in excess of the earnings and profits of the Company will be
treated, for U.S. federal income tax purposes, first as a nontaxable return of
capital to the extent of the U.S. Holder's basis in the shares (thereby
increasing the amount of any gain and decreasing the amount of any loss realized
on the subsequent disposition of such shares) and then as a gain from the sale
or exchange of the shares. The amount of any dividend paid in euro will be equal
to the U.S. dollar value of the euro on the date of receipt regardless of
whether the U.S. Holder converts the payment into U.S. dollars. Gain or loss, if
any, recognized by a U.S. Holder resulting from currency exchange fluctuations
during the period from the date the dividend is includable to the date such
payment is converted into U.S. dollars and any exchange gain or loss will be
ordinary income or loss.
On each of July 23, 2001 and May 13, 2002, ICTS declared and paid a $2.25
dividend per Share ($1.69 net of all withholding taxes required by The
Netherlands) and on December 10, 2002 ICTS declared and paid a dividend of $3.00
per share (net of all withholding taxes required by The Netherlands). For a
discussion of the applicable taxes on such dividends see, "Netherlands Dividend
Withholding Tax". The declaration of dividends will be at the discretion of our
board of directors and will depend upon our earnings, capital requirements,
financial position, general economic conditions, and other pertinent factors. We
cannot assure you that dividends will be paid in the future.
Foreign Tax Credits
U.S. Holders will generally be entitled to claim a credit against their
United States federal income tax liability for the amount of Netherlands
dividend withholding tax imposed on dividends paid to U.S. Holders. See
Netherlands Dividend Withholding Tax.. U.S. Holders who are entitled to the
benefits of a reduced rate of Netherlands dividend withholding tax under the
U.S. Tax Treaty will be allowed a credit for only the amount of withholding tax
provided for under the U.S. Tax Treaty (i.e. 15%). However, the full amount of
the dividend, including any withheld amounts in excess of 15%, will be subject
to current United States federal income taxation whether or not such Holder
obtained a refund of the excess amount withheld. The U.S. Holder is also
entitled to a U.S. foreign tax credit for Dutch corporate taxes assessed on the
earnings and profits that are distributed. To the extent that Dutch corporate
income tax has reduced the accumulated earnings and profits (i.e. the taxes have
been paid or at least accrued with an assessment), these taxes accompany the
dividend at the same pro-rata percentage as the dividend to the accumulated
earnings and profits. The dividend income against which U.S. tax is assessed
must be grossed up by the amount of Dutch taxes to be claimed as a credit in
order to reverse the effect of the reduction to taxable earnings and profits.
The amount of the credit for Netherlands income tax in accordance with the U.S.
Tax Treaty will be subject to limitations contained in the foreign tax credit
provisions of the Code. In the event the Company pays a dividend to a U.S.
Holder out of the earnings of a non-Dutch subsidiary, however, it is possible
that under certain circumstances such U.S. Holder would not be entitled to claim
a credit for a portion of any Dutch taxes withheld by the Company from such
dividend. The portion of Dutch withholding tax that may not be creditable in
this instance equals a maximum of 3% of the gross amount of such dividend (or
20% of the Dutch taxes withheld in the case of a U.S. Holder
-74-
entitled to claim a 15% withholding rate under the U.S. Tax Treaty). This
limitation could only potentially apply under circumstances where the Company
pays dividends on the shares.
Depending on the particular circumstances of the U.S. Holder, dividends
accrued from shares will generally be classified, for foreign tax credit
purposes, as passive income or financial services income. A U.S. Holder who
finds it more advantageous because of such limitations, to claim The Netherlands
dividend withholding tax as a deduction instead of a credit may do so, but only
for a year for which such Holder does not claim a credit for any foreign taxes.
If the U.S.Holder is a U.S. partnership, trust, or estate, any tax credit is
available only to the extent that the income derived by such partnership,
trusts, or estate is subject to U.S. tax on the income of a resident either in
its hands or in the hands of its partners or beneficiaries, as the case may be.
Taxation on Sale or Disposition of Shares
U.S. Holders will recognize capital gain or loss for U.S. federal income
tax purposes on the sale or other disposition of shares in an amount equal to
the difference between the U.S. dollar value of the amount realized and the U.S.
Holder's adjusted tax basis in the shares. In general, a U.S. Holder's adjusted
tax basis in the shares will be equal to the amount paid by the U.S. Holder for
such shares. For shares held less than a year, any such gain or loss will
generally be treated as short-term gain or loss and taxed as ordinary gain or
loss. If the shares have been held for more than a year, any such gain or loss
will generally be treated as long-term capital gain or loss. Rates of tax on
long-term capital gains vary depending on the holding period. U.S. Holders are
advised to consult a competent tax adviser regarding applicable capital gains
tax provisions and sourcing of capital gains and losses for foreign tax credit
purposes.
Gift and Estate Tax
An individual U.S. Holder may be subject to U.S. gift and estate taxes on
shares in the same manner and to the same extent as on other types of personal
property.
Backup Withholding and Information Reporting
Payments in respect of the shares may be subject to information reporting
to the U.S. Internal Revenue Service and to a 31% U.S. backup withholding tax.
Backup withholding generally will not apply, however, to a Holder who furnishes
a correct taxpayer identification number or certificate of foreign status and
makes any other required certification or who is otherwise exempt from backup
withholding. Generally, a U.S. Holder will provide such certification on Form
W-9 (Request for Taxpayer Identification Number and Certification) and a non-US
Holder will provide such certification on Form W-8 (Certificate of Foreign
Status).
Foreign Personal Holding Companies
The Company or any of its non-US subsidiaries may be classified as a
foreign personal holding company" ("FPHC") if in any taxable year five or fewer
persons who are U.S. citizens or residents own (directly or constructively after
the application of certain attribution rules) more than 50% of the Company's
stock (a "US Group") and more than 60% of the gross income of the Company or of
any subsidiary consists of passive income for purposes of the FPHC rules. There
is a look-through rule for dividends and interest received from related persons.
Accordingly, dividends and interest received by the Company from its
subsidiaries will be re-characterized based on the income of the subsidiaries.
If the Company or any of its subsidiaries is or becomes a FPHC, each
U.S.Holder of the Company (including a U.S. corporation) who held stock in the
Company on the last day of the taxable year of the Company, or, if earlier, the
last day of its taxable year in which a U.S. Group existed with respect to the
Company, is required to include in gross income as a dividend such shareholder's
pro rata portion of the undistributed FPHC income of the Company or the
subsidiary, even if no cash dividend was actually paid. In this case, if the
Company is a FPHC, a U.S. Holder is entitled to increase its tax basis in the
shares of the Company by the amount of a deemed dividend from the Company. If a
subsidiary of the Company is a FPHC, a U.S. Holder in the Company should be
afforded similar relief, although the law is unclear as to the form of the
relief.
Taxes in The Netherlands
The following is a general discussion of the tax laws in The Netherlands
as they relate to the operations of the Company.
Corporate Income Taxes
Each subsidiary of ICTS is subject to taxation according to the applicable
tax laws with respect to its place of incorporation, residency or operations.
ICTS is incorporated under the laws of The Netherlands and is therefore subject
to
-75-
the tax laws of The Netherlands. In 2005 the standard corporate income tax rate
was 27% applicable for taxable profits up to (euro)22,689 and 31.5% for the
excess. In 2006 these rates are 25.5% and 29.6% respectively.
For Dutch corporate income tax purposes business affiliates should
calculate their profits at arms length. Therefore, if in transactions between
such affiliates, certain benefits are bestowed on either entity because of such
affiliation and if any profits are realized due to such association, then both
entities should include such profits as part of their income.
Participation Exemption
In addition, all income of ICTS arising from dividends paid by its
subsidiaries or affiliates or capital gains from the sale of its shares in
subsidiaries or affiliates is exempt from corporate income tax in The
Netherlands if the following conditions are fulfilled: (i) ICTS must hold at
least 5% of the nominal paid-in capital of the subsidiary or affiliate, (ii) the
subsidiary or affiliate must be an operating company, (iii) the subsidiary or
affiliate must be subject to taxation of its profits in its jurisdiction of
incorporation or residence and (iv) for non-European Community subsidiaries or
affiliates or for European Community subsidiaries or affiliates in which ICTS
owns less than 25% of the nominal paid-in capital, as well as for larger
shareholdings if the EU company is to benefit from the participation exemption,
ICTS must not hold the shares in the subsidiary or the affiliate merely as a
portfolio investment (which is deemed to be the case if the activities of the
subsidiary or affiliate consist mainly of the financing (directly or indirectly)
entities related to ICTS or assets of such entities). Furthermore, the
participation exemption is denied if 70 percent or more of the assets of any
participation would consist of interests in companies which would not be
considered qualifying participations if the interests would have been directly
held by ICTS. The participation exemption will also be excluded for
participations in EU companies with foreign branches if the branches would not
have been exempted in case they would have been held directly by ICTS.
Consequently, income of ICTS arising from dividends paid by its
subsidiaries or affiliates or capital gains from the sale of its shares in its
subsidiaries or affiliates may be exempt from corporate income tax in The
Netherlands.
Thin-capitalization rules
As of January 1 2004, expenses relating to participations in all
companies, regardless of whether they are resident in The Netherlands or abroad,
are deductible. The deduction of interest expenses will be reduced with regard
to loans provided to group companies or related companies that have been
excessively financed by debt.
The non-deductible amount of interest in any fiscal year will be equal to
the portion of the interest on loans, including expenses incurred in connection
with loans, that is proportional to the ratio between excess debt and average
debt. The thin capitalization rules do not apply to currency exchange results
and currency gains and losses on acquisition debts. These items will be taxable
or deductible.
A company is regarded as excessively financed by debts if the average
annual debt for tax purposes exceeds three times the average annual equity for
tax purposes and the excess is greater than EUR 500,000. In this respect, the
amount of the debts is defined as the net amount of cash loans receivable and
cash loans payable.
Limitations on set-off of losses
As from 1 January 2004, new rules have been introduced that may affect the
carry forward of losses of prior years against profits made in 2004 and
subsequent years. Generally, the new rules provide that, if the activities of a
company for the entire year entirely or almost entirely (i.e. 90%) consist(ed)
for 90% or more of the holding of participations or (in)directly financing
related companies, losses resulting from these activities can only be set off
against the profits of years in which the activities of the taxpayer for
(almost) the entire year also (almost) entirely consisted of the holding of
participations or (in)directly financing of related companies; and the book
value of debt claims on related companies less the book value of debts to these
companies in (almost) the entire year does not exceed the book value of other
comparable debts less the book value of other comparable debts at the end of the
year in which the loss was realized.
The new rules clarify that the activities of a company will not be deemed
to be (almost) entirely consisting of the holding of participations or
(in)directly financing related companies if at least 25 employees are engaged in
other activities on a full-time basis.
The following is a non exhaustive summary of Netherlands tax consequences
to a holder of Common Shares who is not, or is not deemed to be, a resident of
The Netherlands for purposes of the relevant tax codes (a "non-resident
Shareholder") and is based upon laws and relevant interpretations thereof in
effect as of the date of this Annual Report, all of which are subject to change,
possibly on a retroactive basis. The summary does not address taxes imposed by
The Netherlands and its political subdivisions, other than the dividend
withholding tax, the individual income tax, the corporate
-76-
income tax, the net wealth tax and the gift and inheritance tax. The discussion
does not address the tax consequences under tax laws in any other jurisdiction
besides The Netherlands.
Netherlands Tax Consequences of Holding Shares
The following is a general discussion of the tax laws in The Netherlands
as they relate to the holding shares of the Company:
Dividend Withholding Tax in The Netherlands
ICTS currently does not anticipate paying any dividends in the foreseeable
future. To the extent that dividends are distributed by ICTS, such dividends
ordinarily would be subject, under the tax laws of The Netherlands, to a
withholding tax at a rate of 25%. Dividends include distributions in cash or in
kind, constructive dividends and redemption and liquidation proceeds in excess
of, for The Netherlands tax purposes, recognized paid-in capital. Share
dividends are also subject to The Netherlands dividend withholding tax, unless
distributed out of the paid-in share premium of ICTS as recognized for tax
purposes in The Netherlands.
A non-resident Shareholder can be eligible for a reduction or a refund of
the Dutch dividend withholding tax under a tax convention which is in effect
between the country of residence of the shareholder and The Netherlands. The
Netherlands has concluded such conventions with, among others, the United
States, most European Community countries, Canada, Switzerland and Japan. Under
most of these conventions, a dividend withholding tax in The Netherlands is
reduced to a rate of 15% or less.
Under the tax convention currently in force between the United States and
The Netherlands (the "Treaty"), dividends paid by ICTS to an individual
shareholder resident in the United States or a corporate shareholder organized
under the laws of the United States or any State or territory thereof, holding
less than 10% of the voting power in ICTS (each, a "U.S. Treaty Shareholder"),
are generally eligible for a reduction in the rate of The Netherlands dividend
withholding to 15%, provided that they are entitled to the benefits of the
Treaty, unless such U.S. Treaty Shareholder has a permanent establishment in The
Netherlands to which the Common Shares are attributable.
Generally, there is no dividend withholding tax applicable in The
Netherlands on the sale or disposition of Common Shares to persons other than
ICTS or its subsidiaries or affiliates. In case of sale or disposition of common
shares to ICTS or any of its subsidiaries, the dividend withholding tax in The
Netherlands may apply. However, after January 1, 2001, in limited circumstances,
the Dutch dividend withholding tax will not apply to repurchases of shares by
ICTS.
In addition, in an effort to reduce the practice of dividend stripping to
reduce or avoid the applicable taxes, the Dutch tax authorities have introduced
new laws to avoid such practices effective retroactively from April 27, 2001.
Income Tax and Corporate Income Tax in The Netherlands
A non-resident Shareholder will not be subject to income tax and corporate
income tax in The Netherlands with respect to dividends distributed by ICTS on
the Common Shares or with respect to capital gains derived from the sale or
disposal of Common Shares, provided that:
(a) the non-resident Shareholder does not carry on a business in The
Netherlands through a permanent establishment or a permanent representative to
which or to whom the Common Shares are attributable; and
(b) the non-resident Shareholder does not have a direct or indirect
substantial interest or deemed substantial interest in the share capital of ICTS
as defined in the tax code in The Netherlands or, in the event the non-resident
Shareholder does have such a substantial interest, such interest forms part of
the assets of an enterprise of that non-resident Shareholder; and
(c) the non-resident Shareholder is not entitled to a share in the
profits of an enterprise effectively managed in The Netherlands, other than
through ownership of securities or through employment, to which enterprise the
Common Shares are attributable.
Generally, a substantial interest in the share capital of ICTS does not
exist if the non-resident Shareholder, alone or together with certain close
relatives, does not own, directly or indirectly, 5% or more of the issued
capital of any class of shares in ICTS, options to acquire 5% or more of the
issued capital of any class of shares or certain profit-sharing rights. In case
of a substantial interest claims the non-resident Shareholder has on ICTS may
belong to such substantial interest. Non-resident Shareholders owning a
substantial interest in ICTS may be subject to income tax upon the occurrence of
certain events, for example when they cease to own a substantial interest.
-77-
Special rules may apply to non-resident Shareholders who owned a
substantial interest or deemed substantial interest under the rules applicable
before such dates and to non-resident Shareholders who own a substantial
interest or deemed substantial interest as a result of modifications of the
special tax regime for substantial interest holders as of such dates.
As of January 1, 2001, a non-resident individual taxpayer can opt to be
treated like a resident of The Netherlands for tax purposes. This choice will
allow the individual to benefit from deductions and other tax benefits only
available to residents of The Netherlands. However, in most cases, this choice
may not prove beneficial since then the individual will be liable for its
worldwide income as well as its entire worldwide holdings to taxes in The
Netherlands.
Gift, Inheritance Tax and Transfer Tax Upon Gift or Death in The
Netherlands
A gift or inheritance of Common Shares from a non-resident Shareholder
will not be subject to gift, inheritance tax, and transfer tax upon gift or
death in The Netherlands provided that:
(a) (i) the Common Shares are not an asset attributable to a
resident enterprise or to a permanent establishment or a permanent
representative of a non-resident enterprise, as well as the Common Shares are
not an asset that comes of a co-entitlement other than being a shareholder, in
such an enterprise and (ii) the non-resident Shareholder is not entitled to a
share in the profits of an enterprise effectively managed in The Netherlands,
other than through ownership of securities or through employment, to which
enterprise the Common Shares are attributable.
(b) the Common Shares held by the non-resident do not qualify as
"fictitious real estate holdings" for Dutch real estate transfer tax purposes.
(c) the non-resident Shareholder has not been a resident of The
Netherlands at any time during the ten years preceding the time of the gift or
death or, in the event he or she has been a resident of The Netherlands in that
period, the non-resident Shareholder is not a citizen of The Netherlands at the
time of the gift or death; and
(d) for purposes of the tax on gifts, the non-resident Shareholder
has not been a resident of The Netherlands at any time during the twelve months
preceding the time of the gift.
(e) the beneficiaries of a deceased non-resident Shareholder have
not requested the treatment of the deceased Shareholder as a resident of The
Netherlands according to the Dutch inheritance taxes.
(f) In case of a grant of the Common Shares by a non-resident
Shareholder, the donee has not requested to have the donor treated as a resident
of The Netherlands for Dutch gift tax purposes.
Tax assessment in the U.S
Under an ongoing tax examination, started in early 2005, by the U.S tax
authorities of the U.S. subsidiaries of the Company, through the years ended
December 31, 2003. The U.S subsidiaries were required to provide information
regarding their treatment of certain expenses. Based on the issues raised, the
tax authorities' position and a professional opinion the Company has received,
the Company has included a provision in its accounts. The Company's management
believes that the applicable provision in its financial statements as of
December 31, 2005 is adequate to cover probable costs arising from this tax
examination if and when they will become to Tax assessments.
Documents on display
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements, the
Company files reports and other information with the United States Securities
and Exchange Commission ("SEC"). These materials may be inspected at the
Company's office in Amstelveen, The Netherlands.. Documents filed with the SEC
may also be read and copied at the SEC's public reference room at Room 1024,
Judiciary Plaza Building, 450 Fifth Street N.W., Washington, D.C. 20549 and at
the regional offices of the SEC located at 500 West Madison Street, Suite 1400,
Chicago, IL 60661. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. The SEC also maintains a web site at
http://www.sec.gov that contains reports, proxy statements and other information
regarding registrants that file electronically with the SEC.
Subsidiary Information
Not applicable
Item 11. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Exchange Risk - Only applies to Companies operations
outside the USA. In 2003 about 90 percent of the Companies revenues were derived
in the USA.
-78-
See financial statements note 18.
Item 12. Description of Securities Other than Equity Securities
Not applicable
-79-
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable
Item 14. Material Modifications to the Rights of Security Holders and Use
of Proceeds
Not applicable
Item 15. Controls and Procedures.
Based on their evaluation of the Company's disclosure controls and
procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934) as of a date within 90 days of the filing date of this
Annual Report on Form 20-F, the Company's chief executive officer and chief
financial officer have concluded that the Company's disclosure controls and
procedures are designed to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms and are operating in an effective manner.
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their most recent evaluation. Notwithstanding the foregoing, the Company
is of the belief that its internal controls and procedures could be strengthened
in certain aspects to improve its effectiveness. In particular, the Company
believes that it could retain additional persons with financial background and
improve its financial record-keeping. The Company anticipates improving these
internal controls and procedures in the future.
Item 16A. Audit Committee Financial Experts
The financial experts of the Audit Committee consist of Philip M. Getter
and Gordon Hausmann. All members are independent, with no relationship with
management. Mr. Getter has financial expertise. Mr Getter is the Chairman of the
Audit Committee and is also an independent Director of the Company.
Item 16B. Code of Ethics
The Company has adopted a Code of Ethics for principal's executive
officers and senior financial officers.
Item 16C. Principal Accountant Fees and Services
Auditors' fees for the year 2005 were the following:
Audit fees:
Audit fees $431
Audit related fees
Sub-total $431
Non-Audit services:
Tax fees
Total fees
Item 16D. Exemptions from listing standards for Audit Committees.
One of the Company's directors who acts as the chairman of the Company's
Audit Committee is also a director and chairman of the Audit Committee of one of
the Company's affiliates. Other than such affiliation such director meets the
independence requirement for each such entity.
-80-
PART III
Item 17. Financial Statements - See Item 18.
Item 18. Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated of Statements of Cash Flows
Notes to Consolidated Financial Statements.
Item 19. Exhibits
1. Articles of Association of the Company.*
2. Specimen of the Company's Common Stock.*
3. Code of Ethics for Principal Executive Officers and Senior Financial
Officers.**
Certification by the Registrant's Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Certification by the Registrant's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Incorporated by reference to the Company's 1999 annual report filed with
the Commission on Form 20-F.
** Incorporated by reference to the Company's 2003 annual report filed with
the Commission on Form 20-F.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
ICTS INTERNATIONAL N.V.
By: /s/ Avraham Dan
-------------------------
Name: Avraham Dan
Title: Managing Director
Date: September 15, 2006
-81-
ICTS INTERNATIONAL N.V.
2005 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of independent registered public accounting firms ........... F-2
Consolidated financial statements:
Consolidated balance sheets ................................ F-4
Consolidated statements of operations
and comprehensive operations ............................. F-6
Consolidated statements of changes in
shareholders' equity (deficiency) ........................ F-7
Consolidated statements of cash flows ...................... F-8
Notes to consolidated financial statements .......................... F-10
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
ICTS INTERNATIONAL N.V.
We have audited the accompanying consolidated balance sheets of ICTS
International N.V. and subsidiaries ("the Company") as of December 31, 2005 and
2004, and the related consolidated statement of operations and comprehensive
operations, changes in shareholders' equity (deficiency) and cash flows for each
of the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company as of December 31, 2005 and 2004, and the consolidated results of their
operations, the changes in their shareholders' equity (deficiency) and their
cash flows for each of the years then ended, in conformity with United States
generally accepted accounting principles.
As disclosed in Note 14, a multitude of lawsuits have been commenced against the
Company in connection with the September 11, 2001 terrorist attacks in the
United States and the Company's insurance carriers have canceled all its war
risk policies. Also, there is a dispute between the Company and the United
States Transportation Security Administration ("TSA"), with respect to the basis
of calculation of payments for security services rendered by the Company in
2002, in respect of which, the TSA might be claiming refund of material amounts.
The Company has been advised that an investigation by the Criminal
Investigations Division of the Internal Revenue Service has resulted in a grand
jury investigation by the U.S Department of Justice, Tax Division, regarding
possible criminal tax violations by ICTS USA, Inc. for the tax years 2002 and
2003.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1(b), 14 and
17(g) to the financial statements, the Company has suffered recurring losses
from operations, and has a net working capital deficiency, and is subject to
potential contingencies in connection with the U.S. Department of Justice matter
and the September 11, 2001 terrorist attacks, both discussed above. These
matters raise substantial doubt about the Company's ability to continue as a
going concern. Management's plan in regard to these matters is also described in
Note 1(b). The financial statements do not include any adjustments that might
result from the outcome of these uncertainties
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
April 8, 2006, except for Notes 14 and 23,
as to which the date is August 31, 2006
-83-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
ICTS INTERNATIONAL N.V.
We have audited the accompanying consolidated statement of operations and
comprehensive income, changes in shareholders' equity and cash flows of ICTS
International N.V. ("the Company") and its subsidiaries for the year ended
December 31, 2003. These financial statements are the responsibility of the
Company's board of directors and management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We did not audit the financial statements of certain associated companies, the
Company's share in excess of losses over profits of which is a net amount of
$1.7 million in 2003. The financial statements of the above associated companies
were audited by other independent auditors, whose reports have been furnished to
us, and our opinion, insofar as it relates to amounts included for those
companies, is based on the reports of the other independent auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United State) and auditing standards generally
accepted in Israel, including those prescribed by the Israeli auditors (Mode of
performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Company's Supervisory board of directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits and the reports of the other independent auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of the other independent
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
comprehensive income, the changes in shareholders' equity and cash flows of the
Company and its subsidiaries for the year ended December 31, 2003, in conformity
with accounting principles generally accepted in the United States of America.
Without qualifying our opinion, we draw attention to Note 14b(3), regarding a
dispute between the company's subsidiary in U.S.A. and the Transportation
Security Administration ("TSA"), with respect to the basis of calculation of
payments for security services rendered in 2002, in respect of which, the TSA
might be claiming refund of material amounts.
As discussed in note 2i to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill to
conform with FASB Statement of Financial Accounting Standard No. 142 "Goodwill
and Other Intangible Assets".
Tel Aviv, Israel Kesselman & Kesselman
July 13, 2004, except for Certified Public Accountants (Isr.)
Note 2u and the resulting
presentation of discontinued
operations, for which the date
is September 14, 2006
-84-
ICTS INTERNATIONAL N.V
CONSOLIDATED BALANCE SHEETS
(US $ in thousands, except share data)
December 31,
----------------------------
2005 2004
---- ----
A s s e t s
CURRENT ASSETS:
Cash and cash equivalents $ 5,927 $ 3,224
Restricted cash and short term investments 3,724 4,773
Accounts receivable (net of allowance for
doubtful accounts of $1,237 and $2,708 as of
December 31, 2005 and 2004, respectively) 13,639 11,958
Prepaid expenses 1,335 1,051
Other current assets 337 2,523
Current assets from discontinued operations 482 1,139
------- -------
T o t a l current assets 25,444 24,668
------- -------
INVESTMENTS:
Investments in associated companies 2,989 3,774
Other investments 495 7,118
Deferred income taxes 0 3
------- -------
3,484 10,895
------- -------
PROPERTY AND EQUIPMENT:
Cost 4,232 3,549
L e s s - accumulated depreciation and amortization 2,979 2,534
------- -------
1,253 1,015
------- -------
GOODWILL 314 314
------- -------
OTHER ASSETS, net of
Accumulated amortization 1,663 1,754
Non current assets from discontinued operations 55 16,316
------- -------
T o t a l other assets 1,718 18,070
------- -------
T o t a l assets $32,213 $54,962
======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
-85-
ICTS INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS
(US $ in thousands, except share data)
December 31,
---------------------------
2005 2004
---- ----
Liabilities and shareholders' equity
CURRENT LIABILITIES:
Short-term bank credit $ 3,907 $ 3,870
Current maturities of long-term liabilities 150 47
Accounts payable - trade 2,750 1,081
Accrued expenses and other liabilities 18,628 15,397
Current liabilities from discontinued operations 2,666 6,265
-------- --------
T o t a l current liabilities 28,101 26,660
-------- --------
LONG-TERM LIABILITIES:
Accrued severance pay 189 65
Deferred income taxes 0 20
Long-term liabilities, net of current maturities 313 4,190
Non current liabilities from discontinued operations 8,758 2,521
-------- --------
T o t a l long-term liabilities 9,260 6,796
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
-------- --------
T o t a l liabilities 37,361 33,456
-------- --------
SHAREHOLDERS' EQUITY (DEFICIENCY):
Share capital - shares of common stock,
par value 0.45 Euro, December 31, 2005
and 2004:
Authorized - 17,000,000 shares;
issued - 6,672,980 shares 3,605 3,605
Additional paid-in capital 19,670 19,670
Retained earnings (Accumulated Deficit) (20,230) 4,650
Accumulated other comprehensive loss (7,294) (5,520)
-------- --------
(4,249) 22,405
-------- --------
Treasury stock at cost - December 31, 2005 and 2004 -
144,880 shares (899) (899)
-------- --------
T o t a l shareholders' equity (deficiency) (5,148) 21,506
-------- --------
Total liabilities and shareholders'
equity (deficiency) $ 32,213 $ 54,962
======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
-86-
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(US $ in thousands, except per share data)
Year ended December 31,
--------------------------------------------
2005 2004 2003
---- ---- ----
REVENUES $ 57,713 $ 57,993 $ 67,933
COST OF REVENUES 53,721 52,825 52,557
-------- -------- --------
GROSS PROFIT 3,992 5,168 15,376
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 11,690 12,201 8,547
IMPAIRMENT OF ASSETS 797
-------- -------- --------
OPERATING INCOME (LOSS) (7,698) (7,033) 6,032
FINANCIAL INCOME (EXPENSES) -- net (908) (452) 4,118
OTHER INCOME (EXPENSES), net 147 (2,907) (353)
-------- -------- --------
INCOME (LOSS) BEFORE TAXES (8,459) (10,392) 9,797
INCOME TAXES BENEFIT (EXPENSE) (2,387) 1,529 (3,910)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net (486) (1,625) (6,661)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (11,332) (10,488) (744)
DISCONTINUED OPERATIONS:
Loss from discontinued operations, net of tax
benefit of $2,525, $1,655 and $795 in
2005, 2004 and 2003, respectively. Includes
loss of 4,774$ on sale of assets to
related party in 2005 and after share in
loss of associated company of $36 and $81
in 2005 and 2004, respectively (13,548) (15,474) (18,130)
-------- -------- --------
LOSS FOR THE YEAR (24,880) (25,962) (18,904)
-------- -------- --------
OTHER COMPREHENSIVE INCOME :
Translation adjustments (1,560) 1,043 3,456
Unrealized gains (losses) on marketable
securities (214) (616) 794
Reclassification adjustment for losses for
available for sale securities included in
net income 237
-------- -------- --------
(1,774) 427 4,487
-------- -------- --------
TOTAL COMPREHENSIVE LOSS FOR THE YEAR $(26,654) $(25,535) $(14,417)
======== ======== ========
LOSSES PER SHARE : Loss from continuing operations:
Loss per common share-basic $ (1.74) $ (1.61) $ (0.12)
======== ======== ========
Loss per common share-diluted $ (1.74) $ (1.61) $ (0.12)
======== ======== ========
Loss from discontinued operations:
Loss per common share-basic $ (2.07) $ (2.37) $ (2.78)
======== ======== ========
Loss per common share-diluted $ (2.07) $ (2.37) $ (2.78)
======== ======== ========
Net Loss:
Loss per common share-basic $ (3.81) $ (3.98) $ (2.90)
======== ======== ========
Loss per common share- diluted $ (3.81) $ (3.98) $ (2.90)
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
-87-
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
(US $ in thousands, except share data)
Shares of common
Stock Accumulated Accumulated
------------------- Additional (deficiet) other
Number of Paid-in Retained Comprehensive Treasury
shares Amount capital earnings income (loss) stock Total
------ ------ ------- -------- ------------- ----- -----
BALANCE AT JANUARY 1,
2003 6,513,100 $ 3,605 $ 19,670 $ 49,516 $*(10,434) $ (979) $ 61,378
CHANGES DURING 2003:
Comprehensive loss:
Loss (18,904) (18,904)
Other comprehensive income (loss):
Translation adjustments 3,456 3,456
Unrealized gains on marketable
Securities 1,031 1,031
--------
Total comprehensive loss (14,417)
---------- ------- -------- --------- -------- ------ --------
BALANCE AT DECEMBER 31,
2003 6,513,100 3,605 19,670 30,612 *(5,947) (979) 46,961
========== ======= ======== ========= ======== ====== ========
CHANGES DURING 2004:
Stock options exercised from treasury stock 15,000 80 80
Comprehensive loss:
Loss (25,962) (25,962)
Other comprehensive income:
Translation adjustments 1,043 1,043
Unrealized losses on marketable
Securities (616) (616)
--------
Total comprehensive loss (25,455)
---------- ------- -------- --------- -------- ------ --------
BALANCE AT DECEMBER 31, 2004 6,528,100 3,605 19,670 4,650 *(5,520) (899) 21,506
---------- ------- -------- --------- -------- ------ --------
CHANGES DURING 2005:
Stock options exercised from treasury stock
Comprehensive loss:
Loss (24,880) (24,880)
Other comprehensive income (loss):
Translation adjustments
Unrealized losses on marketable (1,560) (1,560)
Securities (214) (214)
--------
Total comprehensive loss (26,654)
---------- ------- -------- --------- -------- ------ --------
BALANCE AT DECEMBER 31, 2005 $6,528,100 $ 3,605 $ 19,670 $ (20,230) $*(7,294) $ (899) $ (5,148)
========== ======= ======== ========= ======== ====== ========
December 31,
------------------------------------------------------
2005 2004 2003
---- ---- ----
Cumulative translation adjustments $ (7,194) $(5,634) $(6,677)
Cumulative unrealized gains on marketable
securities (100) 114 730
--------- -------- --------
$ (7,294) $(5,520) $(5,947)
========= ======== ========
-88-
The accompanying notes are an integral part of the consolidated
financial statements.
-89-
ICTS INTERNATIONAL N.V
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ in thousands)
Year ended December 31,
----------------------------------
2005 2004 2003
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss for the period (24,880) $(25,962) (18,904)
Loss on discontinued operations (13,548) (15,474) (18,130)
-------- -------- --------
Loss on continuing operations (11,332) (10,488) (774)
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization 743 762 725
Impairment of assets 797
Deferred income taxes (177) 515 5,047
Increase (decrease) in accrued severance pay 128 (26) 6
Capital loss on fixed assets 341 6
Realized gain on marketable securities (16) (737)
Increase in value of long term deposit (541) (217)
Write off of investments and impairment of investment 1,148 2,893 400
Share in losses of associated companies 486 1,618 6,661
Interest from other long-term investments (derivative) (31)
Interest on a loan to associated company (100)
Changes in operating assets and liabilities:
Accounts receivable - trade, net (1,788) 1,807 1,662
Other current assets and prepaid expenses 1,239 2,044 (1,938)
Accounts payable 1,704 233 (181)
Accrued expenses and other liabilities 3,481 (2,217) (29,294)
Net cash provided by discontinued operations (254) 1,526 16,594
-------- -------- --------
Net cash used in operating activities (5,163) (1,225) (19,287)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and construction of entertainment projects (329) (250) (606)
Associated companies - acquisition of shares and granting of loans (984)
(2,109)
Other investments (175) (5,202)
Proceeds from affiliates 195
Proceeds from sale of equipment 989 92
Proceeds from sale of other investments 2,185 5,687 1,000
Repayment of long term loans granted to related parties 3,700
Decrease (increase) of time deposits and restricted cash 1,273 (1,686) 4,735
Proceeds from sale of marketable securities available for sale 3,726
Decrease (increase) in other assets (133) 463 (579)
Net cash provided by (used in) discontinued operations 5,257 (4,501) (8,000)
-------- -------- --------
Net cash provided by (used in) investing activities 8,272 (282) (3,243)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Cost of acquisition of treasury stock
Sale of treasury stock 80
Long-term loan received 124 245
Funding advances 4,113
Repayments of long-term liabilities (156) (103) (2,471)
Net increase (decrease) in short-term bank credit 54 (1,766) (4,270)
Net cash from discontinued operations to financing activities (1,536) 205
-------- -------- --------
Net cash provided by (used in) financing activities 22 (3,080) (2,423)
-------- -------- --------
EFFECT OF CHANGES IN FOREIGN CURRENCY
EXCHANGE RATES ON CASH AND CASH EQUIVALENTS (428) 407 (21)
-------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 2,703 (4,180) (24,974)
BALANCE OF CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 3,224 7,404 32,378
-------- -------- --------
BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 5,927 $ 3,224 $ 7,404
======== ======== ========
The accompanying notes are an integral part of the consolidated
financial statements.
-90-
ICTS INTERNATIONAL N.V
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ in thousands)
Year ended December 31,
----------------------------------
2005 2004 2003
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW ACTIVITIES:
Cash from continued operations paid
during the year for:
Interest $ 450 $ 381 $ 224
======= ======= =======
Taxes on income $ 188 $ 228 $ 5,679
======= ======= =======
Cash from discontinued operations paid during the year for:
Interest $ 168 $ 327 $ 354
======= ======= =======
Taxes on income $ 2 $ 20
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Investment in Subsidiary - continuing operations $ -,- $ -,- $
=======
Settlement of debt upon sale of long term
deposit - continuing operations $ 4,196 $ -,- $ -,-
=======
Purchase of equipment - continuing operations $ 455 $ -,- $ -,-
=======
Purchase (sale) of equipment - discontinued
operations ($2,116) $ 1,406
======= ======= =======
The accompanying notes are an integral part of the consolidated
financial statements.
-91-
ICTS INTERNATIONAL N.V
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 1 -- GENERAL
a. Operations
ICTS International N.V., including its subsidiaries (collectively
referred to herein as "ICTS" or "the Company"), is a provider of
aviation security and other aviation related services through
service contracts with airline companies and airport authorities.
As mentioned in c. below, in 2002 one of the Company's subsidiaries,
Huntleigh USA Corporation ("Huntleigh") derived a substantial
portion of its revenues from providing aviation security services to
the United States Transportation Security Administration ("TSA").
Commencing November 2002 the Company ceased providing such services
to the TSA but continues to provide such services to aviation
companies and others. As to Segment Information see note 19.
Other activities of the Company were leasing of equipment and
development of entertainment projects. In December 2005, the Company
decided to discontinue those activities. At that time all the
equipment the Company leased was sold to the lessee. See note 2(u)
and 7(d).
b. The Company's financial position
During the years ended December 31, 2005, 2004 and 2003, the Company
has incurred $25 million, $26 million and $19 million of net losses,
respectively, which were accompanied by net cash used in operating
activities of $5.2 million ,$1.2 million and $19.3 million,
respectively. As of December 31, 2005 the Company had a working
capital deficiency of $2.7 million. In addition, the Company is
subject to potential contingencies in connection with the U.S
department Justice matter (see note 17(g)) and the September 11,
2001 terrorist attacks (see note 14). These factors raise
substantial doubt about the Company's ability to continue as a going
concern
Subsequent to the end of the year 2004, the Company's management
commenced liquidating its position in several long term assets as
described in Notes 7(d), 6(a) and 23. In addition, during 2005,
management has ceased its operations in non core business as
described in note 2(u) and is re-entering to the Security European
market, see note 14(c). Management anticipates that those
liquidations will provide the Company with the resources necessary
to meet its obligations and that entering into additional service
contracts will contribute toward achieving profitability.
-92-
ICTS INTERNATIONAL N.V
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 1 - GENERAL (continued)
The accompanying financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a
going concern.
c. Effect of the events of September 11, 2001 and Aviation and
Transportation Security Act
On November 19, 2001, as a result of the events of September 11,
2001, the Aviation and Transportation Security Act was signed into
law. The Aviation and Transportation Security Act made airport
security including security screening operations for passenger air
transportation and intrastate air transportation a direct
responsibility of the Federal government as administered by the TSA.
As a result, in accordance with a contract signed with the TSA ("TSA
Contract"), the Company has provided screening services in its
airport locations during the transition period through November
2002, when all such activities were transferred to the TSA. Through
December 31, 2002, the Company has recorded revenues of
approximately $205 million from the TSA. As a result of the
foregoing the Company closed certain locations and dismissed part of
its employees. As to the dispute with the TSA, see note 14b (3).
During 2003, the Department of Labor in the US ("DOL") finalized its
audit of the Company's subsidiary concerning the pay rates used to
compensate employees for services rendered pursuant to the TSA
Contract. The DOL concluded that in certain instances, employees had
not been paid the correct base rate, fringe benefits, vacation and
holiday pay by the subsidiary. As of December 31, 2005 and 2004 a
liability relating to the audit of approximately $7.3 million was
recorded in the consolidated financial statements. In March 2006 the
DOL filed a complaint alleging that the Company subsidiary underpaid
$7.1 million during the TSA takeover period from February 15th
through December of 2002.
The TSA Contract indicates that the Company will receive
notification in writing at least 30 calendar days in advance of a
location transition. Under the provisions of the Worker Adjustment
and Retraining Notification Act (the "WARN Act"), the Company is
required to give 60 days written notification to its employees of an
involuntary termination. At December 31, 2002 and throughout most of
fiscal 2003, management estimated the Company's liability under the
WARN Act to approximate $18.9 million, which had been recorded by
the Company in cost of revenues in 2002.
However, during the fourth quarter of fiscal 2003, the Company
obtained a legal letter from an outside counsel indicating that the
Company may have meritorious defenses against the payment of a
substantial portion of the recorded accrual. Based on the points
-93-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 1 - GENERAL (continued)
noted in the legal letter and given the fact that no claims have
been filed to date by former employees seeking compensation under
the WARN Act provisions, the Company reviewed its original estimate
and reduced the estimated liability to approximately $0.3 million
and $0.5 million at December 31, 2005 and 2004, respectively, by
recording a credit to cost of revenues of approximately $0.2 million
and $0.5 million in 2005 and 2004, respectively.
As to the other outstanding issues, see note 14.
d. Sale of ICTS Europe Holding B.V. ("ICTS Europe")
On October 5, 2000, the Company entered into a share purchase
agreement (the "Share Purchase Agreement") with Fraport AG
("Fraport"), whereby Fraport was to acquire, in two stages of 45%
and 55% in 2001 and 2002, respectively, the shares of ICTS Europe.
As a result of the sale, the Company has fully divested itself of
its European operations except for the operations of the Company's
subsidiary in the Netherlands and countries that were formerly part
of the Soviet Union republics, including Russia, and Kazakhstan, and
took upon certain restrictions on its operations, see note 14c.
During 2005, the restrictive covenant expired and the Company
re-entered the aviation security business in Europe with contracts
with US carriers throughout Europe.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the USA ("U.S. GAAP").
The significant accounting policies are as follows:
a. Functional currency
The major part of the Group's revenues and operations are carried
out by the Company subsidiaries in the United States. The functional
currency of these entities is the U.S. dollar ("dollar" or "$").
-94-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
The functional currency of the remaining subsidiaries and associated
companies, mainly European companies, is their local currency,
mainly Euro ("euro" or "(euro)"). The financial statements of those
companies are included in the consolidation, based on translation
into dollars in accordance with Statement of Financial Accounting
Standards ("FAS") 52 of the Financial Accounting Standards Board of
the United States ("FASB"). Assets and liabilities are translated at
year end exchange rates, while operating results are translated at
average exchange rates during the year. Differences resulting from
translation are presented in shareholders' equity, under accumulated
other comprehensive income (loss).
b. Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with US GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during
the reported years. As applicable to these financial statements, the
most significant estimates and assumptions relate to allowances,
income taxes, contingencies, liabilities and valuation impairment of
goodwill and other assets. Actual results could differ from those
estimates.
c. Principles of consolidation
The consolidated financial statements include the accounts of ICTS
and its over 50% controlled subsidiaries. Significant intercompany
balances and transactions have been eliminated. Profits from
intercompany transactions, not yet realized outside the Company,
have also been eliminated.
d. Cash equivalents
The Company considers all highly liquid investments, which include
short-term bank deposits (up to three months from date of deposit)
that are not restricted as to withdrawal or use, to be cash
equivalents.
-95-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
e. Concentration of cash risk
Most of the group's cash and cash equivalents and short term
investments as of December 31, 2005 were deposited with major U.S.
and European banks. The Company is of the opinion that the credit
risk in respect of these balances is remote.
f. Marketable securities and other investments:
1) Marketable securities:
The Company classifies its existing marketable securities in
accordance with the provisions of FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities", as available-for-sale.
Securities classified as available-for-sale are reported at fair
value (which is determined based upon the quoted market prices) with
unrealized gains and losses, net of related tax, recorded as a
separate component of accumulated other comprehensive income (loss)
in shareholders' equity until realized. Gains and losses on
securities sold are included in financial income - net. For all
investment securities, unrealized losses that are other than
temporary are recognized in the income statement. The Company does
not hold these securities for speculative or trading purposes. See
also note 6.
2) Other investments
Investments in less than 20% - owned, privately-held companies in
which the Company does not have the ability to exercise significant
influence are stated at cost. The Company's management evaluates its
investments from time to time and, if necessary, recognizes losses
for other than temporary declines in the value of these investments.
g. Investments in associated companies
Investments in companies in which the Company holds a 20% interest
or more or in which it has the ability to exercise significant
influence, provided it does not have control, are accounted for by
the equity method. See also note 5.
-96-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Property and equipment
Property and equipment are carried at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful life of the assets. The estimated useful life used
in determining depreciation and amortization is as follows:
Years
-----
Equipment and facilities 3-16
(mainly 15)
Vehicles 3-7
Office furniture and equipment 3-14
Leased equipment and leasehold improvements are amortized by the straight-line
method over the period of the lease or the estimated useful life of the
improvements, whichever is shorter (3-5 years, mainly 5 years).
i. Goodwill
Goodwill reflects the excess of the purchase price of subsidiaries
acquired over the fair value of net assets acquired and liabilities
assumed. Pursuant to FAS 142, "Goodwill and Other Intangible
Assets", goodwill is not amortized but rather tested for impairment
at least annually, at December 31 of each year.
As of December 31, 2005, the Company has determined that there is no
impairment with respect of goodwill. For the years ended December
31, 2004 and 2003, goodwill of $5,266 and $797 relating to
entertainment and relating to the other operating segment were
written off, respectively (see note 4b and note 8)
j. Other assets and Intangible assets
The intangible asset pertaining to customer relationships is being amortized
over 10 years. Technology was amortized over 3, see note 9.
k. Impairment in value of long-lived assets
The Company tests long-lived assets, including definite life
intangible assets for impairment, in the event an indication of
impairment exists. If the sum of expected future cash flows
(undiscounted and without interest charges) of these assets is less
than their carrying amount of such assets, an impairment loss would
be recognized, and the assets would be written down to their
-97-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
estimated fair values. The impairment expenses of long-lived assets
from continuing operations totaled $797 in 2003. The impairment
expenses from discontinued operations in 2004 and 2003 amounted to
$10,156 and $12,758, respectively.
l. Treasury stock
The treasury stock was acquired by the Company for issuance upon the
exercise of options issued under employee option plans. The treasury
stock is presented as a reduction of shareholders' equity, at its
cost. Gains on the sale of these shares, net of related income
taxes, are recorded under "additional paid in capital".
m. Revenue recognition
Revenue from services is recognized when services are rendered to
the Company's customers, based on terms contained in a contractual
arrangement, provided the fee is fixed and determinable, the
services have been rendered, and collection of the related
receivable is reasonably assured. Revenue from leased equipment was
recognized ratably over the lease term.
n. Earnings (losses) per share ("EPS"):
1) Basic EPS is computed by dividing net income (loss) by the
weighted average number of shares of common stock outstanding during
each year, net of treasury stock. 2) Diluted EPS is computed by
dividing net income (loss) by the weighted average number of shares
outstanding during the year, net of treasury stock, taking into
account the potential dilution that could occur upon the exercise of
options granted under stock options plan, using the treasury stock
method. Options for 615,833, 400,500, and 224,000 shares of common
stock in 2005, 2004 and 2003, respectively, were not included in
computed fully diluted EPS because their effects were anti dilutive.
The total outstanding options for the years 2005, 2004 and 2003 were
1,082, 1,113 and 253 thousands, respectively (see note 22).
o. Deferred income taxes
Deferred income taxes are created for temporary differences between
the assets and liabilities as measured in the financial statements
and for tax purposes. Deferred taxes are computed using the enacted
tax rates expected to be in effect when these differences reverse.
Measurement of deferred tax liabilities and assets is based on
provisions of the tax laws, and deferred tax assets are reduced, if
necessary, by the amount of tax benefits the realization of which is
not considered likely, based on available evidence.
-98-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Deferred tax liabilities and assets are classified as current or
non-current, based on the classification of the related asset or
liability for financial reporting purposes, or according to the
expected reversal date of the specific temporary differences, if not
related to an asset or liability for financial reporting purposes.
Deferred taxes in respect of disposal of investments in subsidiaries
and associated companies have not been taken into account in
computing the deferred taxes, since, under the laws of The
Netherlands, such disposal of investments is tax exempt.
p. Accounts receivable
Accounts receivable are reported at their outstanding unpaid
principal balances reduced by an allowance for doubtful accounts.
The Company estimates doubtful accounts based on historical bad
debts, factors related to specific customers' ability to pay and
current economic trends. The Company writes off accounts receivable
against the allowance when a balance is determined to be
uncollectible.
The allowance for doubtful accounts is composed of specific debts
doubtful of collection amounting to $1,237 and $2,708 as of December
31, 2005 and 2004, respectively. The net bad debts expenses
(collection) were $626, $798 and $(264) in 2005, 2004, and 2003
respectively.
The accounts receivable-trade includes $3 million as of December 31,
2005 and 2004 which is due from the TSA. As to the dispute with the
TSA - see note 14 b (3).
q. Concentrations of credit risks - allowance for doubtful accounts
The Company and its subsidiaries operate mostly in the aviation
industry through service contracts. The Company renders services to
a large number of airline companies to which it provides credit,
with no collateral. Due to the slow-down in the aviation industry,
some airline companies may have difficulties in meeting their
financial obligations. This could have a material adverse effect on
the Company's business. The Company and its subsidiaries regularly
review the credit worthiness of their customers and determine the
credit line, if any.
-99-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
r. Advertising costs
These costs are expensed as incurred. Advertising costs in 2003 were
$522. No advertising costs were incurred in 2005 and 2004.
s. Stock based compensation
1) Employee stock based compensation
The Company accounts for employee stock based compensation in
accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. Under APB 25 compensation cost for employee stock
option plans is measured using the intrinsic value based method of
accounting, and is amortized by the straight-line method against
income, over the expected service period.
FAS 123, "Accounting for Stock-Based Compensation", establishes a
fair value based method of accounting for employee stock options or
similar equity instruments, and encourages adoption of such method
for stock compensation plans. However, it also allows companies to
continue accounting for those plans according to the accounting
treatment prescribed by APB 25.
The Company has elected to continue accounting for employee stock
option plans under APB 25, and has accordingly complied with the
disclosure requirements set forth in FAS 123 and amended by FAS 148
for companies electing to apply APB 25.
The fair value of each option granted is estimated on the date of
grant using the Black & Scholes option-pricing model with the
following weighted average assumptions:
For options granted in
-----------------------
2004 2002
------ ------
Expected life of options (years) 5 3
Expected volatility 101.3% 100%
Risk free interest rate 3.5% 3.5%
Expected dividend yield 0% 0%
The weighted average fair value price per option granted during the
year, using the Black & Scholes option-pricing model was $1.03 and
$2.03 for 2004 and 2002, respectively. During 2005 and 2003 no
options were granted.
-100-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
The following table illustrates the effect on loss and earnings per share
assuming the Company had applied the fair value recognition provisions of FAS
123 to stock-based employee compensation.
Year ended December 31,
------------------------------------
2005 2004 2003
in thousands
(except per share data)
------------------------------------
Net loss $ (24,880) $ (25,962) $ (18,904)
Deduct: stock based employee compensation
expenses determined under fair value
method for all awards (241) (334) (27)
--------- --------- ----------
Pro-forma net loss $ (25,121) $ (26,296) $ (18,931)
========= ========= ==========
Losses per share:
Basic - as reported $ (3.81) $ (3.98) $ (2.90)
========= ========= ==========
Basic - pro-forma $ (3.85) $ (4.03) $ (2.91)
========= ========= ==========
Diluted - as reported $ (3.81) $ (3.98) $ (2.90)
========= ========= ==========
Diluted - pro-forma $ (3.85) $ (4.03) $ (2.91)
========= ========= ==========
-101-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
see also note 21.
2) Non-employee stock based compensation
The Company accounts for options granted to non-employees in
exchange for services received, using the fair value based method of
accounting as prescribed by FAS 123, based on the fair value of the
options granted.
t. Comprehensive Income (Loss)
In addition to net income, other comprehensive income (loss)
includes unrealized gains and losses on available-for-sale
securities and currency translation adjustments of non-dollar
currency financial statements of investee companies.
u. Costs Associated with Exit or Disposal Activities
In August 2001, the FASB issued FAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. FAS 144 provides guidance on the financial
accounting and reporting for the impairment or disposal of long-lived assets.
During 2005 the Company decided to cease its entertainment and leasing
activities.
1) On December 28, 2005 the Company sold its lease equipment to the lessee (a
related party), see note 7(d). The loss associated with the selling of the
equipment totaled to $4,774. The cost of the equipment was $23.5 million
and impairment losses were recorded in 2004 and 2003 of $2,247 and $6,042
respectively.
2) After reviewing the financial results of the entertainment segment, the
Company decided in December 2005 to cease its operations. As a result of
this decision the Company recorded an expense of $9,701 associated with
rent expenses that the Company is obligated to pay until the year 2019.
3) The components of assets and liabilities from the discontinued operation
(leasing and entertainment segments) are presented below:
-102-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
(4) Balance Sheet and Profit and loss for discontinued operations for the
years 2005, 2004 and 2003 is presented below:
December 31,
-------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------
Leasing Entertainment Total Leasing Entertainment Total
------- ------------- ----- ------- ------------- -----
Cash and cash equivalents $ 71 $ 59 $ 130 $ 4 $ 198 $ 202
Accounts receivable 14 14
Prepaid expenses 151 151 80 80
Other current assets 201 201 843 843
-------- -------- -------- -------- -------- --------
Total current assets from discontinued
operations 71 411 482 4 1,135 1,139
-------- -------- -------- -------- -------- --------
Investment in associated companies 55 55 201 201
Property and equipment 16,087 28 16,115
-------- -------- -------- -------- -------- --------
Total non current assets from discontinued
operations 55 55 16,087 229 16,316
-------- -------- -------- -------- -------- --------
Short term bank credit (200) (200) (546) (546)
Current maturities (942) (942) (2,532) (200) (2,732)
Accounts payable - trade (1,551) (1,551) (1,498) (1,498)
Accrued expenses and other liabilities (1,287) 1,315 28 (205) (1,284) (1,489)
-------- -------- -------- -------- -------- --------
Current liabilities from discontinued
operations (1,287) (1,378) (2,665) (2,737) (3,528) (6,265)
-------- -------- -------- -------- -------- --------
Long term liabilities (8,759) (8,759) (2,321) (200) (2,521)
-------- -------- -------- -------- --------
-103-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Year ended December 31,
----------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ----------------------------- -----------------------------
Leasing Entertainment Total Leasing Entertainment Total Leasing Entertainment Total
--------------------- ----- ------- ------------- ----- ------- ------------- -----
Revenues 2,814 1,171 3,985 3,294 1,491 4,785 2,995 643 3,638
Cost of revenues 2,497 1,905 4,402 2,410 2,669 5,079 2,427 2,578 5,005
------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit (loss) 317 (734) (417) 884 (1,178) (294) 568 (1,935) (1,367)
Selling, general and
administrative expenses 19 10,486 10,505 1 1,010 1,011 3 666 669
Impairment of assets 110 110 2,046 13,376 15,422 6,042 7,513 13,555
------- ------- ------- ------- ------- ------- ------- ------- -------
Operating income (loss) 298 (11,330) (11,032) (1,163) (15,564) (16,727) (5,477) (10,114) (15,591)
Financial income (expenses) (212) (19) (231) (335) 14 (321) (3,334) (3,334)
Capital gain (loss) (4,774) (4,774)
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss before taxes (4,688) (11,349) (16,038) (1,498) (15,550) (17,048) (8,811) (10,114) (18,925)
Income taxes benefit
(expenses) 2,525 2,525 911 744 1,655 795 795
Equity in results of
affiliates (36) (36) (81) (81)
------- ------- ------- ------- ------- ------- ------- ------- -------
Loss from discontinued
operations (4,688) (8,860) (13,548) (587) (14,887) (15,474) (8,016) (10,114) (18,130)
======= ======= ======= ======= ======= ======= ======= ======= =======
-104-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(continued) (US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
v. Recently issued accounting pronouncements
FAS 123R
1) In December 2004, the FASB issued SFAS No. 123 (revised 2004)
"Share-Based Payment" (FAS 123R), which requires the measurement of
all share-based payments to employees, including grants of employee
stock options, using a fair-value-based method and the recording of
such expense in an entity's statement of income. The accounting
provisions of FAS 123R are effective for annual reporting periods
beginning after June 15, 2005. The Company is required to adopt the
provisions of FAS 123R in the quarter ending March 31, 2006. The
proforma disclosures previously permitted under FAS 123 no longer
will be an alternative to financial statement recognition. Although
the Company has not yet determined whether the adoption of FAS 123R
will result in amounts that are similar to the current pro forma
disclosures under FAS 123, the Company is evaluating the
requirements under FAS123.
FAS 154
2) In June 2005, the FASB issued FAS 154, "Accounting Changes and Error
Corrections - a replacement of APB No. 20 "Accounting Changes" and
FAS No. 3 "Reporting Changes in Interim Financial Statements". This
statement provides guidance on the accounting and reporting of
accounting changes and error corrections, and guidance in
determination of retrospective application of changes in accounting
principals. As applicable to ICTS, the provisions of FAS 154 are
effective as for the year beginning January 1, 2006.
The Company does not believe that any other recently issued but not
yet effective accounting standards if currently applied would have a
material effect on the accompanying financial statements.
w. Reclassification:
Certain amounts from 2004 and 2003 have been reclassified to conform
with 2005 presentation, separating the continuing operations from
the discontinued operations according to FAS 144 - see note 2(u).
The reclassification had no effect on previously reported net loss
or shareholders' equity.
-105-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 3 - RESTRICTED CASH AND SHORT TERM INVESTMENTS
December 31,
---------------------
2005 2004
------ ------
Restricted cash (a) $3,500 $3,500
Time deposit (b) 1,185
Other investment (c) 224
Other 88
------ ------
$3,724 $4,773
====== ======
(a) In connection with the revolving line of credit agreement of a
subsidiary (see note 10(c)), the subsidiary established a time deposit
account with the lender as cash collateral security. The amount bears an
annual interest at 3.88%.
(b) As of December 31, 2004, dollar denominated deposit beared interest at
2.19%. The deposit was cashed in June 2005.
(c) During December 2001 and 2002 the Company wrote off several
investments when their operations ceased or were in financial
difficulties, including an investment in YCD Multimedia LTD ("YCD). The
Company owned 211,228 shares of YCD. In January 2006, the Company agreed
to sell it's shares of YCD on a price of 1.06 per share. As of December
31, 2005 , the amount of $224 was recorded based on the subsequent period
sale price, as other investment and other comprehensive income in the
accompanying statements of operations. See also note 23(e).
NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES
a. In September 2002, ICTS increased its percentage interest in Procheck
International B.V. ("PI") to 100% for a cash consideration of $2,845. PI
provides security services in The Netherlands at Schiphol Airport
Amsterdam. The purchase price exceeded the acquired share of the fair
market value of the identified net assets of PI by approximately $1,879
which was allocated to the contract with Schiphol Airport. This intangible
asset is amortized by the straight -line method, over its estimated useful
life, which is estimated as 10 years.
b. In July 1, 2002, ICTS increased its percentage interest in Demco
Consultants Ltd. ("Demco") from 37% to 67% for cash consideration of $410.
As part of the above transaction, ICTS has been granted a 13 months option
commencing July 1, 2004 to purchase the remaining 33% equity from the
minority shareholders in Demco for $589, and the Company has granted to
the minority shareholders an option to sell the
-106-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES (continued)
same equity to the Company for $533. As a result, the Company had fully
consolidated Demco as of July, 2002, and recorded a liability to the
minority in the amount of $589. The purchase price exceeded the fair
market value of the tangible net assets of Demco by approximately $440,
which was allocated to goodwill. The goodwill was attributed to "other
operations segment".
Demco provides services for planning, organization and establishment of
large scale national systems infrastructures designed to assist local
governments with the operations, control and the proper decision making
during national or local emergencies.
During 2003 the minority shareholder exercised its put option. The balance
of the liability (in excess of the final cost of the option that was
exercised) was written off against the goodwill that was recorded in 2002,
at the time the exercise was recorded. At the end of the third quarter of
2003, it was determined that Demco will not be able to realize its
business plans, the Company tested Demco's goodwill for impairment and
wrote off the balance of this goodwill of $797.
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES
Composed and presented as follows:
December 31,
------------------------
2005 2004
------ ------
Investment in 31.83% ( 2004 - 32.15%)
interest of InkSure
Technologies Inc. (1) $1,805 $2,943
Investment in 50% interest in ICTS-NAS (2) 1,184 796
Investment in 50% interest in Aerosafe LLC 35
Investment in 42.5% interest in Rainbow Square
Entertainment LLC(3) $55 201
------ ------
$3,044 $3,975
------ ------
The investments are presented in the balance sheets as follows:
Among investments 2,989 3,774
Among non current assets from discontinued operations 55 201
------ ------
$3,044 $3,975
====== ======
-107-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
a.
(1) During the period from April to September 2002, ICTS purchased
4,106,895 shares, which represent 34.3% of InkSure Technologies Inc.
("Inksure") for a consideration of $5,986. The purchase price
exceeded the fair market value of the net assets of Inksure by
approximately $3,881, of which $660 was allocated to in process R&D
and was expensed immediately, and the remaining $3,221 was
attributed to technology purchased and was amortized using the
straight-line method over 7 years.
As a result of a reverse merger with a non-operating public shell
corporation, performed by Inksure in October 2002, the Company
became the shareholder of the merged quoted company (which changed
its name to Inksure Technologies Inc).
In July 2003, ICTS purchased another 174,542 shares for a
consideration of $192. The amount exceeded the fair value of the
tangible net assets by $143 which was attributed to technology
purchased and is to be amortized using the straight-line method over
5.75 years (the remaining life of the technology purchased in 2002).
In April 2004, ICTS participated, proportionate to its share, in a
private placement in the amount of $370. The amount was at the fair
value of the tangible net assets.
Following a private placement in July 2004, in which the Company did
not participate, the Company share in Inksure was reduced to 32.15%.
At September 2005 Inksure completed another private placement in
which ICTS did not participate and as a result of that the company
share in Inksure reduced to 31.83%. The Company's share in Inksure'
losses for the year ended December 31, 2005 totaled to $693 and the
technology amortization for 2005 totaled $445.
The investment in Inksure is being displayed by the Equity Method.
The balance of $1,805 as of December 31, 2005 ($2,943 as of December
31,2004),include the amortized technology of $1,669 ($2,113 as of
2004) and the equity balance of $136 ($830 as of 2004). The market
value of the investment as of December 31, 2005 was $13,994. During
2006 the company decided to sell its investment in Inksure - see
note 23(b).
-108-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
(2) In September 2002, ICTS and ICTS Europe established a joint
venture, ICTS Netherlands Airport Services VOF ("NAS"), owned
equally by the parties, which provides security services at
Amsterdam Schiphol Airport in The Netherlands. NAS commenced
operations in December 2002. In 2004 and 2003 the Company invested
additional amounts in NAS of $564 and $1,399, respectively. The
Company's share in profit (loss) on equity in the years ended
December 31, 2005, 2004 and 2003 were $705 $1,195 and $(2,392)
respectively. The joint venture declared dividend in April 2005.
ICTS part was approximately $195. The Company recorded other
comprehensive loss of $122 and $30 as of December 31, 2005 and
2004 respectively regarding its investment.
The investment in NAS is being displayed by the Equity Method.
(3) The Company holds 42.5% in Rainbow Square Entertainment LLC
("Rainbow"), a partnership that was established in July 2003.
Rainbowoperates an entertainment site. In 2005 and 2004 the
Company recorded a loss of $36 and $81 respectively on its share
of the partnership loss.
In December 2004, the Company determined that the further cash
flows from the partnership will not recover its investment, and as
a result recorded an impairment loss of $419. In December 2005,
the Company recorded another impairment loss of $110.
At December 31, 2005, the balance of this investment $55, is
included in non current assets from discontinued operations.
(4)(a) As of December 31, 2003 an investment of $(1,137) was comprised of
investment in 40% of the outstanding shares of Ramasso Holdings
B.V. ("Ramasso") and a loan (see below). The remaining 60%
shareholdings of Ramasso are held 40% by ITA, International
Tourist Attractions Ltd. ( a company under the control of one of
ICTS's shareholders) and 20% by other affiliates.
The loan, in an original amount of $2,988 at December 31, 2003
bore annual interest of 4.25%, and had no fixed repayment date.
Ramasso was engaged in construction of an entertainment project in
Rome owned and managed by Italian Multimedia
-109-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
Attraction SPA ("IMA"), a wholly owned subsidiary of Ramasso.
In 2003 Ramasso recognized an impairment loss on its investment in
IMA's assets and recorded a loss of $2,429 which resulted in a
negative equity in the amount of $4,588. After taking into account
the additional loans granted by ICTS in 2003, and the guarantee
described in (b) below, ICTS recorded its share in the losses of
Ramasso in the amount of $2,361.
(b) In January 2002, IMA entered into a loan facility agreement with a
German bank. The Company and ITA, collectively and individually,
guaranteed the loan in full to the bank. The guarantee is a
continuing guarantee for the obligations of IMA. As of December 31,
2003 IMA's net obligations to the bank amounted to $1,683.
Taking into account the deferred note the Company issued to ITA , in
connection with the acquisition of ITA activities (see note 10 (b))
of $546 (which serves as a security to this guarantee) the Company
recorded at December 31,2003 a liability of $1,137 in respect of
this guarantee.
Subsequent to December 31, 2003 as a result of IMA not been able to
continue and finance its operations, IMA entered into bankruptcy
procedures, and ICTS was required to cover its guaranty to the bank
(see note 10(b)).
The receiver in the bankruptcy has filed a proceeding against the
bank which provided loans to IMA to recover a security deposit in
the amount of (euro)866 ($1 million as of December 31, 2005) which
the bank held as security and applied against its outstanding
indebtedness as a result of IMA's defaults. The bank has implead the
company on its guarantee to the bank if the bank is required to
return the security deposit to the receiver in the bankruptcy.
Although the Company believes that it accounted in full for its
exposure as to this investment, it is still dependent on the outcome
of the Italian court bankruptcy proceedings
(5) In 1998, ICTS acquired 5.4% interest in Pioneer Commercial Funding
Corp. ("Pioneer"). In 2002 the Company acquired in private placement
-110-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
offerings additional shares (representing 8.8% shareholding). After
these transactions the Company holds approximately 14.2% of the
outstanding shares of Pioneer (674,300 shares).
The excess of costs of these investments over the acquired share in
Pioneer's net assets of $766 was attributed to goodwill.
In addition, Pioneer granted to the Company a 5 year warrant
(commencing February 2002) to purchase 13,000 shares at a price of
$2.25 per share and a 3 year warrant (commencing January 2004) to
purchase 5,883 shares at a price of $1.00 per share.
Following the 2002 acquisition ICTS has determined that it had
obtained significant influence, and as a result changed its method
of accounting for this investment to the equity method. Prior years
figures have been retroactively adjusted.
Effective February 20, 2003, Pioneer's shares are no longer listed
on the NASD Electronic Bulletin Board stock market and the company
is no longer a reporting company under the Securities Exchange Act
of 1934.
In January 2000, ICTS acquired a $1,000 non-marketable debenture of
Pioneer, bearing interest at the rate of 10% per annum. The
debenture was due in November 2004, and its repayment was guaranteed
by Leedan International Holdings B.V a subsidiary of Leedan Business
Enterprise Ltd. (hereafter - "Leedan" - a company controlled by the
Company's shareholders). As of December 31, 2003 the loan included
an accrued interest of $369. Due to legal procedures and based on
the opinion of its legal advisors, management estimated that Pioneer
will be able to repay the debenture, however, not before the
procedures are finalized, therefore the amount was classified among
long term assets.
In December 2004 ICTS determined that as a result of an adverse
decision by the Pennsylvania Supreme Court reversing a favorable
decision of the lower court in a case involving Pioneer, the Company
has decided to write off, its entire investment in Pioneer in the
amount of $1,794 and, as a result of Leedan financial position, not
to exercise the guaranty granted by Leedan.
-111-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
b. Below is summarized financial data of Inksure, Rainbow and NAS:
Inksure:
Balance sheet data:
December 31,
------------------------
2005 2004
------- -------
unaudited
Current assets $ 6,174 $ 2,606
======= =======
Non-current assets $ 1,269 $650
======= =======
Current liabilities $1018 $616
======= =======
Shareholders' equity $431 $ 2,525
======= =======
Operating results data:
Year ended December 31,
------------------------------------------
2005 2004 2003
------- ------- -------
unaudited
Revenues $ 1,626 $955 $608
======= ======= =======
Gross profit $842 $542 $474
======= ======= =======
Net loss (2,213) $(2,061) $(2,965)
======= ======= =======
Rainbow:
Balance sheet data:
December 31,
------------------------
2005 2004
------- -------
unaudited
Current assets $200 $155
======= =======
Non-current assets $ 1,276 $ 1,318
======= =======
Current liabilities $274 $184
======= =======
Partners' capital $ 1,202 $ 1,289
======= =======
-112-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
Operating results data:
Operating results data:
Year ended December 31,
------------------------
2005 2004
------- -------
unaudited
Net loss $87 $190
======= =======
NAS:
Balance sheet data:
December 31,
------------------------
2005 2004
------- -------
unaudited
Current assets $7,358 $6,076
====== ======
Non-current assets $312 $263
====== ======
Current liabilities $5,306 $4,746
====== ======
Shareholders' equity $2,364 $1,593
====== ======
Operating results data:
Year ended December 31,
------------------------------------------
2005 2004 2003
------- ------- -------
unaudited
Revenues $40,443 $26,468 $13,759
======= ======= =======
Gross profit (loss) $ 3,609 $ 4,202 $(2,852)
======= ======= =======
Net income (loss) $ 1,409 $ 2,392 $(4,784)
======= ======= =======
-113-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 6 - OTHER INVESTMENTS
December 31,
-------------------
2005 2004
------- --------
Long term deposits (a) $ 217 $ 5,170
Marketable securities:
Investment in 2.8% interest in VCON Ltd.(c(1)) 683
Investment in 17.6% interest in PlanGraphics, Inc. (d) 278 343
------- -------
$ 495 $ 6,196
======= =======
Non-marketable securities:
Investment in a convertible debenture
of VCON Ltd. (c (2)) 880
------- -------
Other 42
------- -------
Total $ 495 $ 7,118
======= =======
Gross unrealized gain (loss) on marketable
securities and other investments were
as follows:
Gross unrealized gains $ 222 $ 371
======= =======
Gross unrealized losses $ (322) $ (257)
======= =======
(a) Long term deposits:
The amount invested in "China Dragon" bore minimum annual interest
plus interest based on performance of index:
December 31,
------------------
2005 2004
---- ------
China Dragon $5,170
Others $217
---- ------
$217 $5,170
==== ======
In July 2005, the Company signed an agreement with related party, to
sell it's rights of ownership in the long term deposit "China
Dragon" in an amount of $5,731 as of the sale date and to transfer
the related long term loan in an amount of $4,214 as of the sale
date which was received as part of the arrangement with a bank, (see
note 12(a) (1)), for consideration of $1.2 million. During 2005, $1
million was received in cash and $200 showed under "Other current
assets". The loss from the selling amounted to $317 and is included
in financial income (expenses) in the accompanying statement of
operations.
-114-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 6 - OTHER INVESTMENTS (continued)
(b) Investment in Bilu Investments Ltd. ("Bilu")
Bilu is a privately held company based in Israel. ICTS acquired the
shares in that company from Rogosin Development and Holding Ltd.
("Rogosin"), which was an affiliated company of Leedan. At the time
Rogosin and Leedan held another 18% interest in Bilu. ICTS has
granted bank guarantees of $2,515 in respect of Bilu's obligations,
of which $1,400 is on behalf of Leedan and Rogosin. To secure the
bank guarantees ICTS has pledged bank deposits at the same amounts.
As a result of continuance deterioration in the financial results of
Bilu, on December 31, 2004 management decided to write off its
investment in Bilu in the amount of $227 and to fully provide for
its bank guarantees in the amount of $2,515, including the guaranty
share of Leedan and Rogosin as a result of their financial
positions, see note 16. The recorded provision for these guarantees
is presented as a reduction to the restricted deposits that the
Company has deposited at the banks where the guaranties were issued.
(c) Investment in VCON Ltd. ("VCON"):
(1) In January 2002, ICTS purchased 909,091 shares of VCON for $1.10 per
share and invested in a convertible note with a fare value of $2
million, see (2) below. VCON was a publicly held company, the shares
of which were traded on Nouveau Marche.
In addition, ICTS received 3 year warrants to purchase 1,402,597
shares of VCON at a price per share of $1.40. The fair value of the
warrants using Black & Scholes Valuation model, was $0 as of
December 31, 2004.
(2) The note, secured by a second degree floating charge to all existing
debt of VCON, was convertible into shares of VCON at a conversion
price of $1.00 per share, bore annual interest at the rate of 2% and
was repayable in quarterly installments of $160 starting May 2004.
The note was presented net of a current maturity of $640, which was
presented among other current assets.
In May 2005 the Company and VCON reached a prepayment agreement in
which VCON paid $825 for the outstanding principal and interest
balance totaled to $1,365. As a result of the prepayment agreement
the conversion feature expired and the Company removed its pledge.
-115-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 6 - OTHER INVESTMENTS (continued)
As a result of the prepayment agreement a loss of $540 was recorded
in 2005. In August 2005 VCON announced that it is winding up and
it's shares were stopped trading from that date. The company
recorded a loss of $310 regarding its investment in VCON's shares,
which is included in financial income (expenses) in the accompanying
statement of operations.
(d) Investment in PlanGraphics, Inc. ("PlanGraphics"):
In January 2002, ICTS purchased 17,142,857 shares (17.6%) of common
stock of PlanGraphics (formerly "Integrated Spatial Information
Solutions, Inc.") for $0.035 per share. PlanGraphics securities are
traded on the Pink sheets. The price share as of December 31, 2005
and 2004 was $0.016 and $0.02 respectively. Unrealized loss as of
December 31, 2005 and 2004 amounted to $322, and $257
respectetively.
(e) Long term loan to an employee.
In December 2003 ICTS granted a loan of $150 to one of its
employees. The loan bore an interest of 2% per annum and was to be
repaid in four equal payments, every six months, starting January
2005.
Upon review the loan in December 2004, the Company determined that
the loan will likely not be recoverable and made a provision for
writing off the loan and the accrued interest. In June 2005, the
Company approved an extension of the loan to January 2007. All the
other terms of the loan are the same as is the original agreement.
-116-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 7 - PROPERTY AND EQUIPMENT
a. Property and equipment from continuing operations are composed as
follows:
December 31,
----------------------
2005 2004
------- -------
Cost:
Equipment and facilities (d,e) $ 3,068 $ 2,382
Vehicles 303 418
Leasehold improvements 113 112
Office furniture and equipment 748 637
------- -------
4,232 3,549
L e s s - accumulated depreciation
and amortization (2,979) (2,534)
------- -------
$ 1,253 $ 1,015
======= =======
Property and equipment from discontinued operations:
December 31,
-----------------------
2005 2004
-------- --------
Cost $ 748 $ 23,998
Less - accumulated depreciation
and amortization (748) (7,883)
-------- --------
-,- $ 16,115
======== ========
b. Depreciation expense from continuing operations totaled $520, $507
and $477 in 2005, 2004 and 2003, respectively. Depreciation expense
from discontinued operations totaled $2,533, $2,862 and $2,692,
respectively.
c. A portion of the Company's equipment is pledged as collateral for
bank loans.
d. In June 2002 equipment in the amount of $23.5 million was purchased
and leased back to the seller, a related party and private Dutch
company, for 7 years in an operating lease agreement (with respect
to equipment in an amount of $12.5 million, the Company entered into
a purchase and lease agreement that replaced a predecessor acquirer,
see below). The seller had the option to buy back the assets after 5
or 7 years, at their fair value, which would have been determined by
an appraiser. The Company has undertaken to repay the predecessor
acquirer's liability to a bank, in an amount of $8.7 million, and
issued him a promissory note. The loan was non-recourse. The note
bore annual interest of Euro-Libor +2.05%.
-117-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 7 - PROPERTY AND EQUIPMENT (continued)
In December 2004, ICTS determined that the future cash flows from
the leased equipment will not recover its investment, and as a
result recorded an impairment loss of $2,247 in addition to an
impairment loss of $6,042 that was recorded in 2003. The value of
the equipment was based on a cash flow projection that incorporated
an external appraisal of the equipments terminal value at the option
exercise date.
In June 2005, the Company granted the lessee an option to purchase
the leased equipment for an amount of $5 million plus an amount
equal to the related loan balance on the exercise date, thus
providing for the possibility of the early termination of the
leasing agreement. The option period started on June 1, 2005 and
runs to September 30, 2006. As a consideration for granting the
option fee the lessee had to pay ICTS an option fee of $20 per
month, which will be reduced from the $5 million in case of
exercising the option.
In July 2005 the company received an advanced payment of $1 million
on lease installments which will be reduced from the purchase price
of $5 million in case that the option will be exercised.
On December 28, 2005 the lessee announced that he is interested in
exercising the option. The net value of the equipment as of the
purchase date was (euro)9,775 (equal to $11,554 on that date). The
loss from the selling amounted to $4,774, and is included in
discontinued operations in the accompanying statement of operations.
e. Equipment and facilities included an amount of $15,906 relating to
the entertainment sites in Baltimore, Maryland and in Atlantic City,
New Jersey. The Baltimore facility started operations in June 2003.
The facility in Atlantic City commenced operations in June 2004.
Those locations have been closed since December 2005.
Based on the performances of the entertainment sites the Company's
management revaluated these two facilities during 2004 and
determined that the forecasted cash flows from them will not cover
the investments. Based on their fair value which was calculated
using discounted cash flows model, the Company recognized an
impairment loss and wrote off its investment in those sites in an
amount of $7,691 in 2004, in addition to an impairment loss of
$7,513 that was recorded in 2003. See also note 2(u)(2).
-118-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 8 - GOODWILL
Continuing Discontinued
operations operations
---------- -----------
Balance as of December 31, 2003 $314 $5,266
Impairment of Goodwill during 2004 (5,266)
---- ------
Balance as of December 31, 2005 and 2004 $314 -,-
==== ======
In December 2003 the Company signed an agreement to buy the
activities and certain fixed assets ($163) of ITA (a company
controlled by a significant shareholder of ICTS). The Company paid a
total of approximately $5.4 million by waiving the $3,000 loan
granted to ITA and its $542 accrued interest, issuing a deferred
note of $546 and a promissory note of $685 and by paying $711 in
cash to ITA. As to the terms of these notes see note 10(e). The
purchase price was based on fairness opinion that was based on free
cash generated from future projects of ITA, in which ICTS planned to
invest. The purchase price exceeding the fair value of the net
identifiable assets acquired by $5,266 which was recorded as
Goodwill.
In March 2004, as a result of the impairment of the entertainment
projects, management has decided to write off the goodwill and
recognized an impairment loss of $5,266.
The goodwill as of December 31, 2005 and 2004, arose from the
purchase of Procheck (PI) during 2002.
NOTE 9 - OTHER ASSETS
a. As of December 31, 2005, other assets were comprised of the
following:
December 31, 2005 December 31, 2004
--------------------------------------- ----------------------
Gross carrying Accumulated Net book Accumulated Net book
amount amortization value amortization value
------------- ------------ -------- ------------ --------
Customer relationship (1) $ 1,785 $ 436 $1,349 $248 $1,537
Technology (2) 156 156 -,- 120 36
Other (3) 314 -,- 314 -,- 181
------- ----- ------ ---- ------
$ 2,255 $ 592 $1,663 $368 $1,754
======= ===== ====== ==== ======
-119-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 9 - OTHER ASSETS (continued)
(1) Relating to contract with Schiphol Airport.
(2) Relating to technology acquired by a subsidiary.
(3) Mainly rent deposits. Amortization expense in 2005, 2004 and
2003 totaled $224, $248 and $248 respectively.
b. Estimated amortization expense for each of the following five years
is $188 per year.
NOTE 10 - SHORT-TERM BANK CREDIT
Short-term bank credit, classified by currency and interest rates,
is comprised of the following:
Weighted
average interest
rates as of December 31,
December 31, -------------------------
2005 2005 2004
---------------- ------ ------
%
Short term credit from continuing operations:
ICTS -
In dollars (a) 6.29 $ 17 $ 984
In Euros (b) 1,290
Subsidiaries:
In dollars (c) 8.25 3,879 1,456
In other currencies (d) 9.5 11 140
------ ------
$3,907 $3,870
------ ------
Short term credit from discontinued
operations(e) 3.12 $ 200 $ 546
====== ======
(a) Short term credit standing as for 2004 was received as part of an
arrangement with a bank, following which the money received and
additional amounts were deposited with the bank.
(b) As of December 31, 2004 the balance includes Euros 658 (on December
31, 2004, $897) in connection with the payment request by the German
bank to which the Company issued a letter of guaranty securing the
loan the bank had granted IMA (a company under the control of one of
ICTS's shareholders) Under a settlement agreement with the bank, the
last balance outstanding as of
-120-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 10 - SHORT-TERM BANK CREDIT (continued)
December 31, 2004 was fully paid during 2005. It bore an annual
interest of 3 month Euribor plus 2.58% .See also note 23(f).
(c) In 2002, a subsidiary entered into a Revolving Line of Credit (RLC).
The RLC provides a borrowing base of (i) an amount up to 60% of
Eligible Accounts receivable of the subsidiary and (ii) an amount up
to $3.5 million under some conditions stipulated in the RLC. The RLC
was extended to March 31, 2005.
On April, 2005, the subsidiary entered into a Loan and Security
agreement (the "Revolver") with a financial institution which
replace the RLC. The Revolver provides a borrowing base up to $8
million limited by 85% of defined eligible accounts receivable plus
95% of required Certificates of Deposit less Letter of Credit
obligations. The interest rate is one percent (1%) per annum in
excess of the Prime Rate for loan balances in excess of the LIBOR
Rate Loans. The interest rate for LIBOR loans is three hundred fifty
(350) basis points in excess of the LIBOR Rate. As of December 31,
2005, the Revolver is collateralized by the restricted cash and by
the Company guaranty. Interest accrues at the bank's prime rate plus
1% (8.25) percent on December 31, 2005.
The Revolver is secured by the Company guaranty, by a first priority
security interest in all existing and future property of the
subsidiary and the subsidiary has undertaken to comply with
financial covenants and non financial provisions.
In June 2005, the subsidiary was notified by the financial
institution that it is in default in three provisions of the
Revolver. The subsidiary failed to maintain the tangible net worth,
as defined in the loan agreement of $654, failed to maintain the
minimum interest coverage ratio of 1.50 and that the subsidiary
chief executive officer did not remain in office, due to his
resignation. The financing institute continued to fund the Revolver
under the agreement. In December 2005, an amended agreement was
signed which adjusted the minimum tangible net worth covenant, the
Interest Coverage covenant and the annual Capital Expenditure
Limitation covenant. As of December 31, 2005, the Company met all of
the financial covenants in the Amended Agreement except for the
Interest Coverage covenant.
-121-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 10 - SHORT-TERM BANK CREDIT (continued)
At December 31, 2005, $3.9 million was outstanding and $1.2 million
was available under the revolving credit facility for additional
borrowings. The borrowing agreement also provides for an additional
commitment guarantee of up to a maximum of $3.5 million for letters
of credit and requires a per annum fee equal to 3 percent. The
Company hadletters of credit outstanding of approximately $2.5
million and $3.2 million at December 31, 2005 and 2004,
respectively.
(d) In November 2004, a subsidiary of the Company entered into a one
year credit agreement with a bank. During 2005 the agreement was
extended and it provides a borrowing facility of up to Euros 400 (at
December 31, 2005 -$473), limited to 60% of certain pledged accounts
receivable. The borrowing facility is also secured by the Company
guaranty and is subject to certain covenants. At December 31, 2005.
The outstanding balance was $0 and all the (euro)400($473 as of
December 31, 2005) were available under the credit agreement.
(e) The short term credit from discontinued operations as of December
31, 2005 represents mainly a promissory note was issued in
connection with the purchase agreement of the operations of ITA (see
note 8). The note was payable in 13 quarterly installments of $50
plus the accrued interest, the first installment was paid in
December 2004. During 2006 the Company intends to pay the last four
payments.
NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES
December 31,
--------------------------
2005 2004
------- -------
Relating from continuing operations:
Payroll and related liabilities $ 4,039 $ 3,515
Employees' claims and related severance (see note 1c) 8,234 8,622
Taxes to government institutions, including taxes payable 4,637 1,019
Related parties 240 500
Deferred income taxes (see note 17 b) 0 160
Accrued expenses and other 1,478 1,581
------- -------
Total accrued expenses and other liabilities from
continuing operations $18,628 $15,397
======= =======
Accrued expenses and other liabilities from discontinued
operations (a) $ (28) $ 1,489
======= =======
-122-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES (continued)
(a) As of December 31, 2005 $1,271 are due for VAT mainly as of the
selling of the leasing equipment, see note 7(d).
NOTE 12 - LONG-TERM LIABILITIES
a. Composition:
Interest rate as of December 31,
December 31, ------------------------
2005 2005 2004
------------------- ------- -------
From continuing operations:
In dollars:
Banks (1), (2) 5.78% $ 145 $ 4,236
Others (1) 6.40% 319
------- -------
464 4,236
Less - current maturities (151) (46)
------- -------
$313 $4190
======= =======
From discontinued operations: $ 9,701 $ 5,254
Less - current maturities (3) (942) (2,733)
------- -------
$ 8,759 $ 2,521
======= =======
(1) The balance as of December 31,2005 represents loans that a
subsidiary received to finance a purchase of operative equipment
during the third quarter at 2005. The total liability as to December
31, 2005 from this purchase totals to $409 - $90 from banks and $319
from other financial institutions. The repayment of those loans is
on basis of monthly payments for 36-60 months.
(2) The balance of 2004 included a loan for the amount of $4,072. This
loan was received as part of an arrangement with a bank, following
which the money received and an additional amount were deposited
with the bank. On July 2005 the deposit and the loan were sold to a
related party (see note 6(a)).
-123-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 12 - LONG-TERM LIABILITIES (continued)
(3) (a) During 2002 two subsidiaries from the Entertainment segment
signed a rent contract for 15 years. As of December 2005, the
Company decided to discontinue the operations of the Entertainment
segment (see note2 (u)). The Company aggregated and charged
operations for the whole liability using discounted interest rate of
7.25%. The liability totaled to $9,701. The current maturities for
this amount total at December 31, 2005 to $942. Although the amount
was fully charged to operations, the Company is looking for
alternative solutions regarding the contracts terms.
(b) The balance as of December 31, 2004 represents a Promissory Note
that was granted to the seller of part of the leased equipment. In
December 2005, the equipment was sold to the lessee and as part of
the selling, the buyer took over the Promissory Note. See also note
7(d).
b. The total liabilities mature in the following years after the
balance sheet date:
December 31, 2005
-------------------------------------
Continuing Discontinued
operations operations
---------- ------------
2006 $150 $ 942
2007 150 916
2008 119 891
2009 33 830
2010 11 809
2011 787
2012 and thereafter 4,526
---- ------
$463 $9,701
==== ======
NOTE 13 - ACCRUED SEVERANCE PAY
The accrued severance pay in the consolidated financial statements
relates to the Israeli subsidiaries.
Israeli law generally requires payment of severance pay upon
dismissal of an
-124-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 13 - ACCRUED SEVERANCE PAY (continued)
employee or upon termination of employment in certain other
circumstances. The following principal plans relate to employee
rights upon retirement, as applicable to Israeli subsidiaries.
a) Insurance policies for employees in managerial positions - these
policies provide coverage for severance pay and pension liabilities
of managerial personnel.
b) Severance pay liabilities not covered by the pension funds are fully
provided for in these consolidated financial statements, as if it
was payable at each balance sheet date on an undiscounted basis,
based upon the number of years of service and the most recent
monthly salary (one month's salary for each year worked) of the
Company's employees in Israel.
The net expenses (income) from accrued severance pay totaled to
$124, $(25) and $12 for the years ended December 31, 2005, 2004 and
2003, respectively.
The Company expects to contribute in 2006 $108 to the insurance
companies in respect of its severance pay obligation.
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
a. Operating leases
1) The Company leases premises under long-term operating leases, in
most cases with renewal options. Lease expenses from continuing
operations for the years ended December 31, 2005, 2004 and 2003 were
$849, $809 and $994, respectively. The lease expenses from
discontinued operations for those years totaled to $984, $596 and
$172, respectively.
Future minimum lease payments from under long-term leases are as
follows:
December 31, 2005
------------------------------------
Continuing Discontinued
operations operations
---------- ------------
2006 $ 708 $ 1,008
2007 297 1,053
2008 95 1,099
2009 27 1,099
2010 22 1,148
2011 and thereafter 10,289
------ -------
$1,149 $15,696
====== =======
-125-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
As to future lease payments from discontinued operations see also
note 12(a)(3).
2) As to income from leasing of equipment, see note 7d.
b. Operations in the U.S.:
1) As a result of the September 11, 2001 terrorist attacks, a
numerous of lawsuits have commenced against Huntleigh and
ICTS. All of the cases were filed in the United States
District Court, Southern District of New York. The cases are
in their early stages. The Company reviewed its security
services provided at Boston's Logan International Airport,
from which one of the airplanes commandeered by the terrorists
departed, subsequent to September 11, 2001 for evidence of
non-compliance with the policies of the Federal Aviation
Administration. Based on the contracts with the airlines, the
Company may be indemnified by the airlines if the Company is
found to have followed the procedures enumerated by the
Federal Aviation Administration. However, if the Company is
found to have violated these screening regulations, it could
be liable for damages. Based on the Company's review, no
evidence of non-compliance has been identified with respect to
the services provided at Boston's Logan International Airport
on September 11, 2001. The Company maintains an aviation
insurance policy, which may provide limited coverage for
liabilities that may be assessed against the Company as a
result of the events of September 11, 2001. Management is
unable to estimate the impact of the litigation or fines, as
described above. Accordingly, no provision in respect of these
matters has been made.
2) As a provider of security services, the Company faces
potential liability claims in the event of any successful
terrorist attempt in circumstances associated with the
Company. After the September 11th terrorist attacks, the
Company's insurance carriers canceled all war risk insurance
policies the Company carried.
3) In February 17, 2002, the Company was awarded a security
services contract (the "TSA Contract") by the United Stated
Transportation Security Administration ("TSA") to continue to
provide security services in all of its current airport
locations until the earlier of either the completed transition
of these security services on an airport basis to the U.S.
Federal Government or November 19, 2002. In accordance with
the terms of the Contract, the U.S. Federal Government
provided the Company with a non-interest bearing partial
payment of $26 million to be paid back on a monthly basis of
$1.3 million at the beginning of every month commencing April
1, 2002. On December 31, 2002, approximately $11.7 million of
the $26 million had been paid back to the TSA (in 2005 and
2004 no additional payments have been paid back to the TSA).
As of December 31, 2005 the amount due from the TSA in respect
of services provided under the contract aggregates $17.3
million; this amount, net of $14.3 million-the balance of the
prepayment, is presented among trade receivables.
-126-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
On June 21, 2002, the FAA issued a request for definitization,
which was due on July 23, 2002. Huntleigh obtained an
extension for submission of its proposal until September 1,
2002. Huntleigh submitted its documentation to the TSA which
detailed all of the information which Huntleigh viewed as
responsive to the TSA's request though it did not believe that
this information had any bearing on the contract pricing.
After receiving Huntleigh's submission, the Defense Contract
Management Agency ("DCMA") requested a review of Huntleigh's
costs. DCMA enlisted the services of the DCAA to perform this
review, and Huntleigh cooperated with the DCCA in this
process.
The DCAA produced a preliminary report (for the services which
had been provided through July 31, 2002) which sought further
support from Huntleigh on certain categories of expense, and
Huntleigh provided the DCAA and the TSA with the requested
information. Although this preliminary report was originally
represented to us to be an audit, we have learned through
discovery that the document was the product of agreed upon
procedures that were designed to help the contracting officer
negotiate a better price with Huntleigh. The DCAA report did
not comply with GAAS or with GAGAS. In fact, the Contract
under review by the DCAA was subject to AMS standards of the
FAA, not the FAR regulations. None of the DCAA auditors had
any prior experience with AMS standards. The DCAA auditors
were also unaware that Huntleigh's Contract was a firm fixed
price contract, not the cost plus contract that they were
accustomed to review. Many of the issues raised by the DCAA in
the preliminary report were resolved to their satisfaction in
the second report which they produced in early 2003. Like the
early report, this second report was designed as a negotiating
tool for the contracting officer.
The TSA filed with the Office of Dispute Resolution for
Acquisition ("ODRA") a contract dispute in connection with the
contract entered into in February, 2002 by Huntleigh seeking
reimbursement of an alleged overpayment of principal in the
amount of $59.2 million. This claim follows the lawsuit which
Huntleigh has already filed against the TSA for its repeated
breaches of its contract with Huntleigh. Both claims are now
pending before ODRA. Huntleigh has filed a motion to dismiss
the action. The TSAs response to this motion is due on
September 15, 2006 and Huntleigh's reply brief is due on
September 29, 2006.
-127-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Management and its legal counsel are unable to estimate at
this stage the final outcome of the above mentioned dispute.
Accordingly, no provision in respect of this matter has been
made.
The Company had also filed a claim against the US Federal
Government, for what it alleges to be a taking of its US
aviation security business by the TSA in 2002. A hearing
regarding a motion for summary judgment filed by the
government has been scheduled for October 12, 2006 and a trial
has bee scheduled for November 13, 2006.
(4) In September 2005, Avitecture, Inc, (f/k/a
Audiovisual-Washington, Inc.) ("Avitecture"), filed a Demand
for Arbitration and Mediation against ITA-Atlantic City, LLC
("ITA") with the American Arbitration Association in Somerset,
NJ. The Demand for Arbitration alleges that pursuant to a
written agreement dated March 20, 2003, ITA owes Avitecture
$222 for audio, video and control systems it provided for
ITA's use in tourist attraction in Atlantic City, New Jersey,
but for which Avitecture claims it has not been paid. The case
is currently pending in a New Jersey arbitration proceeding
before an arbitrator assigned by the American Arbitration
Association. In October 2005 ITA filed its answer, generally
denying the allegations in the Demand and asserting numerous
affirmative defenses. The Company recorded a provision on the
full amount in its books. This action is currently in
discovery.
(5) In November 2005, Turner Construction Company ("Turner")
filed a Demand for Arbitration and Mediation against Explore
Atlantic City, LLC ("Explore") with the American Arbitration
Association in Somerset, NJ. The Demand for Arbitration
alleges that pursuant to a written agreement dated October 28,
2003, Explore owes Turner $948 for work and/or services
performed pursuant to the contract, but for which Explore has
not paid Turner. The case is currently pending in a New Jersey
arbitration proceeding. An arbitrator has been assigned to the
case so the parties can explore settling the matter. At this
time, Explore has responded to the demand by denying any
liability and has asserted defenses to the amount of the claim
and to challenge Turner's right to make any demand for
payment. A motion for summary judgment has been made by Turner
and the action is currently in discovery. The Company recorded
a provision on the full amount in its books.
(6) During 2005 a subsidiary filed a refund claim with the
Internal Revenue Service ("IRS") in an amount in excess of $2
million. During August 2006, the Company was advised that a
criminal investigation by the United States Department of
Justice, Tax Division is ongoing by a
-128-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
grand jury regarding possible criminal tax violations by the
subsidiary for the tax years 2002 and 2003 regarding certain
royalty payment made to the Company. As a result of the
investigation the Company believes that the refund had been
put on hold.
(7) On August 30, 2006 the Company filed a complaint in the
United States District Court for the Southern District of New
York against the United Stated and Area Director - Technical
Compliance, Internal Revenue Service to recover the refund in
the amount of $2,470,365. In addition, the Company has filed
an administrative claim against the IRS in order to recover
the same refund as well as damages. The Company is currently
waiting for a response from the defendants.
(8) Two of the Company's subsidiaries have been sued by their
landlord (which is the same entity) alleging breach of the
respective leases. One suit is in Circuit Court for Baltimore
City affecting the Company's Explore Baltimore facility, and
the other is in the Superior Court of New Jersey affecting the
Company's Explore Atlantic City facility. Through legally
defective service, the landlord was able to obtain orders for
possession of both of these locations. A petition to open the
Atlantic City action has been filed and one is being prepared
for the Baltimore action. In addition to seeking possession,
in both the cases the landlord is seeking unpaid rent for the
entire term of the leases. In the Atlantic City case the
amount sought is $5,970.197 and in the Baltimore case the
amount is $4,443,513. While a resolution of both actions is
being discussed, a standstill of the proceedings if being
negotiated.
(9) On August 2006 the Company was informed that Rogozin
Industries Ltd (in liquidation) filed a litigation regarding a
payment of $340 it paid during 2001, which according to the
litigation ICTS is guaranteeing.
(10) From time to time various claims against the Company,
some of which are in litigation, have been alleged by former
employees mainly for wrongful termination and labor related
issues. Some of the claims are in their earlier stage and it
is impossible to determine the amount of contingent liability
involved, if any.
c. Restrictions on operations
As part of the sale of its European operations to ICTS Europe, the
Company was restricted from conducting in Europe (except for The
Netherlands and the former Soviet Union republics, including Russia,
Georgia and Kazakhstan) any of the activities in which ICTS Europe
was engaged prior to such sale. This restriction was effective
through February 2005. As of March 2005 the company re-entered into
the aviation security business in Europe, which was followed by
various alleged claims.
The Company is in dispute with Fraport A.G. International Airport
Services Worldwide in relation to alleged unlawful use of the letter
combination "ICTS" by the Company. Fraport initiated proceedings
-129-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
before the district court of Amsterdam, which are still pending. The
principal amount claimed is (euro)57.7 million ($68.1 million as of
December 31, 2005). However, this claim is based on an alleged
incorrect interpretation of the underlying contractual obligation.
If the court follows the Company's interpretation, the maximum
liability is (euro)700 ($827 as of December 31, 2005). The Company
filed a counter claim of (euro)2.45 million ($3 million as of
December 31, 2005), or under the condition the Fraport's
interpretation is followed, (euro)73 million ($86.9 million as of
December 31, 2005). Currently this action is stayed, pending
settlement discussions between the parties.
Pursuant to an agreement dated July 1, 1995 with ICTS Global
Security (1995) Ltd. ("ICTS Global Security"), the Company may not
provide non-aviation security services in Latin America, Turkey or
the former Soviet Union republics, including Russia, Georgia and
Kazakhstan.
d. Following the sale of the European operations, ICTS has undertaken
to indemnify ICTS Europe and its subsidiaries in respect of any
liability or loss originated prior to December 31, 2001 and not
known at that date. As of December 31, 2005, management has not
received any notification for any such liability or loss.
e. In December 28, 1995, the Company entered into an employment
contract with Mr. Lior Zouker, its former Chief Executive Officer
and a former member of its board of directors, pursuant to which the
Company agreed to employ Mr. Zouker in those capacities for a 30
month term. The contract was extended for an additional three years
on November 25, 1997 and again on December 12, 2000. Pursuant to
such contract, Mr. Zouker was entitled to a bonus, which is
calculated at 3% of the net income of ICTS and was provided in the
accounts. On April 2004, Mr. Zouker resigned as the Chief Executive
Officer of the Company.
f. In December 16, 2003, the Company entered into an agreement with Mr.
Boaz Harel the former chairman of the Supervisory Board of
Directors, on which basis he received for his services to the
Company a compensation of $245 on an annual basis. In July 2004 Mr.
Boaz Harel resigned as the chairman of the Supervisory Board of
Directors and the above agreement was replaced for monthly
consultancy fees of $14. The consultancy agreement was terminated at
September 2005.
g. In 2002 the Company, and one of its subsidiaries, entered into a
consultancy services agreement with a company, owned by a former
-130-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
member of the Supervisory Board of the Company. The agreement
provided for annual fees of $75 for a period of 2 years and shall be
automatically renewed for an additional period of one year. In May
2004 the consultancy company's owner was appointed CEO and the
agreement was amended. The agreement shall be valid for 5 years with
an automatic extension of an undefined period, with a notice period
of 12 months.
In August 2004 the CEO resigned and compensation was settled in the
amount of approximately $26 per month until June 2006. The
accumulated amount was provided in the accounts.
h. As to tax assessments, see note 17(g).
i. As to the guarantee given to Bilu Investment Ltd., see note 6(b).
j. As to guarantee to a German bank, see note 23(f).
NOTE 15 - FINANCIAL INCOME (EXPENSES) - NET
Year ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
From continuing operations:
Interest expenses $(1,493) $ (825) $ (755)
Interest income 203 456 2,238
Exchange differences - gain (loss) 382 (83) 2,635
------- ------- -------
$ (908) $ (452) 4,118
======= ======= =======
Financial expenses from discontinued
operations:
Interest expenses (191) (335) (467)
Interest income 14 10
Exchange differences loss (40) -- (2,877)
------- ------- -------
(231) (321) (3,334)
======= ======= =======
-131-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 16 - OTHER INCOME (EXPENSES)
Year ended December 31,
-----------------------------
2005 2004 2003
------- ------- -------
Other income from continuing operations:
Write off investment and guaranty
deposits related to investment in
Bilu , see note 6(b) $(2,742)
Loss on sale of fixed assets (124)
Write off of Investments in start-up
companies $ (400)
Capital gain from investments (a) $ 110
Other 37 (41) 47
------- ------- -------
$ 147 $(2,907) $ (353)
======= ======= =======
Loss from discontinued operations (b) $(4,774)
=======
a. The Company has written off several investments in the past - see
note 6(f). During 2005 an amount of $110 was paid to ICTS from two
of those companies in which ICTS invested and which were completely
disassembled through 2005.
b. The Company sold the property it used to lease - see note 7(d). The
loss from that sale amounted to $4,774.
NOTE 17 - INCOME TAXES
a. Each subsidiary of ICTS is subject to tax according to the tax rules
applying with respect to its place of incorporation or residency.
ICTS is incorporated under the laws of The Netherlands and is,
therefore, subject to the tax laws of The Netherlands. Inter company
payments are subject to withholding taxes at varying rates according
to their nature and the payer's country of incorporation or
residency.
-132-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 17 - INCOME TAXES (continued)
b. Deferred taxes:
1) Deferred tax assets have been computed in respect of the following:
December 31,
--------------------------
2005 2004
-------- --------
Carry forward losses $ 21,820 $ 10,949
Fixed assets (2,169) 6,372
Provision for bad debts 144 600
Accruals and other reserves (297) (640)
-------- --------
19,498 17,281
Less - valuation allowance 19,498 17,458
-------- --------
-,- $ (177)
======== ========
2) Deferred taxes from continuing operations are presented in the
balance sheets as follows:
December 31,
--------------------------
2005 2004
-------- --------
Among investments and long-term receivables $ 3
Among other current liabilities (160)
Among long term liabilities (20)
--- -----
-,- $(177)
=== =====
c. Income (loss) before taxes on income and share in associated
companies is comprised of the following:
Year ended December 31,
--------------------------------
2005 2004 2003
-------- -------- --------
From continuing operations:
ICTS and subsidiaries in The Netherlands $ 413 $ (5,364) $ 991
Subsidiaries outside The Netherlands (8,872) (5,028) 8,806
-------- -------- --------
$ (8,459) $(10,392) $ 9,797
-------- -------- --------
From discontinued operations:
Subsidiaries in The Netherlands (4,690) (1,498) (8,811)
Subsidiaries outside The Netherlands (11,236) (15,550) (10,114)
======== ======== ========
(15,926) (17,048) (18,925)
======== ======== ========
$(24,385) $(27,440) $ (9,128)
======== ======== ========
-133-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 17 - INCOME TAXES (continued)
d. Taxes (expenses) benefit on income included in the income
statements:
Year ended December 31,
-----------------------------------------------
2005 2004 2003
------- ------- -------
Current taxes from continuing operations:
In The Netherlands $ (51) $ (911) $ (710)
Outside The Netherlands 680 2,050 1,847
Current taxes from discontinued operations 1,655 795
------- ------- -------
$ 629 $ 2,794 $ 1,932
======= ======= =======
For previous years - from continuing operations:
In The Netherlands 29 (51)
Outside The Netherlands (3,485) 956
For previous years from discontinued operations:
2,525
------- ------- -------
(930) 905 -,-
======= ======= =======
Deferred from continued operations outside
The Netherlands 440 (515) (5,047)
======= ======= =======
$ (138) $ 3,184 $(3,115)
======= ======= =======
e. The Company's effective income tax rate differs from The
Netherlands' statutory rate of 31.5% with respect to the
following:
Year ended December 31,
-----------------------------------------------
2005 2004 2003
------- ------- -------
Income (loss) before taxes and equity
in results of associated companies:
From continued operations $ (8,459) $(10,392) $ 9,797
From discontinued operations (15,926) (17,048) (18,925)
-------- -------- --------
Total $(24,385) $(27,440) $ (9,128)
======== ======== ========
Statutory tax rate 31.5% 34.5% 34.5%
======== ======== ========
Expected tax benefit (expense) at
statutory rate $ 7,681 $ 9,467 $ 3,149
Reconciliation for earnings taxed
at different rates 1,034 514 (18)
Disallowable expenses (3,686) (2,160) (460)
Non-taxable (expense) income (2,120) (109) (275)
Changes in valuation allowance (2,040) (5,244) (6,513)
Provision to return matters -- 812
Previous years (671) 905 --
Other (60) (189) 190
-------- -------- --------
Income taxes (expenses) benefit $ 138 $ 3,184 $ (3,115)
======== ======== ========
-134-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 17 - INCOME TAXES (continued)
Income taxes (expenses) benefits are shown as follow:
Year ended December 31,
----------------------------------
2005 2004 2003
------- ------- -------
From continuing operations $(2,387) $ 1,529 $(3,910)
From discontinued operations 2,525 1,655 795
------- ------- -------
Total $ 138 $ 3,184 $(3,115)
======= ======= =======
f. Carry forward tax losses
As of December 31, 2005, the Company has carry forward tax losses in
the Netherlands, in the amount of approximately $41 million.
Utilization of such losses is limited in certain circumstances.
g. Tax assessment
Under ongoing tax examination of the U.S subsidiaries of the
Company, by the U.S tax authorities, through the years ended
December 31, 2002 and 2003, the subsidiaries were required to
provide information regarding their treatment of certain expenses.
By letter dated August 15, 2006, the Company was advised that a
criminal investigation by the United States Department of Justice,
Tax Division is ongoing by a grand jury regarding possible criminal
tax violations by the subsidiary for the tax years 2002 and 2003
regarding certain royalty payment made to the Company.
Based on the issues raised and the tax authorities' position, the
Company has included a provision in its accounts in an amount which,
based on an opinion of its tax advisers, the Company considers being
adequate to cover costs arising from the tax examination if and when
it will become a tax assessment.
-135-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 18- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a. Fair market value of financial instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair market value of
the Company's short-term and long-term debt from continuing
operations approximates the carrying value.
Furthermore, the carrying value of other financial instruments
potentially subject to credit risk (principally consisting of cash
and cash equivalents, time deposits and marketable securities,
accounts receivable and accounts payable) also approximates fair
market value.
The Company has a liability of $9.7 million from discontinued
operations (see note 12). This liability was recorded using a rate
of discount 7.25% to show the liability at fair market value in
accordance with FAS 144. The amount of the liability before the
discount amounts to $15.7 million. All other short term debt from
discontinued operations approximates their carrying value.
b. Risk management:
1) The Company operates in the USA, Europe and other countries,
which gives rise to exposure to market risks in respect of
foreign exchange rate fluctuations. The Company did not
utilize derivative financial instruments to reduce these
risks.
Credit risk represents the accounting loss that would be
incurred if any party failed to perform according to the terms
of the financial instrument. Credit risk may arise from
financial instruments that have a significant exposure to
individual debtors or groups of debtors, or when they have
similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly
affected by changes in economic and other conditions.
2) At December 31, 2005, two major customers accounted for 34% of
accounts receivable from continuing operations (at December
31, 2004, two major customers accounted for 32% of accounts
receivable from continuing operations).
-136-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 18- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
For the years ended December 31, 2005, 2004 and 2003, sales to
major customers (constituting 10% or more of the Company's
consolidated revenues from continuing operations), derived
from aviation service contracts, amounted 25%, 14% and 43% of
revenues, respectively, as set forth below:
Year ended December 31,
---------------------------------------------
2005 2004 2003
---- ---- ----
(% of consolidated revenues)
---------------------------------------------
Customer A 15% 14% 17%
Customer B 13%
Customer C 13%
Customer D 10%
3) The Company's financial instruments that are exposed to
concentrations of credit risks, consist primarily of cash and
cash equivalents, trade accounts receivable, short-term
investments (see note 3), and long-term investments (see note
6). The Company places its cash and cash equivalents and time
deposits with high quality credit institutions. The Company
provides normal trade credit, in the ordinary course of
business, to its customers. Based on past experience and the
identity of its current customers, the Company believes that
its net accounts receivable exposure is limited.
4) The Company is currently engaged in direct operations in
numerous countries and is therefore subject to risks
associated with international operations (including economic
or political instability and trade restrictions), any of which
could have a significant negative impact on the Company's
ability to deliver its services on a competitive and timely
basis and on the results of the Company's operations. Although
the Company has not encountered significant difficulties in
connection with the sale or provision of its services in
international markets, future imposition of, or significant
increases in, the level of trade restrictions or economic or
political instability in the areas where the Company operates,
could have an adverse effect on the Company. For example, the
Company currently provides services at several airports in the
former Soviet Union. The Company's ability to continue
operations in the former Soviet Union may be adversely
affected by future changes in legislation or by changes in the
political environment.
-137-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 19 - SEGMENT INFORMATION
The Company adopted FAS 131, which establishes disclosure and reporting
requirements in respect of segments. Until December 2005 the Company had 3
operating segments: Aviation, Leasing and Entertainment. In December 2005,
the company decided to stop its activities on the Leasing and the
Entertainment. As a result of that the Company has only one business
segment - Aviation.
a. Geographical information
Following is a summary of revenues and long-lived assets by
geographical areas:
1) Revenues - classified by country in which the services were
rendered:
Year ended December 31,
---------------------------------
2005 2004 2003
------- ------- -------
From continuing operations:
USA $48,313 $48,156 $58,503
The Netherlands 6,319 6,397 7,039
Other 3,081 3,440 2,391
------- ------- -------
Total $57,713 $57,993 $67,933
======= ======= =======
From discontinued operations:
USA 1,171 1,491 643
The Netherlands 2,814 3,294 2,995
------- ------- -------
$ 3,985 $ 4,785 $ 3,638
======= ======= =======
-138-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 19 - SEGMENT INFORMATION (continued)
2) The Company's long-lived assets, net of accumulated
depreciation, are located in the following geographical areas:
December 31,
--------------------
2005 2004
------- -------
Long lives assets from continuing operations:
The Netherlands $ 56 $ 43
USA 879 630
Other 318 342
------- -------
$ 1,253 $ 1,015
======= =======
From discontinued operations:
The Netherlands: 16,087
USA 28
------- -------
-,- $16,115
======= =======
b. As to the Company's major customers, see note 18(b) (2).
NOTE 20 - RELATED PARTIES - TRANSACTIONS AND BALANCES
a. Revenues from, and expenses to, related parties:
Year ended December 31,
-----------------------------------------------
2005 2004 2003
------- ------- -------
Cost of revenues $ 89 $ 98
======= =======
Selling, general and administrative expense $ 524 $ 2,546 $ 1,618
======= ======= =======
Includes compensation payments and services
provided to the Company by related parties
Financial income (expenses) $ (320) $ 517
======= =======
Other expenses, see (e) and (i) below $ 4,775 $ 1,400
======= =======
Share in Losses of associated companies:
From continuing operations $ 486 $ 1,625 $ 6,661
From discontinued operations 36 81
------- ------- -------
Selling, general and administrative expenses $ 522 $ 1,706 $ 6,661
======= ======= =======
-139-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 20 - RELATED PARTIES - TRANSACTIONS AND BALANCES (continued)
b. Balances with related parties:
December 31,
-------------
2005 2004
---- ----
Other current assets, see (j) below $200
====
Accrued expenses and other liabilities $253 $500
==== ====
Liabilities from discontinued operations, see note 2(u) $200 $600
==== ====
c. On July 24, 2001 Noaz Management Company assigned to ICTS an
investment of $400 (out of its total investment of $1 million) in
ArtLink Inc., representing 4.1% of the class A preferred shares. A
major shareholder of ICTS is a major shareholder in Noaz Management
Company. This investment was written off in 2003.
d. As to the Company acquisition from a related party in December 2003
of the entertainment business of ITA, and the related impairment
losses of the tangible and intangible assets in 2003 and 2004
amounted to $20,888, see note7(e) and note 8. At December 2005 the
company decided to discontinue the operations of the Entertainment
business - see note 2(u).
e. As to guarantees issued to Bilu on behalf of related parties
(`Leedan' and `Rogosin') in the amount of $1,400, and not exercising
them in 2004, see note 6(b).
f. As to an execution in 2004 of a guaranty granted by the Company to
related party (`IMA'), in the amount of $1,137, see notes 5(a)(4)
and 10(b).
g. As to write down in 2004 of the Company investment in Pioneer (a
company held by principal shareholders) in the amount of $1,794 see
note 5(a)(5).
h. As to not exercising, in 2004, a guaranty granted to the Company by
related party (`Leedan') in the amount of $1,438, in connection with
the Company investment in Pioneer, see notes (5).
i. As to the selling of the lease equipment in the amount of $5 million
in cash plus an amount equal to the related loan balance on the
exercise
-140-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 20 - RELATED PARTIES - TRANSACTIONS AND BALANCES (continued)
j. date ($2.1 million as for the exercise date) , and a loss of $4,775
see notes 7(d) and note 2(u).
k. As to the selling of the "China Dragon" deposit at amount of 1.2
million and a loss of $316, see note 6(a).
l. The accrued expenses for the years 2005 and 2004 to related parties
are mainly liabilities regarding agreements with resigned employee,
see also note 14 (g).
NOTE 21 - LOSSES PER SHARE
The following table presents the data used for computation of basic and
diluted losses per share:
Year ended December 31,
---------------------------------------------------------
2005 2004 2003
----------- ----------- -----------
Basic:
Net loss from continuing operations $ (11,332) $ (10,488) $ (774)
=========== =========== ===========
Net loss from discontinued operations $ (13,548) $ (15,474) $ (18,130)
=========== =========== ===========
Weighted average shares of common
stock outstanding 6,528,100 6,524,250 6,513,100
=========== =========== ===========
Diluted:
Net loss from continuing operations $ (11,332) $ (10,488) $ (774)
=========== =========== ===========
Net loss from discontinued operations $ (13,548) $ (15,474) $ (18,130)
=========== =========== ===========
Weighted average shares of common
stock outstanding 6,528,100 6,524,250 6,513,100
=========== =========== ===========
NOTE 22 - STOCK OPTIONS
In 1999 ICTS adopted share option plan and reserved 600,000 common shares
for issuance under the plan.
On October 28, 2004 the Compensation Committee approved the "2005 Equity
Incentive Plan", the plan was ratified in November 2004 by the Supervisory
Board and Management Board and in February 2005 a special meeting of
shareholders adopted the proposal. Under this plan the Company reserved
1,500,000 common shares for issuance.
Under the above plans, options may be granted to employees, officers,
directors and consultants at an exercise price equal to at least the fair
market value at the date of grant and are granted for periods not to
exceed ten years. Options granted under the plans generally vest over a
period of three years. Any options that are cancelled or forfeited before
expiration become available for future grants.
-141-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 22 - STOCK OPTIONS (continued)
Pursuant to the above plans, the Company reserved for the issuance a total
of 2,100,000 common shares, out of which as of December 31, 2005 1,017,500
options are still available for future grant.
As of December 31, 2005, 1,082,500 options are outstanding, all of which
have been granted to directors and executive officers of the Company, at
exercise prices ranging from $1.35 to $5.30 per share. These options vest
over various terms, ranging from immediately to three years. Outstanding
options expire at various times, but not later than November 2009.
The options granted under the Company's plans are exercisable for the
purchase of shares as follows:
December 31,
-------------------------
2005 2004
--------- ---------
At balance sheet date 615,833 400,500
During the first year thereafter 233,333 246,333
During the second year thereafter 233,334 233,333
During the third year thereafter 233,334
--------- ---------
1,082,500 1,113,500
========= =========
A summary of the status of the plans as of December 31, 2005, 2004 and
2003 and changes during the year ended on those dates is presented below:
Year ended December 31,
--------------------------------------------------------------------------------------
2005 2004 2003
-------------------------- ---------------------------- --------------------------
Weighted Weighted Weighted
Number of average Number of average Number of average
options exercise options exercise options exercise
(in thousands) price (in thousands) price (in thousands) price
-------------- -------- -------------- -------- -------------- --------
$ $ $
---- ---- ----
Options outstanding
at the beginning of year 1,113 1.68 253 6.99 278 6.85
Changes during the year:
Granted 1,020 1.35
Exercised or bought
By the Company (15) 5.30
Forfeited and cancelled (31) 5.17 (145) 8.50 (25) 5.32
----- ---- ----- ---- --- ----
Options outstanding at the
end of year 1,082 1.58 1,113 1.68 253 6.99
===== ==== ===== ==== === ====
Options exercisable at the
end of year 616 1.75 400 2.40 224 7.12
===== ==== ===== ==== === ====
-142-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 22 - STOCK OPTIONS (continued)
The options outstanding as of December 31, 2005 have been separated into ranges
of exercise price as follows:
Options Weighted
Options Weighted Exercisable average
outstanding Average Weighted as of exercise
as of remaining average December 31, price of
Exercise December 31, 2005 contractual exercise 2005 exercisable
price (in thousands) life Price (in thousands) options
-------- ----------------- ----------- -------- -------------- -----------
$ Years $ $
---- ----- ---- ----
1.35 1,020 4 1.35 553 1.35
5.3 62 1 5.3 63 5.3
----- ---- --- ----
1,082 1.58 616 1.75
===== ==== === ====
NOTE 23 - SUBSEQUENT EVENTS
a) On December 28, 2005 the Company sold its Leasing equipment to the
lessee company. On January 4, 2006 the company signed a loan
agreement with the owner of the lease company (a related party), in
which he received a loan of (euro)1 million ($1.2 million as of
December 31, 2005) from ICTS for 6 months, bearing an interest of
5.45%. The entire loan was repaid by May 17, 2006.
b) In April 2006 the supervisory board authorized the management to
sell its investment in Inksure. The market value of the investment
as of August 31, 2006 is $9 million.
c) As explained in note 10(d) one of the subsidiaries had on December
31, 2005 a credit agreement up to (euro)400 ($473 as of December 31,
2005). As of May 2006 the agreement was updated to (euro)650 ($829
as of August 31, 2006). As of August 2006 there is no outstanding
balance.
d) On March 2006 the DOL in the USA alleged that Huntleigh underpaid
airport screeners while performing under the contract with the TSA.
As of December 2005 a liability regarding the audit of approximately
$7.3 million is included in the consolidated financial statements -
see note 1(c).
-143-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 23 - SUBSEQUENT EVENTS (continued)
e) In January 2006 the company was offered to sell its shares in YCD,
an investment that was written of in the past. The company received
approximately $224, for 211,228 shares of YCD. See note 3.
f) In March, 2006 the Company was informed that the German bank, to
which the Company completed its payments during 2005 under the
agreement described in note 10(b), intends to demand from ICTS an
amount of (euro)866 in case that the bank is ordered to compensate
IMA in the same amount. The date for the hearing will be in
September 2006. As the Company is still checking the implications of
the announcement, no allowance was made referring to this subject.
g) As of August 30, 2006 the Company received a loan of $2,050,000
million from a related party as bridging finance.
h) In May 2006 the Company decided to stop payments for the lease of
the entertainment sites, which are part of the discontinued
operations (see note 12). The landlord filed a litigation against
the company - see note 14(b)(8).
i) By letter dated August 15, 2006, the Company was advised that a
criminal investigation by the United States Department of Justice,
Tax Division is ongoing by a grand jury regarding possible criminal
tax violations by the subsidiary for the tax years 2002 and 2003
regarding certain royalty payment made to the Company.
j) On August 2006 the Company was informed that Rogozin Industries Ltd
(in liquidation) filed a litigation regarding a payment of $340 it
paid during 2001, which according to the litigation, ICTS is
guaranteeing.
-144-
Exhibit 12.1
CERTIFICATIONS
I, Avraham Dan, certify that:
1. I have reviewed this annual report on Form 20-F of ICTS
International N.V.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this annual report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this annual report (the "Evaluation Date");
and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether or not there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
ICTS INTERNATIONAL, N.V.
By: -------------------------------
Name:
-----------------------------
Title:/s/ Avraham Dan
--------------
Avraham Dan
Dated: September 15, 2006
-145-
EXHIBIT 13.1
CERTIFICATION
In connection with the annual report of ICTS International, N.V. (the
"Company") on Form 20-F for the period ending December 31, 2005 as filed with
the Securities and Exchange Commission on the date hereof (the "Report"), I,
Avraham Dan, Chief Executive Officer of the Company, certify, pursuant to 18
U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of
2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of
the Securities and Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the Company.
By: /s/ Avraham Dan
--------------
Avraham Dan
Dated: September 15, 2006
-146-
EXHIBIT 14.1
Deloitte
Brightman Almagor 1
Azrieli Center
Tel Aviv 67021
P O.B. 16593
Tel Aviv 61164
Israel
Tel: +972 (3) 608 5555
Fax: +972 (3) 609 4022
Info@deloitte.co.il
wwwdeloitte com
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of InkSure Technologies Inc.
We have audited the accompanying consolidated balance sheet of InkSure
Technologies Inc. ("the Company") and its subsidiaries as of December 31, 2004
and the related statements of operations, shareholders' equity and cash flows
for each of the years in the two-year period ended December 31, 2004. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted Our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States) Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor Were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting Accordingly, we express no such opinion An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management. as well as evaluating the overall
financial statement presentation We believe that our audit provides a reasonable
basis for our opinion
In our Opinion, the consolidated financial statements present fairly, in all
material respects, the consolidated financial position of the Company and its
subsidiaries as of December .31, 2004 and the consolidated results of their
operations and their consolidated cash flows for each of the years in the two
year period ended December .31,2004 in conformity with US generally accepted
accounting principles.
/s/ Brightman Almagor & Co
- --------------------------
Brightman Almagor & Co.
Certified Public Accountants
A member firm of Deloitte Touche Tohmatsu
Tel Aviv, lsrael
August 3, 2005
Audit. Tax.Consulting. Financial Advisory.
A member firm of Deloitte Touche Tohmatsu
-147-
EXHIBIT 15.1
Lazar Levine & Felix LLP
CERTIFIED PUBUC ACCOUNTANTS & BUSINESS CONSULTANTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors Pioneer Commercial Funding Corp. New York, New York
We have audited the accompanying balance sheet of Pioneer Commercial Funding
Corporation (a New York corporation) as of December 31, 2003, and the related
statements of operations, comprehensive income (loss), changes in stockholders'
equity (deficit), and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of Pioneer Commercial Funding
Corporation as of December 31, 2003, and the results of its operations and its
cash flows for the year then ended in conformity with accounting principles
generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company has ceased issuing loans in its' mortgage
warehouse lending business. The Company has also suffered recurring losses from
operations and has negative working capital and net worth. These factors raise
substantial doubt about its ability to continue as a going concern. Management's
plans regarding those matters are also described in Note 3. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ LAZAR LEVINS & FELIX LLP
----------------------------
LAZAR LEVINS & FELIX LLP
New York, New York
February 9. 2004
350 FIFTH AVENUE 68th FLOORI NEW YORK NY 10118-0170
T 212 736 1900 F 212 629 3219
Other Office: MORRISTOWN. NJ IT 973 267 1414
PARSIPPANY. NJ I T 973 428 3200
www.lazarcpa.com
-148-