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, December 6, 2006,17, 2008, 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 20052007 with respect to the annual accounts of the
financial year 2005.2007.
3. Report by the Supervisory Board with respect to the annual accounts of the
financial year 2005.2007.
4. Report of the Audit Committee with respect to the annual accounts of the
financial year 2005.2007.
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 2005.2007.
7. Election of twothree Managing Directors.
8. Election of six Supervisory Directors.
9. Ratification of appointment of independent auditors for the Company.
10. Discharge from liability of the Management and Supervisory Boards.
11. Adoption of the 2008 Employee, Director and Consultant Stock Option Plan.
12. Adoption of an amendment to the Articles of Association of the Company to
eliminate the age requirement.
13. Authorization for the Supervisory Board, for a period of five years from
the date of the meetingMeeting, to issue up to 17,000,000 shares, representing
all of the authorized shares andof the company's common stock,Company's Common Stock, for any lawful
corporate purpose without further shareholder approval.
10.14. 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.
11.15. Questions.
12.16. Adjournment.
Pursuant to the Articles of Association of the Company and Netherlands law,
copies of the annual accounts for the financial year 2005,2007, 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 November 6, 2006,14, 2008 the record date for the
determination of shareholders entitled to vote at the Annual Meeting.
The Management Board
Avraham Dan
Ran Langer
Managing Directors
November 6, 200614, 2008
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)
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PROXY STATEMENT
ANNUAL GENERAL MEETING OF SHAREHOLDERS
To be held on December 6, 200617, 2008
This Proxy Statement is being furnished to holders of common shares, par value
..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, December 6 , 2006,17, 2008, 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, 2005,2007, 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 20042007 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"):
1. 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 twothree Managing Directors (Item 7 of the Agenda).
4. Election of six Supervisory Directors (Item 8 of the Agenda).
5. AuthorizationRatification of appointment of independent auditors for the Supervisory Board to issue stockCompany (Item
9 of the Agenda).
6. Discharge from liability the Management and Supervisory Boards. (Item 10
of the Agenda).
7. Adoption of the 2008 Employee, Director and Consultant Stock Option Plan.
(Item 11 of the Agenda).
8. Adoption of an amendment to the Articles of Association of the Company to
eliminate the age requirement. (Item 12 of the Agenda).
9. Authorization to purchase shares of the companies common stock (Item 1014 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.
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
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Statement, the Notice, the Annual Report, and the form of Power of Attorney to
the shareholders on or about November 8, 2006.17, 2008.
3
Voting Securities and Voting Rights
At the close of business on November 6, 2006,17, 2008, 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 November 6, 2006,, 2008, the record date for the Annual Meeting.
Shareholders owning and holding approximately 62.5%56% of the issued and outstanding
Common Shares of the Company have indicated that they will vote FOR items 5, 6,
7, 8, 9, 10, 11 and 1012 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 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 proxy 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 proxy holders FOR items 5, 6, 7, 8, 9,
10, 11 and 1012 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 November 6, 2006,17, 2008, 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 proxy holder shall present the duly executed proxy together with
the enclosed form of Power of Attorney and Proxy signed by the registered
shareholder.
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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 November 6, 2005,16, 2007, by each person who is known by the Company to
own beneficially more than 5% of the outstanding Common Shares:
4
- --------------------------------------------------------------------------------
Percent of
Amount
Beneficially Common Shares
Name of Five Percent Shareholders Owned (a) Outstanding
- --------------------------------------------------------------------------------
Atzmon Family Trust (b)(1)(2) 4,298,500 62.5%3,597,226 56%
- --------------------------------------------------------------------------------
Elchauan Moaz & Affiliates (c) 703,772 10.78%
- --------------------------------------------------------------------------------
Nicholas P. Monteban, Xalladio Holding B.V. and
Galladio Capital Management B.V.(d) 688,000 10.54%
- --------------------------------------------------------------------------------
All officers and directors as a group
(9(14 persons) 4,548,8363,597,226 56%
- --------------------------------------------------------------------------------
(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 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 November 6,2006, if any held by such
shareholder. Common shares subject to options that are immediately exercisable
or exercisable within 60 days of November 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.June 30, 2008.
1. Harmony Ventures BV,Aragata Holdings Co., Limited, owns directly and indirectly
approximately 60%56% of the issued and outstanding Common Shares. A family trust
for the benefit of the family of Mr. Menachem J. Atzmon (the "AtzmonAtzmon Family
Trust")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.Aragata Holdings Co., Limited. Mr. Atzmon disclaims any beneficial
interest in the Atzmon Family Trust. Harmony
Ventures BVAragata Holdings Co., Limited and the
Atzmon Family Trust may be able to appoint all the directors of ICTS and control
the affairs onof ICTS.
2. Includes 550,000Of the 900,000 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,
900,000 are granted in lieu of a current salary for Mr. Atzmon.currently exercisable. Options are exercisable at $1.35 per share
for 550,000 options and $1.00 per share for 350,000 options representing the
fair market value on the datedates of grant.
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(b) The shares were purchased by the group during 2007 and 2008.
(c) The shares were purchased by that group during 2006, 2007 and 2008.
ITEM FOUR OF THE AGENDA:
REPORT OF THE AUDIT COMMITTEE
The Audit Committee consists of Mr. Philip M. Getter (Chairman), Eytan Barak 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 and Code of Ethics which isare attached hereto as Exhibit A.Exhibits
A and B. 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. The Code of Ethics sets forth the conduct required of all
directors, officers and employees, including whistle blowing procedures.
The Audit Committee after such review and discussion with the independent
auditors have recommended that the audited financial statements be included in
the Company's annual report on Form 20-F.
5
The Audit Committee held 8four 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 hasand Mr. Barak have 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, 20052007 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)13a-14(c) and 15d-14(C) 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.
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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 RECOMMENDSBOARD RECOMMEND THAT THE SHAREHOLDERS VOTE
"FOR
""FOR" THE ADOPTION OF THE ENGLISH LANGUAGE (ITEM 1 ON THE POWER OF ATTORNEY AND
PROXY).
6
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 includes the adoption of the Dutch accounts
through December 31, 2007.
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 31,2005.31, 2007.
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 RECOMMENDSBOARD RECOMMEND THAT THE SHAREHOLDERS VOTE
"FOR" THE ADOPTION OF ANNUAL ACCOUNTS (ITEM 2 ON THE POWER OF ATTORNEY AND
PROXY).
-8-
ITEM SEVEN OF THE AGENDA:
ELECTION OF MANAGING DIRECTORS
At the Annual Meeting, Mr. Raanan Nir, Mr. Avraham Dan and Ran Langer are to be
elected to serve as Managing Directors until their successors have been elected.
Messrs. Nir, 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 (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.
Raanan Nir, since 2002, has been managing director of his own company, Red Flag,
B.V., which is a trust company established in The Netherlands, providing
financial and general management services. From 2000 to 2002 he was in charge of
finance for an IT start-up company. From 1998 to 2000 he was CFO of ICTS
International, N.V.
7
THE SUPERVISORY BOARD AND MANAGEMENT BOARD RECOMMEND THAT THE SHAREHOLDERS VOTE
"FOR" THE ELECTION OF THE FOLLOWING NOMINEES (ITEM 3 ON THE POWER OF ATTORNEY
AND PROXY).
ITEM EIGHT OF THE AGENDA:
ELECTION OF SUPERVISORY DIRECTORS
At the Annual Meeting, six 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, Eytan Barak, Elie Housman,
Gordon Hausmann, David W. Sass and Philip M. 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, unless marked to the contrary, will be voted in favor of the election
of Messrs. Menachem Atzmon, Eytan Barak, Elie Housman, Gordon Hausmann, David W.
Sass and Philip M. 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 investmentinvestments companies.
Since
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January 1998 he has served as CEO of Seehafen Rostock. He has been a
member of the Supervisory Board of ICTS since 1999.
Eytan Barak fromis a CPA (Isr). From the year 2001 to the present, Mr. Barak is a
partner in Dovrat-Barak Investment in High-Tech Companies Ttd.Ltd., a company which
arranges financial resources and management assistance to start-up companies. He
is, and has been since the year 2003 and to the present, a member of the Board of
Directors of a public company owned by aan Israeli Bank; a Provident Fund Company
managed by "Bank Otsar Ha-Hayal" a subsidiary of Bank Hapoalim, where he is
acting as the chairman of the investment committee and member of the audit
committee; and from the 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,Ltd., a public company that was listed in Nasdaq. He is
since the year 2000 to the present a member of the executive board and a member
of the finance committee of the Olympic Committee of Israel. He is the chairman
of the board of "OTZMA","OTZMA," the Israel Center of Sport Clubs (operating about 250 clubs).
HeClubs. Since 2006, he is a
member of the Board of Directors since the 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.until 2008 and is
a member of the Board. 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 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
8
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,banking group, and
a Governor of the Hebrew University.
David W. Sass for the past 4547 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 an honoraryHonorary Trustee of Ithaca College.
Philip M. Getter fromis currently the managing member of GEMPH Development LLC. From
2000 to 2005 he 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
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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 PharmacalPharmaceutical 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, and became Chairman of the Board in 2008.
InkSure is 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.
THE SUPERVISORY BOARD AND MANAGEMENT RECOMMENDSBOARD RECOMMEND THAT THE SHAREHOLDERS VOTE
"FOR" THE ELECTION OF SUPERVISORY DIRECTORS (ITEM 4 ON THE POWER OF ATTORNEY AND
PROXY).
-11-ITEM NINE OF THE AGENDA
RATIFICATION OF THE APPOINTMENT OF
MAHONEY COHEN & COMPANY, CPA. P.C.
AND
HLB VAN DAAL & PARTNERS
At the annual meeting the shareholders are being asked to ratify the appointment
of Mahoney Cohen & Company, CPA, P.C., and HLB Van Daal & Partners as the
independent auditors of the Company for the fiscal year ended December 31, 2008.
Such firms were the auditors for the year ended December 31, 2007. The
appointment was made by the Company's Audit Committee and approved by the
Supervisory Board and Management Board of the Company.
THE SUPERVISORY BOARD AND MANAGEMENT BOARD RECOMMEND THAT THE SHAREHOLDERS VOTE
"FOR" THE RATIFICATION OF THE APOINTMENT OF THE AUDITORS FOR THE COMPANY (ITEM 5
OF THE POWER OF ATTORNEY AND PROXY)
9
ITEM NINETEN OF THE AGENDA
DISCHARGE FROM LIABILITY OF THE MANAGEMENT
AND SUPERVISORY BOARDS
At the annual meeting the shareholders are being asked to discharge from
liability the members of the Management Board in respect to their management and
the members of the Supervisory Board in respect of their supervision up to and
including the 2007 financial year.
THE SUPERVISORY BOARD AND MANAGEMENT BOARD RECOMMEND THAT THE SHAREHOLDERS VOTE
"FOR" THE DISCHARGE FROM LIABILITY (ITEM 6 OF THE POWER OF ATTORNEY AND PROXY)
ITEM ELEVEN OF THE AGENDA
2008 EMPLOYEE, DIRECTOR AND CONSULTANT
STOCK OPTION PLAN
The Management Board and the Supervisory Board have approved and recommends that
the shareholders adopt the 2008 Employee, Director and Consultant Stock Option
Plan (the "Plan") so that options may be granted under the Plan. Approval of
these proposals will require the affirmative vote of a majority of the shares
present in person or represented by proxy at the Meeting.
The Plan provides a means whereby employees, officers, directors, and certain
consultants and independent contractors of the Company ("Qualified Grantees")
may acquire the Common Stock 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. A copy of the full Plan s
annexed as Exhibit C to this Proxy Statement. 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 Company and will further the identification of those
persons' interests with those of the Company's shareholders.
The Plan provides that options to purchase up to 1,500,000 Common Stock 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 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 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 grant.
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 two members of the Supervisory Board of the
Company.
As of the date of this proxy statement, no options have been granted under the
Plan.
10
THE SUPERVISORY BOARD AND MANAGEMENT BOARD RECOMMEND THAT THE SHAREHOLDERS VOTE
"FOR" THE DISCHARGE FROM LIABILITY (ITEM 7 OF THE POWER OF ATTORNEY AND PROXY)
ITEM TWELVE OF THE AGENDA
ADOPTION OF AN AMENDMENT TO THE ARTICLES OF
CORPORATION OF THE COMPANY
TO ELIMINATE THER AGE REQUIREMENT
At the annual meeting the shareholders are being urged to amend the Articles of
Association of the Company by striking out, in its entirety, Article 13, Section
5 relating to the retirement age of 72. Under Dutch law, this maximum age ceased
to apply in April, 2003.
THE SUPERVISORY BOARD AND MANAGEMENT BOARD RECOMMEND THAT THE SHAREHOLDERS VOTE
"FOR" THE AMENDMENT TO THE ARTICLES OF CORPORATION (ITEM 8 OF THE POWER OF
ATTORNEY AND PROXY).
ITEM THIRTEEN 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.SHAREHOLDER 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 general 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, requestingrepresenting all of the
authorized shares of the Company's Common shares,Shares, for a period of five years
from the atedate of the Meeting without further shareholder approval.
A majority of votes cast is required for the authorization of the Supervisory
Board to issue such Common Shares during such period without further shareholder
approval.
THE SUPERVISORY BOARD AND THE MANAGEMENT BOARD RECOMMEND A VOTE "FOR" ITEM
NINETHIRTEEN (ITEM 59 OF THE PROXY CARD).
ITEM TENFOURTEEN 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
Dutch Civil Code, the Company may only acquire Common Shares if authorized by
the MeetingShareholders 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
11
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 voteTHE SUPERVISORY BOARD AND THE MANAGEMENT BOARD EACH RECOMMENDS A VOTE "FOR" ITEM
TEN (ITEM 610 OF THE PROXY CARD).
Corporate Governance
The aggregate fees billedSupervisory Board, Management Board and Shareholders of the Company have
adopted a Corporate Governance Policy that meets the requirements of the Dutch
Civil Code and the requirements of the United States of America Federal
Securities Laws.
The policy includes among others, the management description of the corporate
governance structure of the Company, the strategy and the financial objectives,
the risk profile of the activities and the group risk management and control
systems in place and their assessment by the management.
The Management and Supervisory Boards are responsible for the corporate
governance structure of the Company and for compliance with the Dutch Civil
Code. They will give an account of their actions in this regard to the Company for the financial year ended December
31, 2005 by the principal accounting firm was a totalGeneral
Meeting of $431,000.Shareholders.
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
November 6, 2006
-13-14, 2008
12
EXHIBIT A
CHARTER OF THE AUDIT COMMITTEE
This Charter of the Audit Committee (this NASDAQ Rule "Charter") has been
adopted by the Supervisory (the 4350(d)(1) Board (the "Board") of ICTS
International, N.V. requires that "Company"). The Audit Committee (the
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 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.
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.
13
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.
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. Alternative 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
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.
16. To directly appoint, retain, Exchange Act Rule 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.
14
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. Audit 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.
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). Party 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.
26. To establish and maintain procedures Exchange Act Rule 10A-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
Listed Company Audit have direct access to the independent Committees. Auditors
as well as anyone in the Company.
15
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. 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-expenses of the
Committee that are 3(b)5). Necessary 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-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.
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 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
Prospective 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.
16
F. Chairman
The Committee shall include a Committee Determined by the 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 time per
quarter, or more frequently as circumstances dictate, and all Committee members
shall strive to attend all Committee meetings. At least twoone 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):
(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
17
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.
-19-18
EXHIBIT B
ICTS INTERNATIONAL, N.V.("ICTS"
And All Subsidiaries
(collectively "ICTS")
CODE OF BUSINESS CONDUCT AND ETHICS
INTRODUCTION
We are committed to maintaining the highest standards of business conduct
and ethics. This ICTS Code of Business Conduct and Ethics (the "Code") reflects
the business practices and principles of behavior that support this commitment.
This Code is intended to comply with the provisions of the U.S. Sarbanes-Oxley
Act of 2002 (the "Act"). 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.Directors as well as the Company's chief executive
officer (principal executive officer), chief financial officer (principal
financial officer) and chief accounting officer (principal accounting officer)
(the management directors, principal executive officer and principal accounting
officer collectively, the "ss. 406 Officers" as referred to in the Act) are
bound by these Business Conduct Guidelines, including those provisions that
relate to ethical conduct, conflicts of interest and compliance with applicable
laws. The ss. 406 Officers hold an important and elevated role in corporate
governance in that they are uniquely capable and empowered to ensure that all
shareholders' interests are appropriately balanced, protected and preserved.
Therefore, in addition to the broad and comprehensive codes of ethical conduct
set forth in the ICTS Business Conduct Guidelines, the ss. 406 Officers shall be
subject to the additional conduct guidelines continued on Section 18 hereof.
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 terms of employment at-will policy ofbetween an individual employee and 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 1617 BELOW DETAILS
19
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 16.17.
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 or summary dismissal ("ontslag op staande
voet") 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.Board (the
"Audit Committee", as further described in Section 18).
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
discoveryinspection 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
20
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 appearance of
conflict or if you become aware of an actual or potential conflict or appearance
of a 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).Committee. 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 ofand the Supervisory Board of Directors.ICTS.
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.conditions to
his/her supervisor or the Managing Director. Further, misusing controlled
substances or selling, manufacturing, distributing, possessing, using or
misusing controlled substances, or being under the influence of illegal drugs on
the job is absolutely prohibited.
21
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.
22
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 contactobtain prior approval from your supervisor, a Managing
Director, the General Counsel or the Chairperson of the Audit Committee for approval.Committee.
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 imposes8. ENVIRONMENT COMPLIANCE
The laws of the various jurisdictions where we do business can impose
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.
8.9. 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 United States 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
23
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.
9.10. 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.
10.11. 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.
-25-12. COMPETITION LAW
The European competition rules are supplemented in The Netherlands by
national rules set out in the Competition Act ("Mededingingswet"). This Act is
applicable in parallel with the European competition rules.
The Competition Act prohibits all agreements between undertakings,
decisions by associations of undertakings and concerted practices of
undertakings which have as their object or effect the prevention, restriction or
distortion of competition within the Dutch market, or a part of such market.
Such agreements may for instance directly or indirectly fix purchase or selling
prices or any other trading conditions; limit or control production, markets,
technical development, or investment; share markets or sources of supply. This
list is not limitative.
Undertakings are also prohibited from abusing a dominant position through
exclusionary, discriminatory or exploitative practices.
24
11. ANTITRUST
Antitrust laws in the United States 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.
UnderstandingCertain transactions require prior approval from the requirementsDutch (or European)
competition authority. They include transactions whereby two or more
undertakings merge, or set up a joint venture, or an undertaking acquires
control over another, subject to a number of antitrustminimum turnover criteria.
Undertakings and unfairtheir (de facto) managers can be fined for infringing the
competition lawsrules. Undertakings can be fined up to 10% of the various jurisdictions where we do businessannual group
worldwide turnover and (de facto) managers can be difficult,fined up to (euro) 450,000.
Fines can also be imposed when undertakings do not cooperate with the Dutch
competition authority.
The above is merely a general outline of the competition rules, for more
information and you are urged
to seek assistance from yourspecific guidelines regarding competition law, please ask a
supervisor, a Managing Director, the General Counsel or the Chairperson of the
Audit Committee whenever you have a question
relating to these laws.
12.of the Supervisory Board.
13. 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 can 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.
13.14. 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.
25
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, [suchsuch 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-
During the employment as well as after its termination the employee shall
treat as strictly confidential and not disclose to third parties, whether
directly or indirectly, in any form or manner whatsoever, any information which
has come to his/her knowledge regarding the business and interests of ICTS
and/or affiliated companies and businesses and/or its customers and other
business relations, all this in the broadest sense, unless the discharge of
his/her duties under the employment requires the disclosure of such information
to third parties on a need-to-know basis.
In the event that the employee is suspended and upon termination of
his/her employment the employee shall at ICTS's first request to that effect
surrender to ICTS all property of ICTS in his/her possession as well as all
documents which in any way whatever relate to ICTS and/or affiliated companies
and/or its customers and other business relations, all this in the broadest
sense, as well as all copies of such documents (whether or not recorded on data
carriers) and property.
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.
14.15. 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 equalequal.
access to information. All inquiries or calls from the press and financial
analysts should be referred to a Managing Director.
15.16. WAIVERS
There will be no waivers of this Code unless an exception is made in
accordance with Section 18 of this Code.
16.17. 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.
26
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 OR SUMMARY DISMISSAL ("ONTSLAG OP STAANDE
VOET") AND, IN APPROPRIATE CASES, CIVIL ACTION OR REFERRAL FOR CRIMINAL
-27-
PROSECUTION. APPROPRIATE ACTION MAY ALSO BE TAKEN TO DETER ANY FUTURE CODE
VIOLATIONS.
18. ss. 406 OFFICERS
a) The ss. 406 Officers shall supervise the implementation of measures
that are designed to ensure that information disclosed in reports and documents
filed with or submitted to the Securities and Exchange Commission, or contained
in other public communications made by ICTS, is full, fair, accurate, complete,
timely and understandable.
b) The ss. 406 Officers shall promptly bring to the attention of the Audit
Committee of the ICTS's Supervisory Board (the "Audit Committee") any material
information of which he or she may become aware that could affect the
disclosures made by ICTS in its public filings.
c) The ss. 406 Officers shall promptly bring to the attention of the Audit
Committee any information he or she may have concerning (i) significant
deficiencies in the design or operation of internal controls which could
adversely affect ICTS ability to record, process, summarize and report financial
data or (ii) any fraud, whether or not material, that involves management or
other employees who have a significant role in ICTS's financial reporting,
disclosures or internal controls.
27
d) The ss. 406 Officers shall promptly bring to the attention of ICTS's
Corporate Compliance Officer and to the Audit Committee any information he or
she may have concerning any violation of this Code of Ethics or ICTS's Business
Conduct Guidelines by any director, officer or other employee of the Company.
e) The ss. 406 Officers shall promptly bring to the attention of the
Corporate Compliance Officer and to the Audit Committee any material transaction
or relationship that arises and of which he or she becomes aware that reasonably
could be expected to give rise to an actual or apparent conflict of interest
between a director or senior officer of ICTS, on the one hand, and ICTS, on the
other. Any failure of a ss. 406 Officer to observe the terms of this Code of
Ethics or the Business Conduct Guidelines may result in appropriate disciplinary
action that shall be designed to deter wrongdoing and to promote accountability
to this Code of Ethics and the Business Conduct Guidelines.
The Audit Committee shall be responsible for recommending to the ICTS's
Supervisory Board whether and on what terms to grant to any ss. 406 Officer a
waiver of this Code of Ethics or the Business Conduct Guidelines. The decision
to grant to any ss. 406 Officer a waiver of this Code of Ethics or the Business
Conduct Guidelines shall be made by the Supervisory Board and shall be promptly
disclosed to the public and ICTS's shareholders in accordance with applicable
law and listing standards.
28
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 termination of employment or summary dismissal
("ontslag op staande voet").
NAME (printed):
SIGNATURE:
DATE:
29
Exhibit C
ICTS International, N.V.
2008 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK OPTION PLAN
1. DEFINITIONS.
Unless otherwise specified or unless the context otherwise requires, the
following terms, as used in this ICTS International, N.V. 2008 Employee,
Director and Consultant Stock Option Plan, have the following meanings:
Administrator means the Supervisory Board, unless it has delegated power
to act on its behalf to the Committee, in which case the Administrator
means the Compensation Committee.
Affiliate means a corporation which, for purposes of Section 424 of the
Code, is a parent or subsidiary of the Company, direct or indirect.
Supervisory Board means the Supervisory Board of the Company.
Code means the United States Internal Revenue Code of 1986, as amended.
Committee means the compensation committee of the Supervisory Board to
which the Supervisory Board has delegated power to act under or pursuant
to the provisions of the Plan.
Common Stock means shares of the Company's common stock, 0.45 Euro par
value per share.
Company means ICTS International, N.V., a corporation originated under the
laws of The Netherlands.
Disability or Disabled means permanent and total disability as defined in
Section 22(eX3) of the Code.
Employee means any employee of the Company or of an Affiliate (including,
without limitation, an employee who is also serving as an officer or
director of the Company or of an Affiliate), designated by the
Administrator to be eligible to be granted one or more Options under the
Plan.
Fair Market Value of a Share of Common Stock means:
(1) If the Common Stock is listed on a national securities exchange or
traded in the over-the-counter market and sales prices are regularly
reported for the Common Stock, the closing or last price of the Common
Stock on the Composite Tape or other comparable reporting system for the
trading day immediately preceding the applicable date;
(2) If the Common Stock is not traded on a national securities exchange
but is traded on the over-the-counter market, if sales prices are not
regularly reported for the Common Stock for the trading day referred to in
clause (1), and if bid and asked prices for the Common Stock are regularly
reported, the mean between the bid and the asked price for the Common
Stock at the close of trading in the over-the-counter market for the
trading day on which Common Stock was traded immediately preceding the
applicable date; and
(3) If the Common Stock is neither listed on a national securities
exchange nor traded in the over-
30
the-counter market, such value as the Administrator, in good faith, shall
determine.
ISO means an option meant to qualify as an incentive stock option under
Section 422 of the Code.
Non-Qualified Option means an option which is not intended to qualify as
an ISO.
Option means an ISO or Non-Qualified Option granted under the Plan.
Option Agreement means an agreement between the Company and a Participant
delivered pursuant to the Plan, in such form as the Administrator shall
approve.
Participant means an Employee, director or consultant of the Company or an
Affiliate to whom one or more Options are granted under the Plan. As used
herein, "Participant" shall include "Participant's Survivors" where the
context requires.
Plan means ICTS International, N.V., 2008 Employee, Director and
Consultant Stock Option Plan.
Shares means shares of the Common Stock as to which Options have been or
may be granted under the Plan or any shares of capital stock into which
the Shares are changed or for which they are exchanged within the
provisions of Paragraph 3 of the Plan. The Shares issued upon exercise of
Options granted under the Plan may be authorized and unissued shares or
shares held by the Company in its treasury, or both,
Survivor means a deceased Participant's legal representatives and/or any
person or persons who acquired the Participant's rights to an Option by
will or by the laws of descent and distribution.
2. PURPOSES OF THE PLAN.
The Plan is intended to encourage ownership of Shares by Employees and directors
of and certain consultants to the Company in order to attract such people, to
induce them to work for the benefit of the Company or of an Affiliate and to
provide additional incentive for them to promote the success of the Company or
of an Affiliate. The Plan provides for the granting of ISO's and Non-Qualified
Options.
3. SHARES SUBJECT TO THE PLAN.
The number of Shares which may be issued from time to time pursuant to this Plan
shall be 1,500,000, or the equivalent of such number of Shares after the
Administrator, in its sole discretion, has interpreted the effect of any stock
split, stock dividend, combination, recapitalization or similar transaction in
accordance with Paragraph 16 of the Plan,
If an Option ceases to be "outstanding", in whole or in part, the Shares which
were subject to such Option shall be available for the granting of other Options
under the Plan, Any Option shall be treated as "outstanding" until such Option
is exercised in full, or terminates or expires under the provisions of the Plan,
or by agreement of the parties to the pertinent Option Agreement
4. ADMINISTRATION OF THE PLAN.
The Administrator of the Plan will be the Supervisory Board, except to the
extent the Supervisory Board delegates its authority to the Committee, in which
case the Committee shall be the Administrator. Subject to the provisions of the
Plan, the Administrator is authorized to:
31
a. Interpret the provisions of the Plan or of any Option or Option
Agreement and to make all rules and determinations which it deems
necessary or advisable for the administration of the Plan;
b. Determine which employees of the Company or of an Affiliate shall be
designated as Employees and which of the Employees, directors and
consultants shall be granted Options;
c. Specify the terms and conditions upon which an Option or Options may be
granted; and
d. Adopt any sub-plans applicable to residents of any specified
jurisdiction as it deems necessary or appropriate in order to comply with
or take advantage of any tax laws applicable to the Company or to Plan
Participants or t~ otherwise facilitate the administration of the Plan,
which sub-plans may include additional restrictions or conditions
applicable to Options or Shares acquired upon exercise of Options.
provided, however, that all such interpretations, rules, determinations, terms
and conditions shall be made and prescribed in the context of preserving the tax
status under Section 422 of the Code of those Options which are designated as
150g. Subject to the foregoing, the interpretation and construction by the
Administrator of any provisions of the Plan or of any Option granted under it
shall be final, unless otherwise determined by the Board of Directors, if the
Administrator is the Committee.
5. ELIGIBILITY FOR PARTICIPATION.
The Administrator will, in its sole discretion, name the Participants in the
Plan, provided, however, that each Participant must be an Employee, director or
consultant of the Company or of an Affiliate at the time an Option is granted.
Notwithstanding the foregoing, the Administrator may authorize the grant of an
Option to a person not then an employee, director or consultant of the Company
or of an Affiliate; provided, however, that the actual grant of such Option
shall be conditioned upon such person becoming eligible to become a Participant
at or prior to the time of the execution of the Option Agreement evidencing such
Option. ISOs may be granted only to Employees. Non-Qualified Options may be
granted to any Employee, director or consultant of the Company or an Affiliate.
The granting of any Option to any individual shall neither entitle that
individual nor disqualify him or her from, participation in any other grant of
Options.
6. TERMS AND CONDITIONS OF OPTIONS.
Each Option shall be set forth in writing in an Option Agreement, duly executed
by the Company and, to the extent required by law or requested by the Company,
by the Participant The Administrator may provide that Options be granted subject
to such terms and conditions, consistent with the terms and conditions
specifically required under this Plan, as the Administrator may deem appropriate
including, without limitation, subsequent approval by the shareholders of the
Company of this Plan or any amendments thereto. The Option Agreements shall be
subject to at least the following terms and conditions:
A. Non-Qualified Options: Each Option intended to be a Non-Qualified
Option shall be subject to the terms and conditions which the
Administrator determines to be appropriate and in the best interest of the
Company, subject to the following minimum standards for any such
Non-Qualified Option:
a. Option Price: Each Option Agreement shall state the option price (per
share) of the Shares covered by
32
each Option, which option price shall be determined by the Administrator
but shall not be less than the par value of the Common Stock.
b. Each Option Agreement shall state the number of Shares to which it
pertains;
c. Each Option Agreement shall state the date or dates on which it first
is exercisable and the date after which it may no longer be exercised, and
may provide that the Option rights accrue or become exercisable in
installments over a period of months or years, or upon the occurrence of
certain conditions or the attainment of stated goals or events; and
d. Exercise of any Option may be conditioned upon the Participant's
execution of a Share purchase agreement in form satisfactory to the
Administrator providing for certain protections for the Company and its
other shareholders, including requirements that:
i. The Participant's or the Participant's Survivors' right to sell
or transfer the Shares may be restricted; and
ii.The Participant or the Participants Survivors may be required to
execute letters of investment intent and must also acknowledge that
the Shares will bear legends noting any applicable restrictions.
B. ISOs: Each Option intended to be an ISO shall be issued only to
an Employee and be subject to the following terms and conditions,
with such additional restrictions or changes as the Administrator
determines are appropriate but not in conflict with Section 422 of
the Code and relevant regulations and rulings of the Internal
Revenue Service:
a. Minimum standards: The ISO shall meet the minimum standards
required of Non-Qualified Options, as described in Paragraph 6(A)
above, except clause (a) thereunder.
b. Option Price: Immediately before the ISO is granted, if the
Participant owns, directly or by reason o the applicable attribution
rules in Section 424(d) of the Code:
i. 10% or less of the total combined voting power of all classes of
stock of the Company or an Affiliate, the Option price per share of
the Shares covered by each ISO shall not be less than 100% of the
Fair Market Value per share of the Shares on the date of the grant
of the Option; or
ii.More than 10% of the total combined voting power of all classes
of stock of the Company or an Affiliate, the Option price per share
of the Shares covered by each ISO shall not be less than 110% of the
said Fair Market Value on the date of grant.
c. Term of Option: For Participants who own:
10% or less of the total combined voting power of all classes of
stock of the Company or an Affiliate, each ISO shall terminate not
more than ten years from the date of the grant or at such earlier
time as the Option Agreement may provide; or
ii.More than 10% of the total combined voting power of all classes
of stock of the Company or an Affiliate, each ISO shall terminate
not more than five years from the date of the grant or at
33
such earlier time as the Option Agreement may provide.
d. Limitation on Yearly Exercise: The Option Agreements shall
restrict the amount of ISO's which may become exercisable in any
calendar year (under this or any other ISO plan of the Company or an
Affiliate) so that the aggregate Fair Market Value (determined at
the time each ISO is granted) of the stock with respect to which
ISO's are exercisable for the first time by the Participant in any
calendar year does not exceed $100,000.
7. EXERCISE OF OPTIONS AND ISSUE OF SHARES.
An Option (or any part or installment thereof) shall be exercised by giving
written notice to the Company or its designee, together with provision for
payment of the full purchase price in accordance with this Paragraph for the
Shares as to which the Option is being exercised, and upon compliance with any
other condition(s) set forth in the Option Agreement. Such notice shall be
signed by the person exercising the Option, shall state the number of Shares
with respect to which the Option is being exercised and shall contain any
representation required by the Plan or the Option Agreement. Payment of the
purchase price for the Shares as to which such Option is being exercised shall
be made (a) in United States dollars in cash or by check, or (b) at the
discretion of the Administrator, through delivery of shares of Common Stock
having
a Fair Market Value equal as of the date of the exercise to the cash
exercise price of the Option and held for at least six months, or (c) at
the discretion of the Administrator, by delivery of the grantee's personal
note, for full, partial or no recourse, bearing interest payable not less
than annually at no less than 100% of the applicable Federal rate, as
defined in Section 1274(d) of the Code, with or without the pledge of such
Shares as collateral, or (d) at the discretion of the Administrator, in
accordance with a cashless exercise program established with a securities
brokerage firm, and approved by the Administrator, or (e) at the
discretion of the Administrator, by any combination of(a), (b), (c) and
(d) above. Notwithstanding the foregoing, the Administrator shall accept
only such payment on exercise of an ISO as is permitted by Section 422 of
the Code.
The Company shall then reasonably promptly deliver the Shares as to which such
Option was exercised to the Participant (or to the Participant's Survivors, as
the case may be). In determining what constitutes "reasonably promptly," it is
expressly understood that the issuance and delivery of the Shares may be delayed
by the Company in order to comply with any law or regulation (including, without
limitation, state securities or "blue sky' laws) which requires the Company to
take any action with respect to the Shares prior to their issuance. The Shares
shall, upon delivery, be evidenced by an appropriate certificate or certificates
for fully paid, non-assessable Shares.
The Administrator shall have the right to accelerate the date of exercise of any
installment of any Option; provided that the Administrator shall not accelerate
the exercise date of any installment of any Option granted to any Employee as an
ISO (and not previously converted into a Non-Qualified Option pursuant to
Paragraph 19) if such acceleration would violate the annual vesting limitation
contained in Section 422(d) of the Code, as described in Paragraph 6.B.d.
The Administrator may, in its discretion, amend any term or condition of an
outstanding Option provided (1) such term or condition as amended is permitted
by the Plan, (ii) any such amendment shall be made only with the consent of the
Participant to whom the Option was granted, or in the event of the death of the
Participant, the Participant's Survivors, if the amendment is adverse to the
Participant, and (iii) any such amendment of any ISO shall be made only after
the Administrator determines whether such amendment would constitute a
"modification" of any Option which is an ISO (as that term is defined in Section
424(h) of the Code) or would cause any adverse tax consequences for the holder
of such ISO.
34
8. RIGHTS AS A SHAREROLDER.
No Participant to whom an Option has been granted shall have rights as a
shareholder with respect to any Shares covered by such Option, except after due
exercise of the Option and tender of the full purchase price for the Shares
being purchased pursuant to such exercise and registration of the Shares in the
Company's share register in the name of the Participant.
9. ASSIGNABILITY AND TRANSFERABILITY OF OPTIONS.
By its terms, an Option granted to a Participant shall not be transferable by
the Participant other than (i) by will or by the laws of descent and
distribution, or (ii) as approved by the Administrator in its discretion and set
forth in the applicable Option Agreement. Notwithstanding the foregoing, an ISO
transferred except in compliance with clause (1) above shall no longer qualify
as an ISO. The designation of a beneficiary of an Option by a Participant, with
the prior approval of the Administrator and in such form as the Administrator
shall prescribe, shall not be deemed a transfer prohibited by this Paragraph.
Except as provided above, an Option shall be exercisable, during the
Participant's lifetime, only by such Participant (or by his or her legal
representative) and shall not be assigned, pledged or hypothecated in any way
(whether by operation of law or otherwise) and shall not be subject to
execution, attachment or similar process. Any attempted transfer, assignment,
pledge, hypothecation or other disposition of any Option or of any tights
granted thereunder contrary to the provisions of this Plan, or the levy of any
attachment or similar process upon an Option, shall be null and void.
10. EFFECT OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE" OR DEATH OR
DISABILITY.
Except as otherwise provided in a Participant's Option Agreement, in the event
of a termination of service (whether as an employee, director or consultant)
with the Company or an Affiliate before the Participant has exercised an Option,
the following rules apply:
a. A Participant who ceases to be an employee, director or consultant of
the Company or of an Affiliate (for any other reason than termination "for
cause', Disability, or death for which events there are special rules in
Paragraphs 11, 12, and 13, respectively), may exercise any Option granted
to him or her to the extent that the Option is exercisable on the date of
such termination of service, but only within such term as the
Administrator has designated in a Participant's Option Agreement.
b. Except as provided in Subparagraph (c) below, or Paragraph 12 or 13, in
no event may an Option intended to be an ISO, be exercised later than
ninety (90) days after the Participant's termination of employment.
c. The provisions of this Paragraph, and not the provisions of Paragraph
12 or 13, shall apply to a Participant who subsequently becomes Disabled
or dies after the termination of employment, director status or
consultancy, provided, however, in the case of a Participant's Disability
or death within ninety (90) days after the termination of employment,
director status or consultancy, the Participant or the Participant's
Survivors may exercise the Option within one year after the date of the
Participant's termination of service, but in no event after the date of
expiration of the term of the Option.
d. Notwithstanding anything herein to the contrary, if subsequent to a
Participant's termination of employment, termination of director status or
termination of consultancy, but prior to the exercise of an Option, the
Supervisory Board determines that, either or subsequent to the
Participant's termination, the Participant engaged in conduct which would
constitute 'cause', then such Participant
35
shall forthwith cease to have any right to exercise any Option.
e. A Participant to whom an Option has been granted under the Plan who is
absent from work with the Company or with an Affiliate because of
temporary disability (any disability other than a permanent and total
Disability as defined in Paragraph 1 hereof), or who is on leave of
absence for any purpose, shall not, during the period of any such absence,
be deemed, by virtue of such absence alone, to have terminated such
Participant's employment, director status or consultancy with the Company
or with an Affiliate, except as the Administrator may otherwise expressly
provide.
f. Except as required by law or as set forth in a Participant's Option
Agreement, Options granted under the Plan shall not be affected by any
change of a Participant's status within or among the Company and any
Affiliates, so long as the Participant continues to be an employee,
director or consultant of the Company or any Affiliate.
11. EFFECT OF TERMINATION OF SERVICE "FOR CAUSE".
Except as otherwise provided in a Participant's Option Agreement, the following
rules apply if the Participant's service (whether as an employee, director or
consultant) with the Company or an Affiliate is terminated "for cause" prior to
the time that all his or her outstanding Options have been exercised:
a. All outstanding and unexercised Options as of the time the Participant
is notified his or her service is terminated "for cause" will immediately
be forfeited.
b. For purposes of this Plan, "cause" shall include (and is not limited
to) dishonesty with respect to the Company or any Affiliate,
insubordination, substantial malfeasance or non-feasance of duty,
unauthorized disclosure of confidential information, breach by the
Participant of any provision of any employment, consulting, advisory,
nondisclosure, non-competition or similar agreement between the
Participant and the Company or any Affiliate, and conduct substantially
prejudicial to the business of the Company or any Affiliate. The
determination of the Administrator as to the existence of "cause" will be
conclusive on the Participant and the Company.
c. "Cause' is not limited to events which have occurred prior to a
Participant's termination of service, nor is it necessary that the
Administrator's finding of "cause" occur prior to termination. If the
Administrator determines, subsequent to a Participants termination of
service but prior to the exercise of an Option, that either prior or
subsequent to the Participant's termination the Participant engaged in
conduct which would constitute "cause," then the right to exercise any
Option is forfeited.
d. Any definition in an agreement between the Participant and the Company
or an Affiliate, which contains a conflicting definition of "cause' for
termination and which is in effect at the time of such termination, shall
supersede the definition in this Plan with respect to that Participant.
12. EFFECT OF TERMINATION OF SERVICE FOR DISABILITY.
Except as otherwise provided in a Participant's Option Agreement, a Participant
who ceases to be an employee, director or consultant of the Company or of an
Affiliate by reason of Disability may exercise any Option granted to such
Participant:
a. To the extent that the Option has become exercisable but has not been
exercised on the date of Disability; and
36
b. In the event rights to exercise the Option accrue periodically, to the
extent of a pro rats portion through the date of Disability any additional
vesting rights that would have accrued on the next vesting date had the
Participant not become Disabled. The prorate shall be based upon the
number of days accrued in the current vesting period prior to the date of
Disability.
A Disabled Participant may exercise such rights only within the period ending
one year after the date of the Participant's termination of' employment,
directorship or consultancy, as the case may be, notwithstanding that the
Participant might have been able to exercise the Option as to some or all of the
Shares on a later date if the Participant had not become Disabled and had
continued to be an employee, director or consultant or, if earlier, within the
originally prescribed term of the Option.
The Administrator shall make the determination both of whether Disability has
occurred and the date of its occurrence (unless a procedure for such
determination is set forth in another agreement between the Company and such
Participant, in which case such procedure shall, be used for such
determination). If requested, the Participant shall be examined by a physician
selected or approved by the Administrator, the cost of which examination shall
be paid for by the Company.
13. EFFECT OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT.
Except as otherwise provided in a Participant's Option Agreement, in the event
of the death of a Participant while the Participant is an employee, director or
consultant of the Company or of an Affiliate, such Option may be exercised by
the Participant's Survivors:
a. To the extent that the Option has become exercisable but has not been
exercised on the date of death; and
b. In the event rights to exercise the Option accrue periodically, to the
extent of a pro rats portion through the date of death of any additional
vesting rights that would have accrued on the next vesting date had the
Participant not died. The proration shall be based upon the number of days
accrued in the current vesting period prior to the Participant's date of
death.
If the Participant's Survivors wish to exercise the Option, they must take all
necessary steps to exercise the Option within one year after the date of death
of such Participant, notwithstanding that the decedent might have been able to
exercise the Option as to some or all of the Shares on a later date if he or she
had not died and had continued to be an employee, director or consultant or, if
earlier, within the originally prescribed term of the Option.
14. PURCHASE FOR INVESTMENT.
Unless the offering and sale of the Shares to be issued upon the particular
exercise of an Option shall have been effectively registered under the
Securities Act of 1933, as now in force or hereafter amended (the "1933 Act"),
the Company shall be under no obligation to issue the Shares covered by such
exercise unless and until the following conditions have been fulfilled:
a. The person(s) who exercise(s) such Option shall warrant to the Company,
prior to the receipt of such Shares, that such person(s) are acquiring
such Shares for their own respective accounts, for investment, and not
with a view to, or for sale in connection with, the distribution of any
such Shares, in which event the person(s) acquiring such Shares shall be
bound by the provisions of the following legend which shall be endorsed
upon the certificate(s) evidencing their Shares issued pursuant to such
exercise or such grant:
37
"The shares represented by this certificate have been taken for investment
and. they may not be sold or otherwise transferred by any person,
including a pledgee, unless (I) either (a) a Registration Statement with
respect to such shares shall be effective under the Securities Act of
1933, as amended, or (b) the Company shall have received an opinion of
counsel satisfactory to it that an exemption from registration under such
Act is then available, and (2) there shall have been compliance with all
applicable state securities laws."
b. At the discretion of the Administrator, the Company shall have received
an opinion of its counsel that the Shares may be issued upon such
particular exercise in compliance with the 1933 Act without registration
thereunder.
38
15. DISSOLUTION OR LIQUIDATION OF THE COMPANY.
Upon the dissolution or liquidation of the Company, all Options granted under
this Plan which as of such date shall not have been exercised will terminate and
become null and void; provided, however, that if the rights of a Participant or
a Participants Survivors have not otherwise terminated and expired, the
Participant or the Participant's Survivors will have the right immediately prior
to such dissolution or liquidation to exercise any Option to the extent that the
Option is exercisable as of the date immediately prior to such dissolution or
liquidation.
16. ADJUSTMENTS.
Upon the occurrence of any of the following events, a Participant's rights with
respect to any Option granted to him or her hereunder which has not previously
been exercised in full shall be adjusted as hereinafter provided, unless
otherwise specifically provided in the Participant's Option Agreement:
A. Stock Dividends and Stock Splits. If the shares of Common Stock shall be
subdivided or combined into a greater or smaller number of shares or if the
Company shall issue any shares of Common Stock as a stock dividend on its
outstanding Common Stock, the number of shares of Common Stock deliverable upon
the exercise of such Option shall be appropriately increased or decreased
proportionately and appropriate adjustments shall be made in the purchase price
per share to reflect such events. If additional shares or new or different
shares or other securities of the Company or other non-cash assets are
distributed with respect to such shares of Common Stock, the number of shares of
Common Stock deliverable upon the exercise of such Option may be appropriately
increased or decreased proportionately and appropriate adjustments may be made
in the purchase price per share to reflect such events.
B. Corporate Transactions. If the Company is to be consolidated with or acquired
by another entity in a merger, sale of all or substantially all of Company's
assets other than a transaction to merely change the state of incorporation (a
"Corporate Transaction"), the Administrator or the board of directors of any
entity assuming the obligations of the Company hereunder (the "Successor
Board"), shall, as to outstanding Options, either (i) make appropriate provision
for the continuation of such Options by substituting on an equitable basis for
the Shares then subject to such Options either the consideration payable with
respect to the outstanding shares of Common Stock in connection with the
Corporate Transaction or securities of any successor or acquiring entity; or
(ii) upon written notice to the Participants, provide that all Options must be
exercised (either to the extent then exercisable or, at the discretion of the
Administrator or, upon a change of control of the Company, all Options being
made fully exercisable for purposes of this Subparagraph), within a specified
number of days of the date of such notice, at the end of which period the
Options shall terminate; or (iii) terminate all Options in exchange for a cash
payment equal to the excess of the Fair Market Value of the Shares subject to
such Options (either to the extent then exercisable or, at the discretion of the
Administrator, all Options being made fully exercisable for purposes of this
Subparagraph) over the exercise price thereof.
C. Recapitalization or Reorganization. In the event of a recapitalization or
reorganization of the Company other than a Corporate Transaction pursuant to
which securities of the Company or of another corporation are issued with
respect to the outstanding shares of Common Stock, a Participant upon exercising
an Option after the recapitalization or reorganization shall be entitled to
receive for the purchase price paid upon such exercise the number of replacement
securities which would have been received if such Option had been exercised
prior to such recapitalization or reorganization.
D. Modification of ISO's. Notwithstanding the foregoing, any adjustments made
pursuant to Subparagraph A, B or C above with respect to ISO's shall be made
only after the Administrator determining whether such adjustments would
constitute a "modification" of such ISO's (as that term is defined in Section
424(h) of the
39
Code) or would cause any adverse tax consequences for the holders of such ISO's.
If the Administrator determines that such adjustments made with respect to ISO's
would constitute a modification of such ISO's, it may refrain from making such
adjustments, unless the holder of an ISO specifically requests in writing that
such adjustment be made and such writing indicates that the holder has full
knowledge of" consequences of such "modification" on his or her income tax
treatment with respect to the ISO.
17. ISSUANCES OF SECURITIES.
Except as expressly provided herein, no issuance by the Company of shares of
stock of any class, or securities convertible into shares of stock of any class,
shall affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares subject to Options. Except as expressly provided
herein, no adjustments shall be made for dividends paid in cash or in property
(including without limitation, securities) of the Company.
18. FRACTIONAL SHARES.
No fractional shares shall be issued under the Plan and the person exercising
such right shall receive from the Company cash in lieu of such fractional shares
equal to the Fair Market Value thereof.
19. CONVERSION OF ISO's INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISO's.
The Administrator, at the written request of any Participant, may in its
discretion take such actions as may be necessary to convert such Participant's
ISOs (or any portions thereof) that have not been exercised on the date of
conversion into Non-Qualified Options at any time prior to the expiration of
such ISOs, regardless of whether the Participant is an employee of the Company
or an Affiliate at the time of such conversion. At the time of such conversion,
the Administrator (with the consent of the Participant) may impose such
conditions on the exercise of the resulting Non-Qualified Options as the
Administrator in its discretion may determine, provided that such conditions
shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to
give any Participant the right to have such Participant's ISO5 converted into
Non-Qualified Options, and no such conversion shall occur until and unless the
Administrator takes appropriate action. The Administrator, with the consent of
the Participant, may also terminate any portion of any ISO that has not been
exercised at the time of such conversion.
20. WITHHOLDING.
In the event that any federal, state, or local income taxes, employment taxes,
Federal Insurance Contributions Act ("F.LC.A.") withholdings or other amounts
are required by applicable law or governmental regulation to be withheld from
the Participant's salary, wages or other remuneration in connection with the
exercise of an Option or a Disqualifying Disposition (as defined in Paragraph
21), the Company may withhold from the Participant's compensation, if any, or
may require that the Participant advance in cash to the Company, or to any
Affiliate of the Company which employs or employed the Participant, the
statutory minimum amount of such withholdings unless a different withholding
arrangement, including the use of shares of the Company's Common Stock or a
promissory note, is authorized by the Administrator (and permitted by law). For
purposes hereof, the fair market value of the shares withheld for purposes of
payroll withholding shall be determined in the manner provided in Paragraph I
above, as of the most recent practicable date prior to the date of exercise. If
the fair market value of the shares withheld is less than the amount of payroll
withholdings required, the Participant may be required to advance the difference
in cash to the Company or the Affiliate employer. The Administrator in its
discretion may condition the exercise of an Option for less than the then Fair
Market Value on the Participants payment of such additional withholding.
40
21. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION.
Each Employee who receives an ISO must agree to notify the Company in writing
immediately after the Employee makes a Disqualifying Disposition of any shares
acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is
defined in Section 424(c) of the Code and includes any disposition (including
any sale or gift) of such shares before the later of (a) two years after the
date the Employee was granted the ISO, or (b) one year after the date the
Employee acquired Shares by exercising the ISO, except as otherwise provided in
Section 424(c) of the Code. If the Employee has died before such stock is sold,
these holding period requirements do not apply and no Disqualifying Disposition
can occur thereafter
22. TERMINATION OF THE PLAN.
The Plan will terminate on May 31, 2018, the date which is ten years from the
earlier of the date of its adoption by the Board of Directors and the date of
its approval by the shareholders. The Plan may be terminated at an earlier date
by vote of the shareholders or the Board of Directors of the Company; provided,
however, that any such earlier termination shall not affect any Option
Agreements executed prior to the effective date of such termination.
23. AMENDMENT OF THE PLAN AND AGREEMENTS.
The Plan may be amended by the shareholders of the Company. The Plan may also be
amended by the Administrator, including, without limitation, to the extent
necessary to qualify any or all outstanding Options granted under the Plan or
Options to be granted under the Plan for favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code, and to the extent necessary to
qualify the shares issuable upon exercise of any outstanding Options granted, or
Options to be granted, under the Plan for listing on any national securities
exchange or quotation in any national automated quotation system of securities
dealers. Any amendment approved by the Administrator which the Administrator
determines is of a scope that requires shareholder approval shall be subject to
obtaining such shareholder approval. Any modification or amendment of the Plan
shall not, without the consent of a Participant, adversely affect his or her
rights under an Option previously granted to him or her. With the consent of the
Participant affected, the Administrator may amend outstanding Option Agreements
in a manner which may be adverse to the Participant but which is not
inconsistent with the Plan. In the discretion of the Administrator, outstanding
Option Agreements may be amended by the Administrator in a manner which is not
adverse to the Participant.
24. EMPLOYMENT OR OTHER RELATIONSHIP.
Nothing in this Plan or any Option Agreement shall be deemed to prevent the
Company or an Affiliate from terminating the employment, consultancy or director
status of a Participant, nor to prevent a Participant from terminating his or
her own employment, consultancy or director status or to give any Participant a
right to be retained in employment or other service by the Company or any
Affiliate for any period of time.
25. GOVERNING LAW.
This Plan shall be construed and enforced in accordance with the law of the
State of New York and The Netherlands.
41
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:
-28-42
POWER OF ATTORNEY AND PROXY
The undersigned, hereby grants power of attorney and proxy, jointly and
everallyseverally to:
Avraham Dan
Ran Langer
for and in name, place and stead of the undersigned to attend the Annual General
meeting 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, December
6, 2006,17, 2008, 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.
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 2005.2007.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Election of twothree Managing Directors.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
4. Election of six Supervisory Directors.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
5. AuthorizationRatification of appointment of Independent Auditors 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.Company.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
-29-
6. Authorization to purchase sharesDischarge from liability of common stock.the Management and Supervisory Boards.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
Signed in Amstelveen, The Netherlands this 6th day7. Adoption of November 2006.the 2008 Employee, Director and Consultant Stock Option Plan.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
43
8. Adoption of an Amendment to the Articles of Association.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
9. Authorization to the Supervisory Board to issue shares of Common Stock.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
10. Authorization for the Company to repurchase shares.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
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
- ------------------------------2008
By:
- ------------------------------
Name:
- ------------------------------
Title:
- ------------------------------
-30-44
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
-33-2007
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, 20052007
OR
[ ][_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
FOROR
[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE TRANSITION PERIOD FROM TOSECURITIES
EXCHANGE ACT OF 1934
Date of event requiring this shell company report . . . . . . .
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)
Avraham Dan, Tel: +31-20-3471077,
Email: dan@ictsusa.com, Address: Same as above
- --------------------------------------------------------------------------------
(Name, Telephone, E-mail and/or Facsimile number
and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each Class: None 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 .450.45 Euro per share
--------------------------------------------------------
Title- --------------------------------------------------------------------------------
(Title of ClassClass)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
Title- --------------------------------------------------------------------------------
(Title of Class
-34-
Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of December 31, 2005:the close of the period covered by the annual
report: 6,672,980
---------
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
YES [_] NO [X]
If this report is an annual or transition report, indicate by check mark if the
registrant is not required to file reports pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934.
YES [_] NO [X]
Note - Checking the box above will not relieve any registrant required to file
reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
from their obligations under those sections.
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 whether the registrant is a large accelerated filer, am
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark which basis of accounting the registrant has used
to prepare the financial statements included in this filing:
U.S. GAAP [X] International Financial Reporting Standards as issued Other [_]
by the International Accounting Standards Board [_]
If "Other" has been checked in response to the previous question, indicate
by check mark which financial statement item the registrant has elected to
follow.
Item 17 [ ][_] Item 18 [_]
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
YES [_] NO [X]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST
FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
YES [_] NO [_]
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 thatthose actual results may differ materially from those included
within the Forward-Looking Statements as a result of various factors.
-35--2-
Table of Contents
Part I 4
- --------------
Item 1 Identity of Directors, Senior Management and Advisers 4
Item 2 Offer Statistics and Expected Timetable 4
Item 3 Key Information 4
Item 4 Information on the Company 11
Item 5 Operating and Financial Review and Prospects 20
Item 6 Directors, Senior Management and Employees 35
Item 7 Major Shareholders and Related Party Transactions 43
Item 8 Financial Information 47
Item 9 The Offer and Listing 49
Item 10 Additional Information 50
Item 11 Quantitative and Qualitative Disclosures about Market Risk 62
Item 12 Description of Securities other than Equity Securities 62
Part II 62
- ---------------
Item 13 Defaults, Dividend Arrearages and Delinquencies 62
Item 14 Material Modifications to the Rights of Security Holders
and the Use of Proceed 62
Item 15 Controls and Procedures 62
Item 16A Audit Committee Financial Expert 64
Item 16B Code of Ethics 64
Item 16C Principal Accountant Fees and Services 64
Item 16D Exceptions from Listing Standards for Audit Committees 64
Part III 64
- --------
Item 17 Financial Statements 64
Item 18 Financial Statements 64
Item 19 Exhibits 65
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--3-
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, airport authorities and airport authorities.governments. 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.others outside the
U.S.
Discontinued Operations
In December 2005, the company'sCompany's management decided to cease two of its
segments operations and to focus on the main core business of the company -company; the
aviation security activities.activities and aviation related services.
Following the decision, the companyCompany ceased its operations in the Leasing
and Entertainment segments. The leased equipment was sold to the lessee and the
entertainmentsentertainment sites were closed.closed as of December 31, 2005.
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 USU.S. 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)thousands)
- --------------------------------------------------------------------------------
Continuing Operations 2007 2006 2005 2004 2003
2002
- --------------------- ---- ---- ---- ---- ----
Cash and cash equivalents $ 5,927 $ 3,224 $ 7,404 $ 32,378$2,095 $1,743 $5,927 $3,224 $7,404
Current Assets 15,771 17,444 24,962 23,529 30,002
72,606
Total Assets 24,230 26,425 31,676 37,507 55,914
97,763
Current Liabilities (25,435) (20,395) (24,747) (55,920)28,216 29,249 25,435 20,395 24,747
Shareholders (Equity) 5,148 (21,506) (46,961) (61,378)
DeficiencyEquity
(Deficiency) (20,610) (19,002) (5,148) 21,506 46,961
Discontinued Operations
- -----------------------
Total Assets $ 537 $ 17,455 $ 28,586 $ 27,681$2,873 $130 $537 $17,455 $28,586
Total Liabilities (11,424) (8,786) (8,601) (7,817)10,619 13,441 11,424 8,786 8,601
- --------------------------------------------------------------------------------
-37--4-
Selected Financial Data Statement of Operations
The following table summarizes certain statement of operations data for
ICTS for the years ended December 31, 2007, 2006, 2005, 2004, 2003, 2002 and 2001:
(U.S Dollars in thousand2003:
(U.S Dollars in thousands except per share data)
Year ended December 31,
---------------------------------------------------------------------
2007 2006 2005 2004 2003 2002 2001
----------- ----------- -------- ----------- -----------2003*
--------- --------- --------- --------- ---------
REVENUES $ 57,713 $ 57,993 $ 67,933 $ 278,561 $ 212,137$64,780 $60,791 $57,713 $57,993 $67,933
COST OF REVENUES 52,397 55,284 53,721 52,825 52,557
212,439 189,925
----------- ----------- ----------- ----------- -------------------- --------- --------- --------- ---------
GROSS PROFIT 12,383 5,507 3,992 5,168 15,376 66,122 22,212
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,338 14,878 11,690 12,201 8,547 25,635 18,641
IMPAIRMENT OF ASSETS AND GOODWILL 797 9,156 820
----------- ----------- ----------- ----------- -----------9,344
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (955) (9,371) (7,698) (7,033) 6,032 31,331 2,751
FINANCIAL INCOME (EXPENSES) - net (3,334) (714) (908) (452) 4,118 3,046 1,977
OTHER INCOME (EXPENSES) - net (246) 1,241 147 (2,907) (353)
41,229 29,520--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES (4,535) (8,844) (8,459) (10,392) 9,797 75,606 34,248
INCOME TAXES BENEFIT (EXPENSE) (966) (846) (2,387) 1,529 (3,910) (16,442) (4,919)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net (2,479) (132) (486) (1,625) (6,661)
(1,807) (395)
MINORITY INTERESTS IN PROFIT OF
SUBSIDIARIES (2,735)
----------- ----------- ----------- ----------- -----------
PROFIT (LOSS)--------- --------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS (7,980) (9,822) (11,332) (10,488) (744) 57,357 26,198(774)
DISCONTINUED OPERATIONS:
LossProfit (Loss) from discontinued
operations, net of tax Benefitexpenses
(Benefit) of $2,525,
$1,655$(2,470), $2,476,
$(2,525), $(1,655) and $795$(795)
in 2007, 2006, 2005, 2004 and
2003, respectively, Includesincludes
loss of $4,7774$4,774 on sale of assets
to a related party onin 2005, and
after share in loss of associated
company of $36 and $81 in 2005 and
2004, respectively 5,422 (4,248) (13,548) (15,474) (18,130)
(542)
----------- ----------- ----------- ----------- -----------
INCOME (LOSS)--------- --------- --------- --------- ---------
LOSS FOR THE YEAR (2,558) (14,070) (24,880) (25,962) (18,904)
$ 56,815 $ 26,198
----------- ----------- ----------- ----------- -----------========= ========= ========= ========= =========
OTHER COMPREHENSIVE INCOME:INCOME (Loss):
Translation adjustments 80 (399) (1,560) 1,043 3,456 710 (1,811)
Unrealized gains (losses) on marketable
securities 497 104 (214) (616) 794 731 (345)
Reclassification adjustment for losses
for available for sale securities
included in net income 237
(771) 368--------- --------- --------- --------- ---------
577 (295) (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$(1,981) $(14,365) $(26,654) $(25,535) $(14,417)
========= ========= ========= ========= =========
PROFIT (LOSS) PER SHARE:
Loss from continued operations:
Loss per common share - basic $(1.22) $(1.51) $(1.74) $(1.61) $(0.12)
========= ========= ========= ========= =========
(Loss) per common share - diluted $(1.22) $(1.51) $(1.74) $(1.61) $(0.12)
========= ========= ========= ========= =========
Profit (Loss) from continueddiscontinued operations:
Profit (Loss) per common share - basic $ (1.74) $ (1.61) $ (0.12) $ 8.93 $ 4.18
=========== =========== =========== =========== ===========$0.83 $(0.65) $(2.07) $(2.37) $(2.78)
========= ========= ========= ========= =========
Profit (Loss) per common share - diluted $ (1.74) $ (1.61) $ (0.12) $ 8.88 $ 4.09
=========== =========== =========== =========== ===========
(Loss) from discontinued operations:
(Loss)$0.83 $(0.65) $(2.07) $(2.37) $(2.78)
========= ========= ========= ========= =========
NET LOSS:
Loss per common share - basic $ (2.07) $ (2.37) $ (2.78) $ (0.08)
=========== =========== =========== ===========
(Loss)$(0.39) $(2.16) $(3.81) $(3.98) $(2.90)
========= ========= ========= ========= =========
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
=========== =========== =========== =========== ===========$(0.39) $(2.16) $(3.81) $(3.98) $(2.90)
========= ========= ========= ========= =========
Weighted average shares of common
stock outstanding 6,528,100 6,528,100 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 6,528,100 6,528,100 6,524,250 6,513,100
6,453,447 6,412,535
=========== =========== =========== =========== ==================== ========= ========= ========= =========
-38-* Some numbers of 2003 were reclassified to match 2004-2007 presentations.
-5-
Risk FactorsFactors.
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.
TwoOne major eventsevent 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 governmentGovernment through
the Transportation Security Administration (the "TSA")TSA took over aviation security services in the U.S. in November 2002. As a
result of these events,this event, 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 basis, 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.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 BusinessBusiness.
The Security Act provides that all aviation security services in the U.S.
will be handled by the federal governmentFederal Government through the TSA. As a result of the
passage of the Security Act the TSA took over aviation security in the U.S.
Forsince the year ended December 31, 2002, the TSA accounted for 73%end 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.2002. 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 but 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.
-6-
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.Federal Claims. The Court has rejecteddecided against the Company. The Company appealed
this decision and the U.S. Governments motion to dismissCourt of Appeals for the Complaint for failure to state a cause of action. A motion for reconsideration
has been filed byFederal Circuit affirmed the
defendant, but denied. There can be no assurance as tolower court's ruling against the ultimate outcome of such claim and whether or not Huntleigh will be successful
in prosecuting the same.Company.
We face significant potential liability claims.
As a result of the September 11th terroriststerrorist 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$2.6, $14.1, $24.9, $26.0 and
$19$18.9 million in 2007, 2006, 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 $3.6, $7.6, $5.2, $1.2 million and $19.3 million in
2007, 2006, 2005, 2004 and 2003, respectively, and at December 31, 20052007 the
Company had a working capital deficiency of $2.7$11.7 million and negative equity of
20.6 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,
2005,2007, the Company had revenue of $57,713,000$64.8 million and a nettotal loss of $24,880,000.$2.6 million
as well as a net working capital deficiency and negative equity.
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 yearIRS Audit.
The Company's Subsidiary is currently undergoing an IRS audit for the
Company's subsidiary ICTS USA, Inc. filed a refund claim
withyears ended December 31, 2002, 2003 and 2004. Should the Internal Revenue Service ("IRS") in an amount in excess of $2 million.
The refund has not yet been received byaudit conclude that the
Company. The Company made a demandowes significant funds 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, willcould have a materialan adverse effect on
the financial condition of 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
-7-
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.
Our contracts with airports or airlines may be canceled or not renewed.
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. In addition consolidation in the airline industry
could also result in a loss of customers. 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. There is a material contract that will expire
in 2009 and the Company is in the process of negotiations to renew the contract.
If the negotiations will not be in the Company's favor it will have a material
affect on the Company's financial results.
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. Currently our customers' financial results may suffer because of
the increase in oil prices which has affected also our situation as service
provider. 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.
UnderAs part of 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
-8-
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 governmentgovernmental
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. During 2007 the TSA took over part of Huntleigh's business
regarding the ticket checkers. Annual expected loss of revenues is approximately
$5 million.
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 basesdatabases and technologies utilizing
such data basesdatabases 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
-9-
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.
CertainAs of December 31, 2007, three groups of shareholders, officers and
directors own approximately 63%81.5% of our shares; theirshares (including options that are in
the money and immediately exercisable). 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%approximately
56% of our issued and outstanding common stock. As a result of such ownership,
and 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 any other
main shareholder, 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 Thethe Netherlands.
As a Netherlands "Naamloze Vennootschap" (N.V.) public limited liability
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, 2001December 6, 2006, 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 Thethe Netherlands. Our public
shareholders may have more difficulty in protecting their interests in the face
-10-
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. judgmentjudgments may not be enforceable in Thethe Netherlands.
A significant number of our assetsactivities are located outside the United
States. In addition, members of the Management and Supervisory Boards [andand
certain experts named herein are residents of countries other than the United
States].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 Thethe 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 Thethe Netherlands. In order to enforce any
United States judgment obtained against us, proceedings must be initiated before
a court of competent jurisdiction in Thethe Netherlands. A court in Thethe 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 Thethe 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 Thethe Netherlands or countries other than the United States. In
addition, a court in Thethe 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 Thethe Netherlands.
Item 4. Information on the Company
History and Development of the Company.
Unless the context indicates otherwise, all references herein to the
"Company" or "ICTS" include ICTS International N.V. ("ICTS" or the "Company"), and its consolidated
subsidiaries.
Aviation Security Business.
ICTS is a public limited liability company organized under the laws of The
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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 Thethe 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
Holland, 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 and limited security 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 governmentFederal 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 Thethe 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").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 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 at that time from its European operations,
except for its operations in the Netherlands and Russia.
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 re-enter 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.
Since 2005, the company re-entered the aviation security business in
Europe by signing contracts with U.S. carriers. Following these contracts I-SEC
established new subsidiaries throughout Europe, in the Netherlands, France,
England, Spain, Hungary, Germany and other countries.
Leasing Business.
In the second quarter of 2002, the companyCompany 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
-12-
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, asEntertainment Business.
On December 23, 2003, the non-competition restrictions, relatedCompany, 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 was a company in which a principal
shareholder of the Company, at the time, 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-offs against certain debts owed by ITA to the
saleCompany, cash and notes. As a part of the European aviation security operations as mentioned above, expired,transaction, certain agreements made
between the Company made a strategic decision to reenterand ITA in 2001 were terminated, with the European aviation security
market. In March 2005result that the
Company establishedwas no longer committed to involve ITA in its existing and future
entertainment projects. Prior to entering into the transaction the Company
obtained a wholly owned subsidiary, I-SEC
International Security B.V, under which allfairness opinion as to the European aviation security
activities provided by ICTS are operated.
During 2005fairness of the consideration and 2006 the
company re-entered into aviation security
businesstransaction to the Company.
Shortly after the facilities were opened, and based on its performances,
the Company's management revaluated these 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 Europe by signing contracts2003 and 2004 totaling $20.8 million with U.S. carriers. Following these
contracts I-SEC established new subsidiaries throughout Europe, in France,
England, Spain, Germany and other countries.respect to its
entertainment investments.
In 2005 the companyCompany 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. No discussion has been
made as to whether the Niagara Falls location should be closed as well.
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, andin the development of technological
services.USA. 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; throughairports in Europe. Through Huntleigh it supplies aviation
services and limited security services in the USA.
Business Strategy
ICTS is currently pursuing the following business strategy:
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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.Europe.
ICTS, through I-SEC International Security B.V., supplies aviation
security at airports. Huntleigh supplies aviationairports, airlines and governments in Europe. During 2007, I-SEC was
hired to provide and extend the security services it provides to Schiphol
Airport in Amsterdam. This contract is for a period of five years and is an
important breakthrough for the USA.
In 2002Company. ICTS increased its stakeNAS had a contract serving one
customer which expired in its Dutch affiliate, ProCheck International
to 100%.February 2008. 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 CompanyNAS 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.being liquidated.
U.S. Operations.
ICTS continues to provide limited security services and non-security
aviation services in the U.S. Other Investments.
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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.through its subsidiary, Huntleigh.
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.devices, consulting services, public transportation, security
consulting and training.
Following the sale, ICTS primarily providesprovided 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 reentryre-entry and
penetration into the international aviation security market. This phase,
executed in parallel to the expansion of I-SEC'sthe Company'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);UK; Paris,
France (Charles de Gaulle);France; Cologne, Germany; Barcelona, Spain; Budapest, Hungary; Edinburgh,
Scotland and Edinburgh, Scotland.more. 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 916 locations in
Europe, through 9 subsidiaries.Europe. Additionally, I-SEC is providing aviation security consulting services
at airports in the Asia PacificAsia-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 security and
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 3532 airports in 26 states which were not
affected by the enactment of the Security Act.25 states.
The limited security services provided by Huntleigh involves the
following:
o Charter FlightsFlight Screening for Airlines - which includes
security check of passenger'spassengers' body and carry-on.carry-on items.
o Ticket Checks - checkscheck of the boarding authorization of
passengers-14-
passenger and comparecompares them to passenger ID before allowing
the passenger to pass through the checkpoint. This service was
provided until the end of 2007 and then it was taken away by
the TSA.
o Cargo Security Screening - for some international and domestic
carriers.
Each of the non-aviation securitynon-security services involves one of the following specific
job classifications:
Agent Services For Airlines.
Agent services include: Passenger Servicepassenger service, ground handling and Baggage Service.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.cabins.
Maintenance.
Huntleigh provides that workers to maintain equipment in one airport.
Aircraft Search.
Search of the entire aircraft to detect dangerous objects.
Ramp Services.
Ramp services include:
o directing the aircraft into the arrival gate and from the
departure gate
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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.the baggage room and vice
versa.
Shuttle Service.
Huntleigh shuttles airline crews from their hotels to the aircraft and
vice versa 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
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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 manysome 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 electricianselectric carts 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 ServicesServices.
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.locations.
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 SolutionsSolutions.
The accumulated know-how and expertise of ICTS in the implementation of
computer basedcomputer-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.
Technology Initiatives.
I-BOX.
I-BOX, a unique technological platform developed by the Company, comprises
one of the main contributors to operational efficiency. It is an advanced mobile
unit that can be implemented with multiple choices of software packages. The
APS system is currently being operated by ICTS under
contract for services provided by ICTS Europe,I-BOX systems provides an unaffiliated third party,unparalleled level of performance while reducing
processing times to major United States airlines on flights from Europea minimum, thus eliminating related delays and avoiding
inconvenience to the United States.
New Technology Initiatives.
IP@SSpassengers. The I-BOX system has been deployed successfully
in various locations around the world, providing our customers with enhanced
security operations.
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
-16-
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 TravelDocTravel Check.
Automated Travel DocCheck is a technologically upgraded version of TravelDocTravel Doc
offered either as software only, or as a complete software and hardware package.
It verifies that the passengers' travel documents fully comply witwith the
requirements of countries of destination and transit prior to embarkation, and
also facilitates the detection of forged travel documents. Automated TravelDocTravel
Check enhances the level of security, assists in combating illegal immigration
and reduces or mitigates associated civil penalties for airlines.
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APIS+.
APIS+ is a technologically upgraded version of APRIS.APIS. It facilitates
compliance with all requirements of Advance Passenger informationInformation 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 a 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.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,Travel Check, APIS+, the Company's solution for banks, and
more.
Bank Client Security and regulatory Compliance SolutionSolution.
ICTS, through its subsidiary, ICTSI-SEC Technologies USA, Inc.B.V., 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 ICTSICTS's numerous years of experience in the detection
of suspicious signs and in advanced document checks.
Consulting, Auditing and TrainingTraining.
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
-17-
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 CustomersCustomers.
In 2002, the TSA accounted for 73% of ICTS's total revenues. In 2005,
2004, and 2003,2007 ICTS had over eight main clients, which clients accounted for over 50%75% of ICTS's
aviation services revenues, in over 4050 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-
Operation.
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, a private Dutch company. The lease payments provided for in 2005 totaled
in the amount of (euro)2.3 million (atEuro (as of 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 totaledtotaling $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 paypaid to ICTS advanced lease installments of $1millon.$1 million. The
payment of the purchase price will beshould have been reduced by advance payments on
lease installments of $1million$1 million 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 $1lessee 1
million Euros to be repaid on or before June 30, 2006. All the loanEuro that was repaid untilby May 18, 2006. The selling of the leasing equipment
terminatesterminated the leasing activities of ICTS.
CompetitionSales.
Sales in the U.S.
In 2007, 72% of the revenues of ICTS from continuing operations were
derived in the U.S. compared to 77% in 2006.
Sales in Europe.
In 2007, 26% of the revenues of ICTS from continuing operations were
derived in Europe compared to 23% in 2006. Contracts for aviation security
services in various locations are obtained through competitive bids that are
issued by the applicable airport authorities, airlines or agencies. The Company
expects that in the next few years, the European activities will grow.
Marketing of Security Systems and Technology.
ICTS intends to market its technologies by establishing projects with
airports and airlines.
Competition.
Competition in the aviation security industry as well as in the
non-security related aviation services industry is intense. Many of our
-18-
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 MattersMatters.
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 security 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 as of December 31,
2007. (Exhibit 8):
ICTS USA, Inc., New (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.
I-SEC Technologies B.V. (The(the Netherlands - 100%) ICTS Technologies USA, Inc. (Delaware - 100%and its
subsidiaries (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%and its
subsidiaries (100%).
Property, Plant and Equipment.
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, 2007, 2006 and 2005 2004were $1,191, $1,217 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.-19-
Future minimum lease payments under long-term leases from continued
operations are as follows:
December 31, 2005
(in thousand)
--------------------------------------
Continuing Discontinued
Year
Operations Operations
---------- ------------ ----------
2006 $ 708 $ 1,008
2007 297 1,053--------
2008 95 1,099697
2009 27 1,099699
2010 22 1,148653
2011 and thereafter 10,289
------- -------
$ 1,149 $15,696
======= =======305
2012 78
------
$2,432
======
During 2002, subsidiaries from the Entertainment segment signed rent contracts
for 1517 years. As of December 2005, the company decided to discontinue the
operations of the Entertainment segment. The Company has an accrual for future
lease payments fromrent, regarding its discontinued operations stems from this liability.Entertainment operations. The Company aggregated and
capitalized the whole liability using an interest ratetotal accruals as
of 7.25%. Thus the
liability totaled to $9,701. The current maturities for this amount total at December 31, 20052007 and 2006 totaled $8,530 and $10,125, respectively. The
accruals have been updated according to $942. Although the amount was fully allocated,legal claims of the Company
is looking for alternative solutions regardinglandlord against
the contracts terms. ICTS is
guaranteeing those contracts.Company.
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 the U.S. 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,
-20-
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
governmentGovernment, 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.
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-competition restrictions in the sale agreement, ICTS
has fully divested itself at that time 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 contracts throughout Europe with U.S. carriers
and has established subsidiaries in different locations.
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.
Actual results may differ from these estimates. 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, 20052007 for a summary of all of ICTS's significant
accounting policies.
Discontinued Operations:
1) On December 28, 2005 the Company sold its lease equipment to the
lessee and terminated its business in the Lease segment. The loss
associated with the selling of the equipment totaled to $4,774.
2) After reviewing the financial results of the Entertainment segment,
the Company decided in December 2005 to cease operations. As a
result of this decision, as of December 31, 2007 and 2006, the
Company accrued $8,530 and $10,125, respectively, for future rent
regarding its Entertainment locations. The amounts were accrued
according to claims the landlord prosecuted against the Company, and
which are under litigation.
Pursuant to Statement of Financial Accounting Standard ("FAS") No.144 of
the Financial Accounting Standard Board of the United States (the "FASB"),
"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 discontinued
operations were presented separately from the continuing operations, including
the comparative numbers of the previous years.
Goodwill
As of January 1, 2002, pursuant to FAS No.142 of the FASB, "Goodwill and
-21-
Other Intangible Assets", goodwill is no longer amortized but rather is tested
for impairment annually. The Company considershas designated December 31 of each year as
the date on which it will perform its most significant accounting policiesannual goodwill impairment test.
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 $797,000.
In 2004, as a result of the impairment of the Entertainment projects,
management wrote-off the goodwill related to the Entertainment acquisition of
$5.3 million.
At December 31, 2007 goodwill was $314 and reflects the excess of the
purchase price of subsidiaries acquired over the fair value of net assets
acquired and liabilities assumed. During 2007, 2006 and 2005, there were no
additional goodwill write-offs. 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, the functional currency of ICTS and its U.S.
operations is the U.S. Dollar because substantial 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 FAS No. 52 of the 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.
Impairment in value of long-lived assets
ICTS has adopted FAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets", effective January 1, 2002. FAS 144 requires that
long-lived assets, held and used by an entity, be those
discussed below.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.
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 Explore's facilities in Baltimore, Maryland and
Atlantic City, New Jersey in the amount of $7.5 million and leased equipment of
$6 million (all of which are discontinued operations). As a result, an
impairment loss totaling $13.5 million was recognized.
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
-22-
leased equipment in an amount of $2 million and with the entertainment sites in
the amount of $8.1 million (all of which are discontinued operations). As a
result, an impairment loss totaled to $10.1 million was recognized.
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-
As of December 31, 2006, the accounts
receivable trade included $2.9 million due from the TSA. As of December 31,
2007, this amount was re-classified as long term receivable.
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 the underpayments amounted to $7.1 million. HuntleighThis
complaint was amended to $17.5 million by adding fringe benefits. During 2007,
the claim of the DOL has filed a motionbeen settled 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$3 million payable out of any
settlement with the position it
is taking. The Company has madeTSA. A long term receivable of $2.9 million and a provisionlong term
liability of $3 million regarding this settlement are shown in its financial statements in an
amount the Company deemed sufficient to account for its exposure for the above
claim.2007
consolidated financials.
Legal Proceedings
As a result of the September 11th terroriststerrorist attacks, numerous lawsuits
have commenced against Huntleigh and ICTS. Huntleigh hasand ICTS have been named in
approximately 7064 and 61 lawsuits, and ICTS in approximately 70 lawsuits.respectively. 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 beginhaving begun on September 12, 2006. A number of these cases have
been settled or are in the process of being settled or dismissed at no cost to
the Company.
Although these are the only claims brought against Huntleigh and ICTS with
respect to the terrorist attacks of September 11, 2001, Huntleigh and ICTS
-23-
anticipate additional related claims. See "Risk Factors-Potential For Liability
Claims."
Under current legislation Huntleigh and one other security company have
theirhas its liability limited to the
amount of insurance coverage that they carry.it carries. 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 Motionmotion to Dismissdismiss 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.held and the court has decided against the Company. The
company isCompany appealed the decision. In May 2008 the U.S. Court of Appeals for the
Federal Circuit has affirmed the lower court's ruling against the Company.
The Company was in dispute with Fraport A.G. International Airport
Services Worldwide in relation to alleged unlawful use of the letter combination
"ICTS" by the company.Company. Fraport initiated proceedings before the district court
of Amsterdam, which are still pending.Amsterdam. The principal amount claimed is (euro)57.65 million Euros ($68.1 million
as of December 31, 2005). However,During 2008, this claim is based on
an alleged incorrect interpretation ofdispute has been settled without any
liability to 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.Company.
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 pendingwas decided against the Company in a New Jerseyan 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-
awarding Avitecture
$194 plus arbitration costs of $6.
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 inarbitrator awarded
Turner $956 plus interest and costs, which award was affirmed on appeal. As of
December 31, 2007 and 2006, $956 and $970 were accrued, respectively. On or
about October 9, 2007, Explore filed a suggestion of bankruptcy with the New
Jersey arbitration proceeding. An arbitrator has been assigned
toSuperior Court. The Court thereafter stayed the case soproceedings and dismissed
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 amountaction without prejudice as a result of the claim andbankruptcy filing. To date,
Turner has not moved to challenge Turner's right to make any
demand for payment. A motion for summary judgment has been made by Turner andre-instate or reopen 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.case.
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 arbitratorThis matter 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 supportsettled for its opposition to Barlo's claim and to support a
potential motion for summary judgment.$10.
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 ODRAin mediation.
Huntleigh intends to vigorously challenge the TSA's claim which it asserts
-24-
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
Judgmentsummary
judgment against the TSA. ODRA has granted Huntleigh's motion for partial
Summary Judgmentsummary 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$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,action 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 yearbeen
denied.
In 2005 the Company's subsidiary ICTS USA, Inc. filed a refund claim with
the Internal Revenue Service ("IRS") in an amount in excess of $2$2.4 million
which was to be reflected on the December 31, 2005 year end financial statements
as a receivable. The refund hashad 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 investigationIn January 2008, the
Company believeswas advised 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 IRScurrent investigation prove unsatisfactory towas withdrawn, and the
Company this will havereceived the $2.5 million refund and $373 of interest.
In January 2008 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 refundjudgment in the amount of $2,470,365. In addition,$2,559, was awarded in favor
of the landlord and against ITA Baltimore and ICTS International, N.V. The
Company has filed an administrative claimappeal against the IRS in order to recover the same refund as well
as damages.this judgment.
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 landlordlitigation was ablereopened in state court in January 2008
and is still on-going. The amount claimed against ITA is $5,970. Deposition
discovery is about 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-commence.
-25-
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 toSelected Financial Data 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, 2007, 2006, 2005, 2004, 2003, 2002 and 2001:2003:
(U.S Dollars in thousandthousands except per share data)
Year ended December 31,
-----------------------------------------------------------------------------------------------------------------------------------
2007 2006 2005 2004 2003 2002 20012003*
--------- --------- --------- --------- ---------
REVENUES $64,780 $60,791 $57,713 $57,993 $67,933
$278,561 $212,137
COST OF REVENUES 52,397 55,284 53,721 52,825 52,557 212,439 189,925
--------- --------- --------- --------- ---------
GROSS PROFIT 12,383 5,507 3,992 5,168 15,376 66,122 22,212
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 13,338 14,878 11,690 12,201 8,547 25,635 18,641
IMPAIRMENT OF ASSETS AND GOODWILL 797 9,156 8209,344
--------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (955) (9,371) (7,698) (7,033) 6,032 31,331 2,751
FINANCIAL INCOME (EXPENSES) - net (3,334) (714) (908) (452) 4,118
3,046 1,977
OTHER INCONEINCOME (EXPENSES) - net (246) 1,241 147 (2,907) (353)
41,229 29,520--------- --------- --------- --------- ---------
INCOME (LOSS) BEFORE TAXES (4,535) (8,844) (8,459) (10,392) 9,797 75,606 34,248
INCOME TAXES BENEFIT (EXPENSE) (966) (846) (2,387) 1,529 (3,910) (16,442) (4,919)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net (2,479) (132) (486) (1,625) (6,661) (1,807) (395)
MINORITY INTERESTS IN PROFIT OF
SUBSIDIARIES (2,735)
--------- --------- --------- --------- ---------
PROFIT (LOSS)LOSS FROM CONTINUING OPERATIONS (7,980) (9,822) (11,332) (10,488) (744) 57,357 26,198(774)
DISCONTINUED OPERATIONS:
LossProfit (Loss) from discontinued
operations, net of tax benefitexpenses
(Benefit) of $2,525, $1,655$(2,470), $2,476,
$(2,525), $(1,655) and $795$(795) in
2007, 2006, 2005, 2004 and 2003,
respectively, Includesincludes loss of
$4,774 on sale of assets to a
related party onin 2005, and after
share in loss of associated company
of $36 and $81 in 2005 and 2004,
respectively 5,422 (4,248) (13,548) (15,474) (18,130) (542)
--------- --------- --------- --------- ---------
INCOME (LOSS)LOSS FOR THE YEAR (2,558) (14,070) (24,880) (25,962) (18,904)
$56,815 $26,198
--------- --------- --------- --------- ---------========= ========= ========= ========= =========
OTHER COMPREHENSIVE INCOME:INCOME (Loss):
Translation adjustments 80 (399) (1,560) 1,043 3,456 710 (1,811)
Unrealized gains (losses) on
marketable securities 497 104 (214) (616) 794 731 (345)
Reclassification adjustment for
losses for available for sale
securities included in net income 237
(771) 368--------- --------- --------- --------- ---------
577 (295) (1,774) 427 4,487 670 (1,788)
--------- --------- --------- --------- ---------
TOTAL COMPREHENSIVE INCOME (LOSS)
FOR THE YEAR $(1,981) $(14,365) $(26,654) $(25,535) $(14,417) $57,485 $24,410
========= ========= ========= ========= =========
LOSSESPROFIT (LOSS) PER SHARE:
Loss from continued operations:
Loss per common share - basic $(1.22) $(1.51) $(1.74) $(1.61) $(0.12)
========= ========= ========= ========= =========
(Loss) per common share - diluted $(1.22) $(1.51) $(1.74) $(1.61) $(0.12)
========= ========= ========= ========= =========
Profit (Loss) from continueddiscontinued operations:
Profit (Loss) per common share - basic $(1.74) $(1.61) $( 0.12) $8.93 $4.18$0.83 $(0.65) $(2.07) $(2.37) $(2.78)
========= ========= ========= ========= =========
Profit (Loss) per common share - diluted $(1.74) $(1.61) $( 0.12) $8.88 $4.09$0.83 $(0.65) $(2.07) $(2.37) $(2.78)
========= ========= ========= ========= =========
(Loss) from discontinued operations:
(Loss)NET LOSS:
Loss per common share - basic $(2.07) $(2.37) $(2.78) $(0.08)$(0.39) $(2.16) $(3.81) $(3.98) $(2.90)
========= ========= ========= ========= (Loss)=========
Loss per common share - diluted $(2.07) $(2.37) $(2.78) $(0.08)
========= ========= ========= =========
NET INCOME (LOSS):
Profit (Loss) per common share - basic$(0.39) $(2.16) $(3.81) $(3.98) $( 2.90) $8 .85 $4.18
========= ========= ========= ========= =========
Profit (Loss) per common share - diluted $(3.81) $(3.98) $( 2.90) $8.80 $4.09$(2.90)
========= ========= ========= ========= =========
Weighted average shares of
common stock outstanding 6,528,100 6,528,100 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 6,528,100 6,528,100 6,524,250 6,513,100 6,453,447 6,412,535
========= ========= ========= ========= =========
-55-* Some numbers of 2003 were reclassified to match 2004-2007 presentations.
-26-
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,
---------------------------
2007 2006 2005
---- ---- ----
Revenues ........................................ 100% 100% 100%
Cost of revenues................................. 80.9% 90.9% 93.1%
Gross profit..................................... 19.1% 9.1% 6.9%
Selling, general and administrative expenses..... 20.6% 24.5% 20.3%
Operating loss................................... (1.5)%
(15.4)% (13.3)%
Loss from continuing operations.................. (12.3)% (16.2)% (19.6)%
Income (Loss) from discontinued operations....... 8.4% (7.0)% (23.5)%
Loss for the year................................ (3.9)% (23.1)% (43.1)%
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
(U.S. Dollars in thousands unless otherwise indicated)
The following information represents only the results of the Company from
continuing operations unless mentioned otherwise.
Revenues. Revenues for the year ended December 31, 2007 were $64,780
(2006: $60,791), consisted of $46.7 million (2006: $46.8 million) from U.S.
operations, $7.6 million (2006: $7.2 million) from operations in the
Netherlands, $4.8 million (2006: $3.4 million) from operations in France and
$5.7 million (2006: $3.3 million) from other operations.
The increase in other operations is because of the penetration of I-SEC
into new countries in Europe. ICTS expects that the revenues from the European
activities will grow materially in the next few years.
Almost all revenues in the U.S. are derived from non 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.
Gross profit for the year ended December 31, 2007 was $12.4 million, 19.1%
as a percentage of revenue (2006: $5.5 million, 9.1% as a percentage of
revenue). The increase in gross profit as a percentage of revenues is primarily
attributed to an amount of $4.3 million reducing the cost of revenue of 2007
with regards to the agreement of the Company with the DOL. In previous years,
the Company accrued an amount of $7.3 million liability for the DOL claim.
During 2007, the Company has reached an agreement with the DOL of which
its maximum exposure will be $3 million, payable after the Company will reach a
settlement with the TSA. Following this agreement, the Company decreased its
cost of revenue by $4.3 million. The gross profit excluding the deduction of
this amount totaled $8.1 million, 12.5% as a percentage of revenue comparing to
9.1% in 2006. The additional change was achieved mainly based on the increase of
the security operations in Europe during 2007, which has a higher margin
associated with the service provided.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $13.3 million for the year ended December 31, 2007,
20.6% as a percentage of revenues, as compared to $14.9 million, 24.5% as a
percentage of revenues for the year ended December 31, 2006. This amount
includes $880 legal expenses regarding the "taking case" and the TSA litigation
-27-
compared to $3.5 million in 2006. The increase in the SG&A expenses after the
deduction of the legal expenses ($12.4 million in 2007 compared to $11.4 in
2006) was generated mainly from the increase in the SG&A expenses from the
security operations in Europe which grew $1.8 million in 2007 following the
increase of the revenues of the European activities.
The 2007 SG&A expense also includes $1.1 million expense regarding
potential penalties resulting from the IRS audit for the years 2002-2004.
Operating Loss. Operating Loss for the year ended December 31, 2007 was
$955 compared to operating loss of $9.4 million in 2006.
Financial Expenses. Financial expenses-net were $3,334 (compared to $714
in 2006). The Financial expenses included in 2007 an expense of $2,179 estimated
accrued interest regarding possible tax exposure in the U.S. for previous years.
Interest expenses to related party totaled $285 in 2007 compared to $88 in 2006.
The interest is calculated according to the loan terms - Libor plus 1.5%. The
outstanding loan as of December 31, 2007 was $6,528 compared to $2,652 in 2006.
During 2007, the interest expenses from the European activities totaled
$189 compared to $30 in 2006. The increase was mainly attributed to the
financing needs of the Company for the expansion of its operation by using its
credit line.
Other Income (Expenses), Net. Other income for the year ended December 31,
2007 totaled $(246) compared to $1,241 in 2006. Gain from sale of investments
totaled $349 in 2007 compared to $576 in 2006. During 2007 the Company has fully
impaired its investment in Plan Graphics which totaled $600. In 2006 the Company
recognized a profit of $665 regarding deposits that were fully accrued in the
past related to the Bilu investment and were paid back to the Company.
Taxes on Income. Taxes expenses in 2007 totaled $966 compared to $846 in
2006. The Company expensed an additional amount of $659 regarding the 2002-2004
IRS audit.
Share in Losses of Associated Companies. The Company's share in losses of
associated companies during 2007 totaled $2.5 million compared to $132 in 2006.
The Company had 50% in the partnership ICTS Netherlands Airport Services VOF
(NAS). The partnership had one contract with Schiphol airport, which was to
terminate on February 1, 2008. The partnership is in the process of liquidation
during 2008. During 2007, ICTS recognized losses of $2.2 million which include
an impairment of $332, compared to profit of $1.3 million in 2006. The Company
recognized losses of $284 in 2007 from its investment in InkSure, compared to
the $1.4 million in 2006. The net value of this investment in the company's
financials as of December 31, 2007 and 2006 is $0 and $289, respectively.
Loss From Continuing Operations. ICTS's loss from continuing operations
total in 2007, $8 million compared to $9.8 million in 2006.
Loss From Discontinued Operations. ICTS's profit from discontinued
operations in 2007 totaled $5.4 million compared to loss of $4.2 million in
2006.
During 2006 the Company expensed a receivable from the IRS of $2.5 million
following a criminal investigation of the IRS against the Company. ICTS filed a
complaint against the IRS in the U.S. District Court and the complaint was
dismissed. In the beginning of 2008 the criminal investigation was removed and
the refund was paid to the Company with interest of $373.
Against the Company there are a few legal claims outstanding regarding its
-28-
discontinued operations. The Company has fully accrued for the claims of the
landlord regarding the two sites of the Entertainment operations. As of December
31, 2007 and 2006 the total accruals were $8.5 million and $10.1 million,
respectively. The change of $1.6 million on the accruals was done based on the
change in the claims.
Net Loss. As a result of the foregoing, ICTS's losses amounted $2.6
million for the year ended December 31, 2007, as compared to $14.1 million loss
for the year ended December 31, 2006. As for geographical segments, see note 19
in the financial statement.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
(U.S. Dollars in thousands unless otherwise indicated)
The following information represents only the results of the company from
continuing operations unless mentioned otherwise.
Revenues. Revenues for the year ended December 31, 2006 were $60.8 million
(2005: $57.7 million), and consisted of $46.8 million (2005: $48.3 million) from
U.S. operations, and $13.9 million (2005: $9.4 million) from other operations.
The reduction in revenues in the USA is mainly due to the Company's decision to
terminate some unprofitable contracts in its Huntleigh subsidiary. The increase
of revenues from other operations is mainly because of the successful
penetration of the I-SEC group into the European aviation security market.
Almost all revenues in the U.S. 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, 2006 was $5.5 million, 9.1%,
as a percentage of revenue (2005: $4.0 million, 6.9% as a percentage of
revenue). The increase in gross profit as a percentage of revenues is primarily
attributable to the fact that the gross profit for the year 2006 is influenced
from new activities in Europe with higher profitability, improving and reducing
operational expenses and termination of unprofitable contracts in the USA.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $14.9 million for the year ended December 31, 2006,
24.5% as a percentage of revenues, as compared to $11.7 million, 20.3%
percentage of revenues for the year ended December 31, 2005. Of the increase,
approximately $1.2 million is from the European operations, as part of the
establishment of new subsidiaries and new operations. $0.5 million related to
stock based compensation, which is being expensed starting in 2006 (see note 2
in the Financial Statements). During 2006 legal expenses regarding the "taking
case" totaled approximately $3 million compared to $1.3 million in 2005. The
reason for the increase is the preparations for trial which took place in
February 2007.
The amortization expense increased of $423 relating to accrued
amortization of Procheck's intangible assets and their life term due to the high
competition in the security market in the Netherlands and the fact the contract
with Schiphol will be over on 2008 and the renewal is uncertain.
Operating Loss. Operating loss for the year ended December 31, 2006 was
$9.4 million as compared to an operating loss of $7.7 million for the year ended
December 31, 2005.
-29-
Financial Expenses. Financial expenses-net in 2006 were $714 compared to
$908 in 2005. The decrease during 2006 versus 2005 is that in 2005 the Company
included one-time losses of $576 from securities of an unaffiliated company in
its financial expense. During 2006 the Company paid approximately $150 more
interest and fees regarding its line of credit in Huntleigh and accrued $88
interest (Libor +1.5%) to related party. Exchange rate income for the years 2006
and 2005 totaled $96 and $382, respectively.
Other Income (Expense), Net. Other income for the year ended December 31,
2006 was $1,241 compared to $147 for the year ended December 31, 2005. Other
income in 2006 increased because of gains from sales of investments totaling an
amount of $576. Guarantees provided to Bilu in the past against cash deposits
were fully accrued in previous years. During 2007, $665 of those guarantees were
cancelled and paid back to the Company and are included in other income.
Taxes On Income. In 2006 and 2005, the Company recorded tax expenses of
$846 attributable mainly to tax accruals regarding tax years 2002 and 2003. The
tax updates are based on our tax advisors opinion of the exposure, mainly
regarding royalties that Huntleigh paid at those years and that might not be
recognized by the tax authorities.
Share in Losses of Associated Companies. There was a $132 loss in 2006 as
compared to a loss of $486 for the year ended December 2005. The high loss is
according to our investments in Inksure (our part in loss of 1.4 million during
2006 compared to $1.2 million in 2005) and NAS (profit of $1.3 million during
2006 compared to $705 profit in 2005).
Loss from Continuing Operations. ICTS loss from continuing operations
totaled $9.8 million in 2006, compared to $11.3 million in 2005.
Loss from Discontinued Operations. ICTS loss from discontinued operations
in 2006 totaled $4.2 million compared to $13.5 million in 2005. The loss of 2005
includes a capital loss of $4,774 from the selling of the leasing equipment.
During 2005 an expense of $9.7 million was recognized regarding leases that
should be paid until 2019, and was updated in 2006 by $1.4 million based on
legal claims from the landlord and update of the net present value.
The loss from discontinued operations in 2006 includes also $2.5 million
receivable from IRS which were written-off in 2006 according to dispute with IRS
in which ICTS filed a complaint in the United States District Court and its
complaint was dismissed.
Net loss. As a result of the foregoing, ICTS's loss amounted to $14.1
million for the year ended December 31, 2006, as compared to $24.9 million loss
for the year ended December 31, 2005.
As to the geographical segments, please see note 19(a) in the financial
statements.
Year Ended December 31, 2005 Compared to Year Ended December 31, 2004
(U.S. Dollars in thousands unless otherwise indicated)
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.
-30-
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 includeincluded 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 arewere similar to lastthe previous year. The improvement iswas 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 was mainly with regards to new loans that were taken by
one of the subsidiaries to purchase new operating equipment and interest expenses
formfrom short-term bank credit.credit and one-time loans from securities.
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
totaltotaled $11.3 million 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
-31-
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:
Our auditors have expressed an opinion that there is a substantial doubt
about our ability to continue as a going concern.
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 and long-term borrowings. As of December 31, 2005,2007, we had cash
and cash equivalents of $5.9$2.1 million as compared to $3.2$1.7 million on December 31,
2004,2006, and short-term restricted cash and short-term investments of $3.7$1.8 million as compared to $4.8$0.7 million
on December 31, 2004.2006.
During the years ended December 31, 20052007 and 2004,2006, the Company has
incurred $25$2.6 million and $26$14.1 million net losses, respectively, which were
accompanied by net cash used in operating activities of $5.2$3.6 million and $1.2$7.6
million, respectively. As of December 31, 20052007 the Company had a working capital
deficiency of $2.7$11.7 million and negative equity of $20.6 million. In 2005, the Company's management commenced
liquidating its position in several long- term assets. In addition, duringDuring 2005
management has ceased its operations in non corenon-core business and is re-enteringhas successfully
accomplished its penetration to the Security European security market. Management
anticipates that continuing that
programthese resources will provide the Company with the
sufficient funds to operate its business in 2006.2008 together with funds received
from operations and some bridging loans provided by a related party. The
Company's activity, for the long term, depends on entering into additional
service contracts.
During 2007 and 2006, the Company received loans from a related party
which amount to $6.5 and $2.7, respectively, which were used to cover part of
the Company's obligations.
The Company's cash and cash equivalents increaseincreased in 20052007 by $2.7 million$352 as a
result of the following:
Net cash used in operating activities for the year ended December 31, 20052007
was $5.2$3.6 million as compared to net cash used in operating activities of $1.2$7.6
million for the year ended December 31, 20042006 and net cash used by operating
activities of $19.3$5.2 million 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.2005. The net loss
during 20052007 totaled to $25$2.6 million, offset by non
cashnon-cash expenses as write-off investments of $1.1$373 relating
to stock based compensation, $2.2 million andto share in lossesloss of associated
companies, of $486 thousand.and $1.2 million in depreciation and amortization. Changes in
operating assets and liabilities amountingamounted to $4.6 million.$310. The changes in operating
assets and liabilities were primarily attributable to $1.8a $2.9 million increase in
accounts
receivable ,anaccrued expenses and other liabilities, an increase of $3.5 million$634 in other accrued expensesaccounts payable
based on the Company cash situation and an increase of $1.7 million$364 in accounts
payable.receivable. Net of cash usedprovided by discontinued operations totaled $0.3 million.$175.
Net cash used by investing activities was $1.1 million for the year ended
December 31, 2007 as compared to net cash provided by investing activities wasof
$262 for the year ended December 31, 2006 and net cash used in investing
activities of $8.3 million for the year ended December 31, 2005 as compared to net2005. The increase
this year is mainly because of the change in restricted cash which totaled $770.
Proceeds from selling of other investments totaled $295 and $419 in 2007 and
2006, respectively. Total cash used in investing2007 and 2006 for purchase of equipment
-32-
totaled $940 and $630, respectively.
Net cash financing activities of
$0.3 for the year ended December 31, 2004 and net cash used in investing
activities of $3.2were $4.9 million for the year ended
December 31, 2003. Net cash
provided by investing activities was primarily attributable2007 as compared 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.
Netnet cash provided by financing activities was $22 thousandof
$3.7 for the year ended December 31, 2005 as compared to net cash used in financing activities of
$3.12006 and $22 million for the year ended
December 31, 2004 and $2.4 million for the year
ended December 31, 2003.2005. In 2005,2007, net cash provided by financing activities was
attributed primarily to long- ternrelated party loans of $4 million and decreasenet increase in
short- termshort-term bank credit.
Incredit of $1.6 million.
On April 5, 2005, a Company's subsidiary inone of the U.Scompany's subsidiaries entered into a Loan
and Security Agreement withby establishing a financial institution which replaces the revolvingreplacement Revolving line of credit which has expired in January 2005.Credit.
The new agreementRevolver provides for
revolving loansa borrowing base up to $8 million limited bybased on 85% of defined
eligible accounts
receivable plusEligible Accounts Receivable and 95% of the balancerequired Certificates of required certificatesDeposit less
Letter of deposit less
letter of creditCredit obligations. The line of creditinterest rate is secured by the Company
guaranty; by a first priority security interestone percent (1%) per annum in
all existing and future
propertyexcess of the subsidiary andPrime Rate for loan balances in excess of 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.Libor Rate loans. As
of December 31, 2005,2007 the Company met allrestricted cash of 3.5 million held by the financial covenants in the Amended Agreement except for the Interest
Coverage covenant. Incompany
serves as other collect recovery credit facility. On December 31, 2005, $3.92007, $5.7
million was outstanding and $1.2$1.8 million was available under the revolving
credit facility for additional borrowings. The borrowing agreement also provides
for an additionala 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.3%. The Company had letters of
credit outstanding of approximately $2.5$1 million and $3.2$1.5 million at December 31,
20052007 and 2004,2006, respectively.
Based on the revolving line of credit agreement, the subsidiary
established a time deposit account, with the lender as cash collateral security.
The amount bears an annual interest of 4.25%. This deposit is being shown in the
balance sheet as restricted cash - long term.
On December 18, 2007, a fifth amendment was executed extending the term
from March 1, 2008 to March 31, 2009 with automatic one-year renewals at the
election of either Lender or Borrower. The Company was in compliance with all
loan covenants as of December 31, 2006 and 2007. However, as of March 31, 2008,
the Company was in violation of its interest coverage ratio. In June 2002 ICTS purchased equipment for an aggregate purchase price of
$23.5 million. The purchase priceApril 2008 a
sixth amendment to the loan agreement was payable $14.5 million in cashexecuted and the balancebank agreed to waive
this covenant violation 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
expirationissuance of the lease term, then ICTS will be obligatedstand-alone financial
statement. The financial statements have not been issued as of the date of the
filing and the debt is classified as current.
In November 2004, a subsidiary of the Company entered into a credit
agreement with a bank. During 2006 the agreement was extended and it provides a
borrowing facility of up to pay license fees(euro)650 (as of December 31, 2006 - $958), 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, 2007, $610 was outstanding and $348 was available under the credit
agreement. The Company is in connection with intellectual property associatedcompliance with the equipment in an amount
equalcovenants. In February 2008 the
credit agreement was extended up 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(euro)2.1 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
-33-
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, 2005:2007:
Contractual Obligations Payments due by Period (in thousand)thousands)
- ----------------------- ------------------------------------------------------------
more------------------------------- ------------------------------------------------
Less than 1-3 4-5 more than
Total athan 1 year years years 5 years
----- -------------------- ----- ----- -------
Long-term debt $ 463 $150 $301 $123,276 126 3,150
Accrued severance pay 189 18984 84
Operating lease obligations (1) 1,149 708 419 222,432 697 1,657 78
Loan from related party 6,528 884 5,644
Employment contracts 1,082 541 541
Fees and interest regarding Credit Line 825 825
------ ---- ---- --- ----
$1,801 $858 $720 $34 $189------ ------ ------ ------
14,227 3,073 10,992 78 84
TheAs of December 31, 2007 and 2006 the Company has also a liabilitycreated an accrual for future
rent regarding its discontinued operations of $9,701$8.5 million and $10.1 million
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, 2007, 2006 and 2005 2004were $1,191, $1,217 and 2003 were $849, $809, $984,
respectively, and $984, $596 and $172 from discontinued operations
respectively.
ICTS's guarantees regarding Bilu:
-60-
TheBilu
Until 2006, the Company has renewalhad outstanding bank guarantiesguarantees to Bilu
Investments, Ltd. ("Bilu") in the amount of $2,515, as$2,515. As collateral to these
guarantiesguarantees, the Company has long-term restricted deposits in equivalent amounts.
In December 31, 2004, as a result of continuancecontinuing deterioration in the financial
results of Bilu, the Company has determined to write offwrite-off its investment in Bilu
and to fully provide of its bank guaranties.guarantees. In the beginning of 2007, the Company
was released from its guarantee liability in total amount of $665 and the
provision for the bank deposits was reduced by the same amount presented in 2006
results.
Off- balance sheet arrangements
The Company is not a party to any material off -balanceoff-balance sheet arrangements.
In addition, ICTS has no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligation.obligations.
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.
-34-
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 61Age Position
----- ----------
Menachem Atzmon 64 Chairman of the Supervisory Board
Eytan Barak 64 Member of the Supervisory Board, Member of
Compensation and Audit Committee
Elie Housman 71 Member of the Supervisory Board, Chairman
of the Compensation Committee
Gordon Hausmann 63 Member of the Supervisory Board, Member of
the Compensation Committee and Member of the
Audit Committee
David W. Sass 72 Member of the Supervisory Board
Philip M. Getter 71 Member of the Supervisory Board, Chairman
of the Audit Committee
Avraham Dan 63 Managing Director and Chief Financial Officer
Ran Langer 60 Managing Director
Alon Raich 30 Financial Officer
Ran Langer 62 Managing Director
Alon Raich 32 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 NissimEytan Barak is a CPA (Isr). From the year 2001 to the present, Mr. Barak
is a partner in Dovrat-Barak Investment in High-Tech Companies Ltd., a company
which arranges financial resources and management assistance to start-up
companies. He is, and has served as Secretary of ICTSbeen since January 1994 and
becamethe year 2003 to 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") since January 1997 and also serves as the Chairman.Olympic Committee of Israel. He is the chairman
of the board of "OTZMA," the Israel Center of Sport Clubs. Since 2006, he is a
member of the Board of Directors of Surface Tech Ltd.
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
-35-
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 4547 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 honoraryan 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 PharmacalPharmaceutical 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). Mr. Dan joined ICTS in June 2004 as Chief
Financial Officer. InSince September 2004 to the present, he becameMr. Dan is a Managing
Director. From 1995 to 2001 he was Chief Executive OfficeOfficer and a Director of
Pazchem Limited, an Israeli chemical company. Mr. Dan holds an MBA degree from
Pace University, NY,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 &
-36-
Kesselman, PriceWaterhouseCoopers (PWC)(PwC). Mr. Raich holds a BA degree in
economics and accounting and aan MA degree in law from Bar-Ilan University,
Israel.
Compensation
Summary Compensation Table
The following table sets forth compensation earned by the executive officers and
the highest paid executive during 2007
- -----------------------------------------------------------------------------------------------------------------------------
Nonqualified
Name and Non-Equity Deferred Number of Number
Principal All Other Incentive Plan Compensation Option of Stock
Position Year Salary Bonus Compensation Compensation Earnings Awards Awards Total
$ $ $ $ $ $
- -----------------------------------------------------------------------------------------------------------------------------
Avraham Dan, 2007 180 60 240
Managing
Director 2006 180 60 60 45,000 300
2005 180 60 240
- -----------------------------------------------------------------------------------------------------------------------------
Ran Langer, 2007 No
Managing Salary
Director 2006 45,000
2005
- -----------------------------------------------------------------------------------------------------------------------------
Doron Zicher, 2007 242 174 39 455
Managing
Director 2006 221 217 32 55,000 470
Subsidiary
2005 221 178 39 488
- -----------------------------------------------------------------------------------------------------------------------------
Each member of the Supervisory Board who is not an employee of the Company
receives an annual fee of $10,000$10 and a fee for each Board or committee meeting
attended of $1,000 and the$1. The Chairman of the Audit Committee receives an additional $20,000$20
per year.
Mr. Dan has been employed as a Managing Director under a five year
employment agreement commencing SeptemberFebruary 1, 2004,2005, at a monthly compensation of
$15,000.
-62-
$15.
Mr. Langer has been employed as Managing Director since 2004 without
compensation.
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 $1272007.
Salaries, fees, Pension, retirement
commissions and other
and bonuses similar benefits
--------------- -------------------
(in thousands)
All directors and officers ----------------------------------------------
as a group (14 persons) $1,421 $110
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
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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 Supervisoryinitial year they joined the
Board are as follows: Menachem Atzmon (1999), M. Albert Nissim
(2003)Eytan Barak (2006), Elie Housman
(2002), Gordon Hausmann (2005), David W. Sass (2002) and Philip M. Getter
(2003).
The Audit Committee consists of Philip M. Getter, Chairman, Eytan Barak
and Gordon Hausmann, all of whom are independent. Mr. Getter hasand Mr. Barak have
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.Housman, Chairman, Gordon
Hausmann and Eytan Barak. The compensationCompensation committee determines salaries,
incentives and other forms of compensation for ICTS's executive officers and
administratorsadministrator's stock plans and employee benefit plans. The Compensation
Committee has an operating charter as well.
The members of the Audit Committee and Compensation Committee are all
independent and were never officers or employees of ICTS except Mr. Elie
Housman, for a short period, was chairman of the Board of ICTS under contract.
The Supervisory Board of the Company has adopted a Code of Ethics for
principal Executive Officers, Directors and senior financial Officers.officers.
The Articles of Association of ICTS require at least one member forof 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 Thethe 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 enactment750.
The number 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.USA is approximately 2,760.
Share ownership.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)(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--38-
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-employeenon-
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@)NQSO)
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
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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
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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. Mr. Bechor left the Company in 2007 and
can no longer exercise his options.
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 were granted to each toof 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. The options of Lynda
Davey expired in 2007. Ms. Davey left the Company in 2007 and can no longer
exercise her options.
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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.
The Compensation Committee, in October 16, 2006, recommended, and the
Supervisory Board and the Management Board have approved, the granting of the
following options under the 1999 and the 2005 Equity Incentive Plans as follows:
1. Menachem Atzmon (Chairman of the Board) - 350,000 options of which
250,000 shall be immediately vested and 100,000 options to be vested equally
over three years. Options are exercisable at $1.00 per share representing the
fair market value on the date of grant.
2. Doron Zicher (Key Employee) - 55,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.
3. Ran Langer (Managing Director) - 45,000 options to be vested equally
over three years. Options are exercisable at $1.00 per share representing the
fair market value on the date of grant.
4. Avraham Dan (Managing Director) - 45,000 options to be vested equally
over three years. Options are exercisable at $1.00 per share representing the
fair market value on the date of grant.
5. Udi Bechor (Key Employee) - 35,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant. Mr. Bechor left the Company in 2007 and can
no longer exercise his options.
6. Oded Shoam (Key Employee) - 35,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.
7. Phillip Getter (Chairman - Audit Committee) - 40,000 options to be
vested equally over three years. Options are exercisable at $1.00 per share
representing the fair market value on the date of grant.
8. Eli Housman (Chairman - Compensation Committee) - 45,000 options to be
vested equally over three years. Options are exercisable at $1.00 per share
representing the fair market value on the date of grant.
9. David W. Sass (Director) - 20,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.
10. Gordon Hausmann (Director) - 50,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.
11. Eytan Barak (Director) - 30,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.
12. Richard Sporn (Key Employee) - 15,000 options to be vested equally
over three years. Options are exercisable at $1.00 per share representing the
fair market value on the date of grant.
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13. Alon Raich (Key Employee) - 15,000 options to be vested equally over
three years. Options are exercisable at $1.00 per share representing the fair
market value on the date of grant.
A summary of the Options granted is as follows:
As of December 31, 2007 there were outstanding options to purchase
1,723,000 shares, out of 2,100,000 that were approved and issued. All the
options were granted to directors, executive officers and employees of the
Company as a group at exercise prices ranging from $1.00 to $1.35 per share
under the plans. These options vest over various terms, ranging from immediately
to five years and no later than November 2011. Options available for grant under
the plans are 377,000. The plans expire by their terms at various dates to 2015.
All current executive officers (Managing Directors) (2 persons) as a
group: 120,000210,000 Options
All current directors (6 persons) as a group: 760,0001,230,000 Options
All current employees and non-executive officers (3and other (8 persons) as a group: 140,000283,000
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.
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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
-42-
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, 20062, 2008 (including options exercisable
within 60 days from June 30, 2006)2, 2008) with respect to:
(1) Each person who is known by the Company to own beneficially more than
five percent 5%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)
- ---------------------------------------------------------------------------------43-
- -----------------------------------------------------------------------------------------------
Percent of
Amount Beneficially Common Shares
Name of Five Percent Shareholders Owned (a) Outstanding (b)
- -----------------------------------------------------------------------------------------------
Atzmon Family Trust (b) (1)(2) 4,497,226 60.95%
- -----------------------------------------------------------------------------------------------
Nicholas P. Monteban, Xalladio Holding B.V. and
Galladio Capital Management B.V. 688,000 10.54%
- -----------------------------------------------------------------------------------------------
Everest Special Situations Fund
& Affiliates (c) 703,772 10.78%
- -----------------------------------------------------------------------------------------------
All officers and directors as a group including
the Atzmon Family Trust
(12 persons) 5,167,559 64.22%
- -----------------------------------------------------------------------------------------------
(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.June 2, 2008.
(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
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issuable pursuant to the exercise of options exercisable within 60 days from August 31,2006,the
date of the grant, if any held by such shareholder. Common shares subject to
options that are immediately exercisable or exercisable within 60 days of August
31, 2006the
date of the grant 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,B.V., owns directly and indirectly approximately
62.5%60.95% 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 BVB.V. 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.B.V. Mr. Atzmon disclaims any beneficial interest in the Atzmon
Family Trust. Harmony Ventures BVB.V. and the Atzmon Family Trust may be able to
appoint all the directors of ICTS and control the affairs of ICTS.
2. Of the 550,000900,000 options to Menachem Atzmon (Chairman of the Board),
350,000850,000 are currently exercisable and 200,000 options to be vested equally overwith the next two years.remaining 50,000 vesting in 2008.
With respect to the Options, for 200,000400,000 shares they arewere granted in lieu of a current
salary for Mr. Atzmon. Options are exercisable at $1.35 per share for 550,000
options and $1.00 per share for 350,000 options representing the fair market
value on the datedates of grant.
(c) The shares were purchased by such group during 2006, 2007 and 2008.
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$259 and has
guaranteed $2,915,000$2,915 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$2,000 and the provision of guarantees for debt obligations of Bilu in an amount
of US $3,800,000.$3,800. As a result, ICTS's equity interest in Bilu has been diluted to 7%
and ICTS's guarantee was reduced to $2,515,000$2,515, of which $700,000$700 is on behalf of each
-44-
of Leedan and Rogosin, respectively. Rogosin became an unaffiliated party in
2002. In December 31, 2004, as a result of continuancethe continuing 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
offor its bank guaranties. During 1998, ICTS purchased 150,000 shares of common stock of PioneerIn early 2007, the Company was released 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 subscribedits
guarantee obligation for an additional 260,000 shares at $2.00 per share. In January
2003, ICTS purchased 235,300 sharesamount of common stock of Pioneer Commercial
Funding Corp. at a purchase price of $0.90 per share$665. The provision for the bank deposits
was reduced by the same amount presented 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.2006 results.
In July 2000, each of ICTS and International Tourist Attractions Ltd.
("ITA)ITA"), a company under the control of ICTS's principal shareholders, purchased
16 common shares for $16,000$16 each of Ramasso Holding B.VB.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 offwrote-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. InEuro. As of December 31,
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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 havehas reached aan 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. TheIn 2006 the receiver in
the bankruptcy has filed a proceeding against the financial institution which
provided loans to RomassoRamasso to recover a security deposit in the amount of (euro)866
thousandEuro ($11.1 million as of December 31, 2005)2006) 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 increaseThe
financial institution has withdrawn 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-offclaim 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, withhas filed
a Notice of Discontinuance against 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.$5,986. 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$192 and $370,000,$370,
respectively. During December 2006 the Company sold 155,000 shares of Inksure at
a price of $2.70 per share. In March 2007 another 155,000 shares were sold for
$1.90 per share. As of December 31, 20052007 the Company owns approximately 32%28.1% of
the outstanding shares of Inksure. In 2006 the supervisory board authorized the
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management to sell its investment in Inksure. The market value as of AugustDecember
31, 2006 is2007 was approximately $9$2.1 million. As of June 1, 2008 the market value of
the investment dropped to $1 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$1.2 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.$316.
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
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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 30m30, 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 towas $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(euro)1million ($1.2 million as of December 31, 2005) for 6 months
bearing an interest of 5.45%. The entire loan was repaid by May 17, 2006.
As of August 30,December 31, 2007 and 2006 the company received loans in an
aggregate amount of $2,050,000 million$6,528 and $2,652, respectively, from a related party as
bridging finance. These loans are evidenced by a secured Promissory Note. $1 million of principle isAll
loans and accrued interest were due and payable
on January 1, 2007 and the balance and all accrued but unpaid interest is due
and payable onno later then April 1, 2007.2008. Interest
accrues at prime rate plus 1/21.5 percent and the obligations arewere secured by the
pledge of 2,157,895 shares of common stock of Inksure Technologies Inc. The
amount of shares represent two timesloans were, at the valueoption of the loan. Thelender, convertible into the company's common
stock at a price of $3.50 per share. During 2008 the terms of the loan with
related party lender has also committedwere extended for 2 years up to lendingApril 1, 2010. Based on the new
agreement, as collateral on the loan, 26% of the shares of I-SEC International
Security B.V. a wholly owned subsidiary of the Company upwas pledged to an additional $1 million These future loans shall be payablethe
related party In addition, the loan is convertible to the Company' shares at a
price of $2.75. Loans and accrued interest from related parties at June 30, 2008
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amounted to $6.3 million.
Following structural changes and continuous losses in Demco, a 100% held
subsidiary, it was decided to transfer the projects of Demco to "Amesco
Emergency and Security Solutions" as a subcontractor. That company belongs to a
related party. It will pay commissions to Demco based on demand and shall also be secured by the pledge of the Inksure stock.contracts it will
operate until 2010.
Item 8. Financial Information
Consolidated Statements and Other Financial Information.
See pages F-1 through F-64F-43 incorporated herein by reference.
Legal Proceedings
As a result of the September 11th terrorists attacks numerous lawsuits
have commenced against Huntleigh and ICTS. Huntleigh hasand ICTS have been named in
approximately 7064 and 61 lawsuits, and ICTS in approximately 70 lawsuits.respectively. 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.stages with
depositions having begun on September 12, 2006. A number of these cases have
been settled or are in the process of being settled or dismissed at no cost
to the Company.
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
theirhas its liability limited to the
amount of insurance coverage that they carry.it carries. 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 Motionmotion to Dismissdismiss 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.held and the court has decided against the Company. The
company isCompany appealed the decision. In May 2008, the U.S. Court of Appeals for the
Federal Circuit has affirmed the lower court's ruling against the Company.
The Company was 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.Amsterdam. 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
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interpretation, the maximum liability is (euro)700 thousandmillion Euros ($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 $86.968.1 million
as of December 31, 2005). Currently this action is stayed pending settlement
discussions betweenThis dispute has been settled without any liability to
the parties.Company.
In September 2005, Avitecture, Inc.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 pendingwas decided against the Company in aan arbitration proceeding awarding Avitecture
$194 plus arbitration costs of $6. The arbitrator's decision was affirmed by the
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Superior Court of New Jersey arbitration proceeding before an
arbitrator assigned byon or about May 4, 2007. The Company appealed this
decision. In September 2007, ITA k/a Explore Atlantic City, LLC ("Explore")
filed bankruptcy under Chapter 7 Bankruptcy Code. We filed a petition in
bankruptcy with the American Arbitration Association.court. The Appellate Court affirmed the arbitrator's ruling
on February 18, 2008. In October 2005 ITA
filed its answer, generally denying the allegations ininterim, the Demand and asserting
numerous affirmative defenses. This action is currently in discovery.bankruptcy case was closed.
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
pendingarbitrator awarded
Turner $956 plus interest and costs, which award was affirmed on appeal. As of
December 31, 2007 and 2006, $956 and $970 were accrued, respectively. On or
about October 9, 2007, Explore filed a petition in abankruptcy with the New
Jersey arbitration proceeding. An arbitrator has been assigned
toSuperior Court. The Court thereafter stayed the case soproceedings and dismissed
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 amountaction without prejudice as a result of the claim andbankruptcy filing. To date,
Turner has not moved to challenge Turner's right to make any
demand for payment. A motion for summary judgment has been made by Turner andre-instate or reopen 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.case.
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 arbitrationArbitration alleges that pursuant to
a written agreement dated April 16, 2002, Explore owes Turner $21
thousand$21,000 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 arbitratorThis matter 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 supportsettled for its opposition to Barlo's claim
and to support a potential motion for summary judgment.$10,000.
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.in mediation.
Huntleigh isintends to vigorously challengingchallenge 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 ORDAODRA granting Huntleigh's motion for partial Summary Judgmentsummary
judgment against the TSA. ODRA has granted Huntleigh's motion for partial
Summary
Judgmentsummary 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,action 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 yearbeen
denied.
In 2005 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$2.4 million
which was to be reflected on the Company.December 31, 2005 year end financial statements
as a receivable. 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
investigationIn January, 2008, the Company believeswas advised 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 IRScurrent
investigation prove unsatisfactory towas withdrawn, and the Company this will have a material adverse effect on the Company.
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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 recoverreceived 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.$2.4 million
and interest of $373.
Two of the Company's subsidiaries have been sued by their landlord (which
is the same entity)entity for both properties) alleging breach of the respective
leases. One suit is in Circuit Court for Baltimore effectingCity affecting the Company's
Explore Baltimore facility, and the other is in the Superior Court of New Jersey
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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$5,970 and Iin
the Baltimore case, the amount is $4,443,513.01. With$ 4,444. As of December 31, 2007 and 2006, the
Company accrued an amount of $2.5 million and $10.1 million, respectively, for
future rent. The Company filed a resolution of both
actions being discussed, a standstillpetition in bankruptcy for each of the proceedings is being negotiated.
Dividend PolicyAtlantic
City and Baltimore subsidiaries, which stayed the proceeding. However, the
landlord was able to prevail against the Company with respect to a guarantee
given by the Company with respect to the lease in Baltimore. The declarationCompany also
rendered that the landlord could proceed to prove its damages with respect to
the Baltimore lease. In January 2008, the Baltimore litigation was conducted. At
the end 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 paidtrial, a judgment in the future.amount of $2,559,343.67 was awarded in
favor of the Landlord and against ITA Baltimore and ICTS International, N.V.,
jointly and severally. The Company has filed an appeal in this litigation to
challenge the judgment on behalf of ICTS International, N.V.
The Atlantic City litigation was reopened in state court in January, 2008
and is still on-going. The amount claimed against ITA is $5,970,197. Deposition
discovery is about to commence.
Significant Changes.Changes
As of the management decision to cease the operations of the Leasing and
the Entertainment activities all the presentation ofin 2005, the financial statements was changed, including the comparative numbers. The new presentation isare presented
according to FAS 144 and itwhich separates the financial information of the
discontinued operations fromand the continuing operationoperations.
Item 9. The Offer and Listing
ICTS's shares of common stock haveare currently traded on the NASDAQ National Market
since 1996Bulletin Board
OTC under the symbol ICTS.ICTSF.OB.
The reported high and low closing sales prices per shares during the last
five years were as follows:
High Low
- ---- ----- -----
2003 $6.14 $2.49
2004 $8.42 $1.35
2005 $3.23 $1.58
2006 $2.54 $0.10
2007 $2.79 $1.40
The reported high and low closing sales prices per share during each
quarter as reported on NASDAQfor the last 3 years 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
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2006 High Low
- ---- ---- -------- -----
First quarter $2.54 $2.18
Second quarter $2.33 $1.65
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Third Quarter $1.90 $1.06
Fourth Quarter $2.30 $0.10
2007 High Low
- ------ ----- -----
First Quarter $2.79 $2.00
Second Quarter $2.25 $1.60
Third Quarter $2.05 $1.45
Fourth Quarter $1.98 $1.40
The reported high and low closing sales prices per shares during each of the
last six months were as follows:
High Low
----- -----
January $2.20 $1.80
February $2.20 $1.95
March $2.20 $2.00
April $2.20 $2.00
May $2.20 $2.10
June (until June 29, 2008) $2.20 $2.05
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. As of December 31, 2007 and 2006,
6,672,980 shares were issued. The Company holds 144,880 shares of treasury
stock.
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
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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 Thethe 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 Thethe Netherlands
and as provided by the Company's Articles of Association, approval of the annual
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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 aan authorizing resolution provided such authority for a
five year period ending June 30, 2006.2011. 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. Ifeliminated, 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 Thethe 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.
On December 6, 2006, shareholders authorized the Company, for a period of
18 months, to expend funds up to $6.5 million to repurchase common shares in the
open market at prices not to exceed $10 per share. As of June 30, 2007 the
Company has not re-purchased any shares.
Material contracts
For material contracts See "Item 8 - Financial Information, B. Significant
Changes"Information".
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
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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
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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)(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 euroEuro will be equal
to the U.S. dollar value of the euro on the date of receipt regardless of
-53-
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..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 Thethe 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.HolderU.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.
-54-
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"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.HolderU.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 Thethe Netherlands
The following is a general non-exhaustive discussion of the tax laws in
Thethe Netherlands as they relate to the operations of the Company.
-55-
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 Thethe Netherlands and is therefore
subject to -75-
the tax laws of Thethe Netherlands. In 20052006 the standard corporate
income tax rate was 27%25.5% applicable for taxable profits up to (euro)22,68923 and
31.5%29.6% for the excess. In 20062007, these rates are 20% for profits up to (euro)25,
23.5% for profits between (euro)25 and (euro)60 and 25.5% for profits in excess
of (euro)60.
ICTS and 29.6% respectively.a number of its Dutch resident subsidiary companies form a fiscal
unity for Dutch corporate income tax purposes. As a result, Dutch corporate
income tax is levied from these entities on a consolidated basis at the level of
ICTS.
For Dutch corporate income tax purposes business affiliates should
calculate their profits at arms length. Therefore, if inIn case transactions between such
affiliates certain benefitsconditions are bestowed on either entity becausemade or imposed (transfer prices) which differ from
those conditions which would have been made or imposed between independent
entities in the free market, the profits of such
affiliation andthose entities are determined as if
any profits are realized due to such association, then both
entities should include such profits as part of their income.the latter conditions had been agreed.
Participation Exemption
In addition,general, the Dutch participation exemption is applicable to a
shareholding held by ICTS in a subsidiary company in case the following
conditions are met:
(i) The subsidiary company has a capital divided into shares; and
(ii) ICTS holds at least 5% of the nominal paid-in share capital of the
subsidiary company; and
(iii) ICTS does not hold the shares in the subsidiary company as inventory.
In case of a shareholding in a non-Dutch resident subsidiary company, the
following additional conditions are applicable:
(iv) The subsidiary company is subject to a tax on profits in its state of
residence; and
(v) The shares in the subsidiary company are not held by ICTS as a portfolio
investment, including shareholdings in passive group financing companies.
Regardless of the above, a shareholding of 20% or more in a qualifying EU
resident subsidiary company that can be considered as a portfolio investment in
principle still falls within the scope of the participation exemption, provided
that all other above conditions are met and subject to certain anti-abuse
provisions.
As from 2007 conditions (iii)-(v) above for the application of the
participation exemption will be abolished. Further, the different treatment of
shareholdings in Dutch and foreign and of EU and non-EU subsidiaries will
disappear. Instead, the participation exemption will be applicable to
shareholdings in subsidiary companies of at least 5%, unless
(1) the subsidiary company can be considered as a low-taxed company; and
(2) the shareholding in the subsidiary company qualifies as a portfolio
investment.
-56-
A subsidiary company is considered as a low-taxed company in case the
company is not subject to a profit tax that equals at least an effective tax
rate of 10% over a taxable base determined according to Dutch standards.
Whether or not a shareholding in a subsidiary company qualifies as a
portfolio investment is determined based on an asset test at the level of the
subsidiary. A shareholding is qualified as a portfolio investment if the assets
of the subsidiary directly or indirectly consist predominantly (i.e. for more
than 50%) of "free portfolio investments", being portfolio assets that are not
used for business activities, including assets used for passive group financing
activities. The test must be applied from the perspective of the subsidiary
itself. The participation exemption will in principle be applicable by
definition in case 90% or more of the assets of the subsidiary company consist
of real estate.
In case the participation exemption is applicable, income in the hands of
ICTS arising from dividends paid by its
subsidiaries or affiliates or capital gains from the
saledisposal of its shares in such subsidiaries or affiliates is exempt from corporate income tax
in The Netherlands if the following conditionsNetherlands. Apart from special provisions in relation to certain
liquidation losses, capital losses incurred in relation to qualifying
participations 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)not deductible 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 theDutch corporate income tax purposes.
In 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 ofnot applicable, income derived from
a subsidiary company will be grossed up and taxed in 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, incomehands 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 fromagainst
ordinary corporate income tax in The
Netherlands.
Thin-capitalization rules
Asrates, whilst a credit is allowed for underlying
taxes. Income derived from totally exempt portfolio participations will not be
grossed up, nor can a credit for underlying taxes be claimed.
Costs related to the acquisition of January 1 2004,qualifying participations are not
deductible. Other expenses relating to participations, in all
companies, regardless of whether
they are resident in Thethe Netherlands or abroad, are in principle fully
deductible. TheAs from 2007, costs related to the disposal of participations
falling within the scope of the participation exemption will also no longer be
deductible.
Interest deduction limitations
As per January 1, 2004, thin capitalization rules were introduced in the
Netherlands which include restrictions on the deductibility of interest expenses will be reduced with regard
to loans provided to group companies or relatedin the
case of companies that have beenare 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 andto the extent
that the excess is greaterlarger than EUR (euro)500,000. In this respect,As an alternative to applying the
fixed 3:1 debt/equity ratio, as a safe harbour, ICTS may from year to year
decide to apply the average debt/equity ratio of the group of companies to which
it belongs as its maximum debt/equity ratio based on the statutory commercial
(consolidated) accounts. The amount of non-deductible interest is limited to
interest due to affiliated group companies (to the debts is defined asextent that such interest
exceeds interest received from affiliated group companies).
Besides the net amountthin-capitalization regulations, Dutch tax law includes
various other sets of cash loans receivable and
cash loans payable.anti-abuse provisions in relation to deduction of
interest.
Loss compensation
As a general rule, losses can be carried forward by ICTS indefinitely or
carried back to the three preceding book-years, subject to certain anti-abuse
provisions in relation to the trade in compensable losses.
-57-
Limitations on set-offloss compensation may also apply in the case of so-called
"holding losses", being - shortly summarized - losses As from 1 January 2004, new rules have been introduced that may affect the
carry forward of losses of prior years against profits madeincurred in 2004 and
subsequent years. Generally, the new rules provide that, ifa book-year
during which the activities of a
companyICTS (jointly with the subsidiary companies that
form part of the fiscal unity for Dutch corporate income tax purposes) for the
entire or almost entire year, entirely or almost entirely (i.e. 90%) consist(ed)
for 90% or moreconsist 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 direct 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 companycompanies. This will not
be deemed not to be (almost) entirely consisting of the holding of participations or
(in)directly financing related companiescase if at least 25 employees are engaged in other
activities on a full-time basis.
As of 2007, the term for carry-back of losses will be reduced from three
years to one year. Further, the term for carry-forward of losses will be limited
to nine years. Not yet compensated losses will vaporize after these terms have
lapsed. Based on transitional rules, losses sustained in book-years up to and
including 2002 may be set-off against profits of book-years up to and including
2011.
Corporate Income Tax 2007 Act, other changes
Based on the recently adopted Corporate Income Tax Act of 2007, as per
January 1, 2007, various other changes will be introduced to the Dutch corporate
income tax regime. Along with the changes already mentioned above, other changes
including, but not limited to an "interest box" and a "patent box" will be
introduced in the Netherlands (subject to approval from the European Committee).
In the interest box regime, subject to certain conditions, the positive
balance of interest receivable from and payable to group companies will be taxed
against an effective tax rate of 5% (up to a certain maximum depending on the
amount of equity for tax purposes). Application of the interest box regime is
optional. Therefore, ICTS may determine itself whether or not to apply the
interest box regime. If applied, the interest box regime must, in principle, be
applied by all Dutch resident group companies for a period of at least 3 years.
In the patent box regime, income from self-developed intangible assets
will be taxed against an effective tax rate of 10%. In general, the maximum
amount of income to be taxed against this special rate is limited to 4 times the
total costs made in relation to the intangible assets. Application of the patent
box is only possible in relation to intangible assets for which a patent is
granted. Further, application of the patent box regime is subject to the
condition that the income generated with an intangible asset, can for 30% or
more, be attributed to the patent. Brands, images and similar assets are
excluded from the patent box regime. Application of the patent box regime is
optional. ICTS may also decide to deduct R&D costs against other regularly taxed
income when determining its taxable income. At a later stage, subject to certain
conditions aimed at avoiding that costs are deducted against regular corporate
income tax rates whereas income is taxed under the patent box regime against an
effective rate of 10%, ICTS may in this case in principle still decide to apply
the patent box regime.
Further, as per January 1, 2007 restrictions will be introduced on the
depreciation period of goodwill and other business assets. The minimum
depreciation period for goodwill will be 10 years. The minimum depreciation
period for other business assets will be 5 years. It should still be possible to
value assets at lower going-concern value. Further, restrictions will be
introduced on the depreciation of real estate property. Shortly summarized,
depreciation of investment property will no longer be allowed in case the
book-value of the property falls below the official fair market value of the
property for tax purposes. The depreciation of real estate property used as part
of a trade or business will be allowed as long as the book-value of the real
estate property does not fall below 50% of the official fair market value of the
property for tax purposes.
-58-
Dutch Tax Consequences of Holding Shares
The following is a non exhaustivegeneral, non-exhaustive summary of NetherlandsDutch tax
consequences to a holder of Common Shares who is not, or is not deemed to be, a
resident of Thethe 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 Thethe Netherlands and its political subdivisions, other than the dividend withholding tax, the individualpersonal 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
Thethe 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 Thethe 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 Thethe Netherlands, to a
withholding tax at a rate of 25%. In 2007, the domestic Dutch dividend
withholding tax rate will be reduced to 15%. Dividends include distributions in
cash or in kind, constructivedeemed dividends and redemption and liquidation proceeds in
excess of, for The NetherlandsDutch tax purposes, recognized paid-in capital. Share
dividendsIn case there are
profits or in case profits can be anticipated, the repayment of ICTS' share
premium is in principle also subject to The Netherlandsdividend withholding tax. Further, share
dividends are subject to Dutch dividend withholding tax, unless distributed out
of the paid-in share premium of ICTS as recognized for tax purposes in Thethe
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 Thethe Netherlands. The Netherlands
has concluded such conventions with, among others, the United States, most
European Community countries,Union member states, Canada, Switzerland and Japan. Under most of these
conventions, a dividend withholding tax in Thethe Netherlands is effectively reduced
to a rate of 15% in the case of an individual shareholder or less.less in the case of
a corporate shareholder.
Under the tax convention currently in force between the United States and
Thethe 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 NetherlandsDutch dividend withholding tax to 15%,
provided that they are entitled to the benefits of the Treaty, unless such U.S.
Treaty Shareholder has a permanent establishment or permanent representative in
Thethe Netherlands to which or to whom the Common Shares are attributable. Subject
to certain conditions, the dividend withholding tax rate may be reduced to 5% or
0% in case a qualifying U.S. resident corporate shareholder would hold at least
10% respectively at least 80% of the voting power in ICTS.
Generally, there is no dividend withholding tax applicable in Thethe
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
sharesCommon
Shares to ICTS or any of its subsidiaries, the dividend withholding tax in Thethe
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
-59-
new laws to avoid such practices effective retroactively as from April 27, 2001.
Income Tax and Corporate Income Tax in Thethe Netherlands
ABased on Dutch domestic tax law, a non-resident Shareholder will not beis subject to
Dutch income tax and Dutch 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:in case:
(a) the non-resident Shareholder does not carrycarries on a business in Thethe
Netherlands through a permanent establishment or a permanent representative to
which or to whom the Common Shares are attributable; andor
(b) the non-resident Shareholder does not havehas a direct or indirect
substantial interest or deemed substantial interest in the share capital of ICTS
as defined in the tax code in Thethe Netherlands, or, in the event the non-resident
Shareholderwhich interest does have such a substantial interest, such interest formsnot form part
of the assets of an enterprise of that non-resident Shareholder; andor
(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, in the case of an individual shareholder,
through employment, to which enterprise the Common Shares are attributable.
Generally, there is 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,his or her partner (spouse,
registered partner or other individuals as defined in the Dutch 2001 Personal
Income Tax Act), owns, directly or indirectly, (i) 5% or more of the issued
capital of any class of shares in ICTS, (ii) options to acquire 5% or more of
the issued capital of any class of shares or (iii) profit-sharing rights to 5%
or more of the annual profits or liquidation distributions of ICTS. If an
individual, alone or together with his partner, does not have a substantial
interest based on these tests, he or she may nevertheless be deemed to have a
substantial interest in case certain profit-sharing rights.relatives hold a substantial interest in
ICTS. In case of a substantial interest claimsheld by a corporate shareholder, a
receivable the non-resident Shareholder has onfrom ICTS may also 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-
The Netherlands' right to levy tax with respect to dividends distributed
by ICTS to a non-resident Shareholder or capital gains derived from the sale or
disposal of shares in ICTS by a non-resident Shareholder may be limited under a
tax convention which is in effect between the country of residence of the
shareholder and the Netherlands.
In case Dutch income tax is due with respect to dividends distributed by
ICTS, Dutch dividend withholding tax levied with respect to such dividends can
be credited against the income tax due as a pre-tax.
Special rules may apply to non-resident Shareholders who owned a
substantial interest or deemed substantial interest under the rules applicable
before such datesat any time in the past 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.holders.
As of January 1, 2001, if certain conditions are met a non-resident
individual taxpayer can opt to be treated like a resident of Thethe Netherlands for
tax purposes. This choice will allow the individual to benefit from deductions
and other tax benefits only available to residents of Thethe Netherlands. However,Whether
or not such choice could be beneficial should be determined separately in most cases, this choice
may not prove beneficial since then theeach
-60-
individual will be liable for its
worldwide income as well as its entire worldwide holdings to taxes in The
Netherlands.case.
Gift, Inheritance Tax and Transfer Tax Upon Gift or Death in Thethe
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
Thethe Netherlands provided that:in case:
(a) (i) the Common Shares are not an asset attributable to a Dutch
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, andor (ii) the non-resident Shareholder is not entitled to a share in the
profits of an enterprise effectively managed in Thethe Netherlands, other than
through ownership of securities or through employment, to which enterprise the
Common Shares are attributable.attributable; or
(b) the Common Shares held by the non-resident do not qualify as
"fictitious real estate holdings" for Dutch real estate transfer tax purposes.purposes;
or
(c) the non-resident Shareholder has not been a resident of Thethe
Netherlands at any time during the ten years preceding the time of the gift or
death or, inand is a national of 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; andor
(d) for purposes of the tax on gifts, the non-resident Shareholder
has not been a resident of Thethe Netherlands at any time during the twelve months
preceding the time of the gift.gift; or
(e) the beneficiaries of a deceased non-resident Shareholder have
not
requested the treatment of the deceased Shareholder as a resident of Thethe
Netherlands according to the Dutch inheritance taxes.taxes; or
(f) In case of a grantgift of the Common Shares by a non-resident
Shareholder, the doneerecipient has not requested to have the donor treated as a resident
of Thethe 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. The2003, 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.accounts based on its tax advisors
calculations. The Company's management believes that the applicable provision in
its financial statements as of December 31, 20052006 is adequate to cover probable
costs arising from this tax examination if and when they will become to Tax
assessments. The matter is under criminal investigation in the Justice
Department.
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..Netherlands. Documents filed with the SEC
may also be read and copied at the SEC's public reference room at Room 1024,
-61-
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 CompaniesCompany's operations
outside the USA. In 20032007, about 90 percent72% of the Companies revenues were derived in
the USA.
-78-
The Company is subject to changes in the primate rate based on the Federal
Reserve actions and general market interest fluctuations. The Company believes
that moderate interest rate increases will not have a material adverse impact on
the results of their operations, or financial position, in the foreseeable
future. An increase of 1% in the interest rate would have increased the
Company's interest expense for factor advances, bank loans, and other parties,
by approximately $150,000 in the year ended December 31, 2008.
See financial statements, note 18.19.
Item 12. Description of Securities Other than Equity Securities
Not applicable
-79-
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicableThe Company was in compliance with all loan covenants as of December 31,
2007 and 2006. However, as of March 31, 2008, a US subsidiary was in violation
of its interest coverage ratio. The bank agreed to waive this covenant violation
subject to the issuance of the stand-alone financial statements of the
subsidiary. The financial statements have not been issued as of the date of the
filing and the debt is classified as current.
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
Not applicable
Item 15. Controls and Procedures.
BasedManagement's report on their evaluationinternal control over financial reporting
(a) Our management, including our chief executive officer and chief financial
officer, has evaluated the effectiveness of the Company'sour 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 ReportDecember 31, 2007. Based on Form 20-F, the Company'ssuch review, our chief executive
officer and chief financial officer have concluded that the Company's disclosurewe have in place
effective controls and procedures are designed to ensure that information required
to be disclosed by the Companyus in the reports that it fileswe file or submitssubmit under the Securities
Exchange Act of 1934, as amended, is accumulated and communicated to our
management, including our principal executive and principal financial officers,
or persons performing similar functions, as appropriate to allow timely
-62-
decisions regarding required disclosure, and is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and formsforms.
(b) Our management including our chief executive officer and our principal
financial officer is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rules 13a-15(f) and
15d-15(f) under the Exchange Act. Our internal control over financial reporting
is a process to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. Our
internal control over financial reporting includes those policies and procedures
that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of
our assets,
o provide reasonable assurance that transactions are operatingrecorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance with
authorizations of our management and directors, and
o provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on the financial
statements.
Our management recognizes that there are inherent limitations in the
effectiveness of any system of internal control over financial reporting,
including the possibility of human error and the circumvention or override of
internal control. Accordingly, even effective internal control over financial
reporting can provide only reasonable assurance with respect to financial
statement preparation, and may not prevent or detect all misstatements. Further,
because of changes in conditions, the effectiveness of internal control over
financial reporting may vary over time.
Our management including our chief executive officer and our principal financial
officer assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In conducting its assessment of internal
control over financial reporting, management based its evaluation on the
framework in "Internal Control - Integrated Framework" issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). Management has
based the assessment in a scope that includes the significant subsidiaries i.e.
ISEC International Security B.V, Huntleigh Corp USA, PI, I-SEC France.;
collectively "Subsidiaries". Our management including our chief executive
officer and our principal financial officer has concluded based on its
assessment, that our internal control over financial reporting was effective as
of December 31, 2007 based on these criteria.
This annual report does not include an effective manner.attestation report of our registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the SEC that permit us to provide
only management's report in this annual report.
(c) There were no significant changes in our internal control over financial reporting that
occurred during the Company'syear ended December 31, 2007 that have materially affected,
or are reasonably likely to materially affect, our 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 withcontrol over
-63-
financial background and
improve its financial record-keeping. The Company anticipates improving these
internal controls and procedures in the future.reporting.
Item 16A. Audit Committee Financial Experts
The financial expertsmembers of the Audit Committee consist of Philip M. Getter, Gordon
Hausmann and Gordon Hausmann.Eytan Barak. All members are independent, with no relationship with
management. Mr. Getter hasand Mr. Barak have financial expertise. MrMr. Getter is the
Chairman of the Audit Committee and Eytan Barak is also an independent Director of the Company.a CPA (Isr).
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'Paid to Our Independent Registered Public Accounting Firm
The following table sets forth the aggregate fees billed by our registered
independent auditors, Mahoney Cohen & Company, CPA, P.C. ("MC"), for services
rendered to us for the year 2005years ended December 31, 2007 and 2006. No services were
performed by, or fees incurred to, Goldstein, Golub and Kessler LLP ("GGK") in
connection with financial information services design and implementation
projects in 2007. The fees billed by MC, our independent registered public
accounting firm, for audit and other professional services during 2007 and 2006,
respectively, are summarized below. The audit committee has considered whether
the following:provision of these services is compatible with maintaining the principal
accountant's independence and has concluded that such services are compatible.
All fees were reviewed and pre-approved by the audit committee.
2007 2006
----- -----
Audit fees:
Audit fees $431300 400
Audit related fees
Sub-total $431300 400
Non-Audit services:
Tax fees
Total fees 300 400
Goldsten, Golub and Kessler LLP were the 2005 auditors. In 2006 the Company
changed its auditors to Mahoney Cohen & Company, CPA, P.C.
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 -Statements. See Item 18.
Item 18. Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Financial Statements
Consolidated Balance Sheets
-64-
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.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 and
Chief Financial Officer
Date: September 15, 2006
-81-June 30, 2008
-65-
ICTS INTERNATIONAL N.V.
20052007 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of independent registered public accounting firms ........... F-2
Consolidated financial statements:
Consolidated balance sheets ................................Balance Sheets F-4
Consolidated statementsStatements of operationsOperations and comprehensive operations .............................Comprehensive Operations F-6
Consolidated statementsStatements of changesChanges in shareholders' equity (deficiency) ........................Shareholders' Equity (Deficiency) F-7
Consolidated statementsStatements of cash flows ......................Cash Flows F-8
Notes to consolidated financial statements .......................... F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ICTS INTERNATIONAL N.V.N.V
We have audited the accompanying consolidated balance sheetssheet of ICTS
International N.V. and subsidiaries ("the Company")Subsidiaries as of December 31, 20052007 and 2004,2006 and the
related consolidated statementstatements of operations and comprehensive operations,
changes in shareholders' equity (deficiency)(deficit), 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 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 audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company has
determined that it is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. 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 financial position of ICTS
International N.V. and Subsidiaries as of December 31, 2007 and 2006 and the
results of their operations, changes in shareholder equity (deficit) and their
cash flows for the years ended in conformity with accounting principles
generally accepted in the United States of America.
As disclosed in Notes 1, 14 and 17, the Company is involved in significant
litigation, certain of which relates to the September 11, 2001 terrorist attacks
in the United States and the Company's insurance carriers have canceled all its
war risk policies. In addition, the Company is involved in other potential
contingencies including but not limited to (a) 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, (b) potential lawsuits pertaining to the Company's
discontinued operations of Explore USA, (c) the successful renewal of Procheck
and NAS contracts.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Notes 1, 14 and 17 to
the financial statements, the Company has suffered recurring losses from
operations, net working capital deficiency, negative equity, its U.S. subsidiary
is in default of its loan covenants and is subject to potential contingencies as
discussed in the preceding paragraph. 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.
Mahoney Cohen & Company, CPA, P.C.
New York, New York
June 30, 2008
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
ICTS INTERNATIONAL N.V.
We have audited the accompanying consolidated statements of operations and
comprehensive operations, changes in shareholders' equity (deficiency) and cash
flows of ICTS International N.V. and subsidiaries ("the Company") for the year
ended December 31, 2005. 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 auditsaudit 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 provideaudit provides 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 yearsyear 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 a 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), and 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 uncertaintiesuncertainties.
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-F-3
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 per 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 $54,962December 31,
------------
2007 2006
---- ----
Assets
CURRENT ASSETS:
Cash and cash equivalents $ 2,095 $ 1,743
Restricted cash 1,795 665
Accounts receivable (net of allowance for
doubtful accounts of $507 and $994 as of
December 31, 2007 and 2006, respectively) 10,200 13,316
Prepaid expenses 690 1,309
Other current assets 991 411
Current assets from discontinued operations 2,873 75
------- -------
Total current assets 18,644 17,519
------- -------
INVESTMENTS AND LONG TERM RECEIVABLES:
Investments in associated companies 2,513
Other receivables and investments 2,976 380
Restricted cash 3,500 3,500
------- -------
6,476 6,393
------- -------
PROPERTY AND EQUIPMENT
Cost 4,775 4,933
Less - accumulated depreciation and amortization 3,256 3,548
------- -------
1,519 1,385
------- -------
GOODWILL 314 314
------- -------
OTHER ASSETS:
Other assets net of accumulated Amortization 150 889
Non current assets from discontinued operations 55
------- -------
Total other assets 150 944
------- -------
Total assets $27,103 $26,555
======= =======
The accompanying notes are an integral part of the
consolidated financial statements.
-85-F-4
ICTS INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS
(US $ in thousands, except per 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 $ 54,962December 31,
------------
2007 2006
---- ----
Liabilities and shareholders' deficiency
CURRENT LIABILITIES:
Short-term bank credit $ 6,719 $ 5,132
Current maturities of long-term liabilities 126 154
Accounts payable - trade 4,432 3,749
Accrued expenses and other liabilities 16,055 20,214
Loan from related party 884
Current liabilities from discontinued operations 2,089 4,328
-------- --------
Total current liabilities 30,305 33,577
-------- --------
LONG-TERM LIABILITIES:
Accrued severance pay 84 55
Loan from related party 5,644 2,652
Other long-term liabilities, net of current maturities 3,150 160
Non current liabilities from discontinued operations 8,530 9,113
-------- --------
Total long-term liabilities 17,408 11,980
-------- --------
Total liabilities 47,713 45,557
-------- --------
COMMITMENTS AND CONTINGENT LIABILITIES
SHAREHOLDERS' DEFICIENCY:
Share capital - shares of common stock,
par value 0.45 Euro, December 31, 2007
and 2006:
Authorized - 17,000,000 shares;
issued - 6,672,980 shares 3,605 3,605
Additional paid-in capital 20,554 20,181
Accumulated Deficit (36,858) (34,300)
Accumulated other comprehensive loss (7,012) (7,589)
-------- --------
(19,711) (18,103)
-------- --------
Treasury stock at cost - December 31, 2007 and 2006-
144,880 shares (899) (899)
-------- --------
Total shareholders' deficiency (20,610) (19,002)
-------- --------
Total liabilities and shareholders' deficiency $ 27,103 $ 26,555
======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-86-F-5
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(US $ in thousands, except per share data)
Year ended December 31,
-------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ----
REVENUES $64,780 $ 60,791 $ 57,713 $ 57,993 $ 67,933
COST OF REVENUES 52,397 55,284 53,721
52,825 52,557
--------------- -------- --------
GROSS PROFIT 12,383 5,507 3,992 5,168 15,376
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,338 14,878 11,690
12,201 8,547
IMPAIRMENT OF ASSETS 797
--------------- -------- --------
OPERATING INCOME (LOSS)LOSS (955) (9,371) (7,698)
(7,033) 6,032
FINANCIAL INCOME (EXPENSES) --EXPENSES - net (3,334) (714) (908) (452) 4,118
OTHER INCOME (EXPENSES), net (246) 1,241 147
(2,907) (353)------- -------- --------
--------
INCOME (LOSS)LOSS BEFORE TAXES (4,535) (8,844) (8,459) (10,392) 9,797
INCOME TAXES BENEFIT (EXPENSE)EXPENSES (966) (846) (2,387) 1,529 (3,910)
SHARE IN LOSSES OF ASSOCIATED COMPANIES - net (2,479) (132) (486)
(1,625) (6,661)
--------------- -------- --------
LOSS FROM CONTINUING OPERATIONS (7,980) (9,822) (11,332) (10,488) (744)
DISCONTINUED OPERATIONS:
LossProfit (Loss) from discontinued operations, net of tax benefitexpenses (benefit) of
$2,525, $1,655$(2,470), $2,476 and $795$(2,525) in 2005, 20042007, 2006 and 2003,2005, respectively.
Includes loss of 4,774$$4,774 on sale of assets to related party in 2005 and after share in loss
of associated company of $36, and $81both in 2005 and 2004, respectively5,422 (4,248) (13,548)
(15,474) (18,130)
--------------- -------- --------
LOSS FOR THE YEAR (2,558) (14,070) (24,880)
(25,962) (18,904)
-------- -------- --------======= ======== ========
OTHER COMPREHENSIVE INCOME INCOME: (LOSS):
Translation adjustments 80 (399) (1,560) 1,043 3,456
Unrealized gains (losses) on marketable
securitiesSecurities 497 104 (214)
(616) 794
Reclassification adjustment for losses for
available for sale securities included in
net income 237------- -------- --------
--------577 (295) (1,774)
427 4,487
--------------- -------- --------
TOTAL COMPREHENSIVE LOSS FOR THE YEAR $(1,981) $(14,365) $(26,654)
$(25,535) $(14,417)======= ======== ========
========
LOSSESPROFIT (LOSS) PER SHARE :SHARE:
Loss from continuing operations:
Loss per common share-basic $ (1.22) $ (1.51) $ (1.74)
$ (1.61) $ (0.12)
=============== ======== ========
Loss per common share-diluted $ (1.22) $ (1.51) $ (1.74)
$ (1.61) $ (0.12)======= ======== ========
========
LossProfit (Loss) from discontinued operations:
LossProfit (Loss) per common share-basic $ 0.83 $ (0.65) $ (2.07)
$ (2.37) $ (2.78)======= ======== ========
========
LossProfit (Loss) per common share-diluted $ 0.83 $ (0.65) $ (2.07)
$ (2.37) $ (2.78)
=============== ======== ========
Net Loss:
Loss per common share-basic $ (0.39) $ (2.16) $ (3.81)
$ (3.98) $ (2.90)
=============== ======== ========
Loss per common share- diluted $ (0.39) $ (2.16) $ (3.81)
$ (3.98) $ (2.90)
=============== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-87-F-6
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (DEFICIENCY)
(US $ in thousands, except per share data)
Shares of common Stock
---------------------- Accumulated Accumulated
------------------- Additional (deficiet)(deficit) other
Number of Paid-in Retained Comprehensive Treasury
shares Amount capital earnings income (loss) stock Total
--------- ------ ------ ----------------- ----------- ------------- -------- ------------- ----- -----
BALANCE AT JANUARY 1, 2003 6,513,1002005 6,528,100 $3,605 $19,670 $ 3,6054,650 $(5,520) $(899) $ 19,670 $ 49,516 $*(10,434) $ (979) $ 61,37821,506
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):loss:
Translation adjustments (1,560) (1,560)
Unrealized losses on marketable (1,560) (1,560) Securities (214) (214)
--------
Total comprehensive loss (26,654)
------------------- ------ ------- -------- --------- -------- ------------- ----- --------
BALANCE AT DECEMBER 31, 2005 $6,528,100 $6,528,100 3,605 $ 19,670 $ (20,230) $*(7,294) $*(7,294) (899) $ (5,148)
=================== ====== ======= ======== ======= ===== ========
CHANGES DURING 2006:
Employees options according to FAS 123R 511 511
Comprehensive loss:
Loss (14,070) (14,070)
Other comprehensive (loss):
Translation adjustments 104 104
Unrealized losses on marketable Securities (399) (399)
--------
Total comprehensive loss (14,365)
--------- ------ ------- -------- ------- ----- --------
BALANCE AT DECEMBER 31, 2006 6,528,100 3,605 20,181 (34,300) *(7,589) (899) (19,002)
========= ====== ======= ======== ======= ===== ========
CHANGES DURING 2007:
Employees options according to FAS 123R 373 373
Comprehensive Loss:
Loss (2,558) (2,558)
Other comprehensive income (loss):
Translation adjustments 80 80
Unrealized gains on marketable Securities 497 497
--------
Total comprehensive loss (1,981)
--------- ------ ------- -------- ------- ----- --------
BALANCE AT DECEMBER 31, 2007 6,528,100 $3,605 $20,554 $(36,858) *$(7,012) $(899) (20,610)
========= ====== ======= ======== ======= ===== ========
December 31,
------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ----
Cumulative translation adjustments $ (7,194) $(5,634) $(6,677)$(7,012) $(7,090) $(7,194)
Cumulative unrealized gains on marketable securities (499) (100)
114 730
--------- -------- --------
$ ------- ------- -------
*$(7,012) *$(7,589) *$(7,294)
$(5,520) $(5,947)
========= ======== =============== ======= =======
-88-
The accompanying notes are an integral part of the
consolidated financial statements.
-89-F-7
ICTS INTERNATIONAL N.VN.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ in thousands)
Year ended December 31,
---------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss for the period (24,880) $(25,962) (18,904)
Loss$(2,558) $(14,070) $(24,880)
Profit (Loss) on discontinued operations 5,422 (4,248) (13,548)
(15,474) (18,130)
--------------- -------- --------
Loss on continuing operations (7,980) (9,822) (11,332) (10,488) (774)
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation and amortization 1,218 1,127 743 762 725
Impairment of assets 79748 40
Deferred income taxes 42 (177) 515 5,047
Increase (decrease) in accrued severance pay 24 (151) 128
(26) 6
Capital lossLoss (gain) on fixed assets 341(59) 6
Realized gain on marketable securities (16) (737)
Increasein other investments (295) (575)
Decrease (increase) in value of long term depositdeposits 93 143 (541) (217)
Write off of investments and impairment of investmentinvestments 855 1,148 2,893 400
Share in losses of associated companies 2,290 132 486
1,618 6,661
Interest from other long-term investments (derivative) (31)
InterestStock based compensation 373 511
Gain on a loan to associated company (100)settlement of liability (4,266)
Changes in operating assets and liabilities:
Accounts receivable - trade, net 364 438 (1,788) 1,807 1,662
Other current assets and prepaid expenses 103 (20) 1,239 2,044 (1,938)
Accounts payable 633 924 1,704 233 (181)
Accrued expenses and other liabilities 2,855 1,473 3,481 (2,217) (29,294)
Net cash provided by (used in) discontinued operations 175 (1,824) (254)
1,526 16,594
--------------- -------- --------
Net cash used in operating activities (3,569) (7,556) (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)(792) (630) (330)
Other investments (61) (175) (5,202)
Proceeds from affiliates 443 195
Proceeds from sale of equipment 989 92135 22
Proceeds from sale of other investments 295 419 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 (770) (665) 1,273 (1,686) 4,735
Proceeds from sale of marketable securities available for sale 3,726short term investments 224
Decrease (increase) in other assets (14) (133) 463 (579)
Net cash provided by (used in) discontinued operations 55 5,257
(4,501) (8,000)
--------------- -------- --------
Net cash provided by (used in) investing activities (1,077) (262) 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 (247) (152) (156) (103) (2,471)
Net increase (decrease) in short-term bank credit 1,562 1,224 54
(1,766) (4,270)Loan received from related party 3,991 2,652
Net cash from discontinued operations to financing activities (1,536) 205
--------(373)
------- -------- --------
Net cash provided by (used in) financing activities 4,933 3,724 22
(3,080) (2,423)
--------------- -------- --------
EFFECT OF CHANGES IN FOREIGN CURRENCY
EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 65 (90) (428)
407 (21)
--------------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 352 (4,184) 2,703 (4,180) (24,974)
BALANCE OF CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 1,743 5,927 3,224
7,404 32,378
--------------- -------- --------
BALANCE OF CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 2,095 $ 1,743 $ 5,927
$ 3,224 $ 7,404
=============== ======== ========
The accompanying notes are an integral part of the
consolidated financial statements.
-90-F-8
ICTS INTERNATIONAL N.VN.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ in thousands)
Year ended December 31,
---------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES:
Cash from continued operations paid during the year for:
Interest $624 $667 $ 450
$ 381 $ 224
======= =========== ==== =======
Taxes on income $226 $110 $ 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
======= =======$(2,116)
=======
The accompanying notes are an integral part of the
consolidated financial statements.
-91-F-9
ICTS INTERNATIONAL N.VN.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 relatedaviation-related services through
service contracts with airline companies and airport authorities.
As mentioned in section 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 in the past 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, 20042007, 2006 and 2003,2005, the Company
has incurred $25$2.6 million, $26$14.1 million and $19$24.9 million of net
losses, respectively, which were accompanied by net cash used in
operating activities of $5.2$3.6 million, ,$1.2$7.6 million and $19.3$ 5.2 million
respectively. As of December 31, 20052007 the Company had a working
capital deficiency of $2.7 million.$11.7 million, negative equity of $20.6
million and its U.S. subsidiary is in default of its loan covenants.
In addition, the Company is subject to potential contingencies in
connection with the U.S
department Justice matterIRS audit (see note 17(g)) and the September 11,
2001 terrorist attacks (see note 14)14(b)). During 2007 and 2006 the
Company received material loans from related parties to finance its
operations (see note 20(f)). These factors raise substantial doubt
about the Company's ability to continue as a going concernconcern.
Subsequent to the end of the year 2004, the Company's management
commenced liquidating its position in several long termlong-term assets as
described in Notes 7(d), 6(a)5(a) and 23.7(d). In addition, during 2005,
management has ceased its operations in non corenon-core business as
described in note 2(u) and is re-enteringaccomplished successfully its penetration
to the Security European market, see note 14(c).security market. Management anticipates that those
liquidations and the loans received from the related party 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)profitability from continuing
operations. 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 14(b)(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 20042006 a liability
relating to the audit of approximately $7.3 million was recordedincluded in
the consolidated financial statements based on the estimated maximum
exposure according to the Company's legal advisors. The claim of the
DOL has been settled during 2007 for $3 million payable out of any
settlement with the TSA. A long-term receivable of $2.9 million and
a long-term liability of $3 million are shown in the consolidated
financial statements. In March 2006As of the DOL filed a complaint alleging thatchange in the liability, the Company
subsidiary underpaid
$7.1recorded in 2007 income of $4.3 million duringwhich has been reflected as
a reduction of the TSA takeover period from February 15th
through Decembercost of 2002.revenues.
F-10
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 1 - GENERAL (continued)
The TSA Contract indicatesindicated 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 fiscalIn 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.this liability. 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$0 and $0.5 million$100 at December 31, 20052007 and 2004,2006,
respectively, by recording a credit to cost of revenues of
approximately $0.2 million$100 and $0.5 million in 2005 and 2004, respectively.$200, respectively, on those years.
As to the other outstanding issues, see note 14.
d. Sale of ICTS Europe Holding B.V. ("ICTS Europe")
On October 5, 2000, the Company entered into a share purchase
agreement (the "Share Purchase Agreement") with Fraport AG
("Fraport"), whereby Fraport was to acquire, in two stages of 45%
and 55% in 2001 and 2002, respectively, the shares of ICTS Europe.
As a result of the sale, the Company has fully divested itself of
its European operations except for the operations of the Company's
subsidiary in the Netherlands and countries that were formerly part
of the Soviet Union republics, including Russia and Kazakhstan, and
took upon itself certain restrictions on its operations, see note 14c.operations. During
2005, the restrictive covenant expired and since then the Company
has successfully re-entered the aviation security business in Europe
with contracts with US carriers throughout Europe.
e. Renewal of material contracts
The Company's subsidiary Procheck has a material contract that
expired in February 2008 and was extended until February 2009. If
the contract will not be renewed it will have a material adverse
effect on the Company's financial results.
Through I-SEC Group, the Company participated in 2007 in a bid to
provide security services for Schiphol International Airport in the
Netherlands. The Company was chosen to provide such services for the
next five years. This contract ended the activities of the
partnership with NAS in which ICTS had 50% holding, see note
5(a)(2).
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the USA ("U.S. GAAP").
The significant accounting policies are as follows:
a. Functional currency
The major part of the Group's revenues and operations are carried
out by the Company subsidiaries in the United States. The functional
currency of these entities is the U.S. dollar ("dollar" or "$").
-94-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
The.The
functional currency of the remaining subsidiaries and associated
companies, mainly European companies, is their local currency,
mainly Euro ("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, "Accounting for Foreign Exchange Exposure," of
the Financial Accounting Standards Board of the United States
("FASB"). Assets and liabilities are translated at year endyear-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).loss.
F-11
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
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-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 termshort-term
investments as of December 31, 20052007 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",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,-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-F-12
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
-----
EquipmentOffice furniture, 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).shorter.
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",Assets," goodwill is not amortized but rather tested for impairment
at least annually, at December 31 of each year.
As of December 31, 2005,2007, the Company has determined that there is no
impairment with respect to goodwill based on expected future cash
flow examination and based on the results of goodwill. For the years ended December
31, 2004 and 2003, goodwill of $5,266 and $797 relatingacquired companies
compared to entertainment and relating to the other operating segment were
written off, respectively (see note 4b and note 8)previous years.
j. Other assets and Intangibleintangible assets
The intangible asset pertaining to customer relationships is being
amortized over 10 years.until February 1, 2008, see note 4. Technology was
amortized over 3 see note 9.years and was fully amortized at 2005.
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 theirthe 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, arewill be recorded under "additional paid in capital".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)(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. Exercisable Options for
615,833, 400,500,1,530, 1,262, and 224,000616 thousand shares of common stock in 2005, 20042007, 2006
F-13
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
and 2003,2005, respectively, were not included in computed fully dilutedfully-diluted
EPS because their effects were anti dilutive.anti-dilutive. The total outstanding
options for the years 2007, 2006 and 2005 2004were 1,723, 1,920, and
2003 were
1,082 1,113 and 253 thousands,thousand, respectively (see note 22). In addition, for 2007,
stock options to purchase 669,795 common shares, which would have
been dilutive had net income available to common stockholders been
positive, were excluded from the computation of diluted net loss per
common share because 2007 net income available to common
stockholders was a loss; the inclusion of such dilutive stock
options would have been anti-dilutive to the net loss per common
share computation.
o. DeferredIncome taxes
The provision for income tax is calculated based on ICTS's
assumptions as to its entitlements to various benefits under the
applicable tax laws in the jurisdiction in which it operates.
Penalties regarding taxes are presented as part of selling, general
and administrative costs while interest regarding taxes is being
presented as financial expenses.
In June 2006, the FASB issued Interpretation No. 48, Accounting for
Uncertainty in Income Taxes, an Interpretation of FASB Statement No.
109 ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in a company's financial statements and
prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position
taken or expected to be taken in a tax return. The Interpretation
also provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition.
We adopted FIN 48 on January 1, 2007. On the date of adoption there
was no impact on our financial statements pertaining to FIN 48 as
our uncertain position pertained to the U.S. operations which
liability reserves were provided for.
FIN 48 requires that tax benefits (expenses) recognized in the
financial statements must be at least more likely than not sustained
based on technical merits. The amount of benefits (expense) recorded
for these positions is measured as the largest benefit (expense)
more likely than not to be sustained. Significant judgment is
required in making these determinations.
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 ofto disposal of investments in subsidiaries
and associated companies have not been taken into account in
computing the deferred taxes, since, under the laws of Thethe
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
debtsreceivables doubtful of collection amounting to $1,237$507 and $2,708$994 as of
December 31, 20052007 and 2004,2006, respectively. TheFor net bad debts expenses
(collection) were $626, $798, see schedule of Valuation and $(264) in 2005, 2004, and 2003
respectively.
TheQualifying accounts,
receivable-trade includes $3 million asattached to this report.
As of December 31, 2005 and 2004 which is2006, the accounts receivable - trade included
$2.9 million due from the TSA. As to the dispute with the TSA, - see
note 14 b 14(b)(3). As of December 31, 2007, the amount was classified as
other receivables and investments, long term, see note 6.
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,
someSome 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 worthinesscreditworthiness of their
customers and determine the credit line, if any.
-99-F-14
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 20032007,
2006 and 2005 were $522. No advertising costs were incurred in 2005$111, $115 and 2004.$56, respectively.
s. Stock basedStock-based compensation
1) Employee stock basedstock-based compensation
TheEffective January 1, 2006, the Company accountsadopted the provisions of
Statement of Financial Accounting Standard No. 123 (revised 2004)
("FAS 123R"), "Share-Based Payment," and Staff Accounting Bulletin
No. 107 ("SAB 107"), which was issued in March 2005 by the SEC. FAS
123R addresses the accounting for share-based payment transactions
in which the Company obtains employee services in exchange for
equity instruments of the Company. This statement requires that
employee equity awards be accounted for using the grant-date fair
value method. SAB 107 provides supplemental implementation guidance
on FAS 123R, including guidance on valuation methods, classification
of compensation expense, income statement effects, disclosures and
other issues.
FAS 123R supersedes the Company's previous accounting for its
employee stock based compensation in
accordance withoption plans using the intrinsic value-based method
of accounting prescribed under 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 usingThe Company also
followed the intrinsic value based methoddisclosure requirements 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 andCompensation," as amended by FAS 148, "Accounting for
Stock-Based Compensation -Transition and Disclosure," for companies
electing to apply APB 25. The Company elected to adopt the modified
prospective transition method permitted by FAS 123R. Under such
transition method, the new standard has been implemented as from
January 1, 2006, with no restatement of prior periods to reflect the
fair value method of expensing share-based compensation.
The Company has expensed compensation costs, net of estimated
forfeitures, applying the accelerated vesting method, based on the
grant date fair value estimated in accordance with the original
provisions of FAS 123, and previously presented in the pro forma
footnote disclosures. Results for prior periods have not been
restated as explained above. During 2007, no options were granted.
Options granted in 2006 were calculated based on the Lattice method
as opposed to the 2004 options that were calculated using the Black
- Scholes method. For the years ended December 31, 2007, and 2006,
the Company recorded stock-based compensation costs of $373 and
$511, respectively. Out of those expenses, $0 and $9, respectively,
were recorded under cost of revenues, and $373 and $502,
respectively, were recorded under selling, general and
administration expenses.
The fair value of each optionoptions granted is estimated on the date of grant
using the Black & Scholes option-pricing model with the following weighted averageweighted-average assumptions:
For options granted in
---------------------------------------------
2006 2004
2002
------ ---------- ----
Expected life of options (years) 5 35
Expected volatility 101.3% 100%75% 77%
Risk free interest rate 3.5%5.1% 3.5%
Expected dividend yield 0% 0%
Forfeiture - Executives 4.2% 0%
Forfeiture - Employees 3% 0%
In 2002 options were issued that vested over a period of three years
with an expiration date of January 1, 2007. The weighted averageoutstanding options
expired and were not exercised.
The weighted-average fair value price per option granted during
the
year,2006, using the Lattice method for 2006 and the Black &- Scholes
option-pricing model was $1.03 and
$2.03 for 2004 was $0.68 and 2002,$1.03, respectively.
During 2007, 2005 and 2003 no options were granted.
-100-F-15
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)
========= ========= ==========compensation in prior
years.
Year ended December 31, 2005
----------------------------
in thousands
(except per share data)
----------------------------
Net loss $(24,880)
Deduct: stock based employee
compensation expenses determined
under fair value method for
all awards (241)
--------
Pro-forma net loss $(25,121)
========
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(3.81)
========
Basic - SIGNIFICANT ACCOUNTING POLICIES (continued)
seepro-forma $ (3.85)
========
Diluted - as reported $ (3.81)
========
Diluted - pro-forma $ (3.85)
========
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 123,123R, based on the
fair value of the options granted. No options were granted to
non-employees in 2007.
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"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 expensein 2007, 2006 and 2005 income (loss) of $9,701$1,962, $(1,415) and
($9,701) respectively, associated with claims regarding rent
expenses that the Company is obligatedhas to pay until the year 2019.
3) The components of assets and liabilities from the discontinued operation
(leasing and entertainment segments) are presented below:
-102-2019, see
also note 14(b)(8).
F-16
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
(4)3) Balance Sheet for the years 2007 and 2006 and Profit and lossLoss
for discontinued operations for the years 2007, 2006 and 2005
2004 and 2003 isare presented below:
December 31,
-----------------
2007 2006
---- ----
Cash and cash equivalents $ 24
Other current assets *$ 2,873 51
------- -------
Total current assets from discontinued operations 2,873 75
------- -------
Investment in associated companies 55
Short term bank credit (122)
Current maturities (1,012)
Accounts payable - trade (2,109)
Accrued expenses and other liabilities (2,089) (1,085)
------- -------
Current liabilities from discontinued operations (2,089) (4,328)
------- -------
Long term liabilities $(8,530) $(9,113)
------- -------
During 2007 and 2006 there were no assets or liabilities regarding
the discontinued Leasing operations.
Year ended December 31,
-------------------------------------------------------------------
2005 2004
------------------------------------------------------------------------------------------
2007 2006
---- ----
Leasing Entertainment Total Leasing Entertainment Total
------- ------------- ----- ------- ------------- -----
CashRevenues
Cost of revenues
------ ------ ------ ------ ------- -------
Gross profit (loss)
Selling, general and
cash equivalentsAdministrative income (expenses) $2,634 $2,634 $ 71 $ 59 $ 130 $ 4 $ 198 $ 202
Accounts receivable 14 14
Prepaid expenses 151 151 80 80
Other current(3) $(1,771) $(1,774)
Impairment of assets 201 201 843 843
-------- -------- -------- -------- -------- --------
Total current assets(55) (55)
------ ------ ------ ------ ------- -------
Operating income (loss) 2,579 2,579 (3) (1,771) (1,774)
Financial income (expenses) 373 373 2 2
Capital loss
------ ------ ------ ------ ------- -------
Loss before taxes 2,952 2,952 (1) (1,771) (1,772)
Income taxes benefit (expenses) *2,470 2,470 (2,476) (2,476)
Equity in results of affiliates
------ ------ ------ ------ ------- -------
Income (Loss) 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)
-------- -------- -------- -------- --------$5,422 $5,422 $ (1) $(4,247) $(4,248)
====== ====== ====== ====== ======= =======
-103-* In February 2008, the Company received a tax refund of $2.5 million and $373
of interest for which the Company had a full valuation in 2006.
F-17
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)
======= ======= ======= ======= ======= ======= ======= =======Year ended December 31,
-----------------------
2005
----
Leasing Entertainment Total
------- ------------- -----
Revenues $ 2,814 $ 1,171 $ 3,985
Cost of revenues 2,497 1,905 4,402
------- -------- --------
Gross profit (loss) 317 (734) (417)
Selling, general and
administrative expenses 19 10,486 10,505
Impairment of assets 110 110
------- -------- --------
Operating income (loss) 298 (11,330) (11,032)
Financial income (expenses) (212) (19) (231)
Capital loss (4,774) (4,774)
------- -------- --------
Loss before taxes (4,688) (11,349) (16,037)
Income taxes benefit (expenses) 2,525 2,525
Equity in results of affiliates (36) (36)
------- -------- --------
Income (Loss) from discontinued
operations $(4,688) $ (8,860) $(13,548)
=======
-104-======== ========
During 2007 there was no income or expenses relating to the Leasing
discontinued operations.
v. Recently issued accounting pronouncements
FAS 157
In September 2006, the FASB issued FAS 157, "Fair Value
Measurements." This standard establishes a framework for measuring
fair value and expands related disclosure requirements; however, it
does not require any new fair value measurement. As applicable to
ICTS, this statement will be effective as of the year beginning
January 1, 2008. ICTS does not expect that the adoption of FAS 157
will have a significant impact on its financial statements.
FAS 159
In February 2007, the FASB issued FAS 159, "The Fair Value Option
for Financial Assets and Financial Liabilities." This standard
permits entities to choose to measure many financial assets and
financial liabilities at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported
in earnings. As applicable to ICTS, this statement will be effective
as of the year beginning January 1, 2008. ICTS does not expect that
the adoption of FAS 159 will have a significant impact on its
financial statements.
EITF 07-3
In June 2007, the FASB ratified Emerging Issues Task Force Issue
07-3, "Accounting for Advance Payments for Goods or Services to Be
Used in Future Research and Development Activities" ("EITF 07- 03").
EITF 07-03 provides guidance on the capitalization of non-refundable
advance payments for goods and services to be used in future
research and development activities until such goods have been
delivered or the related services have been performed. As applicable
to ICTS, this pronouncement will be effective as of the year
beginning January 1, 2008. The Company does not expect the adoption
of this pronouncement to have a material effect on its consolidated
financial statements.
F-18
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)141R
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 2005,2007, the FASB issued FAS 154, "Accounting Changes141 (revised 2007) ("FAS
141R"), "Business Combinations" FAS 141R will change how business
acquisitions are accounted for and Error
Corrections - a replacement of APB No. 20 "Accounting Changes" and
FAS No. 3 "Reporting Changes in Interim Financial Statements". This
statement provides guidancewill impact financial statements
both on the accountingacquisition date and reporting of
accountingin subsequent periods. Key changes
include: acquired in process research and error corrections,development will no longer
be expensed on acquisition, but capitalized and guidanceamortized over its
useful life; fair value will be based on market participant
assumptions; acquisition costs will be expensed as incurred; and
restructuring costs will generally be expensed in determination of retrospective application of changes in accounting
principals.periods after the
acquisition date. Early adoption is not permitted. As applicable to
ICTS the provisions of FAS 154 arethis statement will be effective as forof the year beginning
January 1, 2006.2009. The Company believes that the adoption of FAS 141R
could have an impact on its consolidated financial statements;
however, the impact would depend on the nature, terms and magnitude
of acquisitions it consummates in the future.
FAS 160
In December 2007, the FASB issued FAS 160, "Noncontrolling Interests
in Consolidated Financial Statements - an amendment of Accounting
Research Bulletin 51" ("FAS 160"), which establishes accounting and
reporting standards for non-controlling interests in a subsidiary
and deconsolidation of a subsidiary. Early adoption is not
permitted. As applicable to ICTS, this statement will be effective
as of the year beginning January 1, 2009. ICTS is currently
evaluating the potential impact the adoption of FAS 160 would have
on its consolidated financial statements.
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:
CertainNOTE 3 - RESTRICTED CASH
December 31,
------------
2007 2006
---- ----
Restricted cash (a) $1,795
Other (b) $665
------ ----
$1,795 $665
====== ====
(a) During 2007 the Company won a bid to provide security services
to Schiphol International Airport in the Netherlands. As part of the
terms it had to provide a guarantee of (euro) 1.2 million ($1.8
million as of December 31, 2007). The Company provided such
guarantee and at the same time had to deposit the same amount as
cash collateral security.
(b) On December 31, 2004, management has decided to record a
provision for amounts that the Company has deposited regarding its
guarantees, provided as part of its investment in Bilu (a privately-
held company). The provision was made based on continuing
deterioration in Bilu's financial results. In May 2007, the Company
was released from 2004part of those guarantees and 2003 have been reclassified to conform
with 2005 presentation, separatingreceived back an
amount of $441. In July 2007, the continuing operationsCompany was released from the discontinued operations according to FAS 144 -an
additional guarantee of $224. The provision for these amounts was
recorded in other income, see note 2(u)16 (a).
The reclassification had no effect on previously reported net loss
or shareholders' equity.
-105-F-19
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 Thethe 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.Airport (customer relationship). This intangible asset is
amortized by the straight -linestraight-line method, over its estimated useful
life of 10 years. During 2006 Management revaluated its previous
estimation and decided to depreciate the intangible, which is
estimated as 10 years.
b. In July 1, 2002, ICTS increased its percentage interestincluded 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 netother 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(see note 9), until the end of the third quarter of
2003, itcontract
with Schiphol, which ended on February 2008, based mainly on the
high competition in the market. The total amortization for the years
2007 and 2006 was determined that Demco will not be able$648, compared to realize its
business plans,$188 in 2005.
In January 2008 PI got a one-year extension for the Company tested Demco's goodwill for impairment and
wrote off the balance of this goodwill of $797.contract with
Schiphol until February 1, 2009.
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES
Composed and presented as follows:
December 31,
------------------------
2005 2004
------ ------------------
2007 2006
---- ----
Investment in 31.83% ( 200428.1% (2006 - 32.15%29.5%) interest of InkSure Technologies Inc. (1) $1,805 $2,943$ 284
Investment in 50% interest in ICTS-NAS (2) 1,184 796
Investment in 50% interest in Aerosafe LLC 352,229
Investment in 42.5% interest in Rainbow Square Entertainment LLC(3) $55 20155
------ ------
$3,044 $3,975-,- $2,568
------ ------
The investments are presented in the balance sheets as follows:
Among investments 2,989 3,774$2,513
Among non current assets from discontinued operations 55
201
------ ------
$3,044 $3,975-,- $2,568
====== ======
-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 processin-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%.
AtIn September 2005 Inksure completed another private placement in
which ICTS did not participate and as a result of that the companyCompany
share in Inksure was reduced to 31.83%. The Company's shareIn December 2006 the Company
sold 155,000 shares of Inksure for $419, which reduced its interest
in Inksure'
lossesInksure to 29.5%, and in March 2007 another 155,000 shares were
sold for the year ended$295. As of December 31, 2005 totaled to $693 and the
technology amortization for 2005 totaled $445.2007, ICTS holds 4,515,555 shares
of Inksure, representing 28.1% of Inksure shares.
F-20
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
The investment in Inksure is being displayed by the Equity Method.
Following Inksure losses in the last years the affiliate accrued a
shareholders' deficiency. The Company's participation in Inksure's
losses exceeding its investment were reduced from the technology
assets regarding ICTS investment in Inksure until it was totally
amortized. The balance of $1,805$284 as of December 31, 2005 ($2,943 as of December
31,2004),include2006 represents
the amortized technology of $1,669 ($2,113 as of
2004) and the equity balance of $136 ($830 as of 2004).$0. This asset
was fully amortized during 2007. The market value of the investment
as of December 31, 20052007 was $13,994. During$1.9 million. As of June 1, 2008, the
market value of the investment dropped to $1 million.
The Company secured 2,157,895 shares of Inksure loans received in
2007 and 2006 the company decided to sell its investment in Inksurefrom related party - see note 23(b)20(f).
-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 providesprovided security services at
Amsterdam Schiphol Airport in Thethe 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) onof equity in the years ended
December 31, 2007, 2006 and 2005 2004were $(2,003), $1,303 and 2003 were $705, $1,195 and $(2,392)
respectively. The joint venture declared a dividend in April 2005.
ICTSSeptember
2006. ICTS's part was approximately $195.$443. The Company recorded other
comprehensive lossincome (loss) regarding its investment of $122$ 32, $184
and $30$(122) as of December 31, 2007, 2006 and 2005, and
2004 respectively regarding its investment.respectively.
The investment in NAS is beingwas displayed by the Equity Method.
The NAS contract with Schiphol expired on February 1, 2008. NAS
ceased its operations at that date and is in the process of
dissolving the entity. The Company does not expect to receive any
proceeds for NAS, so, the Company decided to impair all its
investment in NAS as of December 31, 2007, which totaled to $332.
(3) The Company holds 42.5% in Rainbow Square Entertainment LLC
("Rainbow"), a partnership that was established in July 2003.
RainbowoperatesRainbow operates an entertainment site. In 2005Both in 2007 and 20042006 the
Company recorded a loss of $0, compared to a loss of $36 and $81 respectively on itsin 2005
regarding the share of the partnership loss. In 2007 the Company
impaired $55 on its investment, as the Company does not expect any
future proceeds. The balance of the investment as of December 31,
2007 is zero.
In December 2004, the Company determined that the furtherfuture 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, 2005,2007 and 2006, the balance of this investment of $0
and $55, isrespectively, was included in non currentnon-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------------
2007 2006
---- ----
Current assets $ 6,174 $ 2,606$1,897 $3,599
======= =======
Non-current assets $ 1,269 $650$1,025 $1,146
======= =======
Current liabilities $1018 $616$850 $564
======= =======
Long-term liabilities $5,691 $5,518
======= =======
Shareholders' equity $431 $ 2,525Deficiency $(3,619) $(1,337)
======= =======
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-F-21
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,
-----------------------------------------------
2007 2006 2005
2004
------- -------
unaudited---- ---- ----
Revenues $2,890 $2,002 $1,626
======= ======= =======
Gross profit $1,782 $1,139 $842
======= ======= =======
Net loss $87 $190$(3,078) $(3,112) $(2,213)
======= ======= NAS:=======
Rainbow:
Balance sheet data:
December 31,
------------------------
2005 2004
------- -------
unaudited------------
2007 2006
---- ----
Unaudited
---------
Current assets $7,358 $6,076$193 $205
====== ======
Non-current assets $312 $263$1,122 $1,143
====== ======
Current liabilities $5,306 $4,746$199 $216
====== ======
Shareholders' equity $2,364 $1,593Partners' capital $1,135 $1,133
====== ======
Operating results data:
Year ended December 31,
-----------------------------------------------------------------
2007 2006 2005
2004 2003
------- ------- -------
unaudited
Revenues $40,443 $26,468 $13,759---- ---- ----
Unaudited
---------
Net loss $18 $69 $87
=== === ===
NAS:
Balance sheet data:
December 31,
------------
2007 2006
---- ----
Current assets $9,962 $11,762
====== =======
Non-current assets $44 $385
====== =======
Current liabilities $9,341 $7,695
====== =======
Gross profit (loss) $ 3,609 $ 4,202 $(2,852)Shareholders' equity $665 $4,452
====== =======
======= =======
Net income (loss) $ 1,409 $ 2,392 $(4,784)
======= ======= =======
-113-F-22
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(continued)
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
Operating results data:
Year ended December 31,
-----------------------
2007 2006 2005
---- ---- ----
Revenues $62,684 $57,742 $40,443
======= ======= =======
Gross profit $873 $3,644 $ 3,609
======= ======= =======
Net income (loss) $(4,006) $1,422 $ 1,409
======= ======= =======
NOTE 6 - OTHER RECEIVABLES AND INVESTMENTS
December 31,
-------------------
2005 2004
------- --------
Long term------------
2007 2006
---- ----
Long-term deposits (a) $ 21742 $ 5,170277
Marketable securities:
Investment in 2.8% interest in VCON Ltd.(c(1)) 683
Investment in 17.6% interest in PlanGraphics, Inc. (d) 278 343
------- -------(a) 103
Receivable from the TSA (b) 2,934
------ -----
Total $2,976 $ 495 $ 6,196
======= =======
Non-marketable securities:
Investment in a convertible debenture
of VCON Ltd. (c (2)) 880
------- -------
Other 42
------- -------
Total $ 495 $ 7,118
======= =======380
====== =====
Gross unrealized gain (loss) on marketable securities
and other investments were as follows:
Gross unrealized gains $ 222 $ 371
======= =======
Gross unrealized losses $ (322) $ (257)
======= =======-,- $(497)
====== =====
(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 "IntegratedIntegrated Spatial Information
Solutions, Inc.") for $0.035 per share. PlanGraphics securities are
traded on the Pinkpink sheets. The price per share as of December 31,
20052007 and 20042006 was $0.016$0.006 at both dates. At December 31, 2007 the
Company decided to impair its investment which included the market
value of PlanGraphics at December 31, 2007 of $103 and $0.02 respectively.comprehensive
income of $497 regarding the accumulated comprehensive losses
related to PlanGraphics. Unrealized loss as of December 31, 2005 and 20042006
amounted to $322, and $257
respectetively.
(e) Long term loan$497.
(b) Receivable from the TSA of $2,934 as of December 31, 2007 - see note
14(b)(3). In 2006 the receivable is shown on the balance sheet as
part of the accounts receivable. At 2007 the company decided to
an employee.
In December 2003 ICTS grantedreclass the receivable as 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 determinedlong-term receivable based on
management's estimation that the loanlitigation with the TSA 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-resolved during 2008.
F-23
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
------- -------------------
2007 2006
---- ----
Cost:
Equipment and facilities (d,e) $ 3,0683,659 $ 2,3824,007
Vehicles 303 418817 801
Leasehold improvements 113 112
Office furniture and equipment 748 637299 125
------- -------
4,232 3,549
L e s s4,775 4,933
Less - accumulatedAccumulated depreciation and amortization (2,979) (2,534)(3,256) (3,548)
------- -------
$ 1,2531,519 $ 1,0151,385
======= =======
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 $570, $481
and $520 $507in 2007, 2006 and $477 in 2005, 2004respectively. During 2007 and 2003, respectively. Depreciation2006
there was no depreciation expense from discontinued operations,
totaledcompared to $2,533 $2,862 and $2,692,
respectively.in 2005.
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%plus 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 equipmentsequipment's 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 toexpired on
September 30, 2006. As a consideration for granting the option fee
the lessee hadwas required to pay ICTS an option fee of $20 per month,
which will be reducedshould have been deducted from the $5 million in case of
exercising the option.
In July 2005 the companyCompany received an advancedadvance payment of $1 million
on lease installments which willwould be reduceddeducted from the purchase
price of $5 million in case thatwere the option willto be exercised.
F-24
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 7 - PROPERTY AND EQUIPMENT (continued)
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 sellingsale amounted to $4,774, and is included in
discontinued operations in the accompanying statement of operations.operations
of that year.
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. See also note
2(u).
Based on the performances of the entertainment sites, the Company's
management revaluated these two facilities during 2004 and
determined that thetheir forecasted cash flows from them will not cover the
investments. Based on their fair value whichthat was calculated using a
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
---------- -----------
BalanceGoodwill, which totaled $314 as of December 31, 2003 $314 $5,266
Impairment2007 and 2006,
reflects the excess 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,Procheck acquired in
which ICTS planned to
invest. The purchase price exceeding2002 over 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.assets.
NOTE 9 - OTHER ASSETS
a. As of December 31, 2005,2007, other assets were comprised of the
following:
December 31, 20052007 December 31, 2004
--------------------------------------- ----------------------2006
----------------- -----------------
Gross carrying Accumulated Net book Gross carrying Accumulated Net book
amount amortization value amount amortization value
--------------------------- ------------ -------- -------------- ------------ --------
Customer relationship (1) $1,785 $1,732 $ 1,785 $ 436 $1,349 $248 $1,537
Technology (2) 156 156 -,- 120 36
Other (3) 314 -,- 314 -,- 181
------- -----53 $1,785 $1,084 $701
Rent Deposits 97 97 188 188
------ ------ ---- ------- ------ ----
$1,882 $1,732 $150 $ 2,255 $ 592 $1,663 $368 $1,754
======= =====1,973 $1,084 $889
====== ====== ==== ======= ====== ====
-119-(1) Regarding the contract with Schiphol Airport, see note 1(e).
Amortization expense in 2007, 2006 and 2005 totaled $648, $648 and
$224, respectively.
b. Estimated amortization expenses for the year 2008 are $53.
F-25
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 interestInterest rates as of
December 31, 2007 December 31,
-------------------------
2005 2005 2004
---------------- ------ -------------------------- ------------
% Short term2007 2006
- ---- ----
Short-term credit from continuing operations:
ICTS -
In dollars 7.80 $281 $38
Other currencies 45
Subsidiaries:
In dollars (a) 6.29 $ 17 $ 984
In8.35 5,662 4,833
Euros (b) 1,290
Subsidiaries:
In dollars (c) 8.25 3,879 1,456
In other7.30 680 196
Other currencies (d) 9.5 11 1407.75 96 20
------ ------
$3,907 $3,870$6,719 $5,132
------ ------
Short termShort-term credit from discontinued operations(e) 3.12 $ 200 $ 546operations(c) -,- $122
====== ======
(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 ofOn April 5, 2005, 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 subsidiaryCompany's subsidiaries entered into a
Loan and Security agreement (the "Revolver") withAgreement and established a financial institution which
replace the RLC.replacement Revolving
Line of Credit. The Revolver provides a borrowing base up to $8
million limited bybased on 85% of defined eligible accounts receivable plusEligible Accounts Receivable and 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 LIBORLibor
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 by2007, the restricted cash andof 3.5
million held by the Company guaranty. Interest accrues atserves as other collateral on the
bank's prime rate plus
1% (8.25) percent onrevolving credit facility. At December 31, 2005.2007, $5.7 million was
outstanding and $1.8 million was available under the revolving
credit facility for additional borrowings. The Revolver is secured byborrowing agreement
also provides for a commitment guarantee of up to a maximum of $3.5
million for letters of credit and requires a per annum fee equal to
3%. The Company had letters of credit outstanding of approximately
$1 million at December 31, 2007.
Based on the Company guaranty, by a first priority
security interest in all existing and future propertyrevolving line of credit agreement, the subsidiary
andestablished a time deposit account, with 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 itlender as cash
collateral security. The amount bears annual interest of 4.25%. This
deposit is in default in three provisions of the
Revolver. The subsidiary failed to maintain the tangible net worth,
as definedbeing shown 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. Inbalance sheet as restricted cash -
long term.
On December 31, 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. In
July 2006, a second amendment to the Loan and Security Agreement was
executed. This amendment suspended the Interest Coverage covenant
until March 31, 2007 and replaced this covenant with a Stop Loss
requirement. The Stop Loss requirement was based on pre-established
quarterly pre-tax net loss amounts through December 31, 2006.
As of December 31, 2005,2006, a third amendment to the Loan and Security
Agreement was executed to give recognition to the tax expense
adjustments applicable to prior year taxes made subsequent to
executing the second amendment, adjusting the tangible net worth
covenant amount.
In July 2007, a fourth amendment to the Loan and Security Agreement
was executed to allow the Letter of Credit to extend beyond the
maturity date to October 1, 2008. On December 18, 2007, a fifth
amendment was executed extending the original term from March 31,
2008 to March 31, 2009 with automatic one-year renewals at the
election of either the Lender or Borrower, as well as adjusting the
tangible net worth covenant amount. The Company was in compliance
with all loan covenants as of December 31, 2007 and 2006. However,
as of March 31, 2008, the Company met allwas in violation of its interest
coverage ratio. The bank agreed to waive this covenant violation
subject to the issuance of the stand-alone financial covenants instatements. The
financial statements have not been issued as of the Amended Agreement except fordate of the
Interest Coverage covenant.
-121-filing and the debt is classified as current.
F-26
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)(b) In November 2004, a subsidiary of the Company entered into a one
year credit
agreement with a bank. During 20052006 the agreement was extended and it
providesprovided a borrowing facility of up to Euros 400 (at(euro)650 ($958 at December
31, 2005 -$473)2007), 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.
The2007, $680 was
outstanding balanceand $278 was $0 and all the (euro)400($473 as of
December 31, 2005) were available under the credit agreement. (e) The
short termCompany is in compliance with the covenants. In February 2008 the
credit agreement was extended up to (euro)2.1 million.
(c) The short-term credit from discontinued operations as of December
31, 2005 represents2006 represented mainly a liability arising from a promissory
note that was issued in connection with the purchase agreement of
the operations of ITA (see
note 8).Entertainment operations. The note was payable in 13 quarterly
installments of $50 plus the accrued interest, the first installmentinterest. During 2007 all
outstanding debt was paid in
December 2004. During 2006by the Company intends to pay the last four
payments.Company.
NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES
December 31,
--------------------------
2005 2004
------- -------------------
2007 2006
---- ----
Relating from continuing operations:
Payroll and related liabilities $ 4,0393,013 $ 3,5154,085
Employees' claims and related severance (see note 1c) 8,234 8,622
Taxes(a) 1,071 8,266
Liabilities to government institutions, including taxes payable 4,637 1,019
Related parties 240 500tax accrual 9,548 5,546
Deferred income taxes (see note 17 b) 0 16042
Accrued expenses and other 1,478 1,5812,423 2,275
------- -------
Total accrued expenses and other liabilities from continuing operations $18,628 $15,397$16,055 $20,214
======= =======
Accrued expenses and other liabilities from discontinued operations (a)Operations $ (28)2,089 $ 1,4891,085
======= =======
-122-(a) Employee claims and related severance as of December 31, 2006
included an amount of $7.3 million accrual for the DOL dispute - see
note 1(c).During 2007 this claim was settled for $3 million, payable
out of any future settlement with the TSA. As the company expects
that the dispute with the TSA will not be solved during 2008, the
liability was reclassified in the 2007 financials as a long-term
liability, see note 12.
(b) Regarding the loan from related party, see note 20(f).
F-27
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 $4190Interest rate as of December 31,
December 31, ------------
------------------
2007 2007 2006
---- ---- ----
From continuing operations:
In dollars:
Banks (1) 5.71% $ 80 $ 104
Other financial institutions (1) 8.72% 196 210
DOL (2) 3,000
------ -------
3,276 314
Less - current maturities (126) (154)
------ -------
$3,150 $ 160
====== =======
From discontinued operations (3) $8,530 $10,125
Less - current maturities (1,012)
------ -------
$8,530 $ 9,113
====== ======= =======
From discontinued operations: $ 9,701 $ 5,254
Less - current maturities (3) (942) (2,733)
------- -------
$ 8,759 $ 2,521
======= =======
(1) The balance as of December 31,200531, 2006 represents mainly loans that a
subsidiary received to finance a purchase of operative equipment
during the third quarter atof 2005. This equipment was sold during
2007 and the loans were repaid. The total liability as toof December
31, 2005 from this purchase totals2007 represents mainly new loans taken to $409finance the lease of
operational equipment and should be paid up to 2010.
(2) DOL liability of $3,000 as of December 31, 2007 - $90 from bankssee note 11(a) 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))1(c).
-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 1517 years. As of December 2005, the Company decided
to discontinue the operations of the Entertainment segment (see note2 (u))- see
note 2(u). There are two claims against the Company regarding these
rent liabilities. The Company aggregated and charged
operations forrecorded a liability of the full claim
amount but as the Company does not anticipate that the claims will
be resolved during 2008, the whole liability using discounted interest rate of
7.25%is presented as a
long-term liability.
b. Regarding the loan from related party see note 20(f).
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.c. The total liabilities from banks and other financial institutions mature
in the following years after the balance sheet date:
December 31, 2005
-------------------------------------
Continuing Discontinued
operations operations
---------- ------------
2006 $1502008 $126
2009 90
2010 60
----
$276
====
F-28
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ 942
2007 150 916
2008 119 891
2009 33 830
2010 11 809
2011 787
2012 and thereafter 4,526
---- ------
$463 $9,701
==== ======in thousands)
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
wasthey
were 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$6, $15 and $124 $(25) and $12
for the years ended December 31, 2007, 2006 and 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, 2007, 2006 and 2005 2004were
$ 1,191, $1,217, and 2003 were
$849, $809 and $994, respectively. The lease expenses fromDuring 2005 the Company
accrued for future rent. Regarding its discontinued operations, for those years totaled to $984, $596 and
$172, respectively.see
also note 12 (3).
Future minimum lease payments from under long-term leases are as follows:
December 31, 2005
------------------------------------
Continuing Discontinued
operations operations
---------- ------------
20062008 $ 708 $ 1,008
2007 297 1,053
2008 95 1,099697
2009 27 1,099699
2010 22 1,148653
2011 and thereafter 10,289305
2012 78
------
-------
$1,149 $15,696$2,432
======
=======
-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.:Contingent liabilities
1) As a result of the September 11, 2001 terrorist attacks,
a
numerous of lawsuits have commenced against Huntleigh and ICTS.
Huntleigh and ICTS have been named in approximately 64 and 61
lawsuits, respectively. All of the cases were filed in the
United States District Court, Southern District of New York.
The cases are in their early stages.stages with depositions having
begun on September 12, 2006. 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 enumeratedspecified 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.
F-29
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
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. The liability under these cases may, by statute, be
limited to the policy coverage. A number of personal injury
cases have been settled or are in the process of being settled
at no cost to the Company. 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 carried by the Company carried.Company.
3) InOn 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 noTSA. No additional
payments have been paidmade back to the TSA).TSA in 2007 and 2006. As
of December 31, 2005 the2006 ,the amount due from the TSA inwith respect
ofto services provided under the contract aggregates $17.3
million; this amount, net of $14.3 million-themillion, the balance of the
prepayment, iswas presented among trade receivables.
-126-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $During 2003, the Department of Labor in thousands)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
On June 21, 2002, the FAA issued a requestUS ("DOL")
finalized its audit of the Company's subsidiary concerning the
pay rates used to compensate employees 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 documentationservices rendered
pursuant to the TSA which
detailed allContract. 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, 2006, a liability relating to
the audit of approximately $7.3 million was included in the
consolidated financial statements based on the estimated
maximum exposure according to the Company's legal advisors.
The claim of the information which Huntleigh viewed as
responsive toDOL has been settled during 2007 for $3
million payable out of any settlement with the TSA's request though it did not believe that
this information had any bearing onTSA. A
long-term receivable of $2.9 million and a long-term liability
of $3 million are shown in the contract pricing.
After receiving Huntleigh's submission, the Defense Contract
Management Agency ("DCMA") requested a review of Huntleigh's
costs. DCMA enlisted the services2007 consolidated financial
statements. As of the DCAA to perform this
review, and Huntleigh cooperated withchange in the DCCAliability, the Company
recorded income in this
process.
The DCAA produced a preliminary report (for the services2007 of $4.3 million, 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, notreduced 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.revenues.
The TSA filed a contract dispute with the Office of Dispute
Resolution for Acquisition ("ODRA") a contract dispute in connection with
the
contract entered into inHuntleigh's February 2002 by Huntleighcontract 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.in
mediation.
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 TSAs responseaction which has been denied.
At this stage, Management and its legal counsel are unable to
estimate the final outcome of the above mentioned dispute.
Accordingly, no provision has been made for this motion is due on
September 15, 2006 and Huntleigh's reply brief is due on
September 29, 2006.
-127-matter.
F-30
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.4) The Company had also filed a claimhas commenced an action against the US FederalU.S.
Government for what it allegeswith regard to be athe Fifth Amendment rights relating
to the taking of its US
aviation security business bybusiness. In December 2004 the TSA in 2002.Court
denied the Government's motion to dismiss the case. A hearing
regarding a motion
for summary judgmentreconsideration was filed by the governmentdefendant and denied. The
trial for this action has been scheduledheld and in March 2007 the
court decided against the Company. The Company appealed the
decision. In May 2008 the USA Court of Appeals for October 12, 2006 and a trial
has bee scheduled for November 13, 2006.
(4)the Federal
Circuit affirmed the lower court's ruling against the Company.
5) 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 pendingwas decided against the Company in a New Jerseyan arbitration proceeding
before an arbitrator assignedawarding Avitecture $200. The arbitrator's decision was
affirmed by the American Arbitration
Association. In October 2005 ITA filed its answer, generally
denying the allegationsSuperior Court of NJ in the Demand and asserting numerous
affirmative defenses.May 2007. The Company
recorded appealed this decision. In September 2007, ITA k/a provision onExplore
Atlantic City, LLC filed bankruptcy under Chapter 7 Bankruptcy
code. The Company filed a petition in bankruptcy with the
full amountcourt. The Appellate Court affirmed the arbitrator's ruling in
its books. This action is currently in
discovery.
(5)February 2008. In the interim, the bankruptcy case was closed.
6) 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 inIn an arbitration proceeding the arbitrator
awarded Turner $956 plus interest and costs, for which award
was affirmed on appeal. In October 2007, Explore filed a
petition of bankruptcy with the New Jersey arbitration proceeding. An arbitratorSuperior Court. The
court thereafter stayed the proceedings and dismissed the
action without prejudice as a result of the bankruptcy filing.
To date, Turner has been assignednot moved to reinstate or reopen 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 thecase.
The full amount of $948 was accrued as of December 31, 2007
and 2006.
7) In 2005 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 aCompany's subsidiary, ICTS USA, Inc., filed a
refund claim with the Internal Revenue Service ("IRS") in anthe
amount in excess of $2
million. During$2.4 million, which was reflected on the December
31, 2005 year-end financial statements as a receivable. 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 -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 paymentpayments made to
the Company. As a result of the
investigationIn January 2008, the Company believeswas advised that the
refund had been
put on hold.
(7) On August 30, 2006current investigation was withdrawn and the Company filed a complaintreceived
the refund of $2.4 million and interest of $373. The refund
was presented 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 refund2007 financials as well as damages. The Company is currently
waiting for a responseincome from
the defendants.
(8)discontinued operations, see note 2(u).
8) Two of the Company's subsidiaries have been sued by their
landlord (which is the same entity)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 theleases,
$5,970 in Atlantic City case the
amount sought is $5,970.197 and $4,444 in the Baltimore case the
amount is $4,443,513.Baltimore. While a
resolution of both actions is being discussed, a standstill of
the proceedings ifis being negotiated. (9) On AugustAs of December 31, 2007
and 2006, the Company was informed that Rogozin
Industries Ltd (in liquidation)accrued $8.5 million and $10.1 million,
respectively. The changes in the accruals were done based on
changes in the claims against the Company and are being
presented as part of the discontinued operations - see note
2(u).
F-31
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The Company filed a litigation regardingpetition in bankruptcy for each of the
companies. However, the landlord was able to prevail against
the Company, with respect to a payment of $340 it paid during 2001, which accordingguarantee given by the Company
in connection to the lease in Baltimore. The Company also
rendered that the landlord could proceed to prove its damages
with respect to the Baltimore lease. In January 2008, the
Baltimore litigation was conducted. At the end of the trial a
judgment in the amount of $2.6 million was awarded in favor of
the landlord. The Company has filed an appeal in its
litigation to challenge the judgment on behalf of ICTS
International N.V.
The Atlantic City litigation was reopened in state of court in
January 2008 and is guaranteeing.
(10)still ongoing.
9) 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 relatedlabor-related
issues. Some of the claims are in their earlier stagestages 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, theThe 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.Amsterdam. The principal amount claimed
iswas (euro)57.7 million ($68.185 million as of December 31, 2005)2007). 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, ICTSThis
dispute has undertaken
to indemnify ICTS Europe and its subsidiaries in respect ofbeen settled during 2008 without 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.during 2008.
d. As to tax assessments, see note 17(g).
i.e. 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)16(a).
NOTE 15 - FINANCIAL INCOME (EXPENSES) - NET
Year ended December 31,
----------------------------------------------------
2007 2006 2005
2004 2003
------- ------- ----------- ---- ----
From continuing operations:
InterestFinancial expenses $(3,537) $(1,137) $(1,493)
$ (825) $ (755)
InterestFinancial income 325 327 203 456 2,238
Exchange differences - gain (loss) (122) 96 382
(83) 2,635
------- -------- -------
-------$(3,334) $ (714) $ (908)
$ (452) 4,118
======= =============== =======
Financial expenses from discontinued operations:
InterestFinancial expenses 2 (191)
(335) (467)
InterestFinancial income 14 10(a) (373)
Exchange differences losslosses (40)
-- (2,877)
------- -------- -------
-------(373) 2 (231)
(321) (3,334)
======= ======== =======
=======
-131-(a) During 2008 the company received a refund from the IRS totaling $2.8
million, of which $373 was accrued interest and $2.4 million was a refund of
overpaid taxes in previous years - see note 17. The 2007 financial expenses
include estimation for accrued interest expenses of $2,179 regarding possible
tax exposure in the US for previous years.
F-32
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 16 - OTHER INCOME (EXPENSES)
Year ended December 31,
----------------------------------------------------
2007 2006 2005
2004 2003
------- ------- ----------- ---- ----
Other income from continuing operations:
Write offRecovery (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)(a) $665
Capital gain from investments (a)(b) $ 110349 576 $110
Written-off investment in Plangraphics (c) (600)
Other 5 37
(41) 47---- ------ -------
------- -------
$ 147 $(2,907) $ (353)$(246) $1,241 $147
==== ====== =======
======= =======
LossOther loss from discontinued operations (b)(d) $ (55) -,- $(4,774)
==== ====== =======
a.1) 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 continuing 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. During May and July 2007, the Company was released from
its guarantee for amounts of $441 and $224, respectively, see note
3(b). Accordingly, the provision decreased to $1,850 as of December
31, 2007. 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.
b. The Company has written off several investments in the past - see
note 6(f).past. During
2005 an amount of $110 was paid to ICTS from two of those companies
in which ICTS invested and which were completely disassembleddissolved through
2005. b.In January 2006 the Company sold its holding on YCD which was
written off in previous years. The total gain from the sale was
$224. During 2007, an additional $54 was received for the sale of an
investment that was written off in the past.
During 2007 and 2006 the Company sold 155,000 shares of Inksure each
year for $295 and $419 - see note 5(a). The gain from those sales
totaled $295 and $352, respectively.
c. Write off investment in Plangraphics - see note 6(a).
d. In 2005 the Company sold the property it used to lease - see note
7(d). The loss from that sale amounted to $4,774. At December 2007
the Company decided to recognize a full impairment of its investment
in Rainbow, totaled $55, see also note 5.
NOTE 17 - INCOME TAXES
a.1) 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 Thethe Netherlands and is,
therefore, subject to the tax laws of Thethe Netherlands. Inter companyInter-company
payments are subject to withholding taxes at varying rates according
to their nature and the payer's country of incorporation or
residency. -132-As the Company has subsidiaries in different countries,
each subsidiary is subject to tax according to tax rules applying in
the subsidiary location.
F-33
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
-------- --------------------
2007 2006
---- ----
Carry forward losses $ 21,820 $ 10,949$20,987 $21,603
Fixed assets (2,169) 6,372(22) 44
Provision for bad debts 144 600193 353
Accruals and other reserves (297) (640)
-------- --------
19,498 17,281674 4,163
------- -------
21,832 26,163
Less - valuation allowance 19,498 17,458
-------- --------21,832 26,163
------- -------
-,- $ (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,
-------------------------------------------------------
2007 2006 2005
2004 2003
-------- -------- --------
From---- ---- ----
Profit (Loss) from continuing operations:
ICTS and subsidiaries in Thethe Netherlands $(1,764) $ (373) $ 413
$ (5,364) $ 991
Subsidiaries outside Thethe Netherlands (2,771) (8,471) (8,872)
(5,028) 8,806------- -------- --------
--------Loss before taxes from continuing operations $(4,535) $ (8,844) $ (8,459)
$(10,392) $ 9,797
--------------- -------- --------
From discontinued operations:
Subsidiaries in Thethe Netherlands (4,690) (1,498) (8,811)(4,688)
Subsidiaries outside Thethe Netherlands (11,236) (15,550) (10,114)2,952 (1,772) (11,349)
======= ======== ========
========
(15,926) (17,048) (18,925)Loss before taxes from discontinued operations 2,952 (1,772) (16,037)
======= ======== ========
========
$(24,385) $(27,440) $ (9,128)$(1,583) $(10,616) $(24,496)
======= ======== ========
========
-133-F-34
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 17 - INCOME TAXES (continued)
d. Taxes (expenses)d) Tax benefit (expense) 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)
======= =======Year ended December 31,
-----------------------
2007 2006 2005
---- ---- ----
Current taxes from continuing operations:
In the Netherlands $ (261) $(36) $ (51)
Outside the Netherlands (91) 680
Current taxes from discontinued operations (6)
------ ------- ------
$ (261) $(133) $629
====== =======
e.======
For previous years - from continuing operations:
In the Netherlands (7) 259 29
Outside the Netherlands (740) (930) (3,485)
For previous years from discontinued operations:
2,470 (2,476) 2,525
------ ------- ------
1,723 (3,147) (931)
====== ======= ======
Deferred from continued operations outside
the Netherlands 42 (42) 440
====== ======= ======
$1,504 $(3,322) $138
====== ======= ======
e) The Company's effective income tax rate differs from Thethe
Netherlands' statutory rate of 31.5%25.5% compared to 29.6% in 2006, 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)
========Year ended December 31,
-----------------------
2007 2006 2005
---- ---- ----
Loss before taxes and equity in results of
associated companies:
From continued operations $(4,535) $ (8,844) $ (8,459)
From discontinued operations 2,952 (1,772) (15,926)
------- -------- --------
Total $(1,583) $(10,616) $(24,385)
======= ======== ========
-134-Statutory tax rate 25.5% 29.6% 31.5%
======= ======== ========
Expected tax benefit (expense) at
statutory rate $ 404 $ 3,142 $ 7,681
Reconciliation for earnings taxed
at different rates (287) 737 1,034
Disallowable expenses 1,102 (162) (3,686)
Non-taxable (expense) income 75 170 (2,120)
Previous years 1,723 370 (671)
Changes in valuation allowance and other (1,513) (7,579) (2,100)
------- -------- --------
Income taxes (expenses) benefit $ 1,504 $ (3,322) $ 138
======= ======== ========
F-35
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:follows:
Year ended December 31,
---------------------------------------------------------
2007 2006 2005
2004 2003
------- ------- ----------- ---- ----
From continuing operations $(2,387) $ 1,529 $(3,910)(966) $ (846) $(2,387)
From discontinued operations 2,470 (2,476) 2,525
1,655 795
------------- ------- -------
Total $1,504 $(3,322) $ 138
$ 3,184 $(3,115)
============= ======= =======
f. Carry forward tax losses
As of December 31, 2005,2007, the Company has carry forward tax losses in
the Netherlands, in the amount of approximately $41$10.1 million. The
carryforward tax losses in the U.S.A. amount to $10.9 million which
will expire in 2025 and 2026. Utilization of such losses is limited
in certain circumstances.
g. A reconciliation of the beginning and ending amounts of unrecognized
tax benefits is as follows:
Balance at January 1, 2007 $4,790
Additions for tax positions of prior years 659
------
Balance at December 31, 2007 $5,449
======
1) 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,to 2004, 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 iswas 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. In 2008 the
Company was advised that the criminal investigation was dismissed.
However, the IRS continues with its audit for the years 2002-2004.
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-See Note 11 for tax accrual. During
2007, the Company recorded in the selling, administrative, and
general costs an expense of $1,150 for possible tax penalties
resulting from the audit. The Company recorded additional $2,179 in
interest expenses for possible interest that might be requested by
the IRS following the result of this audit.
In February 2008, the Company received from the IRS a refund of
$2,470 plus interest of $373 regarding its discontinued operations
in the previous years. This amount was withheld by the IRS because
of the criminal investigation. Once the investigation was dismissed,
the refund was released to the Company. This amount is shown as a
current asset from discontinued operations at December 31, 2007.
F-36
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(continued)
(US $ in thousands)
NOTE 18-18 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a.1) 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.value as the interest rates are
variable.
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, accounts payable and accounts payable)loans from related party)
also approximates fair market value.value, due to the short-term nature of
the instrument or its variable rate of interest.
The Company has a long-term liability of $9.7$8.5 million from
discontinued operations, (seesee note 12)12(a)(3). This liability was
recorded using a capitalization rate of discount 7.25% to show the liability
at fair market value in accordance with FAS 144. The amount of144 and based on the
liability beforeclaim against the discount amounts to $15.7 million.company. All other short termshort-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) AtAs of December 31, 2005,2007 and 2006, two major customers
accounted for 23% and 34% of accounts receivable from
continuing operations, (at December
31, 2004, two majorrespectively. The TSA represented one
of those customers accounted for 32%2006 in the amount of accountsapproximately $3
million. This receivable from continuing operations)has been outstanding since 2002, see
note 14(2)(b)(3). -136-
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 18- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)In 2007 the receivable was reclassified and
shown as other receivables - long term, as the issue is under
litigation and Management estimates it will not be resolved
during 2008.
For the years ended December 31, 2005, 20042007, 2006 and 2003,2005, sales to
major customers (constituting 10% or more of the Company's
consolidated revenues from continuing operations), derived
from aviation service contracts, amounted 25%29%, 14%25% and 43%25% of
revenues, respectively, as set forth below:
Year ended December 31,
--------------------------------------------------------------------
2007 2006 2005 2004 2003
---- ---- ----
(% of consolidated revenues)
-------------------------------------------------------------------------
Customer A -- 13% 15% 14% 17%
Customer B 13%11% -- 10%
Customer C 13%
Customer D 10%18% 12% --
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.
F-37
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 18 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
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 offor segments. Until December 2005 the Company had 3three
operating segments: Aviation, Leasing and Entertainment. In December 2005,
the companyCompany decided to stopdiscontinue its activities on the Leasing and the
Entertainment.Entertainment segments. As a result of that the Company has today 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,
--------------------------------------------------------
2007 2006 2005
2004 2003
------- ------- ----------- ---- ----
From continuing operations:
USA $46,745 $46,844 $48,313 $48,156 $58,503
The Netherlands 7,619 7,200 6,319
6,397 7,039France 4,750 3,406
Other 5,666 3,341 3,081 3,440 2,391
------- ------- -------
Total $64,780 $60,791 $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
------- -------------------
2007 2006
---- ----
Long lives assets from continuing operations:
USA $ 689 $ 724
The Netherlands $ 56 $434 43
USA 879 630France 40 58
Other 318 342
------- -------
$ 1,253 $ 1,015
======= =======
From discontinued operations:
The Netherlands: 16,087
USA 28
------- -------
-,- $16,115
======= =======356 560
------ ------
$1,519 $1,385
====== ======
b. As to the Company's major customers, see note 18(b) (2).
F-38
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
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)
(USYear ended December 31,
-----------------------
2007 2006 2005
---- ---- ----
Cost of revenues $109 $ (9) $ 89
====== ===== ======
Selling, general and administrative expense $311 $ 485 $ 524
====== ===== ======
Includes compensation payments and services
provided to the Company by related parties
Financial expenses, see (f) below $293 $ 113 $ (320)
====== ===== ======
Other (income) expenses, see (d) and (g) below $(665) $4,775
====== ===== ======
Share in thousands)
NOTE 20 - RELATED PARTIES - TRANSACTIONS AND BALANCES (continued)losses of associated companies:
From continuing operations $2,479 $ 132 $ 486
From discontinued operations (h) 55 36
------ ----- ------
$2,534 $ 132 $ 522
====== ===== ======
b. Balances with related parties:
December 31,
-------------
2005 2004------------
2007 2006
---- ----
Restricted cash, see (c) below $665
======
Other current assets see (j) below $200
====$14
======
Accrued expenses and other liabilities $253 $500
==== ====$366
======
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$122
======
Loans 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.$6,528 $2,652
====== ======
c. As to guarantees issued to Bilu on behalf of related parties (`Leedan'(Leedan
and `Rogosin')Rogosin) in the amount of $1,400, and not exercising them in
2004 and the release of the $665 from these guarantees in 2006 see
note 6(b)3(b) and note 16(a).
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.d. As to the selling of the lease equipment in 2005 in the amount of $5
million in cash plus an amount equal to the related loan balance on
the exercise -140-date ($2.1 million on the exercise date), and a loss of
$4,775, see notes 7(d) and note 2(u).
e. In July 2005, the Company signed an agreement with a related party
to sell its 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 an arrangement with a bank, for
consideration of $1.2 million. The loss from the selling amounted to
$317 and is included in financial income (expenses) in the
accompanying statement of operations.
F-39
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 20 - RELATED PARTIES - TRANSACTIONS AND BALANCES (continued)
j. date ($2.1 millionf. As of December 31, 2007 and 2006 the company received loans in an
aggregate amount of $6,528 and $2,652, respectively, from a related
party, indirectly through a significant shareholder as bridging
finance. These loans are evidenced by a secured Promissory Note. All
loans and accrued interest were due no later then April 1, 2008.
Interest accrues at prime rate plus 1.5 percent and the obligations
were secured by the pledge of 2,157,895 shares of common stock of
Inksure Technologies Inc - see note 5(a)(1). The loans were, at the
option of the lender, convertible into the company's common stock at
a price of $3.50 per share. During 2008 the Company extended the
agreement for two additional years up to April 1, 2010, see note
23(b).
g. Following structural changes and continuous losses in Demco, a 100%
held subsidiary, it was decided to transfer the exercise date) ,projects of Demco to
Amesco Emergency and Security Solutions, a company owned by a
related party, as a subcontractor. Amesco will pay commissions to
Demco based on the contracts it will operate until 2010. Total net
loss of $4,775
see notes 7(d) and note 2(u).
k.for 2007 was $210.
h. As to the sellingimpairment of the "China Dragon" deposit at amount of 1.2
million and a loss of $316,Rainbow, 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)5(a)(3).
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,
--------------------------------------------------------------------------------
2007 2006 2005
2004 2003
----------- ----------- -----------
Basic:---- ---- ----