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, 2008
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
OR
[_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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.
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(Exact Name of Registrant as specified in its charter)
Not Applicable
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(Translation of Registrant's name into English)
The Netherlands
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(Jurisdiction of incorporation or organization)
Biesbosch 225, 1181 JC Amstelveen, The Netherlands
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(Address of principal executive offices)
Avraham Dan, Tel: +31-20-3471077,
Email: dan@ictsusa.com, Address: Same as above
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(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
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, par value 0.45 Euro per share
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(Title of Class)
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
None
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(Title of Class)
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report: 6,528,100
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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 has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
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 [_]
2
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 those actual results may differ materially from those included
within the Forward-Looking Statements as a result of various factors.
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Table of Contents
Part I
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Item 1 Identity of Directors, Senior Management and Advisers
Item 2 Offer Statistics and Expected Timetable
Item 3 Key Information
Item 4 Information on the Company
Item 5 Operating and Financial Review and Prospects
Item 6 Directors, Senior Management and Employees
Item 7 Major Shareholders and Related Party Transactions
Item 8 Financial Information
Item 9 The Offer and Listing
Item 10 Additional Information
Item 11 Quantitative and Qualitative Disclosures about Market Risk
Item 12 Description of Securities other than Equity Securities
Part II
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Item 13 Defaults, Dividend Arrearages and Delinquencies
Item 14 Material Modifications to the Rights of Security Holders
and the Use of Proceed
Item 15 Controls and Procedures
Item 16A Audit Committee Financial Expert
Item 16B Code of Ethics
Item 16C Principal Accountant Fees and Services
Item 16D Exceptions from Listing Standards for Audit Committees
Item 16G Corporate Governance
Part III
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Item 17 Financial Statements
Item 18 Financial Statements
Item 19 Exhibits
Exhibits
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Exhibit 12.1 Certification
Exhibit 13.1 Certification
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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 governments.
Selected Financial Data
Selected data set forth below have been derived from ICTS Consolidated
Financial Statements which have been prepared in accordance with U.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 thousands)
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Continuing Operations 2008 2007 2006 2005 2004
- --------------------- ------- ------ ------ ------ ------
Cash and cash equivalents $ 3,750 $2,095 $1,743 $5,927 $3,224
Current Assets 16,571 15,771 17,444 24,962 23,529
Total Assets 25,396 24,230 26,425 31,676 37,507
Current Liabilities 29,971 28,216 29,249 25,435 20,395
Shareholders Equity
(Deficiency) (22,965) (20,610) (19,002) (5,148) 21,506
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Discontinued Operations
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Total Assets -- $2,873 $130 $537 $17,455
Total Liabilities 9,174 10,619 13,441 11,424 8,786
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5
Selected Financial Data Statement of Operations
The following table summarizes certain statement of operations data for
ICTS for the years ended December 31, 2008, 2007, 2006, 2005, and 2004:
(U.S Dollars in thousands except per share data)
Year ended December 31,
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2008 2007 2006 2005 2004
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Revenues $98,809 $64,780 $60,791 $57,713 $57,993
Cost of revenues 85,107 52,397 55,284 53,721 52,825
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GROSS PROFIT 13,702 12,383 5,507 3,992 5,168
Selling, General and administrative expenses 15,341 13,338 14,878 11,690 12,201
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OPERATING LOSS (1,639) (955) (9,371) (7,698) (7,033)
Other income (expense), net (856) (3,580) 527 (761) (3,359)
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LOSS BEFORE EQUITY LOSS FROM INVESTMENTS IN
AFFILIATES AND INCOME TAXES (2,495) (4,535) (8,844) (8,459) (10,392)
Equity loss from investments in affiliates (2,479) (132) (486) (1,625)
Income taxes benefits (expenses) (402) (966) (846) (2,387) 1,529
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LOSS FROM CONTINUING OPERATIONS (2,897) (7,980) (9,822) (11,332) (10,488)
Income (loss) from discontinued operations,
net of income tax benefit (expense) of
$(2), $2,470, $(2,476), $2,525 and
$1,655 in 2008, 2007, 2006, 2005 and
2004, respectively 928 5,422 (4,248) (13,548) (15,474)
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NET LOSS (1,969) (2,558) (14,070) (24,880) (25,962)
========= ========= ========= ========= =========
NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED:
Continuing Operations $(0.44) $(1.22) $(1.51) $(1.74) $(1.61)
Discontinuing Operations 0.14 0.83 (0.65) (2.07) (2.37)
========= ========= ========= ========= =========
Net Loss per share $(0.30) $(0.39) $(2.16) $(3.81) $(3.98)
========= ========= ========= ========= =========
Weighted average number of shares outstanding 6,528,100 6,528,100 6,528,100 6,528,100 6,524,250
========= ========= ========= ========= =========
COMPREHENSIVE LOSS
Net loss (1,969) (2,558) (14,070) (24,880) (25,962)
Translation adjustment (487) 80 (399) (1,560) 1,043
Unrealized gain (loss) on marketable
equity securities 497 104 (214) (616)
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(487) 577 (295) (1,774) 427
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Comprehensive loss $(2,456) $(1,981) $(14,365) $(26,654) $(25,535)
========= ========= ========= ========= =========
Risk Factors
You should carefully consider the risks described below regarding the
business and the ownership of our shares. If any of the risks actually occur,
our business, financial condition or results of operations could be adversely
affected, and the price of our common stock could decline significantly.
Developments that have had a significant impact on our operations.
One major event in 2001 and early 2002 significantly changed our business
operations: the passage of the Aviation and Transportation Security Act (the
"Security Act") by the United States Congress in response to the terrorist
attacks on September 11, 2001, pursuant to which the Federal Government through
the United States Transportation Security Administration ("TSA") took over
aviation security services in the U.S. in November 2002. As a result of this
event, we have limited aviation security operations in the U.S.
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If we are unable to increase revenues from aviation security services, our
financial condition and results of operations will be adversely materially
affected.
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 at that time 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 Corporation
Inc. ("Huntleigh"), 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 approximately $59.2 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.
If we are unsuccessful in resolving our disagreements with the TSA, there
may be a significant material adverse effect on our financial condition.
Potential liability claims
As a result of the September 11th terrorist 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. The outcome of
these 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.
Losses in recent years
We incurred net losses of approximately $2.0, $2.6, $14.1, $24.9 and $26.0
million in 2008, 2007, 2006, 2005 and 2004 respectively. We cannot assure you
that we can achieve profitability. The losses were accompanied by net cash
provided by (used in) operating activities of $3.9, $(3.6), $(7.6), $(5.2) and
$(1.2) million in 2008, 2007, 2006, 2005 and 2004, respectively, and at December
31, 2008 the Company had a working capital deficiency of $15.3 million and
negative equity of $23.0 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.
Auditors' going concern opinion
In their 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
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December 31, 2008, the Company had a total loss of $2.0 million, a net working
capital deficiency of $15.3 million and shareholders' deficiency of $23.0
million.
Loans from 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.
IRS Audit
The Company's U.S. subsidiary, ICTS USA, Inc and Subsidiaries, has
undergone an examination by the IRS for the years ended December 31, 2004, 2003
& 2002. The IRS has proposed a number of adjustments that collectively result in
an assessed tax liability and penalties of more than approximately $7.3 million
plus interest. Management is vigorously contesting the proposed adjustments, and
has filed a "Protest" with the IRS. This matter will be heard by the Appellate
Division of the IRS, at which time management will have an opportunity to
present its position on the various issues raised at the examination level.
Management has provided for possible tax liabilities resulting from this
examination in its financial statements presented herein.
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 adverse impact on our operations. Our success will also
be dependent upon our ability to hire and retain additional qualified executive
personnel. We cannot assure you that we will be able to attract, assimilate and
retain personnel with the attributes necessary to execute our strategy. We
cannot assure you that one or more of our executives will not leave our
employment and either work for a competitor or otherwise compete with us.
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 and financial condition. There is a material contract that will
expire in 2010 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 adverse effect 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 have suffered because
of the economic slowdown which affected our situation as service provider. The
8
airline industry continues to encounter financial difficulties and this may have
a material adverse impact on our business.
Development of new Technology
As part of our technology business strategy, we develop technological
solutions and systems for the aviation security industry, develop security
activities other than aviation security, 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.
We compete in a highly competitive industry and our competitors may be
more successful in developing new technology and achieving market acceptance of
their products.
Competition
Competition in the aviation security industry as well as in the
non-security related aviation services industry is intense. Many of our
competitors have greater financial, technical and marketing resources. We expect
that our competitors will develop and market alternative systems and
technologies that may have greater functionality or be more cost effective than
the services we provide or the systems that we may develop. If our competitors
develop such systems we may not be able to successfully market our systems. Even
if we are able to develop systems with greater functionality which are more cost
effective than those developed by our competitors, we may not be able to achieve
market acceptance of our systems.
Governmental regulation
The aviation security industry is subject to extensive governmental
regulation, the impact of which is difficult to predict.
The Security Act has had a significant negative impact on our aviation
security business in the USA. 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 loss of revenues due to the
business taking was approximately $5 million.
Legislation designed to protect privacy rights.
From time to time, personal identity databases and technologies utilizing
such databases have been the focus of organizations and individuals seeking to
curtail or eliminate the use of personal identity information technologies on
9
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.
Licenses for operations
A license to operate is required from the airport authority in the
airports in which we currently operate. 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.
Litigation
We are currently a defendant in several significant lawsuits, the loss of
which could have a material adverse effect on the Company.
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.
Limitations in price share
The market price of our common stock may be volatile, which may make it
more difficult for you to resell your shares when you want at prices you find
attractive.
The market price of our common stock may from time to time be
significantly affected by a large number of factors, including, among others,
variations in our operating results, the depth and liquidity of the trading
market for our shares, and differences between actual results of operations and
the results anticipated by investors and securities analysts. Many of the
factors which affect the market price of our common stock are outside of our
control and may not even be directly related to us.
Main shareholders activities
As of December 31, 2008, there are three main shareholders in the Company,
which own together approximately 78.2% of our shares (excluding options and
conversion rights). 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 approximately
56% of our issued and outstanding common stock (excluding options and conversion
rights). As a result of such ownership, and/or 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.
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Dividends
We cannot assure you that any dividends will be declared or paid on our
common stock.
Laws in the 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 December 17, 2008, the date of such authorization, and has
authorized the Supervisory Board to exclude or limit shareholder preemptive
rights with respect to any issuance of common shares prior to such date. Such
authorizations may be renewed by the general meeting of shareholders from time
to time, for up to five years at a time. This authorization would also permit
the issuance of shares in an acquisition, provided that shareholder approval is
required in connection with a statutory merger (except that, in certain limited
circumstances, the board of directors of a surviving company may resolve to
legally merge the company). Shareholders do not have preemptive rights with
respect to shares which are issued against payment other than in cash.
Our corporate affairs are governed by our Articles of Association and by
the laws governing corporations incorporated in the Netherlands. Our public
shareholders may have more difficulty in protecting their interests in the face
of actions by the Supervisory Board or the Management Board, or their members,
or controlling shareholders, than they would as shareholders of a company
incorporated in the United States. Under our Articles of Association, adoption
of our annual accounts by the shareholders discharges the Supervisory Board, the
Management Board and their members from liability in respect of the exercise of
their duties for the particular financial year, unless an explicit reservation
is made by the shareholders and without prejudice to the provisions of
Netherlands law, including provisions relating to liability of members of
supervisory boards and management boards upon the bankruptcy of a company
pursuant to the relevant provisions of The Netherlands Civil Code. However, the
discharge of the Supervisory Board and the Management Board and their members by
the shareholders is not absolute and will not be effective as to matters
misrepresented or not disclosed to the shareholders. An individual member of the
Supervisory Board or the Management Board who can prove that he is not at fault
for such an omission or misrepresentation would not be liable.
11
U.S. judgments may not be enforceable in the Netherlands
A significant number of our activities are located outside the United
States. In addition, members of the Management and Supervisory Boards and
certain experts named herein are residents of countries other than the United
States. As a result, it may not be possible for investors to effect service of
process within the United States upon such persons or to enforce against such
persons judgments of courts of the United States predicated upon civil
liabilities under the United States federal securities laws.
There is no treaty between the United States and the Netherlands for the
mutual recognition and enforcement of judgments (other than arbitration
awards) in civil and commercial matters. Therefore, a final judgment for the
payment of money rendered by any federal or state court in the United States
based on civil liability, whether or not predicated solely upon the federal
securities laws, would not be directly enforceable in the Netherlands. In order
to enforce any United States judgment obtained against us, proceedings must be
initiated before a court of competent jurisdiction in the Netherlands. A court
in the Netherlands will, under current practice, normally issue a judgment
incorporating the judgment rendered by the United States court if it finds that
(i) the United States court had jurisdiction over the original proceeding, (ii)
the judgment was obtained in compliance with principles of due process, (iii)
the judgment is final and conclusive and (iv) the judgment does not contravene
the public policy or public order of the Netherlands. We cannot assure you that
United States investors will be able to enforce any judgments in civil and
commercial matters, including judgments under the federal securities laws
against us or members of the Management or Supervisory Board [or certain experts
named herein] who are residents of the Netherlands or countries other than the
United States. In addition, a court in the Netherlands might not impose civil
liability on us or on the members of the Management or Supervisory Boards in an
original action predicated solely upon the federal securities laws of the United
States brought in a court of competent jurisdiction in the Netherlands.
Item 4. Information on the Company
History and Development of the Company
Unless the context indicates otherwise, all references herein to the
"Company" or "ICTS" include ICTS International N.V., and its subsidiaries.
Aviation Security Business
ICTS is a public limited liability company organized under the laws of The
Netherlands in 1992. ICTS's offices are located at Biesbosch 225, 1181 JC
Amstelveen, The Netherlands and its telephone number is +31-20-347-1077.
The Company's predecessor, International Consultants on Targeted Security
Holland B.V. ("ICTS Holland"), was founded in the Netherlands in 1987. Until
1994, subsidiaries and affiliates of ICTS Holland conducted similar business in
which the Company is currently engaged. As of January 1, 1994, ICTS Holland's
interest in its subsidiaries (other than three minor subsidiaries) was
transferred to ICTS International B.V. ("ICTS International"). Thereafter, ICTS
International purchased from a third party all of the outstanding shares of ICTS
Holland, incorporated in The Netherlands in 1992 without any operations prior to
its acquisition by ICTS International. As of January 1, 1996, the
12
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% making Huntleigh a wholly owned
subsidiary. Huntleigh is a provider of aviation services and limited security
services in the United States.
In the wake of the events which occurred on September 11, 2001, the
Federal Government of the United States, in November, 2001, enacted the Aviation
and Transportation Security Act (the "Security Act") Public Law 107-71. Under
the Security Act, entities may provide aviation security services in the United
States only if they are owned and controlled at least 75% by U.S. citizens. As a
company organized under the laws of the Netherlands, ICTS is not able to comply
with the ownership requirements under the Security Act. The Security Act is
administered through the TSA.
In the fourth quarter of 2002, pursuant to the Security Act, the Federal
government through the TSA, took over substantially all of the aviation security
operations in U.S. airports. As a result, ICTS, through its wholly owned
subsidiary, Huntleigh, provides limited aviation services in the United States.
In 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. certain carriers. Following these
contracts I-SEC established new subsidiaries throughout Europe and the Far East,
in the Netherlands, France, England, Spain, Hungary, Germany, Japan and other
countries.
Leasing Business
In the second quarter of 2002, the Company purchased equipment and leased
it back to the sellers, an affiliated private Dutch company.
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 in December 2005, and by that time the leasing
activities of the company were terminated.
Entertainment Business
On December 23, 2003, the Company, through wholly owned subsidiaries,
purchased from ITA International Tourist Attractions, Ltd., ("ITA") certain
assets owned by ITA and used by it in the development, establishment and
13
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.
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 2003 and 2004 totaling $20.8 million with respect to its
entertainment investments.
In 2005 the Company decided to cease its operations in the entertainment
business. In early 2006, the Company closed its motion-based entertainment
theater in Baltimore, MD and its multi-experience motion-based entertainment
theater in Atlantic City, NJ. The Company is also a partner (42.5%) in a
movie-based entertainment facility in Niagara Falls, NY.
Business Overview
General
ICTS specializes in the provision of aviation security services. Following
the taking of its aviation security business in the United States by the TSA in
2002, ICTS through its subsidiary Huntleigh engages primarily in non-security
related activities in the USA.
ICTS, through I-SEC International Security B.V. ("I-SEC"), supplies
aviation security services at airports in Europe and the Far East.
In addition, ICTS develops technological systems and solutions for the
following markets: aviation and non - aviation security, banking and other
markets.
Business Strategy
ICTS is currently pursuing the following business strategy:
Developing Security Related Technology
ICTS is focusing on developing security systems and technology for the
aviation security and non-aviation security markets. ICTS is using the know-how
and expertise it has acquired in the provision of enhanced aviation security
services to develop such security systems and technology.
Aviation Security Operations in Europe
ICTS, through I-SEC, supplies aviation security at airports, airlines and
governments in Europe and the far east. During 2008, I-SEC was contracted to
provide and extend the security services it provides to Schiphol Airport in
Amsterdam ("Schiphol"). The contract is for a period of five years.
ICTS NAS, a partnership in which ICTS held 50% interest, had one contract
serving Schiphol which expired in February 2008. ICTS NAS is being liquidated.
14
U.S. Operations
ICTS continues to provide limited security services and non-security
aviation services in the U.S. 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,
operated manual devices, consulting services, public transportation, security
consulting and training.
Following the sale, ICTS primarily provided advanced passenger-screening
services in The Netherlands and Russia. With its reentry into the aviation
security market, I-SEC 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 re-entry and penetration into the
international aviation security market. This phase, executed in parallel to the
expansion of the Company's existing operations in The Netherlands and in Russia,
includes the establishment of subsidiaries and the provision of services at
international airports in London, UK; Paris, France; Barcelona, Spain; Budapest,
Hungary; Edinburgh, Scotland, Narita, Japan and others. 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 13 locations.
Consulting, Auditing and Training
ICTS, through I-SEC, provides consulting services to airlines and
airports. ICTS recommends the adoption of specified security procedures,
develops recruitment and training programs for clients to hire necessary
security personnel and works with airport authorities to ensure that they comply
with applicable local requirements. The Company trains airline employees to
screen passengers and to perform other security measures through extensive
courses and written training manuals.
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. Huntleigh currently
provides limited aviation security services and other separate services at
approximately 30 airports in 23 states.
The limited security services provided by Huntleigh involves the
following:
o Charter Flight Screening for Airlines - which includes
security check of passengers' body and carry-on items.
o Cargo Security Screening - for some international and domestic
carriers.
o Aircraft Search - Search of the entire aircraft to detect
dangerous objects.
15
Each of the non-security services involves one of the following specific
job classifications:
Agent Services For Airlines
Agent services include: passenger service, ground handling, vendor behind
counters and baggage service. Although an agent is a Huntleigh employee, the
employee is considered a representative of specific airlines.
Guard Services
Guard services involve guarding secured areas, including aircraft.
Maintenance
Huntleigh provides workers that maintain equipment in airports.
Queue Monitors
Huntleigh provide queue monitors assisting passengers before the
checkpoint.
Aircraft Cleaning
Huntleigh provides employees who perform interior aircraft cleaning
services.
Janitorial
Huntleigh provides to airline airport offices, airline terminal areas,
airline gates, etc. cleaning (janitorial) services.
Ramp Services
Ramp services include:
o directing the aircraft into the arrival gate and from the
departure gate
o cleaning the aircraft
o conducting cabin searches
o stocking supplies
o de-icing the aircraft and
o moving luggage from one airplane to the baggage room and vice
versa.
Shuttle Service
Huntleigh shuttles airline crews from their hotels to the aircraft back
and forth in airports.
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
16
also assists arriving passengers with transporting luggage from the baggage
carousel to ground transportation or other designated areas.
A skycap also may transport checked baggage from the curbside check-in to
the airline counter. Concierge Service involves a skycap monitoring the baggage
carousel to ensure that passengers do not remove luggage not belonging to them.
In some 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 electric 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.
Baggage Handling Services
Huntleigh provides employees who move passengers' baggage from the check-
in counter to screening machines and/or vice versa, as well as moving oversized
baggage from check-in to appropriate bag belts.
Technological Systems and Solutions
APS
The accumulated know-how and expertise of ICTS in the implementation of
computer-based processors for advanced passenger screening enabled ICTS to
develop its APS technology and system. The APS system is an automated
computerized system that enables the pre-departure analysis of passenger
information and is designed to screen airline passengers in a faster and more
efficient manner.
I-BOX
I-BOX, a unique technological platform developed by the Company, comprises
one of the main contributors to operational efficiency of the Company and is
being used as part of our aviation security systems. It is an advanced mobile
unit that can be implemented with multiple choices of software packages. The
I-BOX systems provides an unparalleled level of performance while reducing
processing times to a minimum, thus eliminating related delays and avoiding
inconvenience to the passengers. The I-BOX system has been deployed successfully
in various locations around the world, providing our customers with enhanced
security operations.
Travel Documents Check
Travel DocCheck (TDC) is the travel industry's most reliable and easy to
operate system for automated clearing of travel document compliance. It verifies
that the passengers' travel documents fully comply with the requirements of
countries of destination and transit prior to embarkation, and also facilitates
the detection of forged travel documents. Automated Travel Check enhances the
level of security, assists in combating illegal immigration and reduces or
mitigates associated civil penalties for airlines.
17
Identity Document Authentication and Management System (FDI)
FDI is designed to speed-up client authentication and capture/retrieve
document data and images. FDI is a fully automated, easy to operate, front-end
client enrollment system.
Key features:
o Full page document scanning (automated or push-button)
o Hi-resolution document imaging
o Photograph extraction
o Full content extraction
o Multi-layer identity authentication (performance enabled by client
hardware capabilities)
o Simple indications
o Ability to investigate alerts, carry out manual double-checks and
investigate template and watch-list libraries
FDI works with a range of operating system environments and terminals with
minimal system requirements.
The system can work with a wide range of document scanners (from simple
scanners to full featured 3-illumination enterprise scanners) and links with any
type of biometric input device.
FDI-equipped terminals can work stand-alone or in real-time network with
enterprise systems.
Electronic Identity Document Authentication and Management System ("E-ID")
E-ID is a fully automated system for authentication and enrollment of
persons carrying electronic identity documents (ePassports, e-IDs/EMV cards).
E-ID is designed to speed-up full scope client authentication,
capture/retrieve printed, embedded and electronic data, and capture document
images.
Key features:
o Full capture of electronic chip data (in compliance with country and
industry regulations)
o Handling of all common electronic security standards
o Full page document scanning (automated or push-button)
o Hi-res document imaging
o Photograph extraction
o Full content extraction
o Multi-layer identity authentication (performance enabled by client
hardware capabilities)
o Simple indications
18
o Ability to investigate alerts, carry out manual double-checks and
investigate template and watch-list libraries
E-ID works with a range of operating system environments and terminals
with minimal system requirements.
The system can work with a wide range of document scanners (simple
scanners, full featured 3-illumination enterprise scanners), self-service
kiosks, with internal or external biometric chip readers, and links with any
type of biometric input device.
E-ID equipped terminals can work stand-alone or in real-time network with
enterprise systems.
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 the Company.
Bank Client Security and regulatory Compliance Solution
ICTS, through its subsidiary, I-SEC Technologies 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. It is a fully automated banking check authentication system. Contrary
to back-end systems offered by the competitors, our front-end solution
incorporates unique features, such as a dynamic questionnaire, developed on the
basis of ICTS's experience in detection of suspicious signs and in advanced
document checks.
Marketing of Security Systems and Technology
ICTS market its technologies by establishing projects with Airports,
airlines, banks and other existing and potential customers.
Main Customers
In 2008 ICTS had two main clients, each one constituting 10% or more of
the Company's consolidated revenues, which accounted together for 55% of ICTS's
revenues.
Sales
Sales in the U.S
ICTS revenue in the USA during the years 2008, 2007 and 2006 totaled $40.4
million (41% of total revenue), $46.7 (72% of total revenue) and $46.8 million
(77% of total revenue) respectively.
19
Sales in Europe
ICTS revenue in Europe during the years 2008, 2007 and 2006 totaled $58.0
million (59% of total revenue), $17.3 (27% of total revenue) and $13.7 million
(23% of total revenue) respectively
Competition
Competition in the aviation security industry as well as in the
non-security related aviation services industry is intense. Many of our
competitors have greater financial, technical and marketing resources.
We expect that our competitors will develop and market alternative systems
and technologies that may have greater functionality or be more cost effective
than the services we provide or the systems that we may develop. If our
competitors develop such systems we may not be able to successfully market our
systems. Even if we are able to develop systems with greater functionality which
are more cost effective than those developed by our competitors, we may not be
able to achieve market acceptance of our systems because our competitors have
greater financial and marketing resources.
Aviation Security Regulatory Matters
ICTS aviation security activities are subject to various regulations
imposed by authorities and various local and federal agencies having
jurisdiction in the serviced area. ICTS, on behalf of its clients, is
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, a license to operate is required
from the respective airport authority. ICTS currently holds the licenses
required to operate in such locations.
Organizational Structure
The following are the significant subsidiaries of ICTS as of December 31,
2008:
ICTS USA, Inc. (New York - 100%).
Huntleigh USA Corporation. (Missouri - 100%).
I-SEC Technologies B.V. (the Netherlands - 100%) and its
subsidiaries (100%).
I-SEC International Security B.V. (The Netherlands - 100%) and its
subsidiaries (100%).
20
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, 2008, 2007 and 2006 were $1.5, $1.2 and $1.2 millions
respectively.
Future minimum lease payments under long-term leases from continued
operations are as follows:
Year Ended
December 31, 2008
-----------------
2009 $1,213
2010 822
2011 453
2012 134
2013 5
------
$2,627
======
During 2002, subsidiaries from the Entertainment segment signed rent
contracts for 17 years. As of December 2005, the company decided to discontinue
the operations of the Entertainment segment. The Company has an accrual for
future rent, regarding its discontinued Entertainment operations. The total
accruals as of December 31, 2008 and 2007 totaled $7.3 and $8.5 million,
respectively. The accruals have been updated according to the legal claims of
the landlord against the Company.
Item 5. Operating and Financial Review and Prospects
Operating Results
General
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
21
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 specializes in the provision of aviation security services. 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 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.
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
engaged in the U.S. primarily in non-security related activities. These
activities consist of non-security aviation security services and the
development of technological services.
In February 2005, as the non-competition restrictions expired in Europe,
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 consolidated financial statements have been prepared with accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP").
Please refer to Note 2 of ICTS's consolidated financial statements
included in this Annual Report for the year ended December 31, 2008 for a
summary of ICTS's significant accounting policies.
Use of Estimates
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
revenue and expenses during the reporting periods. The most significant
estimates and assumptions relate to the (a) calculation of the allowance for
doubtful accounts, (b) recognition of contingent liabilities, (c) calculation of
income taxes, (d) impairment evaluation of marketable equity securities and
equity method investments and (e) calculation of stock-based compensation for
stock option grants. Actual results could differ from those estimates.
Discontinued Operations:
1) In December 2005, the Company sold its lease equipment and
terminated its business in the Lease segment.
2) After reviewing the financial results of the Entertainment segment,
the Company decided in December 2005 to cease those operations. As
22
a result of this decision, as of December 31, 2008 and 2007, the
Company accrued $7.3 and $8.5 million, 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 3 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.
Functional and reporting currency
The accompanying information and consolidated financial statements are
presented in United States dollars in accordance with Statement of Financial
Accounting Standards ("SFAS") No 52, "Foreign Currency Translation." The Company
has determined that the functional currency of its foreign subsidiaries is the
local currency. For financial reporting purposes, the assets and liabilities of
such subsidiaries are translated into United States dollars using exchange rates
in effect at the balance sheet date. The revenue and expenses of such
subsidiaries are translated into United States dollars using average exchange
rates in effect during the reporting period. Resulting translation adjustments
are presented as a separate category in shareholders' deficiency called
accumulated other comprehensive loss.
Since 2007 the activities in Europe increased materially. As the
functional currency in most of Europe is the Euro, the Company is exposed to
foreign currency fluctuations based on the exchange rate fluctuations between
the Euro and the Dollar.
Principles of Consolidation
The consolidated financial statements include the accounts of ICTS and its
wholly-owned subsidiaries. All significant intercompany balances have been
eliminated in consolidation.
Accounts Receivable
Accounts receivable represent amounts due to the Company for services
rendered. The Company provides an allowance for doubtful against accounts
receivable to estimate losses resulting from customers' inability to pay. The
allowance for doubtful accounts is based on historical collection experience,
factors related to a specific customer and current economic trends. The Company
written off accounts receivable against the allowance for doubtful accounts when
the balance is determined to be uncollectible.
Comprehensive Loss
The Company reports comprehensive loss in accordance with SFAS Nb. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the disclosure
of comprehensive income (loss) to reflect changes in shareholders' equity
23
(deficiency) that result from transactions and economic events from non-owner
sources. The Company's comprehensive loss consists of its net loss of $2.0
million, $2.6 million and $14.1 million, foreign currency translation adjustment
of $(487), $80 and $(399) and unrealized gain (loss) on marketable equity
securities of $0, $497 and $104, for the years ended December 31, 2008, 2007 and
2006, respectively.
Revenue Recognition
Revenue is recognized as services are rendered, based on the terms
contained in the contractual arrangements, provided the fee is fixed and
determinable, the services have been rendered, and collection of the related
receivable is reasonably assured.
Cost of Revenue
Cost of revenue represents primarily payroll and related costs associated
with employees who provide services under the terms of the company's contractual
arrangements. Such costs are recognized as services are provided.
Legal Proceedings
United States Transportation Security Administration
In February 2002, one of the Company's subsidiaries was awarded a security
services contract (the "TSA Contract") by the United States 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 2002. In accordance with the terms of the TSA Contract,
the U.S. Federal Government provided the Company with a non-interest bearing
advance of $26 million which was payable to the TSA in monthly installments of
$1.3 million commencing in April 2002. Through December 31, 2008, the subsidiary
has repaid $11.7 million of the advance. As of December 31, 2008, the amount due
from the TSA with respect to services provided under the TSA Contract is $17.3
million. The Company has reflected the amount due from the TSA, net of the
remaining unpaid advance, of $3 million as other receivable on the accompanying
consolidated balance sheet as of December 31, 2008 and 2007.
The TSA filed a contract dispute with the Office of Dispute Resolution for
Acquisition ("ODRA") in connection with the TSA Contract seeking reimbursement
of an alleged overpayment of principal in the amount of $59.2 million. This
claim follows a lawsuit which the Company's subsidiary had already filed against
the TSA for repeated breach of contract. The Company's subsidiary is vigorously
challenging the TSA's claim which it asserts is devoid of any factual or legal
merit. The TSA's filing comes on the heels of a recent decision by ODRA granting
the subsidiary's motion for partial summary judgment against the TSA for breach
of contract by failing the give appropriate notice for the transitioning of
airport locations. A separate hearing will be held to determine the amount of
damages due to the subsidiary on this claim. With respect to the claim for the
$59.2 million overpayment, the subsidiary has filed a motion to dismiss the
action which has been denied. Both claims are now in mediation. At this stage,
Management is unable to determine the outcome of the dispute or estimate a range
of potential loss. Accordingly, no provision has been included in the
accompanying consolidated balance sheet related to this matter.
24
United States Department of Labor
During 2003, the United States Department of Labor ("DOL") finalized its
audit of 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. A long-term liability of $7.3 million was recognized for the DOL
claim as of December 31, 2006. The DOL claim was settled during 2007 for $3
million, payable with the proceeds received from any settlement with the TSA. As
a result of the settlement with the DOL, the Company recorded income of $4.3
million during the year ended December 31, 2007, which is reflected as a
reduction in cost of revenue. As of December 31, 2008 and 2007, a long-term
liability to the DOL of $3 million is reflected in accompanying consolidated
balance sheet.
September 11, 2001 Terrorist Attacks
As a result of the September 11, 2001 terrorist attacks, numerous lawsuits
charging the Company with wrongful death and/or property damage were commenced
in the United States District Court, Southern District of New York, resulting
from certain airport security services provided by one of its subsidiaries for
United Flight 175 out of Logan Airport in Boston, Massachusetts. A number of
these cases have been settled, are in the process of being settled or have been
dismissed at no cost to the Company.
The Company may be indemnified by the airlines if the Company is found to
have followed the procedures specified 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 an internal review of this matter,
Management has not found any evidence of non-compliance with respect to the
security services provided at Boston's Logan International Airport on September
11, 2001.
The Company maintains an aviation insurance policy, which may provide
limited coverage for liabilities that may be assessed against the Company as a
result of the events of September 11, 2001. The liabilities under these cases
may, by statute, be limited to the policy coverage. After the September 11th
terrorist attacks, the Company's insurance carriers canceled all war risk
provisions contained in the Company's insurance policies.
Management is unable to determine the likelihood of an unfavorable outcome
or estimate a range of loss with respect to the remaining open claims against
the Company. Accordingly, no provision has been included in the accompanying
balance sheet related to these matters.
The United States Government
The Company had commenced an action against the United States Government
with respect to its Fifth Amendment rights relating to the taking of its
business. In December 2004, the United States Government's motion to dismiss the
case was denied. A motion for reconsideration was also filed by the defendant
and denied. The trial for this action was held and in March 2007, the court
ruled against the Company's action. The Company appealed the decision and in May
2008, the United States Court of Appeals for the Federal Circuit affirmed the
lower court's ruling. In addition, the Company appealed the case to the United
States Supreme Court, which denied certiorari.
25
Audiovisual-Washington, Inc.
In September 2005, Avitecture, Inc. (a/k/a Audiovisual-Washington, Inc.)
("Avitecture") filed a Demand for Arbitration and Mediation against one of the
Company's subsidiaries with the American Arbitration Association in Somerset,
New Jersey. The Demand for Arbitration alleges that the subsidiary owes
Avitecture $0.2 million for audio, video and control systems. The case was
decided against the Company's subsidiary in an arbitration proceeding, which
resulted in an award to Avitecture of $0.2 million. The arbitrator's decision
was affirmed by the Superior Court of New Jersey in May 2007 and the Appellate
Court in February 2008. The Company has $0.2 million in accrued expenses and
other current liabilities related to this matter as of December 31, 2008 and
2007.
Turner Construction Company
In November 2005, Turner Construction Company ("Turner") filed a Demand
for Arbitration and Mediation against one of the Company's subsidiaries with the
American Arbitration Association in Somerset, New Jersey. The Demand for
Arbitration alleges that pursuant to a written agreement dated in October 2003,
the subsidiary owes Turner $0.9 million for work and/or services performed. In
an arbitration proceeding, the arbitrator awarded Turner $956 plus interest.
This award was affirmed on appeal. In October 2007, the subsidiary filed a
petition of bankruptcy with the New Jersey Superior Court, which dismissed the
action again the subsidiary without prejudice as a result of the bankruptcy
filing. In anticipation of Turner attempting to reinstate or reopen the case,
the Company elected not to release the $1.0 million previously established in
accrued expenses and other current liabilities related to this matter. To date,
Turner has not moved to reinstate or reopen the case.
Landlord Claims
Two of the Company's subsidiaries have been sued by their landlord (which
is the same entity for both properties) alleging breach of their respective
leases. One suit is in the Circuit Court of Baltimore and the other is in the
Superior Court of New Jersey. The landlord is seeking unpaid rent for the entire
terms of the leases for $2.6 million in Atlantic City, New Jersey and $3.7
million in Baltimore, Maryland, plus legal fees. The Company filed a bankruptcy
petition for both of the subsidiaries. However, the landlord was able to prevail
in one of the claims because of a guarantee given by the Company in connection
with the lease in one of the locations. In January 2008, a judgment in the
amount of $2.6 million was awarded in favor of the landlord. The subsidiary has
filed an appeal to challenge the judgment. As of December 31, 2008 and 2007, the
Company has $7.3 and $8.5 million, respectively in other liabilities from
discontinued operations. The reduction in the Company's reserve for these
matters is based on changes in the claims against the Company and is presented
as part of discontinued operations.
Fraport A.G. International Airport Services Worldwide
The Company was in a dispute with Fraport A.G. International Airport
Services Worldwide over the alleged unlawful use of the letter combination
"ICTS" by the Company. Fraport initiated proceedings before the district court
of Amsterdam. The principal amount claimed was (euro)57.7 million ($80.8 million
as of December 31, 2008). This dispute was settled in 2008 without any liability
to the Company.
26
General
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. These claims are primarily related to grievances
filed by current and former employees for unfair labor practices or
discrimination, and for passenger aviation claims. Management recognizes a
liability for any matter when the likelihood of an unfavorable outcome is deemed
to be probable and the amount is able to be reasonably estimated. Management has
concluded that such claims, in the aggregate, would not have a material adverse
effect on the Company's consolidated financial position, results of operations,
or cash flows.
Selected Financial Data Statement of Operations
The following table summarizes certain statement of operations data for
ICTS for the years ended December 31, 2008, 2007, 2006, 2005, and 2004:
(U.S Dollars in thousands except per share data)
Year ended December 31,
---------------------------------------------------------------------
2008 2007 2006 2005 2004
--------- --------- --------- --------- ---------
Revenues $98,809 $64,780 $60,791 $57,713 $57,993
Cost of revenues 85,107 52,397 55,284 53,721 52,825
--------- --------- --------- --------- ---------
GROSS PROFIT 13,702 12,383 5,507 3,992 5,168
Selling, General and administrative expenses 15,341 13,338 14,878 11,690 12,201
--------- --------- --------- --------- ---------
OPERATING LOSS (1,639) (955) (9,371) (7,698) (7,033)
Other income (expense), net (856) (3,580) 527 (761) (3,359)
--------- --------- --------- --------- ---------
LOSS BEFORE EQUITY LOSS FROM INVESTMENTS IN
AFFILIATES AND INCOME TAXES (2,495) (4,535) (8,844) (8,459) (10,392)
Equity loss from investments in affiliates (2,479) (132) (486) (1,625)
Income taxes benefits (expenses) (402) (966) (846) (2,387) 1,529
--------- --------- --------- --------- ---------
LOSS FROM CONTINUING OPERATIONS (2,897) (7,980) (9,822) (11,332) (10,488)
Income (loss) from discontinued operations,
net of income tax benefit (expense) of
$(2), $2,470, $(2,476), $2,525 and
$1,655 in 2008, 2007, 2006, 2005 and
2004, respectively 928 5,422 (4,248) (13,548) (15,474)
--------- --------- --------- --------- ---------
NET LOSS (1,969) (2,558) (14,070) (24,880) (25,962)
========= ========= ========= ========= =========
NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED:
Continuing Operations $(0.44) $(1.22) $(1.51) $(1.74) $(1.61)
Discontinuing Operations 0.14 0.83 (0.65) (2.07) (2.37)
========= ========= ========= ========= =========
Net Loss per share $(0.30) $(0.39) $(2.16) $(3.81) $(3.98)
========= ========= ========= ========= =========
Weighted average number of shares outstanding 6,528,100 6,528,100 6,528,100 6,528,100 6,524,250
========= ========= ========= ========= =========
COMPREHENSIVE LOSS
Net loss (1,969) (2,558) (14,070) (24,880) (25,962)
Translation adjustment (487) 80 (399) (1,560) 1,043
Unrealized gain (loss) on marketable
equity securities 497 104 (214) (616)
--------- --------- --------- --------- ---------
(487) 577 (295) (1,774) 427
--------- --------- --------- --------- ---------
Comprehensive loss $(2,456) $(1,981) $(14,365) $(26,654) $(25,535)
========= ========= ========= ========= =========
27
The following table sets forth, for the annual periods indicated, certain
statement of operations data as a percentage of revenues:
Year Ended December 31,
--------------------------
2008 2007 2006
------ ------ ------
Revenues ........................................ 100% 100% 100%
Cost of revenues................................. 86.1% 80.9% 90.9%
Gross profit..................................... 13.9% 19.1% 9.1%
Selling, general and administrative expenses..... 15.5% 20.6% 24.5%
Operating loss................................... (1.7)% (1.5)% (15.4)%
Loss from continuing operations.................. (2.9)% (12.3)% (16.2)%
Income (Loss) from discontinued operations....... 0.9% 8.4% (7.0)%
Net loss for the year....................... (2.0)% (3.9)% (23.1)%
The following information represents only the results of the Company from
continuing operations unless mentioned otherwise.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
(U.S. Dollars in thousands unless otherwise indicated)
Revenues. Revenues for the year ended December 31, 2008 were $98.8 million
(2007: $64.8 million) consisted of $40.4 million (2007: $46.7 million) from US
operations, $44.2 million (2007: $7.6 million) from operations in The
Netherlands, $6.4 million (2007: $4.8 million) from operations in France and
$7.8 ,million (2007: $5.7 million) from operations in other locations.
The decrease in the revenues from the operations in the US relates mostly
to the fact that since the fourth quarter of 2007 the TSA operates the checks of
the boarding authorization of passengers and the comparison to the passengers'
IDs before allowing the passengers to pass through the checkpoint. Loss of
revenues for the Company is approximately $5 million for 2008.
Increase in the revenue from The Netherlands relates mainly to a new
contract with Schiphol Airport which added $34.4 million to the revenues.
Increase in the other locations was the result of increase in new
contracts and more volume at existing locations.
Gross Profit. Gross Profit is defined as revenues less costs directly
related to such revenues, as well as certain indirect expenses such as airport
fees, local training and other labor related expenses.
Gross profit for the year ended December 31, 2008 was $13.7 million, 13.9%
as percentage of revenue (2007: $12.4 million, 19.1% as percentage of revenue).
In 2007 an amount of $4.3 million reduced the cost of revenues which
relates to the agreement of the Company with the DOL. This amount increased the
2007 gross profit by the $4.3 million. The 2007 gross profit without the $4.3
million would be $8.1 million, 12.5% as percentage of revenues. The increase in
the 2008 gross profit excluding the $4.3 million, comparing to last year is
mainly because of the increase of revenue from the aviation security operations
which maintains higher margin associated with the service provided than the non
aviation security operations.
28
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $15.3 million for the year ended December 31, 2008,
15.5% as percentage of revenues, as compared to $13.3 million, 20.6% as
percentage of revenue for the year ended December 31, 2007.
The 2007 SG&A expenses included $1.1 million expense regarding potential
penalties resulting from IRS audit for the years 2002 - 2004, comparing to a
penalty reduction of $0.2 million in 2008 recorded as part of the IRS tax
accrual examination by the Company's tax advisors. The SG&A expenses, net of the
IRS penalties, totaled $15.5 million in 2008 compared to $12.2 million in 2007.
The increase in the SG&A expenses in 2008 relate mainly to the increase of the
aviation security operations in Europe.
Operating Loss. Operating loss for the year ended December 31, 2008 was
$1.6 million compared to operating loss of $1.0 million in 2007.
Other Income (Expenses), Net. Other expense for the year ended December
31, 2008 totaled $0.9 million compared to $3.6 million in 2007. Other expense
for the year 2008 relates to the following:
(a) Income of $0.4 million relates to agreement between the Company and
Bilu which released ICTS from guarantees that were provided by the Company in
the past and were fully accrued for.
(b) Financial expenses net in 2008 were $1.3 million (2007: $3.3 million).
Financial expenses of $0.5 million compared to 2.2 million in 2007, relate to
estimated interest for previous years possible tax exposure in the US. Interest
expenses to related parties totaled $0.3 million, both in 2008 and 2007. The
interest is calculated according to the loan terms - Libor plus 1.5%. The
outstanding loan as of December 31, 2008 was $6.1 million compared to $6.5
million in 2007.
(c) Other expenses in 2007 of $0.3 million included profit of $0.3 million
from investments that were fully impaired in the previous years and an
impairment of the investment in Plangraphics which totaled $0.6 million.
Taxes on Income. Tax expenses in 2008 totaled $0.4 million compared to
$1.0 million in 2007. The Company expensed in 2008 an amount of $0.2 million
regarding the 2002-2004 IRS audit compared to $0.7 million in 2007.
Share in Losses of Associated Companies. During 2007 the Company wrote off
all its investments in associated companies. As a result of that the share in
loss of associated companies in 2008 was zero compared to $2.5 million in 2007.
Loss for Continuing Operations. ICTS's loss from continuing operations
totaled in 2008 $2.9 million compared to $8.0 million in 2007.
Profit from Discontinued Operations. ICTS's profit from discontinued
operations totaled $0.9 million compared to profit of $5.4 million in 2007.
Against the Company there are two legal claims outstanding regarding its
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, 2008 and 2007 the total accruals were $7.3 and $8.5 million, respectively.
The change of $1.2 million on the accruals was recorded based on the change in
the claims. In 2007 the Company recognized similar income of
29
$1.6 million following the changes in the claims between the years 2007 and
2006. The 2007 amount included also $2.8 million relating to refund received
from the IRS in the USA.
Net Loss. As a result of the foregoing, ICTS's losses amounted $2.0
million for the year 2008, compared to $2.6 million for 2007. As for
geographical segments, see note 15 in the financial statements of the Company.
Year Ended December 31, 2007 Compared to Year Ended December 31, 2006
(U.S. Dollars in thousands unless otherwise indicated)
Revenues. Revenues for the year ended December 31, 2007 were $64.8 million
(2006: $60.8 million), 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
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.
30
Operating Loss. Operating Loss for the year ended December 31, 2007 was
$955 compared to operating loss of $9.4 million in 2006.
Other Income (Expenses), Net. Other expenses for the year ended December
31, 2007 totaled $3,580 compared to income of $527 in 2006. The other expenses
relate to the following:
(a) 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.
(b) 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.
(c) Gain from sale of investments totaled $349 in 2007 compared to $576 in
2006.
(d) During 2007 the Company has fully impaired its investment in Plan
Graphics which totaled $600.
(e) 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 audits.
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
31
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
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 15
in the financial statements.
Year Ended December 31, 2006 Compared to Year Ended December 31, 2005
(U.S. Dollars in thousands unless otherwise indicated)
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
32
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.
Other Income (Expense), Net. Other income for the year ended December 31,
2006 was $527 compared to other expense of $761 for the year ended December 31,
2005. Other income in 2006 relates to the following:
(a) 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.
(b) Gains from sales of investments totaling an amount of $576.
(c) 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 was 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.
33
As to the geographical segments, please see note 15 in the financial
statements.
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,
and by short-term and long-term borrowings. As of December 31, 2008, we had cash
and cash equivalents of $3.8 million as compared to $2.1 million on December 31,
2007. In 2008 there was no short-term restricted cash compared to $1.8 million
on December 31, 2007.
The Company has a history of recurring losses and working capital
deficiency. The Company incurred net losses of $2.0, $2.6, and $14.1 million
during the years ended December 31, 2008, 2007, and 2006, respectively. As of
December 31, 2008, the Company had a working capital deficit and shareholders
deficiency of $15.3 and $23.0,million respectively. In addition, the Company is
subject to potential material contingencies in connection with: (a) an audit of
the Company's operations in the United States of America by the Internal Revenue
Service (b) the September 11, 2001 terrorist attacks in the United States of
America, (c) unpaid rent obligations related to certain non-core businesses
which have been discontinued in the United States of America, and (d) certain
claims made against the Company by the United States Transportation Security
Administration. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
Management believes that the Company's operating cash flows and related
party financing activities will provide it with sufficient funds to meet its
obligations and execute its business plan. However, there are no assurances that
management's plans to generate sufficient cash to continue to operate the
Company will be successful. The accompanying consolidated financial statements
do not include any adjustments that might be necessary if the Company is unable
to continue as a going concern.
Our future capital will depend on our success in developing and
implementing our business strategy.
As of December 31, 2008 and 2007, the Company had loans from a related
party which amount to $6.1 and $6.5 million, respectively, which were used to
cover part of the Company's obligations.
The Company's cash and cash equivalents increased in 2008 by $1.7 million
as a result of the following:
Net cash provided by (used in) in operating activities for the year ended
December 31, 2008 was $3.9 million as compared to net cash used in operating
activities of $3.6 million for the year ended December 31, 2007 and net cash
used in operating activities of $7.6 million for the year ended December 31,
2006. The net loss during 2008 totaled $2.0 million, offset by non-cash expenses
in $0.1 million relating to stock based compensation and $0.8 million in
depreciation and amortization. Changes in operating assets and liabilities
34
in 2008 amounted to $3.6 million compared to $4.0 million in 2007 and $2.7
million in 2006. The changes in operating assets and liabilities in 2008 were
primarily attributable to a $4.9 million increase in accrued expenses and other
current liabilities, a decrease of $0.3 million in accounts payable and an
increase of $1.3 million in accounts receivable. Net cash provided by
discontinued operations totaled $2.4 million.
Net cash provided by investing activities was $0.6 million for the year
ended December 31, 2008 as compared to net cash used in investing activities of
$1.1 million for the year ended December 31, 2007 and net cash used in investing
activities of $0.2 million for the year ended December 31, 2006. The increase in
2008 is mainly because of the change in restricted cash which totaled $1.8
million and cash used for purchase of equipment totaled $1.0 million in 2008
compared to $0.8 million in 2007 and $0.6 in 2006.
Net cash used in financing activities were $2.1 million for the year ended
December 31, 2008 as compared to net cash provided by financing activities of
$5.0 for the year ended December 31, 2007 and $3.7 million for the year ended
December 31, 2006. In 2008, net cash provided by financing activities was used
primarily to decrease the notes payable - bank loans by $1.8 million.
Notes Payable - Bank
In April 2005, one of the Company's subsidiaries entered into a loan and
security agreement with a commercial bank. Pursuant to the terms of the
arrangement, the commercial bank committed to providing the subsidiary with up
to $8 million in revolving loans, including a maximum of $3.5 million in letters
of credit. Borrowings issued under the arrangement are limited to 85% of
eligible accounts receivable and 95% of the subsidiary's required cash
collateral. As of December 31, 2008 and 2007, the subsidiary has $3.5 million in
cash collateral deposited with the commercial bank. The term of the arrangement
extends through March 10, 2010. Loans made under the arrangement are designated
as either prime based or LIBOR based loans at the option of the subsidiary.
Prime based loans bear interest, which is payable monthly, at the bank's prime
rate plus 1% per annum (4.25% and 8.25% at December 31, 2008 and 2007,
respectively). LIBOR based loans bear interest, which is payable monthly, at
LIBOR plus 350 basis points (5.50% and 8.38% at December 31, 2008 and 2007,
respectively). The subsidiary is also assessed commitment fees of 3% per annum.
The arrangement is secured by the cash collateral deposited with the commercial
bank and the assets of the subsidiary. As of December 31, 2008 and 2007, the
subsidiary has $4.8 and $5.7 million, respectively, in outstanding borrowings
and $0.6 and $1.0 million, respectively, in outstanding letters of credit under
the arrangement. The arrangement subjects the subsidiary to various financial
covenants, including interest coverage, minimum tangible net worth, and an
annual capital expenditure limitation.
In November 2004, one of the Company's subsidiaries entered into a credit
agreement with a commercial bank to provide it with a borrowing arrangement of
up to (euro)0.7 million. Borrowings under the arrangement are limited to 60% of
eligible accounts receivable, secured by the assets of the subsidiary, and
guaranteed by the Company. Loans made under the arrangement bear interest, which
is payable monthly at the commercial bank's euro base rate plus 2% per annum
(7.3% at December 31, 2007). As of December 31, 2007, the subsidiary has $0.7
million in outstanding borrowings and under the arrangement. The credit
agreement expired in February 2008.
35
In February 2008, two of the Company's subsidiaries jointly entered into a
credit agreement with a commercial bank to provide them with a borrowing
arrangement of up to (euro)2.2 million. The available capacity under the
borrowing arrangement automatically reduces to (euro)1.7 million on May 1, 2008,
(euro)1.2 million on August 1, 2008 and (euro)0.7 million on January 1, 2009.
Borrowings under the arrangement bear interest, which is payable monthly, at the
bank's euro base rate (subject to a floor of 3.5%) plus 2% per annum (7.4% at
December 31, 2008). Borrowings under the arrangement are secured by the assets
of the subsidiaries and guaranteed by the Company. As of December 31, 2008,
there are no outstanding borrowings and (euro)1.2 million in outstanding
guarantees under the arrangement. The arrangement subjects the subsidiaries to
various financial covenants, including minimum tangible net worth. As of
December 31, 2008, the Company was in violation of certain financial covenants
specified in the credit agreement, including the payment of dividends without
the approval of the commercial bank and the maintenance of a minimum tangible
net worth threshold. On May 1, 2009, the credit agreement expired.
The Company is indebted to a commercial bank for bank overdrafts of $0 and
$0.4 million as of December 31, 2008 and 2007, respectively. These amounts bear
interest, which is payable monthly, at 7% per annum.
Trend information
Labor market conditions may require the Company to increase its prices.
Cost of labor is the most important variable in determining any cost increases.
The Company is affected by the worldwide economic slowdown, which affects the
aviation industry. As the Company is a service provider to this industry, it
affects the results of the Company.
Off-balance sheet arrangements
The Company is not a party to any material off-balance sheet arrangements.
In addition, ICTS has no unconsolidated special purpose financing or partnership
entities that are likely to create material contingent obligations.
The following table summarizes ICTS's obligations from continuing
operations to make future payments under contracts as of December 31, 2008:
Contractual Obligations Payments due by Period (in thousands)
- --------------------------------------- ----------------------------------------------
Less 1-3 4-5 more than
Total than 1 year years years 5 years
----- ----------- ----- ----- ---------
Long-term debt 3,146 90 3,056
Accrued severance pay 88 88
Operating lease obligations (1) 2,627 1,213 1,409 5
Loan from related party, including
accrued interest 6,072 6,072
Employment contracts 1,130 514 616
Fees and interest regarding Credit Line 600 600
------ ------ ------ ------ ------
13,663 2,417 11,153 5 88
As of December 31, 2008 and 2007 the Company recorded an accrual for
future rent regarding its discontinued operations of $7.3 and $8.5 million,
respectively. The accruals have been updated according to the legal claims of
the landlord against the Company.
36
(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, 2008, 2007 and 2006 were $1.5, $1.2 and $1.2 millions,
respectively.
Item 6. Directors, Senior Management and Employees
The following table lists the directors and executive officers of ICTS:
Age Position
----- ----------
Menachem Atzmon 65 Chairman of the Supervisory Board
David W. Sass 73 Member of the Supervisory Board
Eytan Barak 65 Member of the Supervisory Board, Member of
Compensation and Audit Committee
Elie Housman 72 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
Philip M. Getter 72 Member of the Supervisory Board, Chairman
of the Audit Committee
Avraham Dan 64 Managing Director
Ran Langer 63 Managing Director
Raanan Nir 60 Managing Director
Alon Raich 33 Chief Financial Officer
Menachem J. Atzmon is a CPA (Isr). Since 1996 Mr. Atzmon 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.
Eytan 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., He is
currently, and has been since 2004, a member of the Board of Directors of two
companies owned by the Tel-Aviv Municipality. In addition, he is currently a
member of the board of directors since the year 2006 in Mer Telecommunications
Solution (MTS), a public company. 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. Since 2008 to the present, he is a member of the
board of directors of Menora Mivtachim Mutual Funds Ltd. Since January 2009, he
is a member of the board of directors in Eltek Ltd, Meshulam Levinstrin
Contracting & Engineering Ltd, and Elgo irrigation Ltd, public companies.
Elie Housman served as Chairman of Inksure Technologies, Inc. until 2008.
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 a director
of 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.
37
Gordon Hausmann is the senior partner of his own law firm which he founded
in London 28 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 48 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. Mr. Sass became a
director of Inksure Technologies, Inc., 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 Honorary Trustee of Ithaca College.
Philip M. Getter is currently the managing member of GEMPH Development
LLC. From 2000 to 2005 he was president 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 Pharmaceutical 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 its Chairman in 2008, 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. Mr. Getter received his B.S. in Industrial Relations from Cornell
University. He 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. Since September 2004 to the present, Mr. Dan is a Managing
Director. From 1995 to 2001 he was Chief Executive Officer 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.
38
Raanan Nir has been managing director, since 2002, 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.
Alon Raich is a CPA (Isr), joined ICTS in September 2005 as Financial
Controller and became Chief Financial Officer (CFO) of the Company in 2008. From
2001 to 2005 he worked in the accounting firm, Kesselman & Kesselman,
PriceWaterhouseCoopers (PwC). Mr. Raich holds a BA degree in economics and
accounting and an MA degree in law from Bar-Ilan University, Israel.
Summary Compensation Table
The following table sets forth compensation earned by the executive officers and
the highest paid executive during 2008:
- ---------------------------------------------------------------------------------------------------------------------------
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, 2008 180 68 60 308
Managing
Director 2007 180 60 240
2006 180 60 60 45,000 300
- -----------------------------------------------------------------------------------------------------------------------------
Ran Langer, 2008 No Salary
Managing
Director 2007 No Salary
2006 No Salary 45,000
- -----------------------------------------------------------------------------------------------------------------------------
Doron Zicher, 2008 294 321 36 651
Managing
Director of 2007 242 174 39 455
Subsidiary(1)
2006 221 217 32 55,000 470
- -----------------------------------------------------------------------------------------------------------------------------
(1) Mr. Zicher is entitled to a bonus, net of sale expenses, of 8% of the sale
proceeds in the event I-SEC will be sold.
Each member of the Supervisory Board who is not an employee of the Company
receives an annual fee of $10 and a fee for each Board or committee meeting
attended of $1. The Chairman of the Audit Committee receives an additional $20
per year.
Mr. Dan has been employed as a Managing Director under a five year
employment agreement commencing February 1, 2005, at a monthly compensation of
$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, 2008.
39
Salaries, fees, Pension, retirement
commissions and other
and bonuses similar benefits
--------------- -------------------
(in thousands)
---------------------------------------
Directors as a group (6 persons) $108
All officers as a group(7 persons) $1,442 $103
Board practices
ICTS has a Supervisory Board and a Management Board. The Supervisory Board
has the primary responsibility for supervising the policies of the Management
Board and the general course of corporate affairs and recommending the adoption
of the annual financial statements of ICTS by its shareholders. The Management
Board is responsible for the day-to-day operations of ICTS. Members of the
Supervisory Board and the Management Board are appointed by the shareholders for
a term of one year. Non-executive officers are appointed by and serve at the
pleasure of the Management Board.
The members of the Supervisory Board and the initial year they joined the
Board are as follows: Menachem Atzmon (1999), 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 and 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, Chairman, Gordon
Hausmann and Eytan Barak. The Compensation committee determines salaries,
incentives and other forms of compensation for ICTS's executive officers and
administrator'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.
The Articles of Association of ICTS require at least one member of both
the Management Board and the Supervisory Board, but do not specify a maximum
number of members for such boards. The general meeting of shareholders
determines the exact number of members of both the Management Board and the
Supervisory Board. Under the laws of the Netherlands and the Articles of
Association, each member of the Supervisory Board and Management Board holds
office until such member's resignation, death or removal, with or without cause,
by the shareholders.
40
Employees
As of December 31, 2008 the number of employees in Europe is approximately
950.
As of December 31, 2008 the number of employees in the USA is
approximately 2,400.
Share ownership
See tables under Item 7: "Major Shareholders" and "Related Party
Transactions" below.
Options to Purchase Securities
On December 17, 2008 shareholders adopted the 2008 Employee, Director and
Commitment Stock Option Plan (the "Plan"). The Plan provides a means whereby
employees, officers, directors, and certain consultants and independent
contractors of the Company ("Qualified Grantees") may acquire the Common Shares
of the Company pursuant to grants of (i) Incentive Stock Options ("ISO") and
(ii) "non-qualified stock options". A summary of the significant provisions of
the Plan is set forth below. The following description of the Plan is qualified
in its entirety by reference to the Plan itself.
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 1,500,000 Common Shares
of the Company may be issued to the employees and outside directors. All present
and future employees shall be eligible to receive incentive awards under the
Plan, and all present and future non-employee directors shall be eligible to
receive non-statutory options under the Plan. An eligible employee or
non-employee director shall be notified in writing, stating the number of shares
for which options are granted, the option price per share, and conditions
surrounding the grant and exercise of the options.
The exercise price of shares of Company Stock covered by an ISO shall not
be less than 100% of the fair market value of such shares on the date of grant;
provided that if an ISO is granted to an employee who, at the time of the grant,
is a 10% shareholder, then the exercise price of the shares covered by the
incentive stock option shall not be less than 110% of the fair market value of
such shares on the date of the grant. The exercise price of shares covered by a
non-qualified stock option shall be not less than 85% of the fair market value
of such shares on the date of the grant. The Plan shall be administered by the
Compensation Committee. No options have been granted under this plan as of the
date hereof.
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").
41
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 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
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 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
42
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. Directors - 30,000 options were granted to each of the Directors,
namely, Elie Housman, Philip Getter, 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.
6. Committee Chairmen 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. Philip 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.
43
6. 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.
7. 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.
8. 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.
9. 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.
10. 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.
11. 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, 2008 there were outstanding options to purchase
1,632,000 shares, out of 3,600,000 that were approved and issued. All the
options were granted to directors, executive officers and employees of the
Company 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 three
years and no later than October 2009. Options available for grant under the
plans are 1,968,000. The plans expire by their terms at various dates to 2018.
All current executive officers (Managing Directors) (3 persons) as a
group: 210,000 Options.
All current directors (6 persons) as a group: 1,230,000 Options.
All non-executive officers and other (6 persons) as a group: 192,000
Options.
During the year 2009 one of the Company's employees exercised 50,000 options
which were granted to him in previous years.
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
44
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.
If shares acquired upon exercise of ISOs are disposed of prior to the
expiration of the above time periods, the participant will recognize ordinary
income in the year in which the disqualifying disposition occurs, the amount of
which will generally be the lesser of (i) the excess of the fair market value of
the shares on the date of exercise over the option price, or (ii) the gain
recognized on such disposition. Such amount will ordinarily be deductible for
federal income tax purposes by the Company or subsidiary for whom the
participant performs services ("service recipient") in the same year, provided
that the amount constitutes reasonable compensation for services that would
result in a deduction for U.S. federal income tax purposes and that certain
federal income tax withholding requirements are satisfied. In addition, the
excess, if any, of the amount realized on a disqualifying disposition over the
market value of the shares on the date of exercise will be treated as capital
gain.
The foregoing discussion does not consider the impact of the alternative
minimum tax, which may be particularly applicable to the year in which an ISO is
exercised.
NON QUALIFIED STOCK OPTIONS. A participant who acquires shares by exercise
of a NQSO generally realizes as taxable ordinary income, at the time of
exercise, the difference between the exercise price and the fair market value of
the shares on the date of exercise. Such amount will ordinarily be deductible by
the service recipient for federal income tax purposes in the same year, provided
that the amount constitutes reasonable compensation for services that would
result in a deduction for U.S. federal income tax purposes and that certain
federal income tax withholding requirements are satisfied. Subsequent
appreciation or decline in the value of the shares on the sale or other
disposition of the shares will generally be treated as capital gain or loss.
RESTRICTED STOCK. A participant granted shares of restricted stock under
the Plan is not required to include the value of such shares in ordinary income
until the first time such participant's rights in the shares are transferable or
are not subject to substantial risk of forfeiture, whichever occurs earlier,
unless such participant timely files an election under Section 83(b) of the
Internal Revenue Code to be taxed on the receipt of the shares. In either case,
the amount of such income will be equal to the excess of the fair market value
of the stock at the time the income is recognized over the amount (if any) paid
for the stock. The service recipient will ordinarily be entitled to a
45
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 May 31, 2009 (including options exercisable
within 60 days from that date) with respect to:
(1) Each person who is known by the Company to own beneficially more than
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 (c) 4,547,226 61.22%
- ------------------------------------------------------------------------------------------
Nicholas P. Monteban, Xalladio Holding B.V. and
Galladio Capital Management B.V. 688,000 10.54%
- ------------------------------------------------------------------------------------------
Everest Special Situations Fund
& Affiliates (d) 770,582 11.80%
- ------------------------------------------------------------------------------------------
All officers and directors as a group including
the Atzmon Family Trust
(12 persons) 5,267,226 64.64%
- ------------------------------------------------------------------------------------------
(a) The amounts includes common shares owned by each of the above,
directly or indirectly and options immediately exercisable or exercisable within
60 days from May 31, 2009.
(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 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 the
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 shareholders.
(c) 1. Aragata Holdings Co., Limited, owns directly and indirectly
approximately 56% 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 Aragata Holdings Co., Limited. Mr. Atzmon disclaims any beneficial
interest in the Atzmon Family Trust. Aragata Holdings Co., Limited and the
46
Atzmon Family Trust may be able to appoint all the directors of ICTS and control
the affairs of ICTS.
2. Of the 900,000 options to Menachem Atzmon (Chairman of the
Board), 900,000 are 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 dates of grant.
3. As of May 31, 2009 the Company received loans from related party
in total amount of $6.9 million and accrued interest of $0.8 million. The loan
is convertible to the Company's common stock at a rate of $2.10 per share.
(d) The shares were purchased by the group during 2008, 2007 and 2006.
Related Party Transactions
The Company had an outstanding guarantee with respect to certain related
party debt obligations of $2,515, which were fully reserved. In 2007, the
Company was released from $665 of the guarantee. In 2008, the Company paid
$1,429 to settle certain outstanding obligations under the guarantee and was
released from its remaining guarantee of $421. The Company recognized other
income related to the recovery of its guarantee of $0.4, $0, and $0.7 million
during the years ended December 31, 2008, 2007 and 2006, respectively.
ICTS holds 4,825,555 shares of Inksure Technologies Inc. ("Inksure"),
which represents 27.4% of Inksure's outstanding shares. In October 2002, Mr.
Elie Housman, then the Chairman of the Board of Inksure, was appointed to the
ICTS Supervisory Board. Mr. Getter, a member of the ICTS Supervisory Board, was
elected to the Board of Inksure. Mr. Sass 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 September 2006, the Company entered into an arrangement with a related
party to provide it with up to $3.1 million in revolving loans through April
2007. Loans received under the arrangement bear interest, which is payable at
maturity, at LIBOR plus 1.5% per annum. The arrangement was secured by 2,157,894
shares of Inksure Technologies, Inc. common stock.
In January 2007, the borrowing capacity under the arrangement was
increased to $6.3 million and the term was extended to April 2008. In connection
with the extension, the related party was granted an option to convert
outstanding notes payable under the arrangement into the Company's common stock
at a price of $3.50 per share.
In April 2008, the Company entered into a new arrangement with the related
party, which replaced all previous arrangements, to provide it with up to $6.6
million in revolving loans through November 2010. All outstanding borrowings
from previous arrangements were applied to the borrowing capacity of the new
arrangement. Loans received under the arrangement bear interest, which is
payable at maturity, at LIBOR plus 1.5% per annum. The arrangement is secured by
a 26% interest in one of the Company's subsidiaries. In connection with the
arrangement, the related party was granted an option to convert
47
outstanding notes payable under the arrangement into the Company's common stock
at a price of $2.75 per share.
In April 2009, the Company entered into a new borrowing arrangement with a
related party which replaced all previous arrangements between the parties. The
new arrangement provides the Company with the ability to borrow up to $6.3
million from the related party and is convertible at the option of the holder
into the Company's common stock at $2.10 per share. All outstanding borrowings
from previous arrangements were applied to the borrowing capacity of the new
arrangement. Borrowings under the arrangement bear interest, which is compounded
semi-annually, at rates equivalent to those charged by the Company's commercial
bank. Principal and interest under the arrangement are payable in November 2013.
The arrangement is secured by a 26% interest in one of the Company's
subsidiaries.
Entities related to two of the Company's board members provide legal
services to the Company. Legal expense related to these services is $93, $138
and $107 for the years ended December 31, 2008, 2007 and 2006, respectively.
Included in accounts payable on the accompanying consolidated balance sheet is
$106 and $182 due for these services as of December 31, 2008 and 2007,
respectively.
During the year ended December 31, 2007, the Company engaged the services
of an entity owned by a related party as a subcontractor for one of the
Company's subsidiaries. The Company incurred expenses of $176, $91 and $0 for
such services for the years ended December 31, 2008 and 2007 and 2006,
respectively.
Item 8. Financial Information
Consolidated Statements and Other Financial Information.
See pages F-1 through F-36 incorporated herein by reference.
Legal Proceedings
United States Transportation Security Administration
In February 2002, one of the Company's subsidiaries was awarded a security
services contract (the "TSA Contract") by the United States 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 2002. In accordance with the terms of the TSA Contract,
the U.S. Federal Government provided the Company with a non-interest bearing
advance of $26 million which was payable to the TSA in monthly installments of
$1.3 million commencing in April 2002. Through December 31, 2008, the subsidiary
has repaid $14.3 million of the advance. As of December 31, 2008, the amount due
from the TSA with respect to services provided under the TSA Contract is $17.3
million. The Company has reflected the amount due from the TSA, net of the
remaining unpaid advance, of $3 million as other receivable on the accompanying
consolidated balance sheet as of December 31, 2008 and 2007.
The TSA filed a contract dispute with the Office of Dispute Resolution for
Acquisition ("ODRA") in connection with the TSA Contract seeking reimbursement
of an alleged overpayment of principal in the amount of $59.2
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million. This claim follows a lawsuit which the Company's subsidiary had already
filed against the TSA for repeated breach of contract. The Company's subsidiary
is vigorously challenging the TSA's claim which it asserts is devoid of any
factual or legal merit. The TSA's filing comes on the heels of a recent decision
by ODRA granting the subsidiary's motion for partial summary judgment against
the TSA for breach of contract by failing the give appropriate notice for the
transitioning of airport locations. A separate hearing will be held to determine
the amount of damages due to the subsidiary on this claim. With respect to the
claim for the $59.2 million overpayment, the subsidiary has filed a motion to
dismiss the action which has been denied. Both claims are now in mediation. At
this stage, Management is unable to determine the outcome of the dispute or
estimate a range of potential loss. Accordingly, no provision has been included
in the accompanying consolidated balance sheet related to this matter.
United States Department of Labor
During 2003, the United States Department of Labor ("DOL") finalized its
audit of 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. A long-term liability of $7.3 million was recognized for the DOL
claim as of December 31, 2006. The DOL claim was settled during 2007 for $3
million, payable with the proceeds received from any settlement with the TSA. As
a result of the settlement with the DOL, the Company recorded income of $4.3
million during the year ended December 31, 2007, which is reflected as a
reduction in cost of revenue. As of December 31, 2008 and 2007, a long-term
liability to the DOL of $3 million is reflected in accompanying consolidated
balance sheet.
September 11, 2001 Terrorist Attacks
As a result of the September 11, 2001 terrorist attacks, numerous lawsuits
charging the Company with wrongful death and/or property damage were commenced
in the United States District Court, Southern District of New York, resulting
from certain airport security services provided by one of its subsidiaries for
United Flight 175 out of Logan Airport in Boston, Massachusetts. A number of
these cases have been settled, are in the process of being settled or have been
dismissed at no cost to the Company.
The Company may be indemnified by the airlines if the Company is found to
have followed the procedures specified 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 an internal review of this matter,
Management has not found any evidence of non-compliance with respect to the
security services provided at Boston's Logan International Airport on September
11, 2001.
The Company maintains an aviation insurance policy, which may provide
limited coverage for liabilities that may be assessed against the Company as a
result of the events of September 11, 2001. The liabilities under these cases
may, by statute, be limited to the policy coverage. After the September 11th
terrorist attacks, the Company's insurance carriers canceled all war risk
provisions contained in the Company's insurance policies.
49
Management is unable to determine the likelihood of an unfavorable outcome
or estimate a range of loss with respect to the remaining open claims against
the Company. Accordingly, no provision has been included in the accompanying
balance sheet related to these matters.
The United States Government
The Company had commenced an action against the United States Government
with respect to its Fifth Amendment rights relating to the taking of its
business. In December 2004, the United States Government's motion to dismiss the
case was denied. A motion for reconsideration was also filed by the defendant
and denied. The trial for this action was held and in March 2007, the court
ruled against the Company's action. The Company appealed the decision and in May
2008, the United States Court of Appeals for the Federal Circuit affirmed the
lower court's ruling. In addition, the Company appealed the case to the United
States Supreme Court, which denied certiorari.
Audiovisual-Washington, Inc.
In September 2005, Avitecture, Inc. (a/k/a Audiovisual-Washington, Inc.)
("Avitecture") filed a Demand for Arbitration and Mediation against one of the
Company's subsidiaries with the American Arbitration Association in Somerset,
New Jersey. The Demand for Arbitration alleges that the subsidiary owes
Avitecture $0.2 million for audio, video and control systems. The case was
decided against the Company's subsidiary in an arbitration proceeding, which
resulted in an award to Avitecture of $0.2 million. The arbitrator's decision
was affirmed by the Superior Court of New Jersey in May 2007 and the Appellate
Court in February 2008. The Company has $0.2 million in accrued expenses and
other current liabilities related to this matter as of December 31, 2008 and
2007.
Turner Construction Company
In November 2005, Turner Construction Company ("Turner") filed a Demand
for Arbitration and Mediation against one of the Company's subsidiaries with the
American Arbitration Association in Somerset, New Jersey. The Demand for
Arbitration alleges that pursuant to a written agreement dated in October 2003,
the subsidiary owes Turner $0.9 million for work and/or services performed. In
an arbitration proceeding, the arbitrator awarded Turner $956 plus interest.
This award was affirmed on appeal. In October 2007, the subsidiary filed a
petition of bankruptcy with the New Jersey Superior Court, which dismissed the
action again the subsidiary without prejudice as a result of the bankruptcy
filing. In anticipation of Turner attempting to reinstate or reopen the case,
the Company elected not to release the $1.0 million previously established in
accrued expenses and other current liabilities related to this matter. To date,
Turner has not moved to reinstate or reopen the case.
Landlord Claims
Two of the Company's subsidiaries have been sued by their landlord (which
is the same entity for both properties) alleging breach of their respective
leases. One suit is in the Circuit Court of Baltimore and the other is in the
Superior Court of New Jersey. The landlord is seeking unpaid rent for the entire
terms of the leases for $2.6 million in Atlantic City, New Jersey and $3.7
million in Baltimore, Maryland, plus legal fees. The Company filed a bankruptcy
petition for both of the subsidiaries. However, the landlord was able to prevail
in one of the claims because of a guarantee given by the
50
Company in connection with the lease in one of the locations. In January 2008, a
judgment in the amount of $2.6 million was awarded in favor of the landlord. The
subsidiary has filed an appeal to challenge the judgment. As of December 31,
2008 and 2007, the Company has $7.3 and $8.5 million, respectively in other
liabilities from discontinued operations. The reduction in the Company's reserve
for these matters is based on changes in the claims against the Company and is
presented as part of discontinued operations.
Fraport A.G. International Airport Services Worldwide
The Company was in a dispute with Fraport A.G. International Airport
Services Worldwide over the alleged unlawful use of the letter combination
"ICTS" by the Company. Fraport initiated proceedings before the district court
of Amsterdam. The principal amount claimed was (euro)57.7 million ($80.8 million
as of December 31, 2008). This dispute was settled in 2008 without any liability
to the Company.
General
The Company is subject to various investigations, claims and legal
proceedings covering a wide range of matters that arise in the ordinary course
of its business activities. These claims are primarily related to grievances
filed by current and former employees for unfair labor practices or
discrimination, and for passenger aviation claims. Management recognizes a
liability for any matter when the likelihood of an unfavorable outcome is deemed
to be probable and the amount is able to be reasonably estimated. Management has
concluded that such claims, in the aggregate, would not have a material adverse
effect on the Company's consolidated financial position, results of operations,
or cash flows.
Subsequent Events
In April 2009, the Company entered into a new borrowing arrangement with a
related party which replaced all previous arrangements between the parties. The
new arrangement provides the Company with the ability to borrow up to $6.3
million from the related party and is convertible at the option of the holder
into the Company's common stock at $2.10 per share. All outstanding borrowings
from previous arrangements were applied to the borrowing capacity of the new
arrangement. Borrowings under the arrangement bear interest, which is compounded
semi-annually, at rates equivalent to those charged by the Company's commercial
bank. Principal and interest under the arrangement are payable in November 2013.
The arrangement is secured by a 26% interest in one of the Company's
subsidiaries.
Credit agreement of (euro)2,100 with one of the commercial banks, expired
in May 2009 without being extended.
Item 9. The Offer and Listing
ICTS's shares of common stock are currently traded on the Bulletin Board
OTC under the symbol ICTSF.OB.
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The reported high and low closing sales prices per shares during the last
five years were as follows:
Year High Low
---- ----- -----
2004 $8.42 $1.35
2005 $3.23 $1.58
2006 $2.54 $0.10
2007 $2.79 $1.40
2008 $2.30 $1.70
The reported high and low closing sales prices per share during each
quarter for the last 3 years were as follows:
2006 High Low
---- ----- -----
First quarter $2.54 $2.18
Second quarter $2.33 $1.65
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
2008 High Low
------ ----- -----
First Quarter $2.20 $1.80
Second Quarter $2.20 $2.00
Third Quarter $2.30 $1.92
Fourth Quarter $2.20 $1.70
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,
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, 2008 and 2007,
52
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
discretion, subject to statutory provisions, the Management Board may, with the
prior approval of the Supervisory Board, distribute one or more interim
dividends on the common shares before the annual accounts have been approved by
the Company's shareholders. Existing reserves that are distributable in
accordance with Netherlands law may be made available for distribution upon
proposal by the Management Board, subject to prior approval by the Supervisory
Board. With respect to cash payments, the rights to dividends and distributions
shall lapse if such dividends or distributions are not claimed within five years
following the day after the date on which they were made available.
Voting Rights
Members of the Company's Supervisory Board are appointed by the general
meeting. The Company's Articles of Association provide that the term of office
of each Supervisory Director will expire no later than June in each calendar
year. Members of the Supervisory Board may be re-appointed.
General Meetings of Shareholders
The Company's general meetings of shareholders will be held at least once
a year, not later than six months after the end of the fiscal year. Notices
convening a general meeting will be mailed to holders of registered shares at
least 15 days before the general meeting and will be published in national
newspapers in the Netherlands and abroad in countries where the Company's bearer
shares are admitted for official quotation. In order to attend, address and vote
at the general meeting of shareholders, the holders of the Company's registered
shares must notify it in writing of their intention to attend the meeting and
holders of the Company's bearer shares must direct the depository to their
bearer shares, each as specified in the published notice. The Company currently
does not solicit from or nominate proxies for its shareholders and is exempt
from the proxy rules of the Securities Exchange Act of 1934. However,
shareholders and other persons entitled to attend the general meetings of
shareholders may be represented by proxies with written authority.
Other general meetings of shareholders may be held as often as deemed
necessary by the Supervisory Board or the Management Board and must be held if
one or more shareholders or other persons entitled to attend the general meeting
of shareholders jointly representing at least 10% of the Company's issued share
capital make a written request to the Supervisory Board or the Management Board
that a meeting must be held and specifying in detail the business to be dealt
with at such meeting. Resolutions are adopted at general meetings of
shareholders by a majority of the vote's cast, except where a
53
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 Supervisory
Board. A resolution to dissolve the Company must be approved by at least a
three-fourths majority of the votes cast.
Approval of Annual Accounts
The Company's annual Netherlands statutory accounts, together with a
certificate of its auditors, will be submitted to the general meeting of
shareholders for approval. Consistent with business practice in the Netherlands
and as provided by the Company's Articles of Association, approval of the annual
accounts by the shareholders discharges the Management Board and the Supervisory
Board from liability for the performance of their respective duties for the past
financial year. Under Netherlands law, this discharge is not absolute and will
not be effective with respect to matters which are not disclosed to the
shareholders.
Liquidation Rights
In the event of the Company's dissolution and liquidation, the assets
remaining after payment of all debts and liquidation expenses are to be divided
proportionately among the holders of the common shares.
Issues of Shares; Pre-emptive Rights
The Company's Supervisory Board has the power to issue shares. The
shareholders have by an authorizing resolution provided such authority for a
five year period ending December 17, 2008. 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 may be limited or
eliminated, if designated for this purpose by the general meeting of
shareholders (whether by means of any authorizing resolution or an amendment to
the Company's Articles of Association).
Repurchase and Cancellation of Shares
The Company may repurchase its common shares, subject to compliance with
the requirements of certain laws of the Netherlands (and provided the aggregate
nominal value of the Company's common shares acquired by it at any one time
amounts to no more than one-tenth of its issued share capital). Common shares
owned by the Company may not be voted or counted for quorum purposes. Any such
purchases are subject to the approval of the Supervisory Board and the
authorization of the general meeting of shareholders. Authorization is not
effective for more than 18 months. The Company may resell shares it purchases.
Upon a proposal of the Management Board and approval of the Supervisory Board,
the Company's shareholders at the general meeting shall have the power to decide
to cancel shares acquired by the Company or to reduce the nominal value
54
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 17, 2008, 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 May 31, 2009 the
Company has not re-purchased any shares.
Material contracts
For material contracts See "Item 8 - Financial 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
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 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 the same detail or with the attention to an investor's specific
tax circumstances that would be provided by an investor's own tax adviser.
Accordingly, prospective purchasers of shares are advised to consult their own
tax advisers with respect to their particular circumstances and with respect to
the effects of U.S. federal, state, local, or other laws to which they may be
subject.
As used herein, the term "U.S. Holder" means a beneficial owner of shares
that is (i) for United States federal income tax purposes a citizen or resident
of the United States, (ii) a corporation or other entity created or organized in
or under the laws of the United States or any political subdivision thereof,
55
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.
Subject to the discussion below regarding passive foreign investment companies,
the Company should be considered to be a "qualified foreign corporation" so that
such dividends should be eligible to be taxed as net capital gains (at a maximum
U.S. federal rate of 15 percent). Distributions in excess of the earnings and
profits of the Company will be treated, for U.S. federal income tax purposes,
first as a nontaxable return of capital to the extent of the U.S. Holder's basis
in the shares (thereby increasing the amount of any gain and decreasing the
amount of any loss realized on the subsequent disposition of such shares) and
then as a gain from the sale or exchange of the shares. The amount of any
dividend paid in Euro will be equal to the U.S. dollar value of the Euro on the
date of receipt regardless of whether the U.S. Holder converts the payment into
U.S. dollars.
The declaration of dividends will be at the discretion of the Company's
board of directors and will depend upon the Company's earnings, capital
requirements, financial position, general economic conditions, and other
pertinent factors. The Company cannot assure you that dividends will be paid in
the future.
Foreign Tax Credits
U.S. Holders will generally be entitled to claim a credit against their
United States federal income tax liability for the amount of Netherlands
dividend withholding tax imposed on dividends paid to U.S. Holders. See
Netherlands Dividend Withholding Tax. U.S. Holders who are entitled to the
benefits of a reduced rate of Netherlands dividend withholding tax under the
U.S. Tax Treaty will be allowed a credit for only the amount of withholding tax
provided for under the U.S. Tax Treaty (i.e. 15%). However, the full amount of
the dividend, including any withheld amounts in excess of 15%, will be subject
to current United States federal income taxation whether or not such Holder
obtained a refund of the excess amount withheld. 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
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.
56
Depending on the particular circumstances of the U.S. Holder, dividends
accrued from shares will generally be classified, for foreign tax credit
purposes, as passive income or financial services income. A U.S. Holder who
finds it more advantageous because of such limitations, to claim the Netherlands
dividend withholding tax as a deduction instead of a credit may do so, but only
for a year for which such Holder does not claim a credit for any foreign taxes.
If the U.S. Holder is a U.S. partnership, trust, or estate, any tax credit is
available only to the extent that the income derived by such partnership, trust,
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
Subject to the discussion below regarding passive foreign investment
companies, U.S. Holders will recognize capital gain or loss for U.S. federal
income tax purposes on the sale or other disposition of shares in an amount
equal to the difference between the U.S. dollar value of the amount realized and
the U.S. Holder's adjusted tax basis in the shares. In general, a U.S. Holder's
adjusted tax basis in the shares will be equal to the amount paid by the U.S.
Holder for such shares. For shares held for one year or less, 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. 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 a version of Form W-8 (Certificate of
Foreign Status).
Passive Foreign Investment Company
Management has determined that the Company has not been a passive foreign
investment company ("PFIC") for United States federal income tax purposes for
prior taxable years and believes that the Company will not be treated as a PFIC
for the current and future taxable years, but this conclusion is a factual
determination made annually and thus subject to change. The Company would be a
PFIC with respect to a U.S. Holder if, for any taxable year in which such U.S.
Holder held shares, either (i) at least 75% of the Company's gross income for
the taxable year is passive income, or (ii) at least 50% of the Company's
57
assets are attributable to assets that produce or are held for the production of
passive income. Under a "look-through" rule, a corporation takes into account a
pro rata share of the income and the assets of any corporation in which it owns,
directly or indirectly, 25% or more of the stock by value. Passive income
generally includes dividends, interest, royalties, rents (other than rents and
royalties derived from the active conduct of a trade or business and not derived
from a related person), annuities, and gains from assets that produce passive
income. The 50% asset test would apply to the Company based on fair market
values.
If the Company is a PFIC for any taxable year during which a U.S. Holder
holds shares, the U.S. Holder will be subject to special tax rules with respect
to:
o any "excess distribution" that the U.S. Holder receives on shares,
and
o any gain the U.S. Holder realizes from a sale or other disposition
(including a pledge) of the shares,
unless the U.S. Holder makes a "qualified electing fund" or "mark-to-market"
election as discussed below.
Distributions the U.S. Holder receives in a taxable year that are greater
than 125% of the average annual distributions the U.S. Holder received during
the shorter of the three preceding taxable years or the U.S. Holder's holding
period for the shares will be treated as an excess distribution. Under these
special tax rules:
o the excess distribution or gain will be allocated ratably over the
U.S. Holder's holding period for the shares,
o the amount allocated to the current taxable year, and any taxable
year prior to the first taxable year in which the Company was a
PFIC, will be treated as ordinary income, and
o the amount allocated to each other year will be subject to tax at
the highest tax rate in effect for that year and the interest charge
generally applicable to underpayments of tax will be imposed on the
resulting tax attributable to each such year.
The tax liability for amounts allocated to years prior to the year of
disposition or "excess distribution" cannot be offset by any net operating
losses, and gains (but not losses) realized on the sale of the shares cannot be
treated as capital, even if the U.S. Holder holds the shares as capital assets.
If the Company were to become a PFIC, a U.S. Holder may avoid taxation
under the excess distribution rules discussed above by making a "qualified
electing fund" election to include the U.S. Holder's share of the Company's
income on a current basis. However, a U.S. Holder may make a qualified electing
fund election only if the Company, as a PFIC, agree to furnish the shareholder
annually with certain tax information. Management has not decided whether, under
such circumstances, the Company would prepare or provide such information.
Alternatively, if the Company were to become a PFIC, a U.S. Holder may
make a mark-to-market election to elect out of the excess distribution rules
discussed above. If a U.S. Holder made a mark-to-market election for the
58
shares, the U.S. Holder would include in income each year an amount equal to the
excess, if any, of the fair market value of the shares as of the close of the
U.S. Holder's taxable year over the U.S. Holder's adjusted basis in such shares.
A U.S. Holder is allowed a deduction for the excess, if any, of the adjusted
basis of the shares over their fair market value as of the close of the taxable
year only to the extent of any net mark-to-market gains on the shares included
in the U.S. Holder's income for prior taxable years. Amounts included in a U.S.
Holder's income under a mark-to-market election, as well as gain on the actual
sale or other disposition of the shares are treated as ordinary income. Ordinary
loss treatment also applies to the deductible portion of any mark-to-market loss
on the shares, as well as to any loss realized on the actual sale or disposition
of the shares, to the extent that the amount of such loss does not exceed the
net mark-to-market gains previously included for such shares. A U.S. Holder's
basis in the shares will be adjusted to reflect any such income or loss amounts.
Other than net capital gains treatment for dividends, the tax rules that apply
to distributions by corporations which are not PFICs would apply to
distributions by the Company.
The mark-to-market election is available only for stock which is regularly
traded on a national securities exchange that is registered with the Securities
and Exchange Commission, or the national market system established pursuant to
section 11A of the Exchange Act, or any exchange or market that the IRS has
determined has rules sufficient to carry out the purposes of the income tax
rules. There can be no assurance that the Company will continue to satisfy the
requirements of the mark-to-market election.
Taxes in the Netherlands
The following is a general non-exhaustive discussion of the tax laws in
the Netherlands as they relate to the operations of the Company.
Corporate Income Taxes
ICTS is incorporated under the laws of the Netherlands and is therefore
subject to the tax laws of the Netherlands. In 2009 the standard corporate
income tax rate will be 20% on profits up to (euro) 200,000 and 25.5% for the
excess. In 2008 the standard corporate income tax rate was 20% applicable for
taxable profits up to (euro) 275,000 and 25.5% for the excess.
ICTS and 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 on an "at arms length" basis. In case transactions
between such affiliates are made or imposed on conditions (transfer prices)
which differ from those conditions which would have been made or imposed between
independent entities in the free market, the profits of those entities are
determined as if the latter conditions had been agreed.
Participation Exemption
In general, the Dutch participation exemption is applicable to a
shareholding held by ICTS in a subsidiary company in case the following
conditions are met:
59
(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; unless the subsidiary company can be considered as a
low-taxed portfolio investment company;
A subsidiary company is considered as "low-taxed" 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 a subsidiary company qualifies as a (low taxed) portfolio
investment company 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 is applied from the perspective of the subsidiary itself.
Nonetheless, the participation exemption will be applicable 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 subsidiaries or capital gains from the
disposal of its shares in such subsidiaries is exempt from corporate income tax
in The Netherlands. Apart from special provisions in relation to certain
liquidation losses, capital losses incurred in relation to qualifying
participations are not deductible for Dutch corporate income tax purposes.
In case the participation exemption is not applicable, income derived from
a subsidiary company will be taxed in the hands of ICTS against ordinary
corporate income tax rates, while a (partial) credit may be allowed for
underlying taxes.
Costs related to the acquisition of qualifying participations are
generally added to the cost price of the acquisition and are as such not
deductible. Other expenses relating to participations (e.g. the cost of
financing), regardless of whether they are resident in the Netherlands or
abroad, are in principle deductible (however, see infra). As of 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 of January 1, 2004, thin capitalization rules were introduced in the
Netherlands which include restrictions on the deductibility of interest in the
case of companies that are excessively financed by debts. 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 to the extent
that the excess is larger than (euro)500,000. As an alternative to applying the
fixed 3:1 debt/equity ratio, as a safe harbor, ICTS may from year to year decide
to apply the average debt/equity ratio of the "top entity" of the group of
companies to which it belongs as its maximum debt/equity ratio based on the
statutory commercial (consolidated) accounts of that entity. The amount of
non-deductible interest is limited to interest due to affiliated group companies
(to the extent that such interest exceeds interest received from affiliated
group companies).
60
Besides the thin-capitalization regulations, Dutch tax law includes
various other sets of anti-abuse provisions in relation to deduction of
interest.
Loss compensation
As of 2008 the term for carry-back operating losses is reduced to one
year. Further, the term for carry-forward of losses is restricted to nine years,
subject to certain anti-abuse provisions. Not yet compensated losses will
disappear 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,
Limitations on loss compensation may also apply in the case of so-called
"holding losses", - losses incurred in a book year during which the activities
of ICTS (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 consist of the holding of participations or
the direct financing of related companies. This will be deemed not to be the
case if at least 25 employees are engaged in other activities on a full-time
basis.
Corporate Income Tax 2007 Act, other changes
As of January 1, 2007, changes to the corporate income tax legislation
include the introduction of an "interest box" and a "patent box".
In the interest box regime (not yet entered into force), 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, which has entered into force, income from
self-developed intangible assets will be taxed an effective tax rate of 10%. In
general, the maximum amount of income to be taxed this special rate is limited
to 4 times the total costs in relation to the intangible assets. Application of
the patent box is possible in relation only 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 still decide to apply the patent
box regime.
Further, as of January 1, 2008 restrictions apply on the depreciation
period of goodwill and other business assets. The minimum depreciation period
for goodwill is 10 years. The minimum depreciation period for other business
assets is 5 years. It should still be possible to value assets at lower
going-concern value. Further, restrictions have been
61
introduced on the depreciation of real estate property. Depreciation of
investment property is no longer 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 is
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.
Dutch Tax Consequences of Holding Shares
The following is a general, non-exhaustive summary of Dutch tax
consequences to a holder of Common Shares who is not, or is not deemed to be, a
resident of the Netherlands for purposes of the relevant tax codes (a
"non-resident Shareholder") and is based upon laws and relevant interpretations
thereof in effect as of the date of this Annual Report, all of which are subject
to change, possibly on a retroactive basis. The summary does not address taxes
imposed by the Netherlands other than dividend withholding tax, personal income
tax, corporate income tax and gift and inheritance tax. The discussion does not
address the tax consequences under tax laws in any other jurisdictions besides
the Netherlands.
Dividend Withholding Tax in the Netherlands
ICTS currently does not anticipate paying any dividends in the foreseeable
future. To the extent that dividends are distributed by ICTS, such dividends
ordinarily would be subject, under the tax laws of the Netherlands, to a
withholding tax at a rate of 15%. Dividends include distributions in cash or in
kind, deemed dividends and redemption and liquidation proceeds in excess of, for
Dutch tax purposes, recognized paid-in capital. In case there are profits or in
case profits can be anticipated, the repayment of ICTS' share premium is also
subject to dividend 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 the Netherlands.
A non-resident Shareholder can be eligible for a reduction or a refund of
Dutch dividend withholding tax under a tax convention which is in effect between
the country of residence of the shareholder and the Netherlands, or under the
provisions of the EU Parent/Subsidiary Directive. The Netherlands has concluded
such conventions with, among others, the United States, most European Union
member states, Canada, Switzerland and Japan. Under most of these conventions,
dividend withholding tax in the Netherlands is effectively set at a rate of 15%
in the case of an individual shareholder, and is reduced to lower rates in the
case of a corporate shareholder.
Under the tax convention currently in force between the United States and
the Netherlands (the "Treaty"), dividends paid by ICTS to an individual
shareholder resident in the United States or a corporate shareholder organized
under the laws of the United States or any State or territory thereof holding
less than 10% of the voting power in ICTS (each, a "U.S. Treaty Shareholder"),
are subject to Dutch dividend withholding tax of 15%, unless such U.S. Treaty
Shareholder has a permanent establishment or permanent representative in the
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.
62
Generally, there is no dividend withholding tax applicable in the
Netherlands on the sale or disposition of Common Shares to persons other than
ICTS or its subsidiaries or affiliates. In case of sale or disposition of Common
Shares to ICTS or any of its subsidiaries, dividend withholding tax in the
Netherlands may apply. However, after January 1, 2008, in exceptional cases,
Dutch dividend withholding tax will not apply to repurchases of shares by ICTS.
In addition, in an effort to reduce the practice of dividend stripping to
reduce or avoid the applicable taxes, the Dutch tax authorities have introduced
new laws to avoid such practices effective retroactively as of April 27, 2001,
which may have an impact on the levy of dividend withholding tax.
Income Tax and Corporate Income Tax in the Netherlands
Based on Dutch domestic tax law, a non-resident Shareholder is subject to
Dutch income tax or Dutch corporate income tax 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 in case:
(a) the non-resident Shareholder carries on a business in the Netherlands
through a permanent establishment or a permanent representative to which or to
whom the Common Shares are attributable; or
(b) the non-resident Shareholder has a direct or indirect substantial
interest or deemed substantial interest in the share capital of ICTS as defined
in the tax code in the Netherlands, which interest does not form part of the
assets of an enterprise of that non-resident Shareholder; or
(c) the non-resident Shareholder is 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 if
the non-resident Shareholder, alone or together with 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 relatives hold a substantial interest in
ICTS. In case of a substantial interest held by a corporate shareholder, a
receivable the non-resident Shareholder has from 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.
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 may be in effect between the country of residence of the
shareholder and the Netherlands.
63
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.
If certain conditions are met, a non-resident individual taxpayer can opt
to be treated like a resident of the Netherlands for tax purposes. This choice
will allow the individual to benefit from deductions and other tax benefits only
available to residents of the Netherlands. Whether or not such choice could be
beneficial should be determined separately in each individual case.
Netherlands Gift, Inheritance Tax and Transfer Tax Upon Gift or Death
A gift or inheritance of Common Shares from a non-resident Shareholder
will be subject to gift, inheritance tax, and transfer tax upon gift or death in
the Netherlands in case:
(a) (i) the Common Shares are 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 an
asset that comes of a co-entitlement other than being a shareholder, in such an
enterprise, or (ii) the non-resident Shareholder is entitled to a share in the
profits of an enterprise effectively managed in the Netherlands, other than
through ownership of securities or through employment, to which enterprise the
Common Shares are attributable; or
(b) the Common Shares held by the non-resident qualify as
"fictitious real estate holdings" for Dutch real estate transfer tax purposes;
or
(c) the non-resident Shareholder has been a resident of the
Netherlands at any time during the ten years preceding the time of the gift or
death and is a national of the Netherlands at the time of the gift or death; or
(d) for purposes of the tax on gifts, the non-resident Shareholder
has been a resident of the Netherlands at any time during the twelve months
preceding the time of the gift; or
(e) the beneficiaries of a deceased non-resident Shareholder have
requested the treatment of the deceased Shareholder as a resident of the
Netherlands according to the Dutch inheritance taxes; or
(f) In case of a gift of the Common Shares by a non-resident
Shareholder, the recipient has requested to have the donor treated as a resident
of the Netherlands for Dutch gift tax purposes.
Tax assessment in the U.S
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 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 was 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. The IRS has proposed a number of adjustments that
collectively result in an assessed tax liability including penalties of $7.3
64
million plus interest. Management is vigorously contesting the proposed
adjustments and has filed a "protest" with the IRS. This matter will be heard by
the Appellate Division of the IRS, at which time management will have a
opportunity to present its position on the various issues raised at the
examination level. Management has provided for possible tax liabilities
resulting from this examination in its financial statements presented herein.
Documents on display
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended. In accordance with these requirements, the
Company files reports and other information with the United States Securities
and Exchange Commission ("SEC"). These materials may be inspected at the
Company's office in Amstelveen, The Netherlands. Documents filed with the SEC
may also be read and copied at the SEC's public reference room at Room 1024,
Judiciary Plaza Building, 450 Fifth Street N.W., Washington, D.C. 20549 and at
the regional offices of the SEC located at 500 West Madison Street, Suite 1400,
Chicago, IL 60661. Please call the SEC at 1-800-SEC-0330 for further information
on the public reference rooms. The SEC also maintains a web site at
http://www.sec.gov that contains reports, proxy statements and other information
regarding registrants that file electronically with the SEC.
Subsidiary Information
Not applicable
Item 11. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Exchange Risk - applies to Company's operations outside
the USA. In 2008, about 41% of the Companies revenues were derived in the USA,
and 59% was derived in Europe.
The Company is subject to changes in the 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 $125,000 in the year ended December 31, 2008.
See also note 2 in the financial statements.
Item 12. Description of Securities Other than Equity Securities
Not applicable
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
As of December 31, 2008 two of the subsidiaries were in violation of
certain financial covenants specified in the credit agreement, including the
payment of dividends without the approval of the commercial bank and the
maintenance of a minimum tangible net worth threshold. However the commercial
bank accepted those violations with no penalties to the Company. On May 1, 2009
the credit agreement expired.
65
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
Not applicable
Item 15. Controls and Procedures.
Management's report on internal control over financial reporting
(a) Our management, including our chief executive officer and chief
financial officer, have evaluated the effectiveness of our disclosure controls
and procedures as of December 31, 2008. Based on such review, our chief
executive officer and chief financial officer have concluded that we have in
place effective controls and procedures designed to ensure that information
required to be disclosed by us in the reports that we file or submit 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 decisions regarding required disclosure, and is recorded, processed,
summarized and reported, within the time periods specified in the SEC's rules
and forms.
(b) Our management including our chief executive officer and our chief
financial officer are 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 recorded 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 chief
financial officer assessed the effectiveness of our internal control over
66
financial reporting as of December 31, 2008. 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, Procheck International BV,
I-SEC Netherlands BV, I-SEC France and Huntleigh Corp USA; collectively
"Subsidiaries". Our management including our chief executive officer and our
chief financial officer has concluded based on its assessment, that our internal
control over financial reporting was effective as of December 31, 2008 based on
these criteria.
This annual report does not include an 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 changes in our internal control over financial reporting
that occurred during the year ended December 31, 2008 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item 16A. Audit Committee Financial Experts
The members of the Audit Committee consist of Philip M. Getter, Gordon
Hausmann and Eytan Barak. All members are independent, with no relationship with
management. Mr. Getter and Mr. Barak have financial expertise. Mr. Getter is the
Chairman of the Audit Committee and Eytan Barak is 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. Fees Paid to Our Independent Registered Public Accounting Firm
The following table sets forth the aggregate fees billed by our registered
independent auditors, MHM Mahoney Cohen, CPAs, P.C. ("MHM MC"), for services
rendered to us for the year ended December 31, 2008. The fee billed by MHM MC,
our independent registered public accounting firm, for audit and other
professional services during 2008 is summarized below. The audit committee has
considered whether the 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.
67
2008 2007
---- ----
Audit fees:
Audit fees 300 300
Audit related fees
Sub-total 300 300
Non-Audit services:
Tax fees
Total fees 300 300
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.
Item 16F. Change in Accountants Disclosure.
ICTS International N.V. ("the Company") appointed MHM Mahoney Cohen CPAs
as the Company's new auditor on January 8, 2009. The Company's audit committee
approved the engagement of the successor firm of MHM Mahoney Cohen CPAs. The
Company was notified that the shareholders of Mahoney Cohen & Company, CPA, P.C.
("MC"), became shareholders of Mayer Hoffman McCann P.C pursuant to an asset
purchase agreement which is registered with the PCAOB. The New York practice of
Mayer Hoffman McCann P.C. now operates under the name MHM Mahoney Cohen CPAs.
During the Company's two most recent fiscal years ended December 31, 2007
and December 31, 2006, and through the date of this Current Report on this Form
20F, the Company did not consult with MHM Mahoney Cohen CPAs regarding any of
the matters or reportable events set forth in Item 304 (a)(2) (i) and (ii) of
Regulation S-K.
The audit reports of MC were based on the consolidated financial
statements of the Company as of and for the years ended December 31, 2007 and
2006 did not contain an adverse opinion or a disclaimer of opinion, and were not
qualified except that both reports included emphasis paragraphs relating to an
uncertainty as to the Company's ability to continue as a going concern and
regarding other uncertainties.
In connection with the audits of the Company's consolidated financial
statements for each of the fiscal years ended December 31, 2007 and December 31,
2006 and through the date of this Current Report on Form 20F, there were (i.) no
disagreements between the Company and MC on any matters of accounting principles
or practices, financial statement disclosures, or auditing scope or procedures,
which disagreements, if not resolved to the satisfaction of MC, would have
caused MC to make reference to the subject matter of the disagreement in their
reports on the Company's financial statements for such years or for any
reporting period since the Company's last fiscal year end and (ii) no reportable
events within the meaning set forth in Item 304 (a)(1)(v) of Regulation S-K were
noted, except in 2006 the Company reported material weaknesses as noted on Item
15 of Form 20-F for the year ended December 31, 2006 filed July 17, 2007. These
matters were remediated in 2007.
68
Item 16G. Corporate Governance.
There are no significant differences between the corporate governance
practices in the Netherlands and the U.S. The Company has adapted the U.S.
practices.
PART III
Item 17. Financial Statements. See Item 18.
Item 18. Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Financial Statements
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Operations
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 19. Exhibits
1. Articles of Association of the Company.*
2. Articles of Amendment of the Articles of Association filed as exhibit
to Form 6K dated April 22, 2009.
3. Specimen of the Company's Common Stock.*
4. 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.
69
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. AND SUBSIDIARIES
By: /s/ Avraham Dan
-----------------------------
Name: Avraham Dan
Title: Managing Director
Date: June 24, 2009
70
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
2008 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Financial Statements:
Consolidated Balance Sheets F-4
Consolidated Statements of Operations and Comprehensive Loss F-5
Consolidated Statements of Changes in Shareholders' Deficiency F-6
Consolidated Statements of Cash Flows F-7
Notes to Consolidated Financial Statements F-9
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ICTS INTERNATIONAL N.V AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of ICTS
International N.V. and Subsidiaries as of December 31, 2008 and the related
consolidated statements of operations and comprehensive loss, changes in
shareholders' deficiency, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 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, 2008 and the results of
its operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.
As disclosed in Notes 13 and 16, the Company is involved in significant
litigation in connection with (a) an audit of the Company's operations in the
United States of America by the Internal Revenue Service (b) the September 11,
2001 terrorist attacks in the United States of America, (c) unpaid rent
obligations related to certain non-core businesses which have been discontinued
in the United States of America, and (d) certain claims made against the Company
by the United States Transportation Security Administration.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in Note
1 to the consolidated financial statements, the Company has suffered recurring
losses from operations, deficiencies in working capital and is subject to
potential material 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 plans with regard to these matters are also
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
/s/ MHM Mahoney Cohen CPAs
(The New York Practice of Mayer Hoffman McCann P.C.)
New York, New York
June 26, 2009
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ICTS INTERNATIONAL N.V AND SUBSIDIARIES
We have audited the accompanying consolidated balance sheet of ICTS
International N.V. and Subsidiaries as of December 31, 2007 and the related
consolidated statements of operations and comprehensive loss, changes in
shareholders' deficiency, and cash flows for each of the years in the two year
period 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 is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal
control over financial reporting as a basis for designing audit procedures that
are appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit 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 the results of
its operations and its cash flows for each of the years in the two year period
then ended in conformity with accounting principles generally accepted in the
United States of America.
As disclosed in Notes 13 and 16, the Company is involved in significant
litigation in connection with: (a) an audit of the Company's operations in the
United States of America by the Internal Revenue Service (b) the September 11,
2001 terrorist attacks in the United States of America, (c) unpaid rent
obligations related to certain non-core businesses which have been discontinued
in the United States of America, (d) certain claims made against the Company by
the United States Transportation Security Administration and (e) the successful
renewal of a material contract by one of the Company's subsidiaries.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has suffered recurring losses
from operations, deficiencies in working capital 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 plans with regard to these matters are also described in Note 1.
The consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/s/ Mahoney Cohen & Company, CPA, P.C.
New York, New York
June 30, 2008
F-3
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(US $ and (euro) in thousands, except per share data)
December 31,
--------------------------------
ASSETS 2008 2007
--------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 3,750 $ 2,095
Restricted cash -- 1,795
Accounts receivable, net 11,448 10,200
Prepaid expenses and other current assets 1,373 1,681
Current assets from discontinued operations -- 2,873
--------------------------------
Total current assets 16,571 18,644
Property and equipment, net 1,728 1,519
Customer relationship, net -- 53
Goodwill 314 314
Restricted cash 3,500 3,500
Other receivable - United States government 3,000 2,934
Other assets 283 139
--------------------------------
Total assets $ 25,396 $ 27,103
================================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable-bank $ 4,861 $ 6,719
Accounts payable 4,087 4,432
Accrued expenses and other current liabilities 21,023 16,181
Convertible notes payable to related party,
including accrued interest -- 884
Current liabilities from discontinued operations 1,898 2,089
--------------------------------
Total current liabilities 31,869 30,305
Convertible notes payable to related party,
including accrued interest 6,072 5,644
Other liabilities 3,144 3,234
Non-current liabilities from discontinued operations 7,276 8,530
--------------------------------
Total liabilities 48,361 47,713
--------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 16)
SHAREHOLDERS' DEFICIENCY:
Common stock, (euro)0.45 par value; 17,000,000
shares authorized; 6,672,980 shares issued and
6,528,100 shares outstanding 3,605 3,605
Additional paid-in capital 20,655 20,554
Accumulated deficit (38,827) (36,858)
Accumulated other comprehensive loss (7,499) (7,012)
Treasury stock, at cost; 144,880 shares (899) (899)
--------------------------------
Total shareholders' deficiency (22,965) (20,610)
--------------------------------
Total liabilities and shareholders' deficiency $ 25,396 $ 27,103
================================
The accompanying notes are an integral part of
the consolidated financial statements.
F-4
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(US $ and (euro) in thousands, except per share data)
Year Ended December 31,
-------------------------------------------------------
2008 2007 2006
-------------------------------------------------------
Revenue $ 98,809 $ 64,780 $ 60,791
Cost of revenue 85,107 52,397 55,284
-------------------------------------------------------
GROSS PROFIT 13,702 12,383 5,507
Selling, general, and administrative expenses 15,341 13,338 14,878
-------------------------------------------------------
OPERATING LOSS (1,639) (955) (9,371)
Other income (expense), net (856) (3,580) 527
-------------------------------------------------------
LOSS BEFORE EQUITY LOSS FROM INVESTMENTS IN
AFFILIATES AND INCOME TAXES (2,495) (4,535) (8,844)
Equity loss from investments in affiliates -- (2,479) (132)
Income taxes (402) (966) (846)
-------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (2,897) (7,980) (9,822)
Income (loss) from discontinued operations,
net of income tax benefit (expense) of
$(2), $2,470 and $(2,476) in 2008, 2007
and 2006, respectively. 928 5,422 (4,248)
-------------------------------------------------------
NET LOSS $ (1,969) $ (2,558) $ (14,070)
=======================================================
NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED
Continuing operations $ (0.44) $ (1.22) $ (1.51)
Discontinued operations 0.14 0.83 (0.65)
-------------------------------------------------------
Net loss per share $ (0.30) $ (0.39) $ (2.16)
=======================================================
Weighted average number of shares outstanding 6,528,100 6,528,100 6,528,100
=======================================================
COMPREHENSIVE LOSS
Net loss $ (1,969) $ (2,558) $ (14,070)
Translation adjustment (487) 80 (399)
Unrealized gain on marketable equity securities -- 497 104
-------------------------------------------------------
Comprehensive loss $ (2,456) $ (1,981) $ (14,365)
=======================================================
The accompanying notes are an integral part of
the consolidated financial statements.
F-5
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY
(US $ and (euro) in thousands, except per share data)
Accumulated
Common Stock Additional Other Total
-------------------- Paid-In Accumulated Comprehensive Treasury Shareholders'
Shares Amount Capital Deficit Loss Stock Deficiency
---------------------------------------------------------------------------------------
BALANCE at JANUARY 1, 2006 6,528,100 $3,605 $19,670 $(20,230) $(7,294) $(899) $ (5,148)
Stock-based compensation -- -- 511 -- -- -- 511
Net loss -- -- -- (14,070) -- -- (14,070)
Translation adjustment -- -- -- -- 104 -- 104
Unrealized loss on marketable
equity securities -- -- -- -- (399) -- (399)
---------------------------------------------------------------------------------------
BALANCE at DECEMBER 31, 2006 6,528,100 3,605 20,181 (34,300) (7,589) (899) (19,002)
Stock-based compensation -- -- 373 -- -- -- 373
Net loss -- -- -- (2,558) -- -- (2,558)
Translation adjustment -- -- -- -- 80 -- 80
Unrealized gain on marketable
equity securities -- -- -- -- 497 -- 497
---------------------------------------------------------------------------------------
BALANCE at DECEMBER 31, 2007 6,528,100 3,605 20,554 (36,858) (7,012) (899) (20,610)
Stock-based compensation -- -- 101 -- -- -- 101
Net loss -- -- -- (1,969) -- -- (1,969)
Translation adjustment -- -- -- -- (487) -- (487)
---------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2008 6,528,100 $3,605 $20,655 $(38,827) $(7,499) $(899) $(22,965)
======================================================================================
The accompanying notes are an integral part of
the consolidated financial statements.
F-6
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ and (euro) in thousands, except per share data)
Year Ended December 31,
----------------------------------------------
2008 2007 2006
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,969) $(2,558) $(14,070)
Income (loss) from discontinued operations 928 5,422 (4,248)
----------------------------------------------
Loss from continuing operations (2,897) (7,980) (9,822)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 781 1,218 1,127
Impairment of property and equipment 4 48 40
Deferred income taxes -- -- 42
Loss (gain) on property and equipment (12) (59) 6
Other receivable - United States government (64) -- --
Other assets 38 (295) (575)
Impairment of investments -- 855 --
Equity loss in investments in affiliates -- 2,290 132
Stock- based compensation 101 373 511
Gain on settlement of liability -- (4,266) --
Changes in assets and liabilities:
Accounts receivable, net (1,339) 364 438
Prepaid expenses and other current assets 265 103 (20)
Decrease in deposits -- 93 82
Accounts payable (306) 633 924
Accrued expenses and other current liabilities 4,930 2,827 1,314
Net cash provided by (used in) discontinued
operations 2,356 175 (1,824)
----------------------------------------------
Net cash provided by (used in) operating activities 3,857 (3,621) (7,625)
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (1,042) (792) (630)
Proceeds from affiliates -- -- 443
Proceeds from sale of property and equipment 61 135 22
Proceeds from sale of equity method investments -- 295 419
Proceeds from sale of other investments
previously impaired -- -- 224
Decrease (increase) in restricted cash 1,791 (770) (665)
Increase in other assets (185) -- (14)
Net cash provided by discontinued operations -- 55 --
----------------------------------------------
Net cash provided by (used in) investing activities 625 (1,077) (201)
The accompanying notes are an integral part of
the consolidated financial statements.
F-7
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED)
(US $ and (euro) in thousands, except per share data)
Year Ended December 31,
-----------------------------------------------
2008 2007 2006
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of other liabilities (91) (195) (144)
Net increase (decrease) in notes payable - bank (1,824) 1,562 1,224
Net proceeds (repayments of) convertible notes
payable to related party (234) 3,991 2,652
Net cash from discontinued operations to
financing activities -- (373) --
-----------------------------------------------
Net cash provided by (used in) financing activities (2,149) 4,985 3,732
-----------------------------------------------
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS (678) 65 (90)
-----------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,655 352 (4,184)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,095 1,743 5,927
-----------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 3,750 $ 2,095 $ 1,743
===============================================
Year Ended December 31,
-----------------------------------------------
2008 2007 2006
-----------------------------------------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Cash paid during the year for:
Interest $ 565 $ 624 $ 667
===============================================
Income taxes $ 270 $ 226 $ 110
===============================================
The accompanying notes are an integral part of
the consolidated financial statements.
F-8
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 1 - ORGANIZATION
Description of Business
ICTS International N.V. and 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 airlines and airport
authorities mainly in Europe and the United States of America.
Liquidity and Financial Condition
The Company has a history of recurring losses and working capital deficiencies.
The Company incurred net losses of $1,969, $2,558, and $14,070 during the years
ended December 31, 2008, 2007, and 2006, respectively. As of December 31, 2008,
the Company had a working capital deficit and shareholders' deficiency of
$15,298 and $22,965, respectively. In addition, as further described in Notes 13
and 16, the Company is subject to potential material contingencies in connection
with: (a) an audit of the Company's operations in the United States of America
by the Internal Revenue Service (b) the September 11, 2001 terrorist attacks in
the United States of America, (c) unpaid rent obligations related to certain
non-core businesses which have been discontinued in the United States of
America, and (d) certain claims made against the Company made by the United
States Transportation Security Administration. These factors raise substantial
doubt about the Company's ability to continue as a going concern.
Management believes that the Company's operating cash flows and related party
financing activities will provide it with sufficient funds to meet its
obligations and execute its business plan for the next twelve months. However,
there are no assurances that management's plans to generate sufficient cash to
continue to operate the Company will be successful. The accompanying
consolidated financial statements do not include any adjustments that might be
necessary if the Company is unable to continue as a going concern.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
("U.S.GAAP"). The significant accounting policies are as follows:
Functional Currency
The accompanying consolidated financial statements are presented in United
States dollars in accordance with Statement of Financial Accounting Standards
("SFAS") No 52, "Foreign Currency Translation." The Company has determined that
the functional currency of its foreign subsidiaries is the local currency, which
is predominantly the Euro. For financial reporting purposes, the assets and
liabilities of such subsidiaries are translated into United States dollars using
exchange rates in effect at the balance sheet date. The revenue and expenses of
such subsidiaries are translated into United States dollars using average
exchange rates in effect during the reporting period. Resulting translation
adjustments are presented as a separate category in shareholders' deficiency
called accumulated other comprehensive loss.
F-9
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Use of Estimates
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 revenue and
expenses during the reporting periods. The most significant estimates and
assumptions relate to the (a) calculation of the allowance for doubtful
accounts, (b) recognition of contingent liabilities, (c) calculation of income
taxes, (d) impairment evaluation of marketable equity securities and equity
method investments and (e) calculation of stock-based compensation for stock
option grants. Actual results could differ from those estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of ICTS and its
wholly-owned subsidiaries. All significant intercompany balances have been
eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash and cash equivalents.
Restricted Cash
During 2007, the Company won a bid to provide security services to Schiphol
International Airport in the Netherlands. Pursuant to the terms of the
arrangement, the Company provided the airport with a guarantee of approximately
$1,800 through a commercial bank to guarantee the performance of its services.
The Company secured such guarantee by depositing cash collateral of $1,800 with
this commercial bank. As of December 31, 2007, the cash collateral is reflected
as restricted cash on the accompanying balance sheet. In 2008, the Company was
released from the cash collateral requirement.
The Company has a $3,500 time deposit with a commercial bank that serves as cash
collateral to secure a loan and security agreement for one of its subsidiaries
(See Note 7). As of December 31, 2008 and 2007, the cash collateral is reflected
as restricted cash on the accompanying balance sheet.
Accounts Receivable
Accounts receivable represent amounts due to the Company for services rendered.
The Company provides an allowance for doubtful against accounts receivable to
estimate losses resulting from customers' inability to pay. The allowance for
doubtful accounts is based on historical collection experience, factors related
to a specific customer and current economic trends. The Company writes off
accounts receivable against the allowance for doubtful accounts when the balance
is determined to be uncollectible. As of December 31, 2008 and 2007, the
allowance for doubtful accounts is $328 and $507, respectively.
F-10
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Marketable Equity Securities
The Company accounts for marketable equity securities in accordance with SFAS
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("SFAS 115"). All of the Company's marketable equity securities are classified
as available for sale securities. Available for sale securities are reported at
fair value (which is determined based upon the quoted market price of the
underlying securities) with unrealized gains (losses) being reported, net of
related income taxes, as a separate component of shareholders' equity
(deficiency) called accumulated other comprehensive income (loss). Realized
gains (losses) are included in the consolidated statement of operations upon the
sale of the securities. As of December 31, 2007, the Company determined that the
decline in fair value of its marketable equity securities was other than
temporary and that the marketable equity securities were impaired. Accordingly,
the Company recognized an impairment charge of $600. The impairment charge
represents the carrying value of the marketable equity securities as of December
31, 2007 of $103 and cumulative unrealized losses through December 31, 2007 of
$497 which were previously recognized in accumulated other comprehensive loss.
Investments in Affiliates
The Company accounts for investments in equity securities in which it holds an
ownership interest of 20% or more and has the ability to exercise significant
influence, provided it does not have control, using the equity method as
prescribed by Accounting Principles Board Opinion No. 18, "The Equity Method of
Accounting for Investments in Common Stock." The equity method requires the
Company to recognize its share of the net income (loss) of its investees in the
consolidated statement of operations until the carrying value of the investment
is zero.
Property and Equipment
Equipment and facilities and vehicles are stated at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets. The estimated useful lives used in
determining depreciation are as follows:
Years
-----
Equipment and facilities 3-20
Vehicles 3-7
Leasehold improvements are amortized using the straight-line method over the
shorter of the term of the lease or the estimated useful lives of the assets.
Customer Relationship
The customer relationship represents the fair value of an airport contract of an
acquired business. The customer relationship is amortized using the
straight-line method over the life of the contract of six years. As of December
31, 2008, the customer relationship is fully amortized.
F-11
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Goodwill
Goodwill represents the excess purchase price over the fair value of the net of
tangible and intangible assets of an acquired business. Goodwill is reviewed for
impairment at least annually by reporting unit using the two-step process
outlined in Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets." If the carrying value of the reporting unit's goodwill is
not recoverable based upon a discounted cash flow analysis, then an impairment
charge is recorded for the difference between the carrying value and the fair
value of the reporting unit's goodwill. During the years ended December 31,
2008, 2007 and 2006, the Company has not recorded any impairment charges on its
goodwill.
Long-Lived Assets
The Company reviews long-lived assets, other than goodwill, including the
customer relationship, for impairment whenever events or changes in
circumstances indicate that the carrying value of the asset may not be
recoverable. The Company assesses recoverability by determining whether the net
book value of the related asset will be recovered through the projected
undiscounted future cash flows of the asset. If the Company determines that the
carrying value of the asset may not be recoverable, it measures any impairment
based on the projected future discounted cash flows as compared to the asset's
carrying value. During the years ended December 31, 2008, 2007, and 2006, the
Company has recorded impairment charges on its long-lived assets of $4, $48 and
$40, respectively.
Convertible Debt Instruments
The Company evaluates and accounts for conversion options embedded in its
convertible debt instruments in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), and Emerging Issues
Task Force ("EITF") Issue No. 00-19, "Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Company's Own Stock"
("EITF 00-19"). SFAS 133 generally provides three criteria that, if met, require
companies to bifurcate conversion options from their host instruments and
account for them as free standing derivative financial instruments in accordance
with EITF 00-19. These three criteria include circumstances in which: (a) the
economic characteristics and risks of the embedded derivative instrument are not
clearly and closely related to the economic characteristics and risks of the
host contract, (b) the hybrid instrument that embodies both the embedded
derivative instrument and the host contract is not re-measured at fair value
under otherwise applicable accounting principles generally accepted in the
United States of America with changes in fair value reported in earnings as they
occur and (c) a separate instrument with the same terms as the embedded
derivative instrument would be considered a derivative instrument subject to the
requirements of SFAS 133. SFAS 133 and EITF 00-19 also provide an exception to
this rule when the host instrument is deemed to be conventional (as that term is
described in the implementation guidance to SFAS 133 and further clarified in
EITF Issue No. 05-2, "The Meaning of Conventional Convertible Debt Instrument in
Issue No. 00-19."
F-12
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Convertible Debt Instruments (Continued)
The Company accounts for convertible debt instruments (when it has determined
that the embedded conversion options should not be bifurcated from their host
instruments) in accordance with the provisions of EITF Issue No. 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features"
("EITF 98-5"), and EITF Issue No. 00-27, "Application of EITF 98-5 to Certain
Convertible Instruments." Accordingly, the Company records, when necessary,
discounts to convertible debt instruments for the intrinsic value of conversion
options embedded in convertible debt instruments based upon the differences
between the fair value of underlying common stock at the commitment date of the
debt instrument and the effective conversion price embedded in the debt
instrument.
Comprehensive Loss
The Company reports comprehensive loss in accordance with SFAS No. 130,
"Reporting Comprehensive Income" ("SFAS 130"). SFAS 130 requires the disclosure
of comprehensive income (loss) to reflect changes in shareholders' equity
(deficiency) that result from transactions and economic events from non-owner
sources. The Company's comprehensive loss for the years ended December 31, 2008,
2007, and 2006 consists of its net loss, foreign currency translation adjustment
and unrealized gain (loss) on marketable equity securities.
Stock-Based Compensation
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No.123(R), and began to recognize compensation expense for
share-based awards, including stock option grants, based upon the grant date
fair value over the requisite service period, which is generally the vesting
period of the award.
As permitted under SFAS 123(R), the Company elected to adopt the modified
prospective transition method and continue to account for stock-based
compensation granted prior to January 1, 2006 using the intrinsic value method
prescribed under Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees."
Revenue Recognition
Revenue is recognized as services are rendered, based on the terms contained in
the contractual arrangements, provided the fee is fixed and determinable, the
services have been rendered, and collection of the related receivable is
reasonably assured.
F-13
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Cost of Revenue
Cost of revenue represents primarily payroll and related costs associated with
employees who provide services under the terms of the Company's contractual
arrangements. Such costs are recognized as services are provided.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs during the years
ended December 31, 2008, 2007 and 2006 are $235, $111 and $115, respectively.
Income Taxes
The Company accounts for income taxes using the liability method as prescribed
by SFAS No.109, "Accounting for Income Taxes". Under this method, deferred tax
assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date. Valuation allowances are established when
realization of net deferred tax assets is not considered more likely than not.
On January 1, 2007, the Company adopted Financial Accounting Standards Board
Interpretation No.48, "Accounting for Uncertainty in Income Taxes" ("FIN 48").
FIN 48, which interprets Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," prescribes a recognition threshold or measurement
attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in an income tax return. FIN 48 also
provides guidance or de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. On the date of
adoption, there was no impact on beginning retained earnings pertaining to FIN
48 as a liability was already recorded for the Company's uncertain tax
positions.
The Company recognizes interest related to uncertain tax positions in interest
expense. The Company recognizes penalties related to uncertain tax positions in
selling, general and administrative expenses.
Earnings (Loss) Per Share
Basic earnings (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of shares of
common stock outstanding during the period. Diluted earnings (loss) per share is
determined in the same manner as basic earnings (loss) per share, except that
the number of shares is increased to include potentially dilutive securities
using the treasury stock method. Because the Company incurred a net loss in all
periods presented, all potentially dilutive securities were excluded from the
computation of diluted earnings (loss) per share because the effect of including
them is anti-dilutive.
F-14
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings (Loss) Per Share (Continued)
The following table summarizes the number of common shares attributable to
potentially dilutive securities outstanding for each of the periods which were
excluded in the calculation of diluted earnings (loss) per share:
Year Ended December 31,
------------------------------------------------------
2008 2007 2006
--------- --------- ---------
Stock Options 1,632,000 1,723,000 1,920,000
Shares Issuable upon Conversion of
Convertible Notes Payable to
Related Party 2,208,000 1,865,000 --
--------- --------- ---------
Total 3,840,000 3,588,000 1,920,000
========= ========= =========
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, restricted cash, accounts
receivable, accounts payable, accrued expenses and other current liabilities,
and notes payable-bank approximate their carrying values due to the short-term
nature of the instruments. The carrying value note payable to related party
approximates its fair value due to the variable rate of interest being charged.
The fair value of other liabilities is not readily determinable because
comparable instruments do not exist.
Concentration of Credit Risk
Financial instruments which are subject to concentrations of credit risk consist
primarily of cash and cash equivalents, restricted cash and accounts receivable.
The Company maintains cash and cash equivalents and restricted cash in accounts
with high quality financial institutions in the United States of America,
Europe, and Israel. Bank accounts at financial institutions located in the
United States of America are insured by the Federal Deposit Insurance
Corporation ("FDIC") for up to $250 per institution through December 31, 2013.
As of December 31, 2008, the cash balances being held in the United States of
America do not exceed the FDIC limit. Bank accounts located in Europe and Israel
which hold $3,602 as of December 31, 2008 are uninsured.
The Company renders services to a limited number of airlines and airports
through service contracts and provides credit without collateral. Some of these
airlines and airports may have difficulties in meeting their financial
obligations which can have a material adverse effect on the Company's financial
position, cash flows and results of operations. To mitigate this risk, the
Company regularly reviews the credit worthiness of its customers through its
credit evaluation process.
Revenue from two customers represented 55%, 29% and 25% of total revenue during
the years ended December 31, 2008, 2007 and 2006, respectively. Accounts
receivable from two customers represented 41% and 23% of total accounts
receivable as of December 31, 2008 and 2007, respectively.
F-15
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Risks and Uncertainties
The Company is currently engaged in direct operations in numerous countries and
is therefore subject to risks associated with international operations
(including economic and/or political instability and trade restrictions). Such
risks can cause the Company to have significant difficulties in connection with
the sale or provision of its services in international markets and have a
material impact on the Company's financial position, results of operations and
cash flows.
Furthermore, as a result of its international operations, the Company is subject
to market risks associated with foreign currency exchange rate fluctuations. The
Company does not utilize derivative instruments to manage its exposure to such
market risk. As such significant foreign currency exchange rate fluctuations can
have a material impact on the Company's financial position, results of
operations and cash flows.
Reclassifications
Certain amounts in the prior year consolidated financial statements have been
reclassified to conform to the current year presentation.
Recently Issued Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 157, "Fair Value Measurements" ("SFAS 157"). This Statement defines fair
value, establishes a framework for measuring fair value and expands disclosure
of fair value measurements. SFAS 157 applies under other accounting
pronouncements that require or permit fair value measurements and accordingly,
does not require any new fair value measurements. The Company adopted SFAS 157
as of January 1, 2008. The adoption of SFAS 157 did not have a material effect
on the Company's consolidated financial position, results of operations, or cash
flows.
In February, 2007, the FASB issued SFA No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 provides
companies with an option to report selected financial assets and liabilities at
fair value. SFAS 159's objective is to reduce both complexity in accounting for
financial instruments and the volatility in earnings caused by measuring related
assets and liabilities differently. SFAS 159 also establishes presentation and
disclosure requirements designed to facilitate comparisons between companies
that choose different measurement attributes for similar types of assets and
liabilities. SFAS 159 requires companies to provide additional information that
will help investors and other users of financial statements to more easily
understand the effect of the company's choice to use fair value on its earnings.
It also requires entities to display the fair value of those assets and
liabilities for which a company has chosen to use fair value on the face of the
balance sheet. The Company adopted SFAS 159 as of January 1, 2008 and elected
not to report any of its assets and liabilities at fair value. The adoption of
SFAS 159 did not have a material effect on the Company's consolidated financial
position, results of operations, or cash flows.
F-16
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (CONTINUED)
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations"
("SFAS 141(R)"), which replaces SFAS No. 141, "Business Combinations,"
establishes principles and requirements for determining how an enterprise
recognizes and measures the fair value of certain assets and liabilities
acquired in a business combination, including non-controlling interests,
contingent consideration, and certain acquired contingencies. SFAS 141(R) also
requires acquisition-related transaction expenses and restructuring costs be
expensed as incurred rather than capitalized as a component of the business
combination. SFAS 141(R) will be applicable prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. SFAS
141(R) would have an impact on the accounting for any businesses acquired by the
Company after the effective date of the pronouncement.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements -- An Amendment of ARB No. 51" ("SFAS 160").
SFAS 160 establishes accounting and reporting standards for the non-controlling
interest in a subsidiary (previously referred to as minority interests). SFAS
160 also requires that a retained non-controlling interest upon the
deconsolidation of a subsidiary be initially measured at its fair value. Upon
adoption of SFAS 160, the Company would be required to report any
non-controlling interests as a separate component of stockholders' equity. The
Company would also be required to present any net income (loss) allocable to
non-controlling interests and net income (loss) attributable to the shareholders
of the Company separately in its consolidated statements of operations. SFAS 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The Company does not expect the
adoption of SFAS 160 to have a material effect on its consolidated financial
position, results of operations, or cash flows.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities -- an amendment of FASB Statement No. 133"
("SFAS 161"). SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how
derivative instruments and related hedged items are accounted for under SFAS 133
and its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance and
cash flows. The guidance in SFAS 161 is effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. This Statement encourages, but does not
require, comparative disclosures for earlier periods at initial adoption. The
Company has determined at this time that this pronouncement does not apply to
any of its transactions.
F-17
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Recently Issued Accounting Pronouncements (CONTINUED)
In April 2008, the FASB issued FASB Staff Position SFAS 142-3, "Determination of
the Useful Life of Intangible Assets" ("FSP SFAS 142-3"). FSP SFAS 142-3 amends
the factors that should be considered in developing renewal or extension
assumptions used to determine the useful life of a recognized intangible asset
under FASB Statement No. 142, "Goodwill and Other Intangible Assets." The
objective of this guidance is to improve the consistency between the useful life
of a recognized intangible asset under SFAS 142 and the period of expected cash
flows used to measure the fair value of the asset under SFAS 141(R) and other
U.S. GAAP principles. FSP SFAS 142-3 is effective for fiscal years beginning
after December 15, 2008. The Company does not expect the adoption of FSP SFAS
142-3 to have a material impact on its consolidated financial position, results
of operation, or cash flows.
In June 2008, the FASB ratified EITF 07-5, "Determining Whether an Instrument
(or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-5").
EITF 07-5 provides framework for determining whether an instrument is indexed to
an entity's own stock. EITF 07-5 is effective for fiscal years beginning after
December 15, 2008. The Company does not expect the adoption of EITF 07-5 to have
a material impact on its consolidated financial position, results of operations,
or cash flows.
In October 2008, the FASB issued FASB Staff Position 157-3, "Determining Fair
Value of a Financial Asset in a Market that is Not Active" ("FSP 157-3"). FSP
157-3 classified the application of SFAS 157 in an inactive market. It
demonstrated how the fair value of a financial asset is determined when the
market for that financial asset is inactive. FSP 157-3 was effective upon
issuance, including prior periods for which financial statements had not been
issued. The adoption of FSP 157-3 did not have a material impact on the
Company's consolidated financial position, results of operations, or cash flows.
In May 2009, the FASB issued SFAS No. 165, "Subsequent Events" ("SFAS 165").
SFAS 165 provides general standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial statements are
issued or are available to be issued. SFAS No. 165 is applicable for interim or
annual periods after June 15, 2009. The Company does not expect the adoption of
SFAS 165 to have a material impact on its consolidated financial position,
results of operation, or cash flows.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)" ("SFAS 167"). SFAS 167 seeks to improve financial reporting by
enterprises involved with variable interest entities. SFAS 167 is applicable for
annual periods after November 15, 2009 and interim periods therein and
thereafter. The Company does not expect the adoption of SFAS 167 to have a
material impact on its consolidated financial position, results of operation, or
cash flows.
NOTE 3 - DISCONTINUED OPERATIONS
In December 2005, the Company committed to a plan to cease the operations of its
entertainment segment in the United States of America. Accordingly, as of that
date, the assets, liabilities and results of operations of such segment were
classified as discontinued operations in the Company's consolidated financial
statements. The nature of the ongoing discontinued operations reflected below
represents the costs associated with ongoing litigation related to outstanding
rent obligations (See NOTE 16).
F-18
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 3 - DISCONTINUED OPERATIONS (CONTINUED)
A summary of the Company's assets and liabilities from discontinued operations
as of December 31, 2008 and 2007 are as follows:
December 31,
-------------------------
2008 2007
-------------------------
Income tax refund receivable $ -- $ 2,873
-------------------------
Total current assets from
discontinued operations $ -- $ 2,873
=========================
Accrued expenses and other current liabilities $ 1,898 $ 2,089
-------------------------
Total current liabilities from discontinued
Operations $ 1,898 $ 2,089
=========================
Other liabilities (See Note 16) $ 7,276 $ 8,530
-------------------------
Total non-current liabilities from
discontinued operations $ 7,276 $ 8,530
=========================
A summary of the Company's results from discontinued operations for the years
ended December 31, 2008, 2007 and 2006 are as follows:
December 31,
-------------------------------
2008 2007 2006
-------------------------------
Operating income (expense) $ 932 $ 2,634 $ (1,774)
Impairment loss -- (55) --
Other income (expense), net (2) 373 2
Income tax benefit (expense) (2) 2,470 (2,476)
-------------------------------
Income (loss) from discontinued operations $ 928 $ 5,422 $ (4,248)
===============================
NOTE 4 - INVESTMENTS IN AFFILIATES
ICTS Netherlands Airport Services VOF
The Company has a 50% ownership interest in ICTS Netherlands Airport Services
VOF ("NAS"), a joint venture with an unrelated third party. NAS provided airport
services at the Amsterdam Schiphol Airport in the Netherlands pursuant to a
long-term service contract. On February 1, 2008, the service contact expired and
NAS ceased its operations. The Company does not expect to receive any cash
distributions upon the final liquidation of NAS. As of December 31, 2008 and
2007, the Company's investment in NAS is $0.
The Company recognized equity income (loss) in affiliates related to its
investment in NAS of $0, $(2,003) and $1,303 during the years ended December 31,
2008, 2007 and 2006, respectively.
F-19
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 4 - INVESTMENTS IN AFFILIATES (CONTINUED)
The Company recorded an impairment charge of $192 during the year ended December
31, 2007 and discontinued its use of the equity method to account for its joint
venture in NAS. The $192 impairment charge consists of $332 relating to the
carrying amount of the investment in NAS as of December 31, 2007, net of $140 in
accumulated other comprehensive income previously recognized. As of December 31,
2008, the Company's share of the underlying net assets of NAS exceeds the
carrying value of its investment in NAS by $47. The market value of the
Company's investment in NAS as of December 31, 2008 is not determinable.
Balance sheet data for NAS is summarized below:
December 31
--------------------
2008 2007
--------------------
Current assets $1,637 $ 9,962
Non-current assets -- 44
--------------------
Total assets $1,637 $10,006
====================
Current liabilities $1,544 $ 9,341
Shareholders' equity 93 665
--------------------
Total liabilities and shareholders' equity $1,637 $10,006
====================
Statement of operations data for NAS is summarized below:
For the Year Ended December 31,
--------------------------------
2008 2007 2006
--------------------------------
Revenue $5,931 $62,684 $57,742
Gross profit 625 873 3,644
Net income (loss) (565) (4,006) 1,422
Inksure Technologies Inc.
The Company has an ownership interest in Inksure Technologies Inc. ("Inksure")
of 27.5% and 28.3% as of December 31, 2008 and 2007, respectively. Inksure
develops, markets and sells customized authentication systems designed to
enhance the security of documents and branded products.
The Company recognized equity income (loss) in affiliates related to its
investment in Inksure of $0, $(284) and $(1,435) during the years ended December
31, 2008, 2007 and 2006, respectively. During the year ended December 31, 2007,
the Company's investment in Inksure was reduced to $0 and the use of the equity
method was suspended. The market value of the Company's investment in Inksure as
of December 31, 2008 is $542.
F-20
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 4 - INVESTMENTS IN AFFILIATES (CONTINUED)
Balance sheet data for Inksure is summarized below:
December 31
------------------------
2008 2007
------------------------
Current assets $ 3,090 $ 2,282
Non-current assets 288 640
------------------------
Total assets $ 3,378 $ 2,922
========================
Current liabilities $ 8,093 $ 6,541
Shareholders' deficiency (4,715) (3,619)
------------------------
Total liabilities and
shareholder's deficiency $ 3,378 $ 2,922
========================
Statement of operations data for Inksure is summarized below:
December 31,
--------------------------------
2008 2007 2006
--------------------------------
Revenue $ 2,158 $ 2,890 $ 2,002
Gross profit 1,654 1,782 1,139
Net loss (3,528) (3,078) (3,112)
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is as follows:
December 31,
------------------------
2008 2007
------------------------
Equipment and facilities $3,694 $3,659
Vehicles 693 817
Leasehold improvements 304 299
------------------------
4,691 4,775
Less: accumulated depreciation and amortization 2,963 3,256
------------------------
$1,728 $1,519
========================
Depreciation expense is $728, $570 and $481 for the years ended December 31,
2008, 2007 and 2006, respectively.
F-21
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 6 - CUSTOMER RELATIONSHIP
As of December 31, 2008 and 2007, the customer relationship is as follows:
December 31, 2008 December 31, 2007
- -------------------------------------------------------------------------------------------------------------------------------
Gross carrying Accumulated Net book Gross carrying Accumulated Net book
Amount amortization Value Amount amortization value
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,785 $ 1,785 $ -- $ 1,785 $ 1,732 $ 53
- -------------------------------------------------------------------------------------------------------------------------------
$ 1,785 $ 1,785 $ -- $ 1,785 $ 1,732 $ 53
===============================================================================================================================
Amortization expense is $53, $648 and $648 for the years ended December 31,
2008, 2007 and 2006, respectively.
NOTE 7 - NOTES PAYABLE - BANK
In April 2005, one of the Company's subsidiaries entered into a loan and
security agreement with a commercial bank. Pursuant to the terms of the
arrangement, the commercial bank committed to providing the subsidiary with up
to $8,000 in revolving loans, including a maximum of $3,500 in letters of
credit. Borrowings issued under the arrangement are limited to 85% of eligible
accounts receivable and 95% of the subsidiary's required cash collateral. As of
December 31, 2008 and 2007, the subsidiary has $3,500 in cash collateral
deposited with the commercial bank (See Note 2). The term of the arrangement
extends through March 10, 2010. Loans made under the arrangement are designated
as either prime based or LIBOR based loans at the option of the subsidiary.
Prime based loans bear interest, which is payable monthly, at the bank's prime
rate plus 1% per annum (4.25% and 8.25% at December 31, 2008 and 2007,
respectively). LIBOR based loans bear interest, which is payable monthly, at
LIBOR plus 350 basis points (5.50% and 8.38% at December 31, 2008 and 2007,
respectively). The subsidiary is also assessed commitment fees of 3% per annum.
The arrangement is secured by the cash collateral deposited with the commercial
bank and the assets of the subsidiary. As of December 31, 2008 and 2007, the
subsidiary has $4,848 and $5,662, respectively, in outstanding borrowings and
$575 and $1,021, respectively, in outstanding letters of credit under the
arrangement. The arrangement subjects the subsidiary to various financial
covenants, including interest coverage, minimum tangible net worth, and an
annual capital expenditure limitation. The subsidiary was in compliance with
these covenants as of December 31, 2008.
In November 2004, one of the Company's subsidiaries entered into a credit
agreement with a commercial bank to provide it with a borrowing arrangement of
up to (euro)650. Borrowings under the arrangement were limited to 60% of
eligible accounts receivable, secured by the assets of the subsidiary, and
guaranteed by the Company. Loans made under the arrangement bear interest, which
were payable monthly at the commercial bank's euro base rate plus 2% per annum
(7.3% at December 31, 2007). As of December 31, 2007, the subsidiary had $680 in
outstanding borrowings and under the arrangement. The credit agreement expired
in February 2008.
F-22
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 7 - NOTES PAYABLE - BANK (CONTINUED)
In February 2008, two of the Company's subsidiaries jointly entered into a
credit agreement with a commercial bank to provide them with a borrowing
arrangement of up to (euro)2,150. The available capacity under the borrowing
arrangement automatically reduces to (euro)1,650 on May 1, 2008, (euro)1,150 on
August 1, 2008 and (euro)650 on January 1, 2009. Borrowings under the
arrangement bear interest, which is payable monthly, at the bank's euro base
rate (subject to a floor of 3.5%) plus 2% per annum (7.4% at December 31, 2008).
Borrowings under the arrangement are secured by the assets of the subsidiaries
and guaranteed by the Company. As of December 31, 2008, there are no outstanding
borrowings and (euro)1,200 in outstanding guarantees under the arrangement. The
arrangement subjects the subsidiaries to various financial covenants, including
minimum tangible net worth. As of December 31, 2008, the Company was in
violation of certain financial covenants specified in the credit agreement,
including the payment of dividends without the approval of the commercial bank
and the maintenance of a minimum tangible net worth threshold. However, the
commercial bank accepted these violations with no penalty to the Company. On May
1, 2009, the credit agreement expired.
The Company is indebted to a commercial bank for bank overdrafts of $13 and $377
as of December 31, 2008 and 2007, respectively. These amounts bear interest,
which is payable monthly, at 7% per annum.
NOTE 8 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are as follows:
December 31,
---------------------
2008 2007
---------------------
Accrued payroll and related $ 4,774 $ 3,013
Accrued vacation 2,287 1,071
Accrued value added taxes payable 1,756 242
Income taxes payable 9,614 9,306
Other 2,592 2,549
---------------------
Total accrued expenses and other current liabilities $21,023 $16,181
=====================
NOTE 9 - CONVERTIBLE NOTES PAYABLE TO RELATED PARTY
In September 2006, the Company entered into an arrangement with an entity
related to its main shareholder to provide it with up to $3,050 in revolving
loans through April 2007. Loans received under the arrangement bear interest,
which is payable at maturity, at LIBOR plus 1.5% per annum. The arrangement was
secured by 2,157,894 shares of Inksure Technologies, Inc. common stock (See Note
4).
In January 2007, the borrowing capacity under the arrangement was increased to
$6,263 and the term was extended to April 2008. In connection with the
extension, the related party was granted an option to convert outstanding notes
payable under the arrangement into the Company's common stock at a price of
$3.50 per share. The Company determined that the conversion feature did not
qualify as a free standing derivative instrument or contain any intrinsic value
which would be considered beneficial.
F-23
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 9 - CONVERTIBLE NOTES PAYABLE TO RELATED PARTY (CONTINUED)
In April 2008, the Company entered into a new arrangement with an entity related
to its main shareholder, which replaced all previous arrangements, to provide it
with up to $6,644 in revolving loans through November 2010. All outstanding
borrowings from previous arrangements were applied to the borrowing capacity of
the new arrangement. Loans received under the arrangement bear interest, which
is payable at maturity, at LIBOR plus 1.5% per annum. The arrangement is secured
by a 26% interest in one of the Company's subsidiaries. In connection with the
arrangement, the related party was granted an option to convert outstanding
notes payable under the arrangement into the Company's common stock at a price
of $2.75 per share. The Company determined that the conversion feature did not
qualify as a free standing derivative instrument or contain any intrinsic value
which would be considered beneficial.
At December 31, 2008 and 2007, notes payable to the related party consist of
$5,501 and $6,155, respectively, in principal and $571 and $373, respectively,
of accrued interest. Interest expense related to these notes is $297, $280 and
$113 for the years ended December 31, 2008, 2007 and 2006, respectively.
In May 2009, the Company entered into a new financing arrangement with the
related party (See Note 17).
NOTE 10 - OTHER LIABILITIES
Other liabilities are as follows:
December 31,
------------------------
2008 2007
------------------------
Liability to the Department of Labor (Note 16) $ 3,000 $ 3,000
Other 144 234
------------------------
Total other liabilities $ 3,144 $ 3,234
========================
NOTE 11 - STOCK-BASED COMPENSATION
In 1999, the Company adopted a share option plan and reserved 600,000 shares of
common stock for future issuance. The plan expires in 2009.
In February 2005, the Company adopted the 2005 Equity Incentive Plan and
reserved 1,500,000 shares of common stock for future issuance. The plan expires
in 2015.
In December 2008, the Company adopted the 2008 Employees and Directors
Commitment Stock Option Plan and reserved 1,500,000 shares of common stock for
future issuance. No stock options have been issued under this plan. The plan
expires in 2018.
As of December 31, 2008, the Company has stock options outstanding under these
plans to purchase 1,632,000 shares of common stock and 1,968,000 options
available for future grants.
Under the Company's stock option plans, stock options may be granted to
employees, officers, directors and consultants of the Company at an exercise
price equivalent to at least the fair market value of the Company's common stock
on the date of grant with expiration terms of not more than ten years. Options
granted under the plans generally vest over a period of three years.
F-24
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 11 - STOCK-BASED COMPENSATION (CONTINUED)
The Company uses the Binomial Lattice Model to estimate the fair value of stock
option grants. This method incorporates calculations for expected volatility,
risk-free interest rates, employee exercise patterns and post-vesting employee
termination behavior. These factors affect the estimate of the fair value of the
Company's stock options. There were no stock options awarded during the years
ended December 31, 2008 and 2007. The weighted-average assumptions reflected in
the chart below are used in estimating the fair value of stock options awards
during the year ended December 31, 2006.
Expected life of options 5 years
Expected volatility 75.0%
Risk-free interest rate 5.1%
Expected dividend yield 0.0%
Forfeiture rate - executives 4.2%
Forfeiture rate - employees 3.0%
The Company calculates the expected volatility for stock option awards using
comparable industry data because sufficient historical trading data does not yet
exist for the Company's stock. The Company estimates the forfeiture rate for
stock option awards based on historical data. The risk-free rate for stock
options granted during the period is determined by using a zero-coupon U.S.
Treasury rate for the period that coincides with the expected option terms. The
Company has elected to use the simplified method described in Staff Accounting
Bulletin 107, "Share-Based Payment", to estimate the expected term of stock
option awards.
A summary of the Company's stock option activity is as follows:
Weighted
Weighted Average Remaining
Average Contractual Term Intrinsic
Number Exercise Price (in years) Value
------ -------------- ----------------- ---------
Outstanding as of January 1, 2008 1,723,000 $1.19 2.80 $ --
Granted -- -- -- --
Exercised -- -- -- --
Forfeited / Expired (91,000) $1.19 1.80 --
-----------------------------------------------------------
Outstanding as of December 31, 2008 1,632,000 $1.19 1.80 $ --
-----------------------------------------------------------
Exercisable as of December 31, 2008 1,632,000 $1.19 1.80 $ --
===========================================================
There were no stock options granted during the years ended December 31, 2008 and
2007. The weighted average grant date fair value of stock options granted during
the year ended December 31, 2006 is $0.62.
F-25
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 11 - STOCK-BASED COMPENSATION (CONTINUED)
A summary of the status of the Company's non-vested stock options is as follows:
Weighted Average
Grant Date
Number Fair Value
------ ----------------
Non-vested stock options as of January 1, 2008 192,667 $0.62
Granted -- --
Vested (115,334) 0.62
Forfeited/expired (77,333) 0.87
-------- -----
Non-vested stock options as of December 31, 2008 -- --
======== =====
As of December 31, 2008, the Company did not have any unrecognized compensation
cost related to stock options granted under the stock option plans. During the
years ended December 31, 2008, 2007 and 2006, the Company recognized $101, $373
and $511 in compensation expense related to the issuance of stock options under
the stock option plans.
NOTE 12 - OTHER INCOME (EXPENSES)
Other income (expense) is as follows:
2008 2007 2006
---------------------------------
Interest expense $(1,660) $(3,537) $(1,137)
Interest income 228 325 327
Foreign currency gain (loss) 141 (122) 96
Recovery of guarantee from related
party (Note 16) 421 -- 665
Gain from the sale of marketable
equity securities -- 349 576
Impairment of marketable equity
securities -- (600) --
Other 14 5 --
---------------------------------
Total other income (expense) $ (856) $(3,580) $ 527
=================================
NOTE 13 - INCOME TAXES
The components of income (loss) before equity loss from investments in
affiliates and income taxes are as follows:
Year Ended December 31,
-----------------------------------------------
2008 2007 2006
-----------------------------------------------
The Netherlands $ 2,383 $(1,764) $ (373)
Subsidiaries outside of the Netherlands (4,878) (2,771) (8,471)
-----------------------------------------------
Total income (loss) before equity loss from
investments in affiliates and income taxes $(2,495) $(4,535) $(8,844)
===============================================
F-26
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 13 - INCOME TAXES (CONTINUED)
The components of income tax benefit (expense) are as follows:
Year Ended December 31,
-------------------------------------------------
2008 2007 2006
-------------------------------------------------
Current:
The Netherlands $ (19) $ (268) $ 223
Subsidiaries outside of the Netherlands (383) (740) (1,027)
-------------------------------------------------
(402) (1,008) (804)
Deferred:
The Netherlands -- -- --
Subsidiaries outside of the Netherlands -- 42 (42)
-------------------------------------------------
-- 42 (42)
-------------------------------------------------
Total income tax expense $ (402) $ (966) $ (846)
=================================================
The components of deferred tax assets are as follows:
December 31,
------------------------
2008 2007
------------------------
Operating loss carry-forwards $ 21,968 $ 20,987
Depreciation on property & equipment (43) (22)
Allowance for doubtful accounts 96 193
Accrued expenses 761 674
------------------------
Total deferred tax assets 22,782 21,832
Less: valuation allowance 22,782 21,832
------------------------
Total net deferred tax assets $ -- $ --
========================
As of December 31, 2008, the Company has net operating loss carry-forwards of
$40,570 in the Netherlands which will expire in 2011 through 2016. As of
December 31, 2008, the Company has net operating loss carry-forwards of $30,887
in the United States of America which will expire in 2025 through 2028. The
ultimate utilization of such net operating loss carry-forwards is limited in
certain situations.
During the year ended December 31, 2008, the valuation allowance increased by
$950.
F-27
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 13 - INCOME TAXES (CONTINUED)
The Company's effective income tax rate differs from the Netherlands' statutory
rate of 25.5% (29.6% in 2006) as follows:
Year Ended December 31,
-------------------------------------------------
2008 2007 2006
-------------------------------------------------
Effective income tax at statutory rate $ 399 $ 404 $ 3,142
Rate differential 149 (287) 737
Disallowable expenses (541) 1,102 (162)
Non-taxable (expense) income -- 75 170
Prior year tax assessments (251) (747) 2,846
Changes in valuation allowance and other (158) (1,513) (7,579)
-------------------------------------------------
Income taxes benefit (expense) $(402) $ (966) $ (846)
=================================================
A reconciliation of the beginning and ending amounts of unrecognized income tax
benefits is as follows:
December 31,
-----------------------
2008 2007
-----------------------
Balance at January 1 $ 5,449 $4,790
Additions related to prior period tax positions 4,091 659
Reductions related to prior period tax positions (3,888) --
-----------------------
Balance at December 31 $ 5,652 $5,449
=======================
A reconciliation of the beginning and ending amounts of accrued interest is as
follows:
December 31,
-----------------------
2008 2007
-----------------------
Balance at January 1 $ 2,179 $ --
Additions charged to expense 1,964 2,179
Reductions charged to expense (1,430) --
-----------------------
Balance at December 31 $ 2,713 $2,179
=======================
A reconciliation of the beginning and ending amounts of accrued tax penalties is
as follows:
December 31,
-----------------------
2008 2007
-----------------------
Balance at January 1 $ 1,150 $ --
Additions charged to expense 818 1,150
Reductions charged to expense (778) --
Reductions related to tax authorities notice (243) --
-----------------------
Balance at December 31 $ 947 $1,150
=======================
F-28
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 13 - INCOME TAXES (CONTINUED)
The total amount of unrecognized tax benefits, including interest and penalties,
is $9,312 and $8,778 as of December 31, 2008 and 2007, respectively, and is
included in accrued expenses and other current liabilities in the accompanying
consolidated balance sheets. Such unrecognized tax benefits would favorably
impact the Company's effective tax rate, if recognized.
The Company files income tax returns in the Netherlands and other foreign
jurisdictions. Income tax returns for the tax years 2004 to 2008 are subject to
examination in the Netherlands. Income tax returns for the tax years 2002 to
2008 are subject to examination in foreign jurisdictions.
The Company is subject to an ongoing tax examination of its subsidiaries in the
United States of America by the Internal Revenue Service ("IRS") for the tax
years 2002 to 2004. In connection with this examination, the subsidiaries were
required to provide information regarding their treatment of certain expenses.
In August 2006, the Company was advised that a criminal investigation by the
United States Department of Justice, Tax Division, was commenced regarding
possible criminal tax violations by these subsidiaries for the tax years 2002
and 2003 with respect to certain royalty payments made to the Company. In 2008,
the Company was advised that the criminal investigation was dismissed.
However, in connection with the ongoing tax examination, the IRS proposed a
number of adjustments to the Company's filed income tax returns for the tax
years 2002 to 2004 which collectively result in an assessed income tax
liability, including penalties, of $7,325.
Management is vigorously contesting the proposed adjustments and has filed a
protest with the IRS. This matter will be heard by the Appellate Division of the
IRS, at which time management will have an opportunity to present its position
on the various issues raised.
Based on the issues raised and the tax authorities' position, the Company has
included a provision in its consolidated financial statements, based upon the
advice of its tax advisors, which the Company considers adequate to cover the
potential liability related to such assessments.
NOTE 14 - RELATED PARTY TRANSACTIONS
The Company had an outstanding guarantee with respect to certain related party
debt obligations of $2,515, which were fully reserved. In 2007, the Company was
released from $665 of the guarantee. In 2008, the Company paid $1,429 to settle
certain outstanding obligations under the guarantee and was released from its
remaining guarantee of $421. The Company recognized other income related to the
recovery of its guarantee of $421, $0, and $665 during the years ended December
31, 2008, 2007 and 2006, respectively (See Note 12).
Entities related to two of the Company's board members provide legal services to
the Company. Legal expense related to these services is $93, $138 and $107 for
the years ended December 31, 2008, 2007 and 2006, respectively. Included in
accounts payable on the accompanying consolidated balance sheet is $106 and $182
due for these services as of December 31, 2008 and 2007, respectively.
F-29
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 14 - RELATED PARTY TRANSACTIONS (Continued)
During the year ended December 31, 2007, the Company engaged the services an
entity owned by a related party as a subcontractor for one of the Company's
subsidiaries. The Company incurred expenses of $176, $91 and $0 for such
services for the years ended December 31, 2008 and 2007 and 2006, respectively.
As of December 31, 2008 and 2007, the Company has convertible notes payable to
an entity related to its main shareholder (See Note 9).
NOTE 15 - GEOGRAPHICAL INFORMATION
The Company operates in one reportable segment, airport security and other
aviation services, and has its primary operations in the United States of
America and various countries in Europe.
Revenue by country is summarized as follows:
Year ended December 31,
-----------------------------------
2008 2007 2006
-----------------------------------
United States of America $40,421 $46,745 $46,844
Netherlands 44,173 7,619 7,200
Other 14,215 10,416 6,747
-----------------------------------
Total $98,809 $64,780 $60,791
===================================
Property and equipment, net of accumulated depreciation and amortization, by
country is summarized as follows:
December 31,
---------------------
2008 2007
---------------------
United States of America $ 521 $ 689
Netherlands 933 434
Other 274 396
---------------------
$1,728 $1,519
=====================
F-30
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 16 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases certain equipment and premises under non-cancelable operating
leases. Future minimum lease payments under non-cancelable operating leases are
as follows:
Year Ending
December 31,
------------
2009 $ 1,213
2010 822
2011 453
2012 134
2013 5
-------
$ 2,627
=======
Rent expense for the years ended December 31, 2008, 2007 and 2006 is $1,521,
$1,191 and $1,217, respectively.
Legal Proceedings
United States Transportation Security Administration
In February 2002, one of the Company's subsidiaries was awarded a security
services contract (the "TSA Contract") by the United States 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 2002. In accordance with the terms of the TSA Contract,
the U.S. Federal Government provided the Company with a non-interest bearing
advance of $26,000 which was payable to the TSA in monthly installments of
$1,300 commencing in April 2002. Through December 31, 2008, the subsidiary has
repaid $11,700 of the advance. As of December 31, 2008, the amount due from the
TSA with respect to services provided under the TSA Contract is $17,300. The
Company has reflected the amount due from the TSA, net of the remaining unpaid
advance, of $3,000 as other receivable-United States government on the
accompanying consolidated balance sheet as of December 31, 2008 and 2007.
The TSA filed a contract dispute with the Office of Dispute Resolution for
Acquisition ("ODRA") in connection with the TSA Contract seeking reimbursement
of an alleged overpayment of principal in the amount of $59,200. This claim
follows a lawsuit which the Company's subsidiary had already filed against the
TSA for repeated breach of contract. The Company's subsidiary is vigorously
challenging the TSA's claim which it asserts is devoid of any factual or legal
merit. The TSA's filing comes on the heels of a recent decision by ODRA granting
the subsidiary's motion for partial summary judgment against the TSA for breach
of contract by failing to give appropriate notice for the transitioning of
airport locations. A separate hearing will be held to determine the amount of
damages due to the subsidiary on this claim. With respect to the claim for the
$59,200 overpayment, the subsidiary has filed a motion to dismiss the action
which has been denied. Both claims are now in mediation. At this stage,
Management is unable to determine the outcome of the dispute or estimate a range
of potential loss. Accordingly, no provision has been included in the
accompanying consolidated balance sheet related to this matter.
F-31
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 16 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings (Continued)
United States Department of Labor
During 2003, the United States Department of Labor ("DOL") finalized its audit
of 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. A
long-term liability of $7,300 was recognized for the DOL claim as of December
31, 2006. The DOL claim was settled during 2007 for $3,000, payable with the
proceeds received from any settlement with the TSA. As a result of the
settlement with the DOL, the Company recorded income of $4,300 during the year
ended December 31, 2007, which is reflected as a reduction in cost of revenue.
As of December 31, 2008 and 2007, a long-term liability to the DOL of $3,000 is
reflected in accompanying consolidated balance sheet (See Note 10).
September 11, 2001 Terrorist Attacks
As a result of the September 11, 2001 terrorist attacks, numerous lawsuits
charging the Company with wrongful death and/or property damage were commenced
in the United States District Court, Southern District of New York, resulting
from certain airport security services provided by one of its subsidiaries for
United Flight 175 out of Logan Airport in Boston, Massachusetts. A number of
these cases have been settled, are in the process of being settled or have been
dismissed at no cost to the Company.
The Company may be indemnified by the airlines if the Company is found to have
followed the procedures specified 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 an internal review of this matter,
Management has not found any evidence of non-compliance with respect to the
security services provided at Boston's Logan International Airport on September
11, 2001.
The Company maintains an aviation insurance policy, which may provide limited
coverage for liabilities that may be assessed against the Company as a result of
the events of September 11, 2001. The liabilities under these cases may, by
statute, be limited to the policy coverage. After the September 11th terrorist
attacks, the Company's insurance carriers canceled all war risk provisions
contained in the Company's insurance policies.
Management is unable to determine the likelihood of an unfavorable outcome or
estimate a range of loss with respect to the remaining open claims against the
Company. Accordingly, no provision has been included in the accompanying balance
sheet related to these matters.
F-32
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 16 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings (Continued)
The United States Government
The Company had commenced an action against the United States Government with
respect to its Fifth Amendment rights relating to the taking of its business. In
December 2004, the United States Government's motion to dismiss the case was
denied. A motion for reconsideration was also filed by the defendant and denied.
The trial for this action was held and in March 2007, the court ruled against
the Company's action. The Company appealed the decision and in May 2008, the
United States Court of Appeals for the Federal Circuit affirmed the lower
court's ruling. In addition, the Company appealed the case to the United States
Supreme Court, which refused to here it.
Audiovisual-Washington, Inc.
In September 2005, Avitecture, Inc. (a/k/a Audiovisual-Washington, Inc.)
("Avitecture") filed a Demand for Arbitration and Mediation against one of the
Company's subsidiaries with the American Arbitration Association in Somerset,
New Jersey. The Demand for Arbitration alleges that the subsidiary owes
Avitecture $222 for audio, video and control systems. The case was decided
against the Company's subsidiary in an arbitration proceeding, which resulted in
an award to Avitecture of $200. The arbitrator's decision was affirmed by the
Superior Court of New Jersey in May 2007 and the Appellate Court in February
2008. The Company has $200 in accrued expenses and other current liabilities
related to this matter as of December 31, 2008 and 2007.
Turner Construction Company
In November 2005, Turner Construction Company ("Turner") filed a Demand for
Arbitration and Mediation against one of the Company's subsidiaries with the
American Arbitration Association in Somerset, New Jersey. The Demand for
Arbitration alleges that pursuant to a written agreement dated in October 2003,
the subsidiary owes Turner $948 for work and/or services performed. In an
arbitration proceeding, the arbitrator awarded Turner $956 plus interest. This
award was affirmed on appeal. In October 2007, the subsidiary filed a petition
of bankruptcy with the New Jersey Superior Court, which dismissed the action
again the subsidiary without prejudice as a result of the bankruptcy filing. In
anticipation of Turner attempting to reinstate or reopen the case, the Company
elected not to release the $956 previously established in accrued expenses and
other current liabilities related to this matter. To date, Turner has not moved
to reinstate or reopen the case.
F-33
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 16 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings (Continued)
Landlord Claims
Two of the Company's subsidiaries have been sued by their landlord (which is the
same entity for both properties) alleging breach of their respective leases. One
suit is in the Circuit Court of Baltimore and the other is in the Superior Court
of New Jersey. The landlord is seeking unpaid rent for the entire terms of the
leases for $2,600 in Atlantic City, New Jersey and $3,700 in Baltimore,
Maryland, plus legal fees. The Company filed a bankruptcy petition for both of
the subsidiaries. However, the landlord was able to prevail in one of the claims
because of a guarantee given by the Company in connection with the lease in one
of the locations. In January 2008, a judgment in the amount of $2,600 was
awarded in favor of the landlord. The subsidiary has filed an appeal to
challenge the judgment. As of December 31, 2008 and 2007, the Company has $7,276
and $8,530, respectively in other liabilities from discontinued operations (See
Note 3). The reduction in the Company's reserve for these matters is based on
changes in the claims against the Company and is presented as part of
discontinued operations.
Fraport A.G. International Airport Services Worldwide
The Company was in a dispute with Fraport A.G. International Airport Services
Worldwide over the alleged unlawful use of the letter combination "ICTS" by the
Company. Fraport initiated proceedings before the district court of Amsterdam.
The principal amount claimed was (euro)57,700 ($80,800 as of December 31, 2008).
This dispute was settled in 2008 without any liability to the Company.
General
The Company is subject to various investigations, claims and legal proceedings
covering a wide range of matters that arise in the ordinary course of its
business activities. These claims are primarily related to grievances filed by
current and former employees for unfair labor practices or discrimination, and
for passenger aviation claims. Management recognizes a liability for any matter
when the likelihood of an unfavorable outcome is deemed to be probable and the
amount is able to be reasonably estimated. Management has concluded that such
claims, in the aggregate, would not have a material adverse effect on the
Company's consolidated financial position, results of operations, or cash flows.
Bonus Contingency
The Managing Director of one of the Company's subsidiaries is entitled to
receive a bonus payment equivalent to 8% of the proceeds received by the Company
upon the successful sale of the subsidiary.
F-34
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 17 - SUBSEQUENT EVENTS
In April 2009, the Company entered into a new borrowing arrangement with a
related party which replaced all previous arrangements between the parties. The
new arrangement provides the Company with the ability to borrow up to $6,310
from the related party and is convertible at the option of the holder into the
Company's common stock at $2.10 per share. All outstanding borrowings from
previous arrangements were applied to the borrowing capacity of the new
arrangement. Borrowings under the arrangement bear interest, which is compounded
semi-annually, at rates equivalent to those charged by the Company's commercial
bank. Principal and interest under the arrangement are payable in November 2011.
The Company has the option to extend the arrangement for four additional six
month periods. The arrangement is secured by a 26% interest in one of the
Company's subsidiaries.
F-35
Financial Statement Schedule - Valuation and Qualifying Accounts
(in thousands)
Credits to Charges to Balance
Beginning Costs and Other as of
of Period Expenses Accounts Deductions (1) December 31
- ---------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year Ended December 31, 2006 1,237 -- -- (243) 994
Year Ended December 31, 2007 994 (299) -- (188) 507
Year Ended December 31, 2008 507 (51) -- (128) 328
Balance
Beginning as of
of Period Additions Deductions December 31
- ---------------------------------------------------------------------------------------------------------------
Allowance for deferred tax assets:
Year Ended December 31, 2006 27,077 -- (914) 26,163
Year Ended December 31, 2007 26,163 -- (4,300) 21,832
Year Ended December 31, 2008 21,832 950 -- 22,782
(1) Write-offs, net of recoveries
F-36