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, 2009
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 Stock, 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: 7,890,137
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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.
3
Table of Contents
Part I
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Item 1 Identity of Directors, Senior Management and Advisers ..... 5
Item 2 Offer Statistics and Expected Timetable ................... 5
Item 3 Key Information ........................................... 5
Item 4 Information on the Company ................................ 12
Item 5 Operating and Financial Review and Prospects .............. 21
Item 6 Directors, Senior Management and Employees ................ 37
Item 7 Major Shareholders and Related Party Transactions ......... 47
Item 8 Financial Information ..................................... 49
Item 9 The Offer and Listing ..................................... 52
Item 10 Additional Information .................................... 53
Item 11 Quantitative and Qualitative Disclosures about
Market Risk ............................................. 66
Item 12 Description of Securities other than Equity Securities .... 66
Part II
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Item 13 Defaults, Dividend Arrearages and Delinquencies ........... 66
Item 14 Material Modifications to the Rights of Security Holders
and the Use of Proceeds ................................. 66
Item 15 Controls and Procedures ................................... 66
Item 16A Audit Committee Financial Expert .......................... 68
Item 16B Code of Ethics ............................................ 68
Item 16C Fees Paid to our Independent Registered Public
Accounting Firm ......................................... 68
Item 16D Exemptions from Listing Standards for Audit Committees .... 68
Item 16E Purchases of Equity Securities by the Issuer
and Affiliated .......................................... 68
Purchasers ................................................ 68
Item 16F Change in Accountant's Disclosure ......................... 68
Item 16G Corporate Governance ...................................... 69
Part III
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Item 17 Financial Statements ...................................... 69
Item 18 Financial Statements ...................................... 69
Item 19 Exhibits .................................................. 69
Exhibits
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Exhibit 12.1 Certification
Exhibit 13.1 Certification
4
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. ("ICTS") was established by the Department of Justice in
Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively
referred to as, the "Company") operate in two main businesses: (a) airport
security and other aviation services and (b) technology. The airport security
and other aviation services business provides security and other services to
airlines and airport authorities, predominantly in the United States of America
and Europe. The technology business is predominantly involved in the development
and sale of identity security software to financial institutions and airport
authorities, predominantly in Europe and Israel.
In December 2005, the Company committed to a plan to cease the operations
of its entertainment business in the United States of America. Accordingly, as
of that date, the assets, liabilities and results of operations of the
entertainment business were classified as discontinued operations in the
Company's consolidated financial statements. The nature of the ongoing
discontinued operations of the entertainment business consists mainly of
activities associated with the settlement of ongoing litigation, including
disputes related to unpaid vendor and rent obligations. In July 2009, the
Company entered into a settlement arrangement with the former landlord of the
entertainment business to resolve the disputes between the parties related to
unpaid rent obligations.
Selected Financial Data
Selected data set forth below have been derived from the ICTS Consolidated
Financial Statements which have been prepared in accordance with generally
accepted accounting principles in the United States of America ("US GAAP"). The
Selected Consolidated Financial Data set forth below should be read in
conjunction with Item 5 Operating and Financial Review and Prospects and the
ICTS Consolidated Financial Statements and the Notes to those Financial
Statements included in Item 18 in this Annual Report.
5
The following table summarizes certain balance data for ICTS for the years
ended December 31, 2009, 2008, 2007, 2006, and 2005:
(U.S. Dollars in thousands)
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2009 2008 2007 2006 2005
- ------------------------- ------- ------- ------- ------- ------
Cash and cash equivalents $4,835 $3,750 $2,095 $1,743 $5,927
Current assets 21,198 16,571 18,644 17,519 25,444
Total assets from
discontinued operations -- -- 2,873 130 537
Total assets 26,827 25,396 27,103 26,555 32,213
Current liabilities 31,832 31,869 30,305 33,577 28,101
Total liabilities from
discontinued operations 1,222 9,174 10,619 13,441 11,424
Shareholders' deficiency (18,290) (22,965) (20,610) (19,002) (5,148)
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Selected Financial Data Statement of Operations
The following table summarizes certain statement of operations data for
ICTS for the years ended December 31, 2009, 2008, 2007, 2006, and 2005:
(U.S. Dollars in thousands except per share data)
Year ended December 31,
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2009 2008 2007 2006 2005
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Revenue $95,861 $98,809 $64,780 $60,791 $57,713
Cost of revenue 83,491 85,107 52,397 55,284 53,721
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GROSS PROFIT 12,370 13,702 12,383 5,507 3,992
Selling, general and administrative expenses 14,313 15,341 13,338 14,878 11,690
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OPERATING LOSS (1,943) (1,639) (955) (9,371) (7,698)
Other income (expense), net (1,638) (856) (3,580) 527 (761)
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LOSS BEFORE EQUITY LOSS FROM INVESTMENTS IN
AFFILIATES AND INCOME TAX BENEFIT (EXPENSE) (3,581) (2,495) (4,535) (8,844) (8,459)
Equity loss from investments in affiliates -- -- (2,479) (132) (486)
Income tax benefit (expense) 418 (402) (966) (846) (2,387)
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LOSS FROM CONTINUING OPERATIONS (3,163) (2,897) (7,980) (9,822) (11,332)
Income (loss) from discontinued operations 6,086 928 5,422 (4,248) (13,548)
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NET INCOME (LOSS) $2,923 $(1,969) $(2,558) $(14,070) $(24,880)
========= ========= ========= ========= =========
NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED:
Continuing Operations $(0.47) $(0.44) $(1.22) $(1.51) $(1.74)
Discontinuing Operations 0.90 0.14 0.83 (0.65) (2.07)
========= ========= ========= ========= =========
Net income (loss) per share 0.43 $(0.30) $(0.39) $(2.16) $(3.81)
========= ========= ========= ========= =========
Weighted average number of shares outstanding 6,790,707 6,528,100 6,528,100 6,528,100 6,528,100
========= ========= ========= ========= =========
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.
6
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.
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.
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. Most of those claims are in the process of being settled
at no cost to the Company.
Losses in recent years
We incurred losses from continuing operations of $3.2 million, $2.9
million, $8.0 million, $9.8 million, and $11.3 million in 2009, 2008, 2007, 2006
and 2005 respectively. The losses were accompanied by net cash provided by (used
in) operating activities of $(4.6) million, $3.9 million, $(3.6) million, $(7.6)
million and $(5.2) million in 2009, 2008, 2007, 2006 and 2005, respectively, and
at December 31, 2009 the Company had a working capital deficiency of $10.6
million and negative equity of $18.3 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.
7
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 of
December 31, 2009 and for the year then ended, the Company had a net loss from
continuing operations of $3.2 million, a net working capital deficiency of $10.6
million and shareholders' deficiency of $18.3 million.
Loans from principal stockholder
Our financing activities have consisted primarily of loans from our
principal shareholder. We do not have any other continual commitments or
identified sources of additional capital from third parties. There is no
assurance that our principal shareholder 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
One of our U.S. subsidiaries, ICTS USA, Inc and its 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 $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
consolidated 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.
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 2011 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.
8
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 include 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 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 such as banking, 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. For example, during 2007, the TSA took over part of
Huntleigh's business related to ticketing. Annual loss of revenue due to taking
of the business was approximately $5 million.
9
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
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.
In addition, in the event that the Company fails to detect terrorist activity as
a result of legislation designed to protect privacy rights, 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
A substantial portion of our revenue is generated 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
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, 2009, there are three main shareholders in the Company,
which own together approximately 81.3% of our shares (excluding conversion
rights). Their interests could conflict with yours; significant sales of shares
held by them could have a negative effect on our stock price.
10
Mr. Menachem Atzmon, a director and chairman of the Supervisory Board of
the Company, as a representative of the Atzmon Family Trust, owns or controls
approximately 61.4% of our issued and outstanding common stock (excluding
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.
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. Pursuant to mandatory Dutch corporate law,
adoption of our annual accounts by the general meeting of shareholders does not
automatically discharge the Supervisory Board and Management Board and their
members from liability in respect of the exercise of their duties for the
particular financial year. In order to discharge the Supervisory Board and
Management Board and their members from liability a separate resolution thereto
needs to be adopted by the general meeting of shareholders (which resolution
11
can be adopted in the same meeting in which the annual accounts will be
adopted). Such discharge of the Supervisory Board and the Management Board and
their members by the shareholders is subject to the provisions of Dutch 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 Dutch Civil Code and is furthermore 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.
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. The party that wishes to
enforce such judgment in the Netherlands will have to institute second
proceedings before a competent court in the Netherlands in order to obtain a
similar decision that is capable of enforcement. 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 assumed jurisdiction on international recognized grounds, (ii) the
judgment was obtained in compliance with principles of due process, (iii) the
judgment is final and conclusive and (iv) recognition of 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.
12
Aviation Security and Other Aviation Services Business
ICTS is a public limited liability company organized under the laws of The
Netherlands in 1992. Our 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 was transferred to ICTS International B.V. ("ICTS
International"). Thereafter, ICTS International purchased from a third party all
of the outstanding shares of ICTS Holland, incorporated in The Netherlands in
1992 without any operations prior to its acquisition by ICTS International. As
of January 1, 1996, the Company acquired all of the assets and assumed all of
the liabilities of ICTS International.
As of January 1, 1999, the Company acquired 80% of the issued and
outstanding capital stock of Huntleigh and in January 2001 the Company exercised
its option to acquire the remaining 20% 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.
13
Technology Business
Our technology business is predominantly involved in the development and
sale of identity security software to aviation market and financial
institutions, predominantly in Europe and Israel.
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
operation of motion-based entertainment theaters.
In early 2006, the Company closed its motion-based entertainment theaters.
From this date on, the financial results of the entertainment business have been
included in discontinued operations on the Company's consolidated financial
statements. The nature of the ongoing discontinued operations of the
entertainment business consists mainly of activities associated with the
settlement of ongoing litigation, including disputes related to unpaid vendor
and rent obligations.
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, I-SEC Technologies B.V. and its subsidiaries develop
technological systems and solutions for the following markets: aviation and
non-aviation security, banking and other markets.
Business Strategy
We are currently pursuing the following business strategy:
Developing Security Related Technology
We are 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
Through the I-SEC subsidiary, we supply 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
We continue to provide limited security services and non-security aviation
services in the U.S. through its subsidiary, Huntleigh.
Services
Services Offered in Europe
In 2005, the Company 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, United Kingdom;
Paris, France; Barcelona, Spain; Budapest, Hungary; Edinburgh, Scotland, Tokyo,
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.
We also provide consulting services to airlines and airports through the
I-SEC subsidiary. We recommend the adoption of specified security procedures,
develop recruitment and training programs for clients to hire necessary security
personnel and work with airport authorities to ensure that they comply with
applicable local requirements. We train 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 27 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.
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.
15
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 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.
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.
16
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
The Company, through its subsidiaries is involved in the development and
sale of the technology listed below.
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.
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
17
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
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.
18
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
We market our technologies by establishing projects with airports,
airlines, banks and other existing and potential customers.
Main Customers
In 2009 we had two main customers, each one constituting 10% or more of
the Company's consolidated revenues, which accounted together for 56%, 55% and
29% of our revenue during the years ended December 31, 2009, 2008 and 2007,
respectively.
Revenue
Revenue in the U.S.
Our revenue in the USA during the years 2009, 2008 and 2007 totaled $36.8
million (38% of total revenue), $40.4 million (41% of total revenue) and $46.7
million (72% of total revenue) respectively.
Revenue in Europe, Japan and other locations
Our revenue in Europe, Japan and other locations during the years 2009,
2008 and 2007 totaled $59.1 million (62% of total revenue), $58.0 million (59%
of total revenue) and $18 million (28% 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.
19
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
Our 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.
We are 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 we operate, a license to operate is required from
the respective airport authority. ICTS currently holds the licenses required to
operate in such locations.
Climate Change Regulation
Our business is not affected directly or indirectly in any way by existing
and pending, local, state, regional, federal or international legal requirements
and agreements related to climate change.
Organizational Structure
The following are the significant subsidiaries of ICTS as of December 31,
2008:
ICTS USA, Inc. (New York - 100%) and its wholly-owned subsidiaries.
I-SEC Technologies B.V. (The Netherlands - 100%) and its
wholly-owned subsidiaries.
I-SEC Global Security B.V. (The Netherlands - 100%) and its
wholly-owned subsidiaries.
Property, Plant and Equipment
We lease premises under long-term operating leases, in most cases with
renewal options. Lease expenses from continuing operations for the years ended
December 31, 2009, 2008 and 2007 were $1.9 million, $1.5 million and $1.2
million, respectively.
20
Future minimum lease payments under long-term leases from continued
operations are as follows (in thousands):
Year Ended
December 31, 2009
-----------------
2010 $ 1,196
2011 1,139
2012 1,131
2013 1,019
2014 1,004
-------
$ 5,489
-------
Item 5. Operating and Financial Review and Prospects
This section contains forward-looking statements within the meaning of the
U.S. Private Securities Litigation Reform Act of 1995 concerning our 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.
We cannot guarantee any future results, levels of activity, performance or
achievements. The forward-looking statements contained in this annual report on
Form 20-F represent management's expectations as of the date of this annual
report on Form 20-F and should not be relied upon as representing ICTS's
expectations as of any other date. Subsequent events and developments will cause
management's expectations to change. However, while we may elect to update these
forward-looking statements, ICTS specifically disclaims any obligation to do so,
even if its expectations change.
Overview
We operate in two reportable segments (a) airport security and other
aviation services and (b) technology. The corporate segment does not generate
revenue and contains primarily non-operational expenses. The airport security
and other aviation services segment provide security and other services to
airlines and airport authorities, predominantly in the United States of America
and Europe. The technology segment is predominantly involved in the development
and sale of identity security software to financial institutions and airport
authorities, predominantly in Europe and Israel.
21
In December 2005, we committed to a plan to cease the operations of our
entertainment segment in the United States of America. Accordingly, as of that
date, the assets, liabilities and results of operations of the entertainment
segment were classified as discontinued operations in the Company's consolidated
financial statements. The nature of the ongoing discontinued operations of the
entertainment segment consists mainly of activities associated with the
settlement of ongoing litigation, including disputes related to unpaid vendor
and rent obligations. In July 2009, the Company entered into a settlement
arrangement with the former landlord of the entertainment segment to resolve all
disputes between the parties related to unpaid rent obligations.
Critical Accounting Policies
The consolidated financial statements have been prepared in accordance
with U.S. GAAP. 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. Actual results
could differ from those estimates. Our critical accounting policies that require
the use of judgment and estimates are listed below. Please refer to Note 2 of
ICTS's consolidated financial statements included in this Annual Report for the
year ended December 31, 2009 for a summary of ICTS's significant accounting
policies.
Accounts Receivable
Accounts receivable represent amounts due to the Company for services
rendered and are recorded net of an allowance for doubtful accounts. 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.
Long-Lived Assets
We review long-lived assets, other than goodwill, for impairment whenever
events or changes in circumstances indicate that the carrying value of an 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.
Contingent Liabilities
We are subject to various investigations, claims and legal proceedings
covering a wide range of matters that arise in the normal course of its business
activities. Liabilities for such contingencies are recognized when: (a)
information available prior to the issuance of the consolidated financial
statements indicates that it is probable that a liability had been incurred at
the date of the consolidated financial statements and (b) the amount of loss can
reasonably be estimated.
22
Stock-Based Compensation
Share-based payment awards to employees, including stock options, are
measured at the fair value of the award on the date of grant based on the
estimated number of awards that are ultimately expected to vest. Share-based
compensation awards issued to non-employees for services rendered are recorded
at either the fair value of the services rendered or the fair value of the
share-based payment, whichever is more readily determinable. The compensation
expense resulting from share-based payments is recorded over the vesting period
of the award in selling, general and administrative expense in the accompanying
consolidated statements of operations.
Income Taxes
We account for income taxes using the liability method. 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.
Uncertain tax positions are determined based upon the likelihood of the
positions being sustained upon examination by taxing authorities. The benefit of
a tax position is recognized in the consolidated financial statements in the
period during which management believes it is more likely than not that the
position will not be sustained. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured is reflected as income taxes
payable in the accompanying consolidated balance sheets.
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.
Recently Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141(R), "Business Combinations"
("SFAS 141(R)"). SFAS 141(R) replaces Statement of Financial Accounting
Standards No. 141, "Business Combinations," and was primarily codified into FASB
Accounting Standards Codification Topic 805, "Business Combinations" ("ASC
805"). ASC 805 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. ASC 805
also requires acquisition-related transaction expenses and restructuring costs
be expensed as incurred rather than capitalized as a component of the business
combination. The Company adopted ASC 805 on
23
January 1, 2009. ASC 805 will have an impact on the accounting for any
businesses acquired by the Company after its date of adoption.
In December 2007, the FASB issued Statement of Financial Accounting
Standards No. 160, "Non-controlling Interests in Consolidated Financial
Statements - an amendment of ARB No. 51" ("SFAS 160"). SFAS 160, which was
primarily codified into FASB Accounting Standards Codification Topic 810,
"Consolidation" ("ASC 810"), establishes accounting and reporting standards for
the non-controlling interest in a subsidiary (previously referred to as minority
interests). ASC 810 requires non-controlling interests to be reported as a
separate component of stockholder's deficiency and present any net income (loss)
allocable to non-controlling interests and stockholders separately in its
statement of operations. ASC 810 also requires that a retained non-controlling
interest, upon the deconsolidation of a subsidiary, be initially measured at its
fair value. The Company adopted ASC 810 on January 1, 2009. ASC 810 did not have
a material effect on the Company's consolidated financial position, results of
operations or cash flows.
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, which was primarily codified into FASB Accounting Standards
Codification Topic 350, "Goodwill and Other Intangible Assets" ("ASC 350"),
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 this guidance. The objective of this guidance is to improve the
consistency between the useful life of a recognized intangible asset under this
guidance and the period of expected cash flows used to measure the fair value of
the asset under ASC 805 and other US GAAP. The Company adopted ASC 350 as of
January 1, 2009. The adoption of ASC 350 did not have a material effect on the
Company's consolidated financial position, results of operations, 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
07-05"). EITF 07-5, which was primarily codified into FASB Accounting Standards
Codification Topic 815, "Derivatives and Hedging ("ASC 815")," provides
framework for determining whether an instrument is indexed to an entity's own
stock. The Company adopted ASC 815 as of January 1, 2009. The adoption of ASC
815 did not have a material effect on the Company's consolidated financial
position, results of operations, or cash flows.
In May 2009, the FASB issued Statement of Financial Accounting Standards
No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165, which was primarily
codified into FASB Accounting Standards Codification Topic 855, "Subsequent
Events" ("ASC 855"), establishes standards for the accounting and disclosure of
subsequent events. ASC 855 introduces new terminology, defines a date through
which management must evaluate subsequent events, and lists the circumstances
under which an entity must recognize and disclose events or transactions
occurring after the balance sheet date. The Company adopted ASC 855 on December
31, 2009. The adoption of ASC 855 did not have a material effect on the
Company's consolidated financial position, results of operations or cash flows.
24
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB
Interpretation No. 46(R)." SFAS 167, which was primarily codified into FASB
Accounting Standards Codification Topic 810, "Consolidation" ("ASC 810") seeks
to improve financial reporting by enterprises involved with variable interest
entities. The Company adopted ASC 810 as of January 1, 2009. The adoption of ASC
810 did not have a material effect on the Company's consolidated financial
position, results of operations, or cash flows.
In June 2009, the FASB issued Statement of Financial Accounting Standards
No. 168, "The FASB Accounting Standards Codification and the Hierarchy of
Generally Accepted Accounting Principles - a replacement of FASB Statement No.
162" ("SFAS 168"). SFAS 168, which was primarily codified into FASB Accounting
Standards Codification Topic 105, "Generally Accepted Accounting Principles"
("ASC 105"), established the FASB Accounting Standards Codification as the
source of authoritative nongovernmental generally accepted accounting principles
in the United States of America ("GAAP"). Rules and interpretive releases of the
Securities and Exchange Commission ("SEC") under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of these provisions, the codification superseded all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the codification
became non-authoritative. The Company adopted ASC 105 on December 31, 2009.
In December 2009, the FASB issued Accounting Standards Update 2009-17,
"Consolidations - Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities" ("Update 2009-17"). Update 2009-17 amends Topic
810, "Consolidations" of the Accounting Standards Codification by replacing the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity's economic performance and (a) the obligation to
absorb losses of the entity or (b) the right to receive benefits from the
entity. The amendments also require additional disclosures about a reporting
entity's involvement in variable interest entities, which will enhance the
information provided to users of financial statements. The adoption of Update
2009-17 is not expected to have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
In February 2010, the FASB issued Accounting Standards Update 2010-9,
"Subsequent Events, Amendments to Certain Recognition and Disclosure
Requirements" ("Update 2010-9"). Update 2010-9 amends Topic 855, "Subsequent
Events," of the Accounting Standards Codification by eliminating the requirement
to disclose the date through which subsequent events were evaluated for public
entities and clarifying the application of ASC 855 in revised financial
statements. The amendments in Update 2010-9 are effective upon issuance. The
Company adopted Update 2010-9 on December 31, 2009. The adoption of Update
2010-9 did not have a material effect on the Company's consolidated financial
position, results of operations or cash flows.
25
Results of Operations
The following table summarizes our results of operations for the years
ended December 31, 2009, 2008 and 2007:
(U.S. Dollars in thousands)
Year Ended December 31,
--------------------------------------------------
2009 2008 2007
-------- -------- --------
Revenue $ 95,861 $ 98,809 $ 64,780
Cost of revenue 83,491 85,107 52,397
-------- -------- --------
GROSS PROFIT 12,370 13,702 12,383
Selling, general and administrative expenses 14,313 15,341 13,338
-------- -------- --------
OPERATING LOSS (1,943) (1,639) (955)
Other income (expense), net (1,638) (856) (3,580)
-------- -------- --------
LOSS BEFORE EQUITY LOSS FROM INVESTMENTS IN
AFFILIATES AND INCOME TAX BENEFIT (EXPENSE) (3,581) (2,495) (4,535)
Equity loss from investments in affiliates -- -- (2,479)
Income tax benefit (expense) 418 (402) (966)
-------- -------- --------
LOSS FROM CONTINUING OPERATIONS (3,163) (2,897) (7,980)
Income from discontinued operations 6,086 928 5,422
-------- -------- --------
NET INCOME (LOSS) $ 2,923 $ (1,969) $ (2,558)
======== ======== ========
The following table sets forth, for the annual periods indicated, certain
results of operations data as a percentage of revenue for the years ended
December 31, 2009, 2008 and 2007:
Year Ended December 31,
--------------------------
2009 2008 2007
----- ----- -----
Revenue.......................................... 100% 100% 100%
Cost of revenue ................................. 87.1% 86.1% 80.9%
Gross profit..................................... 12.9% 13.9% 19.1%
Selling, general and administrative expenses..... 15.0% 15.5% 20.6%
Operating loss................................... (2.1)% (1.7)% (1.5)%
Loss from continuing operations.................. (3.3)% (2.9)% (12.3)%
Income from discontinued operations.............. 6.4% 0.9% 8.4%
Net income (loss)................................ 3.1% (2.0)% (3.9)%
The following table sets forth, for the annual periods indicated, revenue
generated by country:
(U.S. Dollars in thousands)
Year ended December 31,
-----------------------------------
2009 2008 2007
-----------------------------------
United States of America $36,794 $40,421 $46,745
Netherlands 42,344 44,173 7,619
Other 16,723 14,215 10,416
------- ------- -------
Total $95,861 $98,809 $64,780
======= ======= =======
26
Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 (U.S.
Dollars in thousands unless otherwise indicated)
Revenue. Revenue decreased from $98.8 million during the year ended
December 31, 2009 to $95.9 million during the year ended December 31, 2009. Such
decrease resulted from a decrease in revenue from operations in the U.S. of $3.6
million and operations in Netherlands of $1.9 million partially offset by an
increase in operations in other locations of $2.6 million.
The decrease in revenue in the U.S. relates mostly to the slowdown in the
global economy, which resulted in the provision of less services. In addition,
during 2009, the Company evaluated its service contacts and elected to terminate
certain unprofitable contracts.
The decrease in revenue in the Netherlands is mainly due to currency
fluctuations as the 2008 average exchange rate (1.47 Dollar to Euro) decreased
in 2009 (1.39 Dollar to Euro). Revenue in 2009 based on the 2008 exchange rate
would total $44.7 million compared to $44.2 million in 2008.
The increase in revenue from other locations is mainly attributed to a
full year of operations in Tokyo, Japan.
Cost of Revenue. The cost of revenue decreased from $85.1 million in 2008
to $83.5 million in 2009. The decrease was mainly due to a decrease in payroll
and related costs as a result of the decline in revenue. However, our gross
margin also decreased from 13.9% to 12.9% mainly due higher costs associated
with providing technology-related support services in Israel.
Selling, General and Administrative Expenses ("SG&A".) SG&A expenses were
$14.3 million for the year ended December 31, 2009 or 15% of revenue, compared
to $15.3 million or 15.5% of revenue for the year ended December 31, 2008. This
decrease mainly results from a decrease in legal and professional fees
associated with the Company defending itself against various legal claims and
the elimination of start-up costs we incurred during year ended December 31,
2008 to expand our operations in Europe and Japan, partially offset by a
one-time non-cash charge of $0.6 million related to the issuance of shares to a
related party.
Other Income (Expense), net. Other expenses for the year ended December
31, 2009 totaled $1.6 million compared to $0.9 million in 2008. This increase in
other expenses is due to a one-time recovery of $0.4 million related to the
release of a guarantee in 2008 that the Company previously provided to a third
party and the increase in foreign currency losses related to transactions
denominated in Euros.
Income Tax Benefit (Expense). In 2009, the Company had an income tax
benefit of $0.4 million compared to income tax expense of $0.4 million in 2008.
In 2009, the Company recognized a benefit of $0.4 million related to its
activities in Europe. The decrease in the income tax expense in 2009 compared to
2008 is primarily due to the decrease in income from continuing operations at
certain European locations.
27
Income from Discontinued Operations. Income from discontinued operations totaled
$6.1 million in 2009 compared to $0.9 million in 2008. The increase results
mainly from the recovery of $4.7 million related to the settlement of a dispute
with the former landlord of the Company's entertainment segment related to
unpaid rent obligations of $7.3 million and the recovery of $1.2 million in
vendor disputes resulting from management's assessment that payments to resolve
the dispute are unlikely.
Year Ended December 31, 2008 Compared to Year Ended December 31, 2007
(U.S. Dollars in thousands unless otherwise indicated)
Revenue. 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.
Cost of Revenue. The cost of revenue in 2008 was reduced by $4.3 million
related to the agreement of the Company with the DOL. In addition, in 2008, the
Company expanded its operations in Europe, which resulted in additional cost of
revenue related to labor and start-up costs in the Netherlands. These additional
labor and start-up costs resulted in the decrease in the gross margin percentage
from 19.1% in 2007 to 13.9% in 2008.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $15.3 million for the year ended December 31, 2008
or 15.5% as percentage of revenue, 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.
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.
28
(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.
Income Tax Benefit (Expense). 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.
Equity Loss from Investment in Affiliates. 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.
Income from Discontinued Operations. ICTS's profit from discontinued
operations totaled $0.9 million compared to profit of $5.4 million in 2007.
There are two legal claims outstanding against us regarding our
discontinued operations. We have 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 $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.
29
The following table sets forth, for the annual periods indicated, certain
financial data related to the Company's reportable segments.
(U.S. Dollars in thousands)
Airport
Security
and
Other
Aviation
Corporate Services Technology Total
----------------------------------------------
Year ended December 31, 2009:
Revenue $ -- $ 95,146 $ 715 $ 95,861
Depreciation and amortization 11 681 23 715
Income (loss) from continuing operations (3,729) 2,777 (2,211) (3,163)
Year ended December 31, 2008:
Revenue -- 97,930 879 98,809
Depreciation and amortization 12 741 29 782
Income (loss) from continuing operations (5,120) 2,965 (742) (2,897)
Year ended December 31, 2007:
Revenue -- 63,982 798 64,780
Depreciation and amortization 25 1,163 30 1,218
Loss from continuing operations (4,825) (2,722) (433) (7,980)
Corporate Segment
Loss from continuing operations decreased for the year ended December 31,
2009 as compared to the year ended December 31, 2008 primarily due to the
recognition of income tax expense associated with uncertain tax positions in
2008 and a decrease in legal and professional fees in U.S. during the year ended
December 31, 2009.
Loss from continuing operations increased for the year ended December 31,
2008 compared to the year ended December 31, 2007 primarily due to one-time
expenses incurred in 2007 related to the Company's new contract with Schiphol
Airport in the Netherlands as well as the recognition of certain tax positions
in the U.S.
Airport Security and Other Aviation Services Segment
The decrease in revenue for the year ended December 31, 2009 compared to
the year ended December 31, 2008 relates mostly to a decrease in revenue in the
U.S. and Europe offset by an increase in revenue from the newly established
operation in Japan. The decrease in income from continuing operations for the
year ended December 31, 2009 compared to 2008 is primarily due fluctuations in
the currency exchange rates and a decrease in the U.S. business.
The increase in revenue for the year ended December 31, 2008 compared to
the year ended December 31, 2007 results mainly from a new contract with
Schiphol Airport in the Netherlands, which added $34.4 million of revenue. The
30
increase in income from continuing operations for the year ended December 31,
2008 compared to 2007 was mainly due to the expansion of operations in the
Netherlands, which were profitable and a decrease in amortization expense
related to the customer relationship, which was fully amortized in 2008.
Technology Segment
During the year ended December 31, 2009, the Company expanded its costs
for the technology activities mostly by recruiting more employees, which
resulted in an increase in payroll and related costs.
Liquidity and Capital Resources
The most significant expenditures for all of our businesses are related to
payroll and related costs, legal fees and other professional fees. We have
historically financed such expenditures through cash flows from operations and
funding received from a line of credit with a commercial bank in the United
States of America and borrowings from a convertible note arrangement with a
related party.
As of December 31, 2009, the Company has cash on hand of $4.8 million (not
including a short-term certificate of deposit of $3.5 million, which serves as
collateral for its line of credit in the United States of America).
We have a history of recurring losses from continuing operations and
working capital deficiencies. The Company incurred losses from continuing
operations of $3.2 million, $2.9 million and $8 million during the years ended
December 31, 2009, 2008, and 2007, respectively. As of December 31, 2009, the
Company had a working capital deficit and shareholders' deficiency of $10.6
million and $18.3 million, respectively. In addition, the Company is subject to
potential material contingencies in connection with: (a) its exposure to certain
tax assessments made against it 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) certain claims made against the Company by the United
States Department of Labor, and (d) certain claims made against the Company by
the United States Transportation Security Administration ("TSA"). Furthermore,
one of the subsidiaries of ICTS is in default of its line of credit in the
United States of America, which expires on September 30, 2010, as a result of
violations of certain required financial covenants. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The report of our independent registered public accounting firm on our
2009 consolidated financial statements includes an explanatory paragraph stating
that there is substantial doubt with respect to our 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 2009 consolidated
financial statements do not include any adjustments that might be necessary if
the Company is unable to continue as a going concern.
31
Cash Flows from Operating Activities
Our cash flows from operating activities vary significantly from year to
year, depending on our operating results and timing of cash receipts and
disbursement on accounts receivable and payable.
Net cash used in operating activities for the year ended December 31, 2009
was $4.6 million. This use of cash resulted from a net loss from continuing
operations of $3.2 million and net cash used by operating assets and liabilities
of $2.7 million, partially offset by non-cash charges of $0.7 million for
depreciation and amortization and $0.6 million relating to an issuance of common
stock to a related party. The net cash used in operating assets and liabilities
is primarily attributable to a decrease in accounts payable of $1.4 million and
cash used in discontinued operations of $1.9 million, partially offset by an
increase in accrued expenses and other current liabilities of $0.6 million.
For the year ended December 31, 2008, net cash provided by operating
activities was $3.9 million. This resulted from a net loss from continuing
operations of $2.9 million and net cash provided by operating assets and
liabilities of $5.9 million, partially offset by non-cash charges of $0.8
million for depreciation and amortization, offset by $0.1 million in stock-based
compensation. The net cash provided by operating assets and liabilities is
primarily attributable to an increases in accrued expenses and other liabilities
of $4.9 million, net cash provided by discontinued operations of $2.4 million,
partially offset by increase in accounts receivable of $1.3 million.
For the year ended December 31, 2007, net cash used in operating
activities was $3.6 million. This use of cash resulted from a net loss from
continuing operations of $8.0 million and net cash provided by operating assets
and liabilities of $3.9 million, partially offset by non-cash charges of $1.2
million for depreciation and amortization, $3.1 million related to the
impairment of marketable equity securities and investment in affiliates, $0.4
million in stock-based compensation and a gain on a settlement of a liability of
$4.3 million. The net cash provided by operating assets and liabilities is
primarily attributable to increases in accounts payable of $0.6 million and
accrued expenses and other current liabilities of $2.8 million.
Cash Flows from Investing Activities
Net cash used in investing activities for the year ended December 31, 2009
was $0.8 million and consisted primarily of capital expenditures.
Net cash provided by investment activities for the year ended December 31,
2008 was $0.6 million and consisted primarily of capital expenditures of $1.0
million and an increase in other assets of $0.2 million, partially offset by a
decrease in restricted cash of $1.8 million.
Net cash used in investing activities for the year ended December 31, 2007
was $1.1 million and consisted primarily of capital expenditures of $0.8 million
and an increase in restricted cash of $0.8 million, partially offset by proceeds
from sale of property and equipment and equity method investments of $0.4
million.
32
In March 2010, we purchased 5,400,000 shares of Inksure's common stock for
$0.7 million pursuant to a private placement of Inksure Technologies, Inc.
securities. We do not anticipate making any other significant investments at
this time, except for routine capital expenditures.
Cash Flows from Financing Activities
Net cash provided by financing activities for the year ended December 31,
2009 was $6.2 million, which consisted primarily of $1.2 million increase in a
line of credit with a commercial bank in the United States of America, $3.9
million of proceeds from convertible note arrangement with a related party and
$1.2 million in proceeds from the exercise of stock options.
Net cash used in financing activities for the year ended December 31, 2008
was $2.1 million and consisted primarily of a $1.8 million decrease in a line of
credit with a commercial bank in the United States of America and $0.2 million
in repayments on a convertible note payable arrangement with a related party.
Net cash provided by financing activities for the year ended December 31,
2007 was $5.0 million, which consisted primarily of $1.6 million increase in a
line of credit with a commercial bank in the United States of America, $4.0
million of proceeds from a convertible note arrangement with a related party,
partially offset by $0.2 million in repayments on other liabilities and $0.4
million of net cash used in discontinued operations.
The Company expects to continue to draw down from its lines of credit and
related party financing as necessary to meet its short-term cash needs. In May
2010, the Company increased its borrowing capacity from on a convertible note
arrangement with a related party from $10 million to $12 million and received an
additional $0.8 million in financing from the related party to fund its
operations.
Borrowings
One of the subsidiaries of ICTS has an arrangement with a commercial bank
in the United States of America, which provides up to $8,000 in borrowings and
letters of credit. The borrowing base of the arrangement is limited to 85% of
the subsidiary's eligible accounts receivable, as defined, and 95% of the
subsidiary's cash collateral. Borrowings under the arrangement are secured by
the subsidiary's accounts receivable of $6,213 and a $3,500 certificate of
deposit. Borrowings under the arrangement are also guaranteed by ICTS. The
original term of the arrangement, which was set to expire on March 31, 2010, was
extended to June 30, 2010 and can be automatically extended for an additional
one-year term unless either the Company or the commercial bank elect to
terminate the arrangement prior to the expiration date. In June 2010, the
original term of the arrangement was extended to September 30, 2010. Borrowings
made under the arrangement will be designated as either prime rate or LIBOR rate
loans at the option of the subsidiary. Prime rate loans bear interest, which is
payable monthly, at the bank's prime rate plus 1% per annum. LIBOR rate loans
bear interest, which are payable monthly, at LIBOR plus 350 basis points per
annum. For the years ended December 31, 2009, 2008 and 2007, the weighted
average interest rate on this arrangement is 4.25%, 5.25% and 6.00%,
respectively. The arrangement subjects the subsidiary to certain financial and
non-financial covenants, including minimum tangible net worth, minimum interest
coverage ratio, minimum EBITDA, a required excess availability
33
under the borrowing base and a capital expenditure limitation. As of December
31, 2009 and for the year then ended, the subsidiary is in violation of its
minimum EBITDA and capital expenditure limitation covenants. As of December 31,
2009, the subsidiary has approximately $6,070 in borrowings, $444 in outstanding
letters of credit and $864 in unused borrowing capacity under the arrangement.
As of December 31, 2008, the subsidiary had approximately $4,848 in borrowings,
$575 in outstanding letters of credit and $1,518 in unused borrowing capacity
under the arrangement.
One of the subsidiaries of ICTS had an arrangement with a commercial bank
in Europe to provide it with up to (euro)650 in borrowings. Borrowings under the
arrangement were limited to 60% of the subsidiary's eligible accounts
receivable, secured by the assets of the subsidiary, and guaranteed by ICTS.
Borrowings made under the arrangement bear interest, which is payable monthly,
at the commercial bank's euro base rate plus 2% per annum. For the years ended
December 31, 2008 and 2007, the weighted average interest rate on this
arrangement is 7.30% and 6.73%, respectively. The arrangement expired in
February 2008.
In February 2008, two of the subsidiaries of ICTS 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. For the years ended
December 31, 2009 and 2008, the weighted average interest rate on this
arrangement is 7.30% and 6.73%. Borrowings under the arrangement are secured by
the assets of the subsidiaries and guaranteed by ICTS. As of December 31, 2008,
there are no outstanding borrowings and (euro)1,200 in outstanding guarantees
under the arrangement. On May 1, 2009, the credit agreement expired.
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.
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 holder 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.
In April 2008, the Company entered into a new arrangement with an entity
related to its main shareholder, which replaced all previous arrangements
between the parties, 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 holder 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
34
that the conversion feature did not qualify as a free standing derivative
instrument or contain any intrinsic value which would be considered beneficial.
In April 2009, the Company entered into a new arrangement with an entity
related to its main shareholder, which replaced all previous arrangements
between the parties, to provide it with up to $7,310 in revolving loans through
November 2011. The term of the arrangement can be automatically extended for
four additional six month periods at the option of the holder. 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 compounded semi-annually and payable at maturity, at the prime rate charged
by the Company's European commercial bank on March 31, 2010. The arrangement is
secured by a 26% interest in one of the Company's subsidiaries. In connection
with the arrangement, the holder was granted an option to convert outstanding
notes payable under the arrangement into the Company's common stock at a price
of $2.10 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.
In September 2009, the Company entered into a new arrangement with an
entity related to its main shareholder, which replaced all previous arrangements
between the parties, to provide it with up to $10,000 in revolving loans through
November 2011. The term of the arrangement can be automatically extended for
four additional six month periods at the option of the holder. 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 compounded semi-annually and payable at maturity, at the prime rate charged
by the Company's European commercial bank on March 31, 2010. The arrangement is
secured by a 26% interest in one of the Company's subsidiaries. In connection
with the arrangement, the holder was granted an option to convert outstanding
notes payable under the arrangement into the Company's common stock at a price
of $2.10 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.
In May 2010, the borrowing capacity under the Company's convertible notes
payable to a related party was increased to $12,000 and the term was extended to
November 2012 pursuant to an oral amendment between the parties.
At December 31, 2009 and 2008, notes payable to related party consists of
$9,066 and $5,501, respectively, in principal and $1,078 and $571, respectively,
in accrued interest. Interest expense related to these notes is $514, $297 and
$280 for the years ended December 31, 2009, 2008 and 2007, respectively. For the
years ended December 31, 2009, 2008 and 2007, the weighted average interest rate
on this arrangement is 5.54%, 5.31% and 6.27%, respectively.
In June 2010, two of the subsidiaries of ICTS jointly entered into a
credit arrangement with a commercial bank to provide them with up to (euro)400
in revolving loans through February 2012. Borrowings under the arrangement bear
interest, which is payable monthly, at 1.8% above the European Libor rate per
annum, are secured by the accounts receivable of the subsidiaries and guaranteed
by ICTS.
35
Research and Development Costs
Research and development costs are expensed as incurred and consist
primarily of payroll and related costs related to development of identity
security software. Research and development costs are $1 million, $0.3 million
and $0.3 million during the years ended December 31, 2009, 2008, and 2007,
respectively.
Trend information
Labor market conditions may require the Company to increase its prices.
Cost of labor is the main 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 a party to two employment agreements and various operating
lease arrangements. In addition, ICTS has no unconsolidated special purpose
entities.
The following table summarizes ICTS's future contractual obligations as of
December 31, 2009:
Contractual Obligations Payments due by Period (in thousands)
- ----------------------- -----------------------------------------------------------------
Less 1-3 4-5 more than
Total than 1 year years years 5 years
------- ----------- ------- ------ ---------
Line of credit (1) $ 6,070 $ 6,070 $ -- $ -- $--
Convertible notes payable -
related party (including interest) (2) 10,144 -- 10,144 -- --
Operating lease obligations 5,489 1,196 3,289 1,004 --
Employment contracts 648 331 317
Settlement with former landlord (3) 1,300 1,300 -- -- --
Liability to Department of Labor 3,000 -- 3,000 -- --
Interest and fees on line of credit and
Convertible notes payable -
related party (4) 1,600 1,050 550 -- --
Other 558 94 384 -- 80
------- ------- ------- ------ ---
$28,809 $10,041 $17,684 $1,004 $80
------- ------- ------- ------ ---
(1) In June 2010, the expiration date was extended to September 30, 2010.
(2) In May 2010, the maturity date was extended to November 2012.
(3) Included in current liabilities from discontinued operations on the
consolidated financial statements.
(4) Interest and fees are estimated based on future interest rates expected to
be applicable.
The following table summarizes ICTS's other future commercial obligations
as of December 31, 2009:
Other Obligations Payments due by Period (in thousands)
- ----------------- -----------------------------------------------------------------
Less 1-3 4-5 more than
Total than 1 year years years 5 years
------- ----------- ------- ------ ---------
Letters of credit $ 444 $ 444 $ -- $ -- $ --
----- ----- ---- ---- ----
$ 444 $ 444 $ -- $ -- $ --
----- ----- ---- ---- ----
36
Item 6. Directors, Senior Management and Employees
The following table lists the directors and executive officers of ICTS:
Age Position
----- ----------
Menachem Atzmon 66 Chairman of the Supervisory Board
David W. Sass 74 Member of the Supervisory Board
Eytan Barak 66 Member of the Supervisory Board, Member of
Compensation and Audit Committee
Elie Housman 73 Member of the Supervisory Board, Chairman
of the Compensation Committee
Gordon Hausmann 64 Member of the Supervisory Board, Member of
the Compensation Committee and Member of the
Audit Committee
Philip M. Getter 73 Member of the Supervisory Board, Chairman
of the Audit Committee
Avraham Dan 65 Managing Director
Ran Langer 64 Managing Director
Raanan Nir 61 Managing Director
Alon Raich 34 Chief Financial Officer
Menachem J. Atzmon is a CPA (Isr). Since 1996 Mr. Atzmon has been the
managing director of Albermale Investment Ltd., an investment company. Since
January 1998 he has served as the chairman of the management board of Seehafen
Rostock. Mr. Atzmon acts as a member of the board of Capital Points, Ltd. a
listed Company on the Tel Aviv Stock Exchange in Israel. He has been a member of
the Supervisory Board of ICTS since 1999.
David W. Sass for the past 49 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 is 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 a director of the Temple University Law Foundation and an
Honorary Trustee of Ithaca College.
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 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
37
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.
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.
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 was appointed as the Chairman of the
Board in 2008. In 2009, Mr. Getter resigned from Inksure's Board. Inksure
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 is currently on the Board of Inksure
Technologies Inc. ("Inksure"), serving as the Chairman of the Audit Committee.
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 2009 (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------
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, 2009 180 -- 60 -- -- -- -- 240
Managing 2008 180 68 60 -- -- -- -- 308
Director 2007 180 -- 60 -- -- -- -- 240
- ------------------------------------------------------------------------------------------------------------------------------------
Ran Langer, 2009 -- -- -- -- -- -- -- --
Managing 2008 -- -- -- -- -- -- -- --
Director 2007 -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Raanan Nir, 2009 -- -- 58 -- -- -- -- 58
Managing 2008 -- -- -- -- -- -- -- --
Director 2007 -- -- -- -- -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Doron Zicher, 2009 284 336 36 -- -- -- -- 656
Managing 2008 294 321 36 -- -- -- -- 651
Director of 2007 242 174 39 -- -- -- -- 455
Subsidiary
- ------------------------------------------------------------------------------------------------------------------------------------
Each member of the Supervisory Board who is not an employee of the Company
receives an annual fee of $10,000 and a fee for each Board or committee meeting
attended of $1,000. The Chairman of the Audit Committee receives an additional
$20,000 per year. As of December 31, 2009, no director's fees have been paid for
the past two years.
Mr. Dan has been employed as a Managing Director under a five year
employment agreement commencing February 1, 2005, at a monthly compensation of
$15,000. Mr. Dan is also entitled to benefits and a bonus in the amount of 1.3%
of the Company's net income (excluding extraordinary items).
Mr. Langer has been employed as Managing Director since 2004 without
compensation.
Mr. Nir has been employed as a Managing Director since 2008 at an annual
salary of $58,000.
Mr. Doron Zicher has been employed as a Managing Director of the Company's
European subsidiaries under a five year employment agreement commencing January
1, 2005. Mr. Zicher's employment agreement was extended effective January 1,
2010 for a period of two years at a monthly compensation of 17,000 Euros. Mr.
Zicher is also entitled to benefits and a bonus in the amount of 5% of net
income of two of the Company's European subsidiaries and
39
2.5% of net income of all other subsidiaries involved in the aviation business
with exception of the Company's U.S. subsidiaries. In addition, Mr. Zicher is
entitled to receive a bonus, net of sale expenses, of 8% of the sale proceeds in
the event the Company's I-SEC subsidiary is sold.
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, 2009.
Salaries, fees, Pension, retirement
commissions and other
and bonuses similar benefits
--------------- -------------------
(in thousands)
---------------------------------------
Directors as a group (6 persons) $ 107 $ --
All officers as a group(7 persons) $1,432 $104
Background and Compensation Philosophy
Our Compensation Committee consists of Elie Housman, Chairman, Gordon
Hausmann and Eytan Barak, all independent directors. The Compensation Committee
and, prior to its establishment our Supervisory Board of Directors determined
the compensation to be paid to our executive officers based on our financial and
operating performance and prospects, the level of compensation paid to similarly
situated executives in comparably sized companies, and contributions made by the
officers' to our success. Each of the named officers will be measured by a
series of performance criteria by the supervisory board of directors, or the
compensation committee on a yearly basis. Such criteria will be set forth based
on certain objective parameters such as job characteristics, required
professionalism, management skills, interpersonal skills, related experience,
personal performance and overall corporate performance.
Our Supervisory Board of Directors and Compensation Committee have not
adopted or established a formal policy or procedure for determining the amount
of compensation paid to our executive officers. The Compensation Committee makes
an independent evaluation of appropriate compensation of key employees, with
input from management. The Compensation Committee has oversight of executive
compensation plans, policies and programs.
Our compensation program for our executive officers and all other
employees is designed such that it will not incentivize unnecessary risk-taking.
The base salary component of our compensation program is a fixed amount and does
not depend on performance. Our cash incentive program takes into account
multiple metrics, thus diversifying the risk associated with any single
performance metric, and we believe it does not incentivize our executive
officers to focus exclusively on short-term outcomes. Our equity awards are
limited by the terms of our equity plans to a fixed maximum specified in the
plan, and are subject to vesting to align the long-term interests of our
executive officers with those of our stockholders.
40
Elements of Compensation
We provide our executive officers with a base salary and certain bonuses
to compensate them for services rendered during the year. Our policy of
compensating our executives with a cash salary has served us well.
Board Practices
We have 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 Company's financial statements and confers
with the auditors and the officers. The Audit Committee has an Operating Charter
as well.
We do not have a Nominating Committee. 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.
Employees
As of December 31, 2009, we have 3,150 employees, of which 950 employees
are located in Europe and 2,200 are located in the United States.
Share Ownership
See tables under Item 7: "Major Shareholders" and "Related Party
Transactions" below.
41
Options to Purchase Securities
The Management Board and the Supervisory Board on November 30, 2004 have
approved and the shareholders have adopted on February 12, 2005, the 2005 Equity
Incentive Plan, (the "Plan").
The Plan provides a means whereby employees, officers, directors, and
certain consultants and independent contractors of the Company ("Qualified
Grantees") may acquire the Common Shares of the Company pursuant to grants of
(i) Incentive Stock Options ("ISO"), (ii) non-qualified stock options (the 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.
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:
42
1. Menachem Atzmon (Chairman of the Board) - 550,000 options of which
250,000 shall be immediately vested and 300,000 options to be vested equally
over the next three years. With respect to the Options for 200,000 shares they
are granted in lieu of a current salary for Mr. Atzmon. Options are exercisable
at $1.35 per share representing the fair market value on the date of grant.
These options have been exercised during 2009.
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. These options have been exercised
during 2009.
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. These options have been exercised
during 2009.
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. These options have been exercised during
2009.
5. Directors - 30,000 options were granted to each of the Directors, at
that time, namely, Elie Housman, Philip Getter (exercised), M. Albert Nissim
(exercised) and David W. Sass (exercised). 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. These options have been exercised during
2009.
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.
43
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.
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. These options have been exercised during
2009.
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. These options have been exercised.
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.
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
44
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.
A summary of the Options granted is as follows:
As of December 31, 2009, there were outstanding options to purchase
332,000 shares of common stock. Options were granted to directors, executive
officers and employees of the Company at exercise price of $1.00 per share under
the plans. All these options are vested as of December 31, 2009. Options
available for grant under the plans are 2,279,502. The plans expire by their
terms at various dates through 2018.
All current executive officers (Managing Directors) (3 persons) as a
group: 90,000 Options.
All current directors (6 persons) as a group: 160,000 Options.
All non-executive officers and other (4 persons) as a group: 82,000
Options.
U.S. Federal Income Tax Consequences
The rules governing the U.S. federal tax treatment of stock options,
restricted stock and shares acquired upon the exercise of stock options are
quite technical. Therefore, the description of U.S. federal income tax
consequences set forth below is necessarily general in nature and does not
purport to be complete. Moreover, the statutory provisions are subject to
change, as are their interpretations, and their application may vary in
individual circumstances. In particular, the "American Jobs Creation Act of
2004" imposed new rules concerning the taxation of various deferred compensation
arrangements. It is not clear whether, and to what extent, these new rules apply
to awards under the Plan. Although the Company does not believe that awards
under the Plan are affected by the new rules, there can be no assurance to that
effect until adequate guidance is forthcoming from the U.S. Treasury Department.
Finally, the tax consequences under applicable state, local and foreign income
tax laws may not be the same as under the U.S. federal income tax laws.
Incentive Stock Options
ISOs granted pursuant to the Plan are intended to qualify as incentive
stock options within the meaning of Section 422A of the Internal Revenue Code.
If the participant makes no disposition of the shares acquired pursuant to
exercise of an ISO within one year after the transfer of shares to such
participant and within two years from grant of the option, such participant will
realize no taxable income as a result of the grant or exercise of such
45
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 which the
participant performs services ("service recipient") in the same year, provided
that the amount constitutes reasonable compensation for services that would
result in a deduction for U.S. federal income tax purposes and that certain
federal income tax withholding requirements are satisfied. In addition, the
excess, if any, of the amount realized on a disqualifying disposition over the
market value of the shares on the date of exercise will be treated as capital
gain.
The foregoing discussion does not consider the impact of the alternative
minimum tax, which may be particularly applicable to the year in which an ISO is
exercised.
Non-qualified Stock Options
A participant who acquires shares by exercise of a NQSO generally realizes
as taxable ordinary income, at the time of exercise, the difference between the
exercise price and the fair market value of the shares on the date of exercise.
Such amount will ordinarily be deductible by the service recipient for federal
income tax purposes in the same year, provided that the amount constitutes
reasonable compensation for services that would result in a deduction for U.S.
federal income tax purposes and that certain federal income tax withholding
requirements are satisfied. Subsequent appreciation or decline in the value of
the shares on the sale or other disposition of the shares will generally be
treated as capital gain or loss.
Restricted Stock
A participant granted shares of restricted stock under the Plan is not
required to include the value of such shares in ordinary income until the first
time such participant's rights in the shares are transferable or are not subject
to substantial risk of forfeiture, whichever occurs earlier, unless such
participant timely files an election under Section 83(b) of the Internal Revenue
Code to be taxed on the receipt of the shares. In either case, the amount of
such income will be equal to the excess of the fair market value of the stock at
the time the income is recognized over the amount (if any) paid for the stock.
The service recipient will ordinarily be entitled to a deduction, in the amount
of the ordinary income recognized by the participant, for the service
recipient's taxable year in which the participant recognizes such income,
provided that the amount constitutes reasonable compensation for services that
would result in a deduction for U.S. federal income tax purposes and that
certain federal income tax withholding requirements are satisfied.
46
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
The following table sets forth certain information regarding ownership of
the Company's Common Shares as of June 15, 2010 (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 Shareholders Holding Five Percent or More Owned (a) Outstanding (b)
- -----------------------------------------------------------------------------------------------
Atzmon Family Trust (c) 4,847,226 61.4%
- -----------------------------------------------------------------------------------------------
Nicholas P. Monteban, Xalladio Holding B.V. and
Galladio Capital Management B.V. 665,000 8.4%
- -----------------------------------------------------------------------------------------------
Amos Megides 906,644 11.5%
- -----------------------------------------------------------------------------------------------
All officers and directors as a group including
the Atzmon Family Trust
(10 persons) 5,230,263 64.3%
- -----------------------------------------------------------------------------------------------
(a) The amounts include common shares owned by each of the above, directly
or indirectly and options immediately exercisable or exercisable within 60 days
from June 15, 2010.
(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. The Atzmon Family Trust ("Trust") was created for the benefit of
the family of Mr. Menachem J. Atzmon. The Trust own Aragata Holdings Co.,
Limited., which holds approximately 61.4% of the issued and outstanding Common
Shares on behalf of the Trust. Mr. Atzmon disclaims any beneficial interest in
the Atzmon Family Trust. Aragata Holdings Co., Limited and the Atzmon Family
Trust may be able to appoint all the directors of ICTS and control the affairs
of ICTS.
2. As of May 31, 2010 the Company received loans from related party
in total amount of $9.9 million and accrued interest of $1.2 million. The loan
is convertible to the Company's common stock at a rate of $2.10 per share.
47
Review, Approval or Ratification of Transactions with Related Persons
All ongoing and future transactions between us and any of our officers and
directors and their respective affiliates, including loans by our officers and
directors, will be on terms believed by us to be no less favorable than are
available from unaffiliated third parties. Such transactions or loans, including
any forgiveness of loans, will require prior approval by the Audit Committee
(whose members are "independent" directors) and by a majority of our
disinterested "independent" directors (to the extent we have any) or the members
of our board who do not have an interest in the transaction, in either case who
had access, at our expense, to our attorneys or independent legal counsel. We
will not enter into any such transaction unless our disinterested
("independent") directors determine that the terms of such transaction are no
less favorable to us than those that would be available to us with respect to
such a transaction from unaffiliated third parties. We will not enter into a
business combination or invest alongside any of our directors, officers, any
affiliate of ours or of any of our directors or officers or a portfolio company
of any affiliate of our directors or officers.
Related Party Transactions
We had an outstanding guarantee with respect to certain related party debt
obligations of $2.5 million, which were fully reserved. In 2007, the Company was
released from $0.7 million of the guarantee. In 2008, the Company paid $1.4
million to settle certain outstanding obligations under the guarantee and was
released from its remaining guarantee of $0.4 million. We recognized other
income related to the recovery of its guarantee of $0, $421, and $0 during the
years ended December 31, 2009, 2008 and 2007, respectively.
Entities related to two of our board members provide legal services to us.
Legal expense related to these services is $0.1 million, $0.1 million and $0.1
million for the years ended December 31, 2009, 2008 and 2007, respectively.
Included in accounts payable on the accompanying consolidated balance sheet is
$0.1 million and $0.1 million due for these services as of December 31, 2009 and
2008, respectively.
We engaged the services an entity owned by a related party as a
subcontractor for one of its subsidiaries. The Company incurred expenses of $0.2
million and $0.1 million for such services for the years ended December 31, 2008
and 2007, respectively.
In June 2009, a European bank, issued a performance guarantee in the
amount of (euro)1.2 million to one of our customers to secure our performance
under the service contract between the parties. The performance guarantee
extends for the period June 24, 2009 through April 16, 2013. To secure the
European bank's guarantee, an entity related to the Company's main shareholder
provided a guarantee to the European bank for the same amount.
In July 2009, we entered into a settlement arrangement with the former
landlord of its entertainment segment to resolve all disputes between the
parties related to unpaid rent obligations for $2.6 million. The Company's
obligation under the settlement arrangement is secured by a $1.3 million
irrevocable standby letter of credit issued to the former landlord by an entity
related to the Company's main shareholder.
48
On July 15, 2009, we issued 300,000 shares of fully vested,
non-forfeitable common stock to an entity related to the Company's main
shareholder as consideration for guaranteeing certain of our obligations. We
recognized the fair value of the shares on the date of issuance of $0.6 million
in selling, general and administrative expenses in the accompanying statements
of operations and comprehensive income (loss).
The Company has an arrangement with an entity related to its main
shareholder to provide it with revolving loans. See liquidity and capital
resources section for further information on this arrangement.
The Company has an ownership interest in Inksure Technologies, Inc.
("Inksure") of 27.4% as of December 31, 2009 and 2008. The Company's chief
financial officer serves as a non-employee director of Inksure. In addition, one
of the members of the Company's Board of Directors also serves as a non-employee
director of Inksure. In March 2010, the Company purchased 5,400,000 shares of
Inksure's common stock for $0.7 million pursuant to a private placement of
Inksure Technologies, Inc. securities, which decreased its ownership percentage
in Inksure from 27.4% to 23.9%.
Item 8. Financial Information
The Consolidated Financial Statements and Financial Statement Schedule are
included herein on pages F-1 through F-37
Legal Proceedings
United States Transportation Security Administration
In February 2002, the Company was awarded a security services contract
(the "TSA Contract") by the 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-by-airport basis to the TSA
or November 2002. In accordance with the terms of the TSA Contract, the United
States Federal government provided the Company with a non-interest bearing
advance payment of approximately $26 million, which was payable to the TSA in
monthly installments of approximately $1.3 million commencing in April 2002.
Through December 31, 2009, the Company has repaid $11,700 of the advance. As of
December 31 2009, 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 of $3 million, net of the remaining unpaid advance, as a
receivable from TSA on the accompanying consolidated balance sheets as of
December 31, 2009 and 2008.
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 the lawsuit which the Company had already filed against the TSA
for repeated breach of contract. The Company is vigorously challenging the TSA's
claims, which it asserts is devoid of any factual or legal merit. The TSA's
filing comes on the heels of a recent decision by the ODRA granting the
Company'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. With respect to the claim for the $59,200 overpayment, the Company
has filed a motion to dismiss the action, which has been denied.
49
On March 30, 2009, ODRA denied both cross motions for summary judgment,
stating that the TSA has not met its burden of proof that the prices in the
purported 2006 definitization were reasonable and that ODRA was not willing to
revisit the issue of the statute of limitations in the summary judgment format
but left open the possibility of deciding in the Company's favor on this issue
until the record is complete and fully briefed.
Settlement negotiations followed and the parties have reached a possible
resolution. The settlement proposal has been reduced to a writing, which has not
yet been executed by the Company. At this time, the Company is not willing to
execute the proposed agreement because of its continuing dispute with the United
States Department of Labor ("DOL"). If the Company is unable to reach an
acceptable resolution with the DOL, then the Company will examine its option
with the DOL and determine if it should execute the agreement with the TSA or
seek to resume its litigation against the TSA for the amounts previously
asserted in that litigation. The collection of the receivable from the TSA and
the resolution of the liability to the DOL is currently undeterminable.
United States Department of Labor
During 2003, the 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 resulting in a penalty of
$7.1 million. In 2007, the Company reached a settlement with the DOL with
respect to this claim and agreed to pay them $3 million. The settlement requires
the first $3 million of any settlement with the TSA to be remitted to the DOL
and prohibits the DOL from pursuing any collection activity on its receivable
until the TSA matter is resolved. As of December 31, 2009 and 2008, a liability
to the DOL of $3 million is reflected on our consolidated balance sheets. This
amount is exclusive of any amounts which may be received from the TSA.
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 the Company for United Flight
175 out of Logan Airport in Boston, Massachusetts. All but one of the wrongful
death/personal injury cases relating to Flight 175 have been settled, leaving
the focus of the litigation on the many property damage and insurance
subrogation lawsuits.
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, the
Company 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 11
50
terrorist attacks, the Company's insurance carriers cancelled 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
consolidated balance sheets related to this matter.
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. On December 1, 2008, the Company appealed the case to the
United States Supreme Court, which refused to hear 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 in the United States of America 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. The
arbitrator's decision was affirmed by the Superior Court of New Jersey in May
2007 and the Appellate Court in February 2008. As of December 31, 2008, the
Company had $0.2 in accrued expenses and other current liabilities from
discontinued operations related to the judgment against it. During 2009, based
upon management's assessment that payments are unlikely, the $0.2 previously
accrued by the Company was eliminated and recognized in income from discontinued
operations.
Turner Construction Company
In November 2005, Turner Construction Company ("Turner") filed a Demand
for Arbitration and Mediation against one of the Company's subsidiaries in the
United States of America 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 $1 million for work
and/or services performed. In an arbitration proceeding, the arbitrator awarded
Turner $1 million plus interest. This award was affirmed on appeal. As of
December 31, 2008, the Company had $1 million in accrued expenses and other
current liabilities from discontinued operations related to the judgment against
it. During 2009, based upon management's assessment that payments are unlikely,
the $1 million previously accrued by the Company was eliminated and recognized
in income from discontinued operations.
51
Landlord Claims
Two of the Company's subsidiaries have been sued by their former landlord
(which is the same entity for both properties) alleging breach of their
respective leases. The former landlord was 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 former 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
of $2.6 million was awarded in favor of the former landlord. The subsidiary has
filed an appeal to challenge the judgment. As of December 31, 2008, the Company
has $7.3 million in other liabilities from discontinued operations related to
the unpaid rent obligations owed to the former landlord of the Company's
subsidiaries. In July 2009, the Company entered into a settlement arrangement
with the former landlord to resolve all disputes between the parties related to
the unpaid rent obligations and agreed to pay $2.6 million to the former
landlord in four equal installments during 2009 and 2010.
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) 0.1 million ($0.1 million
as of December 31, 2008). This dispute was settled in 2008 without any liability
to the Company.
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.
The reported high and low closing sales prices per shares during the last
five years were as follows:
Year High Low
---- ----- -----
2005 $3.23 $1.58
2006 $2.54 $0.10
2007 $2.79 $1.40
2008 $2.30 $1.70
2009 $2.55 $1.50
The reported high and low closing sales prices per share during each
quarter for the last 3 years were as follows:
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
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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
2009 High Low
---- ----- -----
First quarter $2.25 $1.50
Second quarter $2.55 $1.50
Third Quarter $2.25 $1.80
Fourth Quarter $2.25 $1.82
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
Our authorized share capital is currently divided into 17,000,000 common
shares, par value 0.45 Euro per common share. The common shares may be in bearer
or registered form. As of December 31, 2009, 7,890,137 shares were issued and
outstanding.
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.
53
Voting Rights
Members of our 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
Our 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 votes cast, except where a different
proportion of votes are required by the Articles of Association or Netherlands
law, in a meeting in which holders of at least one-third of the outstanding
common shares are represented. Each share carries one vote.
Amendment of Articles of Association and Winding Up
A resolution presented to the general meeting of shareholders amending the
Company's Articles of Association or winding up the Company may only be taken
after a proposal made by the Management Board and approved by the 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
Our 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.
54
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
Our Supervisory Board has the power to issue shares. The shareholders have
by an authorizing resolution provided such authority for a five year period from
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
We may repurchase its common shares, subject to compliance with the
requirements of certain laws of the Netherlands (and provided the aggregate
nominal value of the Company's common shares acquired by it at any one time
amounts to no more than one-tenth of its issued share capital). Common shares
owned by the Company may not be voted or counted for quorum purposes. Any such
purchases are subject to the approval of the Supervisory Board and the
authorization of the general meeting of shareholders. Authorization is not
effective for more than 18 months. The Company may resell shares it purchases.
Upon a proposal of the Management Board and approval of the Supervisory Board,
the Company's shareholders at the general meeting shall have the power to decide
to cancel shares acquired by the Company or to reduce the nominal value of the
common shares. Any such proposal is subject to general requirements of
Netherlands law with respect to reduction of share capital.
Shares may only be cancelled by vote of the shareholders at the general
meeting. Only shares which the Company holds or for which it holds the
depository receipts may be cancelled. However, an entire class may be cancelled
provided the Company repays the par value to the holders of such shares.
Material contracts
For material contracts See "Item 8 - Financial Information".
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.
55
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, 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.
56
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.
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.
57
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 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:
58
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 we 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, agrees 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 we 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 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.
59
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
We are 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)0.2 million and 25.5% for the
excess. In 2008 the standard corporate income tax rate was 20% applicable for
taxable profits up to (euro)0.3 million and 25.5% for the excess.
We and a number of our 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 arm's 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:
(i) The subsidiary company has a capital divided into shares; and
(ii) We hold 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
60
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 0.5 million Euros. 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).
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.
61
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 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.
62
Dividend Withholding Tax in the Netherlands
We currently do 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 us 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.
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 us on the Common Shares or with respect to capital gains derived
from the sale or disposal of Common Shares in case:
63
(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.
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
64
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. The IRS has proposed a number of adjustments that collectively
result in an assessed tax liability including penalties of $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 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
We are 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
65
Item 11. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Exchange Risk - applies to our operations outside the
USA. In 2009, approximately 38% of the Companies revenues were derived in the
United States, and approximately 62% was derived in Europe. The Company is
subject to market risks associated with foreign currency exchange rate
fluctuations. We do 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 of the Company's financial position,
results of operations, and cash flows.
Interest Rate Risk - We are subject to changes in interest rates based on
Federal Reserve actions and general market conditions. The Company does not
utilize derivative instruments to manage its exposure to interest rate risk. We
believe 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 $180 in the year ended December 31, 2009.
Item 12. Description of Securities Other than Equity Securities
Not applicable
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
As of December 31, 2009, one of our subsidiaries was in violation of its
minimum EBITDA and capital expenditure limitation covenants. The credit line
will expire on September 30, 2010.
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, 2009. 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
66
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
financial reporting as of December 31, 2009. 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, I-SEC Japan 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, 2009 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, 2009 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
67
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
We have 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
independent registered public accounting firms, Mayer Hoffman McCann CPAs
(formerly MHM Mahoney Cohen, CPAs, ("MHM")) and 25 MAD LIQUIDATION CPA, P.C.
(formerly known as Mahoney Cohen & Company, CPA, P.C.) for services rendered to
us during the years ended December 31, 2009 and 2008. 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 (in thousands).
2009 2008
---- ----
Audit fees $300 $300
Audit related fees -- --
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 was also a director and chairman of the Audit Committee of one
of the Company's affiliates until November 2009. Other than such affiliation
such director meets the independence requirement for each such entity.
Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
Item 16F. Change in Accountants Disclosure.
ICTS International N.V. ("the Company") appointed Mayer Hoffman McCann
CPAs ("MHM") (formerly known as MHM Mahoney Cohen CPAs) as the Company's new
auditor as approved by the Audit Committee of the Board of Directors on January
8, 2009. The Company was notified that the shareholders of 25 MAD LIQUIDATION
CPA, P.C. (formerly known as Mahoney Cohen & Company, CPA, P.C.) ("MAD"), became
shareholders of Mayer Hoffman McCann P.C. pursuant to an asset purchase
agreement. The New York practice of Mayer Hoffman McCann P.C. now operates under
the name MHM Mahoney Cohen CPAs.
68
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
6-K, the Company did not consult with MHM 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 MAD 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 6-K, there were (i.) no
disagreements between the Company and MAD 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 MAD,
would have caused MAD 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.
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
The Consolidated Financial Statements and Financial Statement Schedule of
the Company as of December 31, 2009 and 2008 and for each of the three years
ended December 31, 2009, including the report of our independent registered
public accounting firm thereon are set forth on pages F-1 to F-37.
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.**
69
Certification by the Registrant's Chief Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
Certification by the Registrant's Chief Financial Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002
* Incorporated by reference to the Company's 1999 annual report filed with
the Commission on Form 20-F.
** Incorporated by reference to the Company's 2003 annual report filed with
the Commission on Form 20-F.
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
ICTS INTERNATIONAL, N.V. AND SUBSIDIARIES
By: /s/ Avraham Dan
-----------------------------
Name: Avraham Dan
Title: Managing Director
Date: June 30, 2010
70
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
2009 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Consolidated Financial Statements:
Reports of Independent Registered Public Accounting Firms F-2
Consolidated Balance Sheets as of December 31, 2009 and 2008 F-4
Consolidated Statements of Operations and Comprehensive Income (Loss)
for the Years Ended December 31, 2009, 2008 and 2007 F-5
Consolidated Statements of Changes in Shareholders' Deficiency
for the Years Ended December 31, 2009, 2008 and 2007 F-6
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2009, 2008 and 2007 F-7
Notes to Consolidated Financial Statements F-9
Financial Statement Schedule:
Valuation and Qualifying Accounts F-37
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 sheets of ICTS
International N.V. and Subsidiaries (the "Company") as of December 31, 2009 and
2008 and the related consolidated statements of operations and comprehensive
income (loss), changes in shareholders' deficiency, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the 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 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, 2009 and 2008 and the
results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of
America.
As disclosed in Notes 12 and 15, the Company is involved in significant
litigation in connection with (a) its exposure to certain tax assessments made
against it 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)
certain claims made against the Company by the United States Department of
Labor, and (d) certain claims made by the Company against 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 continuing 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 regarding 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/ Mayer Hoffman McCann CPAs
(The New York Practice of Mayer Hoffman McCann P.C.)
New York, New York
June 30, 2010
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 statements of operations and
comprehensive income (loss), changes in shareholders' deficiency, and cash flows
of ICTS International N.V. and Subsidiaries (the "Company") for the year ending
December 31, 2007. These financial statements are the responsibility of the
Company 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 results of operations and cash
flows of ICTS International N.V. and Subsidiaries for the year ended December
31, 2007 in conformity with accounting principles generally accepted in the
United States of America.
As disclosed in Notes 12 and 15, the Company is involved in significant
litigation in connection with: (a) its exposure to certain tax assessments made
against it 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 Department of Labor, (e) certain claims made by
the Company against the United States Transportation Security Administration,
and (f) the successful renewal of a material contract by one of the Company's
subsidiaries.
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 continuing 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 regarding 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/ 25 MAD LIQUIDATION CPA, P.C.
(formerly known as 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 $ in thousands, except per share data)
December 31,
-------------------------------
ASSETS 2009 2008
-------------------------------
CURRENT ASSETS:
Cash and cash equivalents $ 4,835 $ 3,750
Restricted certificate of deposit 3,500 --
Accounts receivable, net 11,556 11,448
Prepaid expenses and other current assets 1,307 1,373
-------------------------------
Total current assets 21,198 16,571
Property and equipment, net 1,873 1,728
Goodwill 314 314
Restricted certificate of deposit -- 3,500
Receivable - United States Transportation
Security Administration 3,000 3,000
Other assets 442 283
-------------------------------
Total assets $ 26,827 $ 25,396
===============================
LIABILITIES AND SHAREHOLDERS' DEFICIENCY
CURRENT LIABILITIES:
Notes payable-bank $ 6,070 $ 4,861
Accounts payable 2,684 4,087
Accrued expenses and other current liabilities 21,856 21,023
Current liabilities from discontinued operations 1,222 1,898
-------------------------------
Total current liabilities 31,832 31,869
Convertible notes payable to related party,
including accrued interest 10,144 6,072
Other liabilities 3,141 3,144
Non-current liabilities from discontinued operations -- 7,276
-------------------------------
Total liabilities 45,117 48,361
-------------------------------
COMMITMENTS AND CONTINGENCIES (NOTE 15)
SHAREHOLDERS' DEFICIENCY:
Common stock, (euro) 0.45 par value; 17,000,000 shares
authorized; 7,890,137 shares issued and outstanding
as of December 31, 2009; 6,672,980 shares issued and
6,528,100 shares outstanding as of December 31, 2008 4,409 3,605
Additional paid-in capital 20,661 20,655
Accumulated deficit (35,904) (38,827)
Accumulated other comprehensive loss (7,456) (7,499)
Treasury stock, at cost; 144,880 shares as of
December 31, 2008 -- (899)
-------------------------------
Total shareholders' deficiency (18,290) (22,965)
-------------------------------
Total liabilities and shareholders' deficiency $ 26,827 $ 25,396
===============================
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 INCOME (LOSS)
(US $ in thousands, except per share data)
Year Ended December 31,
--------------------------------------------------------
2009 2008 2007
--------------------------------------------------------
Revenue $ 95,861 $ 98,809 $ 64,780
Cost of revenue 83,491 85,107 52,397
--------------------------------------------------------
GROSS PROFIT 12,370 13,702 12,383
Selling, general, and administrative expenses 14,313 15,341 13,338
--------------------------------------------------------
OPERATING LOSS (1,943) (1,639) (955)
Other expenses (1,638) (856) (3,580)
--------------------------------------------------------
LOSS BEFORE EQUITY LOSS FROM INVESTMENTS IN
AFFILIATES AND INCOME TAX BENEFIT (EXPENSE) (3,581) (2,495) (4,535)
Equity loss from investments in affiliates -- -- (2,479)
Income tax benefit (expense) 418 (402) (966)
--------------------------------------------------------
LOSS FROM CONTINUING OPERATIONS (3,163) (2,897) (7,980)
Income from discontinued operations, net of
income tax benefit (expense) of $0, ($2) and
$2,470 in 2009, 2008 and 2007, respectively. 6,086 928 5,422
--------------------------------------------------------
NET INCOME (LOSS) $ 2,923 $ (1,969) $ (2,558)
========================================================
INCOME (LOSS) PER SHARE - BASIC AND DILUTED
Continuing operations $ (0.47) $ (0.44) $ (1.22)
Discontinued operations 0.90 0.14 0.83
--------------------------------------------------------
Net income (loss) $ 0.43 $ (0.30) $ (0.39)
========================================================
Weighted average number of shares outstanding 6,790,707 6,528,100 6,528,100
========================================================
COMPREHENSIVE INCOME (LOSS)
Net income (loss) $ 2,923 $ (1,969) $ (2,558)
Translation adjustment 43 (487) 80
Unrealized gain on marketable equity securities -- -- 497
--------------------------------------------------------
Comprehensive income (loss) $ 2,966 $ (2,456) $ (1,981)
========================================================
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 $ 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, 2007 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)
Exercise of stock options 1,062,037 674 171 -- -- 310 1,155
Issuance of shares to
related party 300,000 130 (165) -- -- 589 554
Net income -- -- -- 2,923 -- -- 2,923
Translation adjustment -- -- -- -- 43 -- 43
----------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2009 7,890,137 $4,409 $ 20,661 $(35,904) $(7,456) $ -- $(18,290)
==============================================================================================
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 $ in thousands, except per share data)
Year Ended December 31,
----------------------------------------------
2009 2008 2007
----------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 2,923 $(1,969) $(2,558)
Income from discontinued operations 6,086 928 5,422
----------------------------------------------
Loss from continuing operations (3,163) (2,897) (7,980)
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization 715 781 1,218
Impairment of property and equipment -- 4 48
Deferred income taxes -- -- --
Loss on sale of property and equipment -- (12) (59)
Impairment of investments -- -- 855
Equity loss in investments in affiliates -- -- 2,290
Stock-based compensation -- 101 373
Gain on settlement of liability -- -- (4,266)
Issuance of shares to related party 554 -- --
Changes in assets and liabilities:
Accounts receivable, net 40 (1,339) 364
Prepaid expenses and other current assets 92 265 103
Other receivable - United States Transportation
Security Administration -- (64) --
Other assets (155) 38 (202)
Accounts payable (1,440) (306) 633
Accrued expenses and other current liabilities 640 4,930 2,827
Net cash provided by (used in) discontinued
operations (1,866) 2,356 175
----------------------------------------------
Net cash provided by (used in) operating activities (4,583) 3,857 (3,621)
----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (865) (1,042) (792)
Proceeds from sale of property and equipment 26 61 135
Proceeds from sale of equity method investments -- -- 295
Decrease (increase) in restricted cash -- 1,791 (770)
Increase in other assets -- (185) --
Net cash provided by discontinued operations -- -- 55
----------------------------------------------
Net cash provided by (used in) investing activities $ (839) $ 625 $(1,077)
----------------------------------------------
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 $ in thousands, except per share data)
Year Ended December 31,
------------------------------------------------
2009 2008 2007
------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of other liabilities $ (5) $ (91) $ (195)
Net increase (decrease) in notes payable - bank 1,209 (1,824) 1,562
Net proceeds (repayments of) convertible notes
payable to related party 3,872 (234) 3,991
Proceeds from exercise of stock options 1,155 -- --
Net cash used in discontinued operations -- -- (373)
------------------------------------------------
Net cash provided by (used in) financing activities 6,231 (2,149) 4,985
------------------------------------------------
EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS 276 (678) 65
------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 1,085 1,655 352
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,750 2,095 1,743
------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,835 $ 3,750 $ 2,095
================================================
Year Ended December 31,
------------------------------------------------
2009 2008 2007
------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Cashless exercise of stock options $ 75 $ -- $ --
================================================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES
Cash paid during the year for:
Interest $ 315 $ 565 $ 624
================================================
Income taxes $ 124 $ 270 $ 226
================================================
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. ("ICTS") was established by the Department of Justice in
Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively
referred to as, the "Company") operate in three reportable segments: (a)
corporate (b) airport security and other aviation services and (c) technology.
The corporate segment does not generate revenue and contains primarily
non-operational expenses. The airport security and other aviation services
segment provides security and other services to airlines and airport
authorities, predominantly in the United States of America and Europe. The
technology segment is predominantly involved in the development and sale of
identity security software to financial institutions and airport authorities,
predominantly in Europe and Israel.
Liquidity and Financial Condition
The Company has a history of recurring losses from continuing operations and
working capital deficiencies. The Company incurred losses from continuing
operations of $3,163, $2,897 and $7,980 during the years ended December 31,
2009, 2008, and 2007, respectively. As of December 31, 2009, the Company had a
working capital deficit and shareholders' deficiency of $10,634 and $18,290,
respectively. In addition, as further described in Notes 12 and 15, the Company
is subject to potential material contingencies in connection with: (a) its
exposure to certain tax assessments made against it 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) certain claims made against the
Company by the United States Department of Labor, and (d) certain claims made by
the Company against the United States Transportation Security Administration
("TSA"). Furthermore, one of the subsidiaries of ICTS is in default of its line
of credit in the United States of America, which expires on September 30, 2010,
as a result of violations of certain required financial covenants (see Note 6).
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 ("US
GAAP"). The significant accounting policies are as follows:
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)
Functional Currency
The accompanying consolidated financial statements are presented in United
States dollars. 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.
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 date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. The most significant estimates and
assumptions included in these consolidated financial statements consist of the:
(a) calculation of the allowance for doubtful accounts, (b) determination of the
fair value of shares of common stock issued to a related party, (c)
determination of the fair value of stock options upon the modification of the
Company's stock option plans, (d) recognition of contingent liabilities, (e)
calculation of income taxes, and (f) impairment evaluation of marketable equity
securities and equity method investments. Actual results could differ from those
estimates.
Principles of Consolidation
The consolidated financial statements include the accounts of ICTS International
N.V. 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 Certificate of Deposit
The Company has a $3,500 certificate of deposit with a commercial bank that
serves as cash collateral to secure a line of credit in the United States of
America (see Note 6). The certificate of deposit matures on September 30, 2010.
Accounts Receivable
Accounts receivable represent amounts due to the Company for services rendered
and are recorded net of an allowance for doubtful accounts. 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, 2009 and 2008, the
allowance for doubtful accounts is $253 and $328, 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
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 prices of the underlying
securities) with unrealized gains (losses) being reported, net of related income
taxes, as a separate component of shareholders' deficiency called accumulated
other comprehensive loss. Realized gains (losses) are included in the
consolidated statements of operations and comprehensive income (loss) upon the
sale of the securities. During 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 (see Note 11). 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 the equity securities of companies which
represent an ownership interest of 20% or more and the ability to exercise
significant influence, provided that ability does not represent control, using
the equity method. 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, internal-use software, 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
Internal-use software 7
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.
Capitalized Internal-Use Software Costs
The Company capitalizes the cost of internal-use software that has a useful life
in excess of one year in property and equipment. These costs consist of payments
made to third party consultants for the installation and integration of software
and related travel costs. Software maintenance and training costs, including
related travel costs, are expensed in the period in which they are incurred.
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)
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, 2009, the customer relationship is fully amortized. Amortization expense is
$0, $53 and $648 for the years ended December 31, 2009, 2008 and 2007,
respectively.
Goodwill
Goodwill represents the excess purchase price over the fair value of the net
tangible and intangible assets of an acquired business. Goodwill is reviewed for
impairment by reporting unit on an annual basis or when events or changes in
circumstances indicate that the carrying value may not be recoverable. 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, 2009, 2008 and 2007, the Company
has not recorded any impairment charges on its goodwill.
Long-Lived Assets
The Company reviews long-lived assets, other than goodwill, for impairment
whenever events or changes in circumstances indicate that the carrying value of
an 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,
2009, 2008, and 2007, the Company has recorded impairment charges on its
long-lived assets of $0, $4 and $48, respectively.
Convertible Debt Instruments
The Company evaluates convertible debt instruments to determine whether the
embedded conversion option needs to be bifurcated from the debt instrument and
accounted for as a freestanding derivative instrument or considered a beneficial
conversion option. An embedded conversion option is considered to be a
freestanding derivative when: (a) the economic characteristics and risks of the
embedded conversion option are not clearly and closely related to the economic
characteristics and risks of the host instrument, (b) the hybrid instrument that
embodies both the embedded conversion option and the host instrument is not
re-measured at fair value under otherwise applicable US GAAP with changes in
fair value reported in earnings as they occur, and (c) a separate instrument
with the same terms as the embedded conversion option would be considered a
derivative instrument subject to certain requirements (except for when the host
instrument is deemed to be conventional). When it is determined that an embedded
conversion option should not be bifurcated from its host instrument, the
embedded conversion option is evaluated to determine whether it contains any
intrinsic value which needs to be discounted from the carrying value of the
convertible debt instrument. The intrinsic value of an embedded conversion
option is considered to be the difference between the fair value of the
underlying security on the commitment date of the debt instrument and the
effective conversion price embedded in the debt instrument.
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)
Contingent Liabilities
The Company is subject to various investigations, claims and legal proceedings
covering a wide range of matters that arise in the normal course of its business
activities. Liabilities for such contingencies are recognized when: (a)
information available prior to the issuance of the consolidated financial
statements indicates that it is probable that a liability had been incurred at
the date of the consolidated financial statements and (b) the amount of loss can
reasonably be estimated.
Comprehensive Income (Loss)
Comprehensive income (loss) reflects changes in shareholders' deficiency that
result from transactions and economic events from non-owner sources. The
Company's comprehensive income (loss) for the years ended December 31, 2009,
2008, and 2007 consists of its net income (loss), foreign currency translation
adjustment and unrealized gain on marketable equity securities.
Stock-Based Compensation
Share-based payment awards to employees, including stock options, are measured
at the fair value of the award on the date of grant based on the estimated
number of awards that are ultimately expected to vest. Share-based compensation
awards issued to non-employees for services rendered are recorded at either the
fair value of the services rendered or the fair value of the share-based
payment, whichever is more readily determinable. The compensation expense
resulting from share-based payments is recorded over the vesting period of the
award in selling, general and administrative expense in the accompanying
consolidated statements of operations.
Revenue Recognition
Revenue is recognized as services are rendered, based on the terms contained in
the Company's contractual arrangements with customers, provided the fee is fixed
and determinable, 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.
Advertising Costs
Advertising costs are expensed as incurred. Advertising costs during the years
ended December 31, 2009, 2008 and 2007 are $48, $235 and $111, respectively.
Research and Development Costs
Research and development costs are expensed as incurred and consist primarily of
payroll and related costs. Research and development costs are $1,001, $330 and
$317 during the years ended December 31, 2009, 2008, and 2007, respectively.
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)
Value Added Tax
Certain of the Company's operations are subject to Value Added Tax ("VAT")
applied on the services sold in those respective countries. The Company is
required to remit the VAT collected to the tax authorities, but may deduct the
VAT paid on certain eligible purchases. The Company records the VAT amount
payable or receivable in each respective country on a net basis in the
accompanying consolidated balance sheets.
Income Taxes
The Company accounts for income taxes using the liability method. 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.
Uncertain tax positions are determined based upon the likelihood of the
positions being sustained upon examination by taxing authorities. The benefit of
a tax position is recognized in the consolidated financial statements in the
period during which management believes it is more likely than not that the
position will not be sustained. Tax positions taken are not offset or aggregated
with other positions. Tax positions that meet the more-likely-than-not
recognition threshold are measured as the largest amount of tax benefit that is
more than 50 percent likely of being realized upon settlement with the
applicable taxing authority. The portion of the benefits associated with tax
positions taken that exceeds the amount measured is reflected as income taxes
payable in the accompanying consolidated balance sheets.
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.
Income (Loss) Per Share
Basic income (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 income (loss) per share is
determined in the same manner as basic income (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 loss from continuing
operations in all periods presented, all potentially dilutive securities were
excluded from the computation of diluted income (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)
Income (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 income (loss) per share:
Year Ended December 31,
-----------------------------------
2009 2008 2007
--------- --------- ---------
Stock Options 332,000 1,632,000 1,723,000
Shares Issuable upon Conversion of
Convertible Notes Payable to
Related Party 4,830,476 2,208,000 1,865,000
--------- --------- ---------
Total 5,162,476 3,840,000 3,588,000
========= ========= =========
Fair Value of Financial Instruments
The fair values of cash and cash equivalents, restricted certificate of deposit,
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 values of the convertible
notes payable to related party and other liabilities are not readily
determinable because: (a) these instruments are not traded and, therefore, no
quoted market prices exist upon which to base an estimate of fair value and (b)
there were no readily determinable similar instruments on which to base an
estimate of fair value.
Concentration of Credit Risk
Financial instruments which are subject to concentrations of credit risk consist
primarily of cash and cash equivalents, restricted certificate of deposit 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, 2009, cash and cash equivalents being held in the United
States of America do not exceed the FDIC limit. Bank accounts located in Europe
and Israel which hold $4,787 as of December 31, 2009 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, results of operations and cash flows. To mitigate this risk, the
Company regularly reviews the credit worthiness of its customers through its
credit evaluation process.
Revenue from two customers represented 56%, 55% and 29% of total revenue during
the years ended December 31, 2009, 2008 and 2007, respectively. Accounts
receivable from these two customers represented 38% and 41% of total accounts
receivable as of December 31, 2009 and 2008, 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 consolidated 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 consolidated financial position,
results of operations and cash flows.
Recently Issued Accounting Pronouncements
In December 2007, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141(R), "Business Combinations"
("SFAS 141(R)"). SFAS 141(R) replaces Statement of Financial Accounting
Standards No. 141, "Business Combinations," and was primarily codified into FASB
Accounting Standards Codification Topic 805, "Business Combinations" ("ASC
805"). ASC 805 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. ASC 805
also requires acquisition-related transaction expenses and restructuring costs
be expensed as incurred rather than capitalized as a component of the business
combination. The Company adopted ASC 805 on January 1, 2009. ASC 805 will have
an impact on the accounting for any businesses acquired by the Company after its
date of adoption.
In December 2007, the FASB issued Statement of Financial Accounting Standards
No. 160, "Non-controlling Interests in Consolidated Financial Statements - an
amendment of ARB No. 51" ("SFAS 160"). SFAS 160, which was primarily codified
into FASB Accounting Standards Codification Topic 810, "Consolidation" ("ASC
810"), establishes accounting and reporting standards for the non-controlling
interest in a subsidiary (previously referred to as minority interests). ASC 810
requires non-controlling interests to be reported as a separate component of
stockholder's deficiency and present any net income (loss) allocable to
non-controlling interests and stockholders separately in its statement of
operations. ASC 810 also requires that a retained non-controlling interest, upon
the deconsolidation of a subsidiary, be initially measured at its fair value.
The Company adopted ASC 810 on January 1, 2009. ASC 810 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 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, which
was primarily codified into FASB Accounting Standards Codification Topic 350,
"Goodwill and Other Intangible Assets" ("ASC 350"), 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 this guidance.
The objective of this guidance is to improve the consistency between the useful
life of a recognized intangible asset under this guidance and the period of
expected cash flows used to measure the fair value of the asset under ASC 805
and other US GAAP. The Company adopted ASC 350 as of January 1, 2009. The
adoption of ASC 350 did not have a material effect on the Company's consolidated
financial position, results of operations, 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 07-05").
EITF 07-5, which was primarily codified into FASB Accounting Standards
Codification Topic 815, "Derivatives and Hedging ("ASC 815")," provides
framework for determining whether an instrument is indexed to an entity's own
stock. The Company adopted ASC 815 as of January 1, 2009. The adoption of ASC
815 did not have a material effect on the Company's consolidated financial
position, results of operations, or cash flows.
In May 2009, the FASB issued Statement of Financial Accounting Standards No.
165, "Subsequent Events" ("SFAS 165"). SFAS 165, which was primarily codified
into FASB Accounting Standards Codification Topic 855, "Subsequent Events" ("ASC
855"), establishes standards for the accounting and disclosure of subsequent
events. ASC 855 introduces new terminology, defines a date through which
management must evaluate subsequent events, and lists the circumstances under
which an entity must recognize and disclose events or transactions occurring
after the balance sheet date. The Company adopted ASC 855 on December 31, 2009.
The adoption of ASC 855 did not have a material effect on the Company's
consolidated financial position, results of operations or cash flows.
In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation
No. 46(R)." SFAS 167, which was primarily codified into FASB Accounting
Standards Codification Topic 810, "Consolidation" ("ASC 810") seeks to improve
financial reporting by enterprises involved with variable interest entities. The
Company adopted ASC 810 as of January 1, 2009. The adoption of ASC 810 did not
have a material effect on the Company's consolidated financial position, results
of operations, or cash flows.
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 June 2009, the FASB issued Statement of Financial Accounting Standards No.
168, "The FASB Accounting Standards Codification and the Hierarchy of Generally
Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS
168"). SFAS 168, which was primarily codified into FASB Accounting Standards
Codification Topic 105, "Generally Accepted Accounting Principles" ("ASC 105"),
established the FASB Accounting Standards Codification as the source of
authoritative nongovernmental generally accepted accounting principles in the
United States of America ("GAAP"). Rules and interpretive releases of the
Securities and Exchange Commission ("SEC") under authority of federal securities
laws are also sources of authoritative GAAP for SEC registrants. On the
effective date of these provisions, the codification superseded all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the codification
became non-authoritative. The Company adopted ASC 105 on December 31, 2009.
In December 2009, the FASB issued Accounting Standards Update 2009-17,
"Consolidations - Improvements to Financial Reporting by Enterprises Involved
with Variable Interest Entities" ("Update 2009-17"). Update 2009-17 amends Topic
810, "Consolidations" of the Accounting Standards Codification by replacing the
quantitative-based risks and rewards calculation for determining which reporting
entity, if any, has a controlling financial interest in a variable interest
entity with an approach focused on identifying which reporting entity has the
power to direct the activities of a variable interest entity that most
significantly impact the entity's economic performance and (a) the obligation to
absorb losses of the entity or (b) the right to receive benefits from the
entity. The amendments also require additional disclosures about a reporting
entity's involvement in variable interest entities, which will enhance the
information provided to users of financial statements. The adoption of Update
2009-17 is not expected to have a material impact on the Company's consolidated
financial position, results of operations or cash flows.
In February 2010, the FASB issued Accounting Standards Update 2010-9,
"Subsequent Events, Amendments to Certain Recognition and Disclosure
Requirements" ("Update 2010-9"). Update 2010-9 amends Topic 855, "Subsequent
Events," of the Accounting Standards Codification by eliminating the requirement
to disclose the date through which subsequent events were evaluated for public
entities and clarifying the application of ASC 855 in revised financial
statements. The amendments in Update 2010-9 are effective upon issuance. The
Company adopted Update 2010-9 on December 31, 2009. The adoption of Update
2010-9 did not have a material effect on the Company's consolidated financial
position, results of operations 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 the entertainment
segment were classified as discontinued operations in the Company's consolidated
financial statements. The nature of the ongoing discontinued operations of the
entertainment segment consists mainly of activities associated with the
settlement of ongoing litigation, including disputes related to unpaid vendor
and rent obligations (see Notes 15).
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)
In July 2009, the Company entered into a settlement arrangement with the former
landlord of the entertainment segment to resolve all disputes between the
parties related to unpaid rent obligations. Pursuant to the settlement
arrangement, the Company agreed to pay $2,600 to the former landlord in four
equal installments of $650. The first two installments were paid upon the
execution of the settlement arrangement and on December 31, 2009. The remaining
payments are payable on June 30, 2010 and December 31, 2010. As a result of the
settlement arrangement, the Company recognized a gain of $4,756 in its results
from discontinued operations.
The payment of the Company's obligation under the settlement arrangement is
secured by a $1,300 irrevocable standby letter of credit issued to the former
landlord by an entity related to the Company's main shareholder (see Note 13).
Furthermore, during 2009, based upon management's assessment that payments are
unlikely, the remaining disputes of the entertainment segment related to unpaid
vendor obligations of $1,156 which were previously accrued by the Company were
eliminated and recognized as income from discontinued operations.
A summary of the Company's assets and liabilities from discontinued operations
as of December 31, 2009 and 2008 are as follows:
December 31,
------------------
2009 2008
------------------
Accrued expenses and other current liabilities $ 1,222 $1,898
------------------
Total current liabilities from discontinued
Operations $ 1,222 $1,898
==================
Other liabilities $ -- $7,276
------------------
Total non-current liabilities from
discontinued operations $ -- $7,276
==================
A summary of the Company's results from discontinued operations for the years
ended December 31, 2009, 2008 and 2007 are as follows:
December 31,
--------------------------------
2009 2008 2007
--------------------------------
Operating income $6,086 $ 932 $ 2,634
Impairment loss -- -- (55)
Other income (expense), net -- (2) 373
Income tax benefit (expense) -- (2) 2,470
--------------------------------
Income from discontinued operations $6,086 $ 928 $ 5,422
================================
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
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 contract 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, 2009 and
2008, the Company's investment in NAS is $0.
The Company recognized an equity loss in affiliates related to its investment in
NAS of $0, $0 and $2,003 during the years ended December 31, 2009, 2008 and
2007, respectively.
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,
2009, the Company's share of the underlying net assets of NAS exceeds the
carrying value of its investment in NAS by $118. The market value of the
Company's investment in NAS as of December 31, 2009 is not determinable.
Balance sheet data for NAS is summarized below:
December 31,
-----------------
2009 2008
-----------------
Current assets $255 $1,637
-----------------
Total assets $255 $1,637
=================
Current liabilities $ 19 $1,544
Shareholders' equity 236 93
-----------------
Total liabilities and shareholders' equity $255 $1,637
=================
Statement of operations data for NAS is summarized below:
For the Year Ended December 31,
---------------------------------------
2009 2008 2007
---------------------------------------
Revenue $ -- $ 5,931 $ 62,684
Gross profit -- 625 873
Net income (loss) 143 (565) (4,006)
Inksure Technologies, Inc.
The Company has an ownership interest in Inksure Technologies, Inc. ("Inksure")
of 27.4% as of December 31, 2009 and 2008. The Company's chief financial officer
serves as a non-employee director of Inksure. In addition, one of the members of
the Company's Board of Directors also serves as a non-employee director of
Inksure. Inksure develops, markets and sells customized authentication systems
designed to enhance the security of documents and branded products. 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.
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)
Inksure Technologies, Inc. (Continued)
The Company recognized an equity loss in affiliates related to its investment in
Inksure of $0, $0 and $284 during the years ended December 31, 2009, 2008 and
2007, respectively. As of December 31, 2009, the Company's carrying value of its
investment in Inksure exceeds the Company's share of the underlying net assets
of Inksure by $1,918. The market value of the Company's investment in Inksure as
of December 31, 2009 is $497.
Balance sheet data for Inksure is summarized below:
December 31
--------------------------
2009 2008
--------------------------
Current assets $ 3,451 $ 3,090
Non-current assets 211 288
--------------------------
Total assets $ 3,662 $ 3,378
=========================
Current liabilities $ 10,063 $ 8,093
Non-current liabilities 598 --
Shareholders' deficiency (6,999) (4,715)
--------------------------
Total liabilities and
Shareholder's deficiency $ 3,662 $ 3,378
=========================
Statement of operations data for Inksure is summarized below:
December 31,
------------------------------------
2009 2008 2007
------------------------------------
Revenue $ 3,335 $ 2,158 $ 2,890
Gross profit 2,962 1,654 1,782
Net loss (1,468) (3,528) (3,078)
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment is as follows:
December 31,
------------------
2009 2008
------------------
Equipment and facilities $3,515 $3,694
Internal-use software 509 --
Vehicles 678 693
Leasehold improvements 446 304
------------------
5,148 4,691
Less: accumulated depreciation and amortization 3,275 2,963
------------------
Total property and equipment, net $1,873 $1,728
==================
Depreciation expense is $715, $728 and $570 for the years ended December 31,
2009, 2008 and 2007, 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 - NOTES PAYABLE - BANK
One of the subsidiaries of ICTS has an arrangement with a commercial bank in the
United States of America, which provides up to $8,000 in borrowings and letters
of credit. The borrowing base of the arrangement is limited to 85% of the
subsidiary's eligible accounts receivable, as defined, and 95% of the
subsidiary's cash collateral. Borrowings under the arrangement are secured by
the subsidiary's accounts receivable of $6,213 and a $3,500 certificate of
deposit (see Note 2). Borrowings under the arrangement are also guaranteed by
ICTS. The original term of the arrangement, which was set to expire on March 31,
2010, was extended to June 30, 2010 and can be automatically extended for an
additional one-year term unless either the Company or the commercial bank elect
to terminate the arrangement prior to the expiration date. In June 2010, the
original term of the arrangement was extended to September 30, 2010 (see Note
16). Borrowings made under the arrangement will be designated as either prime
rate or LIBOR rate loans at the option of the subsidiary. Prime rate loans bear
interest, which is payable monthly, at the bank's prime rate plus 1% per annum.
LIBOR rate loans bear interest, which are payable monthly, at LIBOR plus 350
basis points per annum. For the years ended December 31, 2009, 2008 and 2007,
the weighted average interest rate on this arrangement is 4.25%, 5.25% and
6.00%, respectively. The arrangement subjects the subsidiary to certain
financial and non-financial covenants, including minimum tangible net worth,
minimum interest coverage ratio, minimum EBITDA, a required excess availability
under the borrowing base and a capital expenditure limitation. As of December
31, 2009 and for the year then ended, the subsidiary is in violation of its
minimum EBITDA and capital expenditure limitation covenants (see Note 1). As of
December 31, 2009, the subsidiary has approximately $6,070 in borrowings, $444
in outstanding letters of credit and $864 in unused borrowing capacity under the
arrangement. As of December 31, 2008, the subsidiary had approximately $4,848 in
borrowings, $575 in outstanding letters of credit and $1,518 in unused borrowing
capacity under the arrangement.
One of the subsidiaries of ICTS had an arrangement with a commercial bank in
Europe to provide it with up to (euro)650 in borrowings. Borrowings under the
arrangement were limited to 60% of the subsidiary's eligible accounts
receivable, secured by the assets of the subsidiary, and guaranteed by ICTS.
Borrowings made under the arrangement bear interest, which is payable monthly,
at the commercial bank's euro base rate plus 2% per annum. For the years ended
December 31, 2008 and 2007, the weighted average interest rate on this
arrangement is 7.30% and 6.73%, respectively. The arrangement expired in
February 2008.
In February 2008, two of the subsidiaries of ICTS 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. For the years ended December 31, 2009 and
2008, the weighted average interest rate on this arrangement is 7.30% and 6.73%.
Borrowings under the arrangement are secured by the assets of the subsidiaries
and guaranteed by ICTS. As of December 31, 2008, there are no outstanding
borrowings and (euro)1,200 in outstanding guarantees under the arrangement. On
May 1, 2009, the credit agreement expired.
The Company is indebted to a commercial bank for bank overdrafts of $0 and $13
as of December 31, 2009 and 2008, respectively. These amounts bear interest,
which is payable monthly, at 7% per annum.
F-22
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 7 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities are as follows:
December 31,
------------------
2009 2008
------------------
Accrued payroll and related $ 4,028 $ 4,774
Accrued vacation 2,621 2,287
Accrued VAT 2,026 1,756
Income taxes payable 9,815 9,614
Other 3,366 2,592
------------------
Total accrued expenses and other current liabilities $21,856 $21,023
==================
NOTE 8 - 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 holder 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.
In April 2008, the Company entered into a new arrangement with an entity related
to its main shareholder, which replaced all previous arrangements between the
parties, 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 holder 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.
F-23
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 8 - CONVERTIBLE NOTES PAYABLE TO RELATED PARTY (CONTINUED)
In April 2009, the Company entered into a new arrangement with an entity related
to its main shareholder, which replaced all previous arrangements between the
parties, to provide it with up to $7,310 in revolving loans through November
2011. The term of the arrangement can be automatically extended for four
additional six month periods at the option of the holder. 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 compounded semi-annually and payable at maturity, at the prime rate charged
by the Company's European commercial bank on March 31, 2010. The arrangement is
secured by a 26% interest in one of the Company's subsidiaries. In connection
with the arrangement, the holder was granted an option to convert outstanding
notes payable under the arrangement into the Company's common stock at a price
of $2.10 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.
In September 2009, the Company entered into a new arrangement with an entity
related to its main shareholder, which replaced all previous arrangements
between the parties, to provide it with up to $10,000 in revolving loans through
November 2011 (see Note 16). The term of the arrangement can be automatically
extended for four additional six month periods at the option of the holder. 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 compounded semi-annually and payable at maturity, at the
prime rate charged by the Company's European commercial bank on March 31, 2010.
The arrangement is secured by a 26% interest in one of the Company's
subsidiaries. In connection with the arrangement, the holder was granted an
option to convert outstanding notes payable under the arrangement into the
Company's common stock at a price of $2.10 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.
In May 2010, the borrowing capacity under the Company's convertible notes
payable to a related party was increased to $12,000 and the term was extended to
November 2012 pursuant to an oral amendment between the parties.
At December 31, 2009 and 2008, notes payable to related party consists of $9,066
and $5,501, respectively, in principal and $1,078 and $571, respectively, in
accrued interest. Interest expense related to these notes is $514, $297 and $280
for the years ended December 31, 2009, 2008 and 2007, respectively. For the
years ended December 31, 2009, 2008 and 2007, the weighted average interest rate
on this arrangement is 5.54%, 5.31% and 6.27%, respectively.
NOTE 9 - OTHER LIABILITIES
Other liabilities are as follows:
December 31,
-------------------
2009 2008
-------------------
Liability to Department of Labor (Note 15) $3,000 $3,000
Other 141 144
-------------------
Total other liabilities $3,141 $3,144
===================
F-24
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 10 - STOCK-BASED COMPENSATION
In 1999, the Company adopted the 2003 Equity Incentive Plan and reserved 600,000
shares of common stock for future issuance. The plan expired 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.
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.
In September 2009, the Board of Directors ratified the cashless exercise feature
contained in the Company's 2003 and 2005 Equity Incentive Plans to facilitate
the exercise of stock options which are set to expire in 2009 and 2011. Under
the cashless exercise feature of these plans, an option holder electing to
exercise stock options using this feature would effectively pay for the exercise
of a portion of his/her stock options by surrendering their rights to another
portion of their stock options to affect a stock for stock transfer. The Company
determined that the modification of the stock option plans did not result in any
incremental compensation cost.
As of December 31, 2009, the Company has 2,279,502 options available for future
grants.
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, 2009 1,632,000 $1.19 1.80 $ --
Granted -- -- -- --
Exercised (1,062,037) $1.22 -- --
Forfeited / Expired (237,963) $1.33 -- --
-----------------------------------------------------------------
Outstanding as of December 31, 2009 332,000 $1.00 1.80 $ --
-----------------------------------------------------------------
Exercisable as of December 31, 2009 332,000 $1.00 1.80 $ --
=================================================================
There were no stock options granted during the years ended December 31, 2009,
2008 and 2007. As of December 31, 2009 and 2008, all outstanding stock options
are fully vested.
As of December 31, 2009, 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, 2009, 2008 and 2007, the Company recognized $0, $101
and $373 in compensation expense related to the issuance of stock options under
the stock option plans.
F-25
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 11 - OTHER EXPENSES
Other expenses are summarized as follows:
2009 2008 2007
--------------------------------
Interest expense $(1,554) $(1,660) $(3,537)
Interest income 40 228 325
Foreign currency gain (loss) (102) 141 (122)
Recovery of guarantee
from related party (see Note 13) -- 421 --
Gain from the sale of marketable
equity securities -- -- 349
Impairment of marketable equity
securities (see Note 2) -- -- (600)
Other (22) 14 5
--------------------------------
Total other expenses $(1,638) $ (856) $(3,580)
================================
NOTE 12 - INCOME TAXES
The components of loss before equity loss from investments in affiliates and
income tax (benefit) expense are as follows:
Year Ended December 31,
------------------------------
2009 2008 2007
------------------------------
The Netherlands $ 484 $ 2,383 $(1,764)
Subsidiaries outside of the Netherlands (4,065) (4,878) (2,771)
------------------------------
Loss before equity loss from investments in
affiliates and income tax benefit (expense) $(3,581) $(2,495) $(4,535)
==============================
The components of income tax benefit (expense) are as follows:
Year Ended December 31,
-----------------------------
2009 2008 2007
-----------------------------
Current:
The Netherlands $ 286 $ (19) $(268)
Subsidiaries outside of the Netherlands 132 (383) (740)
-----------------------------
418 (402) (1,008)
Deferred:
The Netherlands -- -- --
Subsidiaries outside of the Netherlands -- -- 42
-----------------------------
-- -- 42
-----------------------------
Total income tax benefit (expense) $ 418 $ (402) $(966)
=============================
F-26
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 12 - INCOME TAXES (CONTINUED)
The components of deferred tax assets and liabilities are as follows:
December 31,
------------------------
2009 2008
------------------------
Deferred tax assets:
Operating loss carry-forwards $ 24,375 $ 21,968
Allowance for doubtful accounts 90 96
Accrued expenses 3,307 5,131
------------------------
Total deferred tax assets 27,772 27,195
Deferred tax liabilities:
Depreciation on property and equipment (76) (43)
Contingent advance (4,370) (4,370)
------------------------
Total deferred tax liabilities (4,446) (4,413)
------------------------
Net deferred tax assets 23,326 22,782
Less: valuation allowance 23,326 22,782
------------------------
$ -- $ --
========================
The ultimate realization of the net deferred tax assets in each jurisdiction the
Company does business in is dependent upon the generation of future taxable
income in that jurisdiction during the periods in which net operating loss
carry-forwards are available and the net deferred tax assets shown above become
deductible. At present, the Company does not have a sufficient history of
generating taxable income in the various jurisdictions it does business in to
conclude that it is more likely than not that the Company will be able to
realize all of its net deferred tax assets in the near future and, therefore, a
valuation allowance was established for the full carrying value of the net
deferred tax assets. A valuation allowance will be maintained until sufficient
positive evidence exists to support the reversal of any portion or all of the
valuation allowance. Should the Company become profitable in any of the
jurisdictions in does business in during future periods, with supportable
trends; the valuation allowance will be reversed.
As of December 31, 2009, the Company has net operating loss carry-forwards of
$39,110 in the Netherlands which will expire in 2011 through 2017. As of
December 31, 2009, the Company has net operating loss carry-forwards of $30,971
in the United States of America which will expire in 2025 through 2029. The
ultimate utilization of such net operating loss carry-forwards is limited in
certain situations.
In addition, as of December 31, 2009, the Company has $698 in tax credits for
the welfare to work and work opportunity programs in the United States of
America that expire in 2024 through 2028.
During the year ended December 31, 2009, the valuation allowance increased by
$544.
F-27
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 12 - INCOME TAXES (CONTINUED)
The Company's effective income tax rate differs from the Netherlands' statutory
rate of 25.5% as follows:
Year Ended December 31,
--------------------------------
2009 2008 2007
--------------------------------
Effective income tax benefit from
continuing operations at
statutory rate $ 913 $ 636 $ 1,156
Rate differential (116) 149 (287)
Non-deductible (expense) income (172) 203 75
Prior year tax assessments 281 (251) (747)
Changes in valuation allowance (544) (950) (1,513)
Other (176) (189) 350
--------------------------------
Income tax benefit (expense) from
continuing operations
$ 418 $(402) $ (966)
================================
A reconciliation of the beginning and ending amounts of unrecognized income tax
benefits is as follows:
December 31,
-------------------
2009 2008
-------------------
Balance at January 1 $5,652 $ 5,449
Additions related to prior period tax positions -- 4,091
Reductions related to prior period tax positions -- (3,888)
-------------------
Balance at December 31 $5,652 $ 5,652
===================
A reconciliation of the beginning and ending amounts of accrued interest is as
follows:
December 31,
-----------------------
2009 2008
-----------------------
Balance at January 1 $2,713 $ 2,179
Additions charged to expense 452 1,964
Reductions charged to expense -- (1,430)
-----------------------
Balance at December 31 $3,165 $ 2,713
=======================
A reconciliation of the beginning and ending amounts of accrued tax penalties is
as follows:
December 31,
-------------------
2009 2008
-------------------
Balance at January 1 $947 $ 1,150
Additions charged to expense -- 818
Reductions charged to expense -- (778)
Reductions related to tax authorities notice -- (243)
-------------------
Balance at December 31 $947 $ 947
===================
F-28
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 12 - INCOME TAXES (CONTINUED)
The total amount of unrecognized tax benefits, including interest and penalties,
is $9,764 and $9,312 as of December 31, 2009 and 2008, 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 2006 to 2009 are subject to
examination in the Netherlands. Income tax returns for the tax years 2002 to
2009 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,
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, which
the Company considers adequate to cover the potential liability related to such
assessments.
NOTE 13 - 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, $421, and $0 during the years ended December
31, 2009, 2008 and 2007, respectively (See Note 11).
Entities related to two of the Company's board members provide legal services to
the Company. Legal expense related to these services is $114, $93 and $138 for
the years ended December 31, 2009, 2008 and 2007, respectively. Included in
accounts payable on the accompanying consolidated balance sheet is $140 and $106
due for these services as of December 31, 2009 and 2008, respectively.
F-29
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED)
The Company engaged the services an entity owned by a related party as a
subcontractor for one of its subsidiaries. The Company incurred expenses of $15,
$176 and $91 for such services for the years ended December 31, 2009 and 2008
and 2007, respectively.
In June 2009, a European bank, issued a performance guarantee in the amount of
(euro)1,200 to one of the Company's customers to secure the Company's
performance under the service contract between the parties. The performance
guarantee extends for the period June 24, 2009 through April 16, 2013. To secure
the European bank's guarantee, an entity related to the Company's main
shareholder provided a guarantee to the European bank for the same amount.
In July 2009, the Company entered into a settlement arrangement with the former
landlord of its entertainment segment to resolve all disputes between the
parties related to unpaid rent obligations for $2,600(see Note 3). The Company's
obligation under the settlement arrangement is secured by a $1,300 irrevocable
standby letter of credit issued to the former landlord by an entity related to
the Company's main shareholder.
On July 15, 2009, the Company issued 300,000 shares of fully vested,
non-forfeitable common stock to an entity related to the Company's main
shareholder as consideration for guaranteeing certain Company obligations. The
Company recognized the fair value of the shares on the date of issuance of $554
in selling, general and administrative expenses in the accompanying statements
of operations and comprehensive income (loss).
NOTE 14 - SEGMENT AND GEOGRAPHICAL INFORMATION
The Company operates in three reportable segments: (a) corporate (b) airport
security and other aviation services and (c) technology. The corporate segment
does not generate revenue and contains primarily non-operational expenses. The
airport security and other aviation services segment provide security and other
services to airlines and airport authorities, predominantly in the United States
of America and Europe. The technology segment is predominantly involved in the
development and sale of identity security software to financial institutions and
airport authorities, predominantly in Europe and Israel. All inter-segment
transactions are eliminated in consolidation. The accounting policies of the
segments are the same as the accounting policies of the Company as a whole.
The operating results of these business segments are regularly reviewed by the
chief operating decision maker and the performance of the business segments are
based primarily on loss from continuing operations.
F-30
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 14 - SEGMENT AND GEOGRAPHICAL INFORMATION (Continued)
Airport
Security and
Other Aviation
Corporate Services Technology Total
--------------------------------------------------------------------
Year ended December 31, 2009:
Revenue $ -- $ 95,146 $ 715 $ 95,861
Depreciation and amortization 11 681 23 715
Income (loss) from continuing
operations (3,729) 2,777 (2,211) (3,163)
Total assets 586 25,662 579 26,827
Year ended December 31, 2008:
Revenue -- 97,930 879 98,809
Depreciation and amortization 12 741 29 782
Income (loss) from continuing
operations (5,120) 2,965 (742) (2,897)
Total assets 640 24,209 547 25,396
Year ended December 31, 2007:
Revenue -- 63,982 798 64,780
Depreciation and amortization 25 1,163 30 1,218
Loss from continuing operations (4,825) (2,722) (433) (7,980)
Total assets 4,019 22,571 513 27,103
Revenue by country is summarized as follows:
Year ended December 31,
-----------------------------------
2009 2008 2007
-----------------------------------
United States of America $36,794 $40,421 $46,745
Netherlands 42,344 44,173 7,619
Other 16,723 14,215 10,416
-----------------------------------
Total $95,861 $98,809 $64,780
===================================
Property and equipment, net of accumulated depreciation and amortization, by
country is summarized as follows:
December 31,
---------------------
2009 2008
---------------------
United States of America $ 849 $ 521
Netherlands 803 933
Other 221 274
---------------------
$1,873 $1,728
=====================
F-31
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 15 - 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 Ended
December 31,
------------
2010 $1,196
2011 1,139
2012 1,131
2013 1,019
2014 1,004
------
$5,489
======
Rent expense for the years ended December 31, 2009, 2008 and 2007 is $1,875,
$1,521 and $1,191, respectively.
Legal Proceedings
United States Transportation Security Administration
In February 2002, the Company was awarded a security services contract (the "TSA
Contract") by the 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-by-airport basis to the TSA or November
2002. In accordance with the terms of the TSA Contract, the United States
Federal government provided the Company with a non-interest bearing advance
payment of approximately $26,000, which was payable to the TSA in monthly
installments of approximately $1,300 commencing in April 2002. Through December
31, 2009, the Company has repaid $11,700 of the advance. As of December 31 2009,
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 of
$3,000, net of the remaining unpaid advance, as a receivable from TSA on the
accompanying consolidated balance sheets as of December 31, 2009 and 2008.
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 the lawsuit which the Company had already filed against the TSA for
repeated breach of contract. The Company is vigorously challenging the TSA's
claims, which it asserts is devoid of any factual or legal merit. The TSA's
filing comes on the heels of a recent decision by the ODRA granting the
Company'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. With respect to the claim for the $59,200 overpayment, the Company
has filed a motion to dismiss the action, which has been denied.
F-32
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings (Continued)
United States Transportation Security Administration (Continued)
On March 30, 2009, ODRA denied both cross motions for summary judgment, stating
that the TSA has not met its burden of proof that the prices in the purported
2006 definitization were reasonable and that ODRA was not willing to revisit the
issue of the statute of limitations in the summary judgment format but left open
the possibility of deciding in the Company's favor on this issue until the
record is complete and fully briefed.
Settlement negotiations followed and the parties have reached a possible
resolution. The settlement proposal has been reduced to a writing, which has not
yet been executed by the Company. At this time, the Company is not willing to
execute the proposed agreement because of its continuing dispute with the United
States Department of Labor ("DOL"). If the Company is unable to reach an
acceptable resolution with the DOL, then the Company will examine its option
with the DOL and determine if it should execute the agreement with the TSA or
seek to resume its litigation against the TSA for the amounts previously
asserted in that litigation. The collection of the receivable from the TSA and
the resolution of the liability to the DOL is currently undeterminable.
United States Department of Labor
During 2003, the 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 resulting in a penalty of $7,100. In
2007, the Company reached a settlement with the DOL with respect to this claim
and agreed to pay them $3,000. The settlement requires the first $3,000 of any
settlement with the TSA to be remitted to the DOL and prohibits the DOL from
pursuing any collection activity on its receivable until the TSA matter is
resolved. As of December 31, 2009 and 2008, a liability to the DOL of $3,000 is
reflected on the accompanying consolidated balance sheets (see Note 9). This
amount is exclusive of any amounts which may be received from the TSA.
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 the Company for United Flight
175 out of Logan Airport in Boston, Massachusetts. All but one of the wrongful
death/personal injury cases relating to Flight 175 have been settled, leaving
the focus of the litigation on the many property damage and insurance
subrogation lawsuits.
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, the
Company 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.
F-33
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings (Continued)
September 11, 2001 Terrorist Attacks (Continued)
The Company maintains an aviation insurance policy, which may provide limited
coverage for liabilities that may be assessed against the Company as a result of
the events of September 11, 2001. The liabilities under these cases may, by
statute, be limited to the policy coverage. After the September 11 terrorist
attacks, the Company's insurance carriers cancelled 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
consolidated balance sheets related to this matter.
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. On December 1, 2008, the Company appealed the case to the United
States Supreme Court, which refused to hear 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 in the United States of America 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. As of December 31, 2008, the Company had $200
in accrued expenses and other current liabilities from discontinued operations
related to the judgment against it. During 2009, based upon management's
assessment that payments are unlikely, the $200 previously accrued by the
Company was eliminated and recognized in income from discontinued operations
(see Note 3).
F-34
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings (Continued)
Turner Construction Company
In November 2005, Turner Construction Company ("Turner") filed a Demand for
Arbitration and Mediation against one of the Company's subsidiaries in the
United States of America 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. As of December 31, 2008,
the Company had $956 in accrued expenses and other current liabilities from
discontinued operations related to the judgment against it. During 2009, based
upon management's assessment that payments are unlikely, the $956 previously
accrued by the Company was eliminated and recognized in income from discontinued
operations (see Note 3).
Landlord Claims
Two of the Company's subsidiaries have been sued by their former landlord (which
is the same entity for both properties) alleging breach of their respective
leases. The former landlord was 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 former 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 of $2,600 was awarded in
favor of the former landlord. The subsidiary has filed an appeal to challenge
the judgment. As of December 31, 2008, the Company has $7,276 in other
liabilities from discontinued operations related to the unpaid rent obligations
owed to the former landlord of the Company's subsidiaries. In July 2009, the
Company entered into a settlement arrangement with the former landlord to
resolve all disputes between the parties related to the unpaid rent obligations
and agreed to pay $2,600 to the former landlord in four equal installments
during 2009 and 2010 (See Note 3).
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.
F-35
ICTS INTERNATIONAL N.V. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(US $ and (euro) in thousands, except per share data)
NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Legal Proceedings (Continued)
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 European 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.
Employment Contracts
The Company has non-cancellable employment contracts with two of its officers
which provide, among other things, for annual base salary and bonus based upon
the financial performance of the Company. The annual base salary payments,
excluding the potential bonus, required under the employment contracts are as
follows:
Year Ended
December 31,
------------
2010 $ 331
2011 317
-----
$ 648
=====
NOTE 16 - SUBSEQUENT EVENTS
In March 2010, the Company purchased 5,400,000 shares of Inksure's common stock
for $675 pursuant to a private placement of Inksure's securities, which
decreased its ownership percentage in Inksure from 27.4% to 23.9% (see Note 4).
In April 2010, two of the subsidiaries of ICTS jointly entered into a credit
arrangement with a commercial bank to provide them with up to (euro)400 in
revolving loans through February 2012. Borrowings under the arrangement bear
interest, which is payable monthly, at 1.8% above the European Libor rate per
annum, are secured by the accounts receivable of the subsidiaries and guaranteed
by ICTS.
In June 2010, an entity related to the Company's main shareholder provided a
letter of credit of $550 to a commercial bank to guarantee an extension of a
borrowing arrangement on behalf of one of the subsidiaries of ICTS (see Note 6).
F-36
Financial Statement Schedule - Valuation and Qualifying Accounts
(U.S. $ in thousands)
Charges to Charges to
Beginning of Costs and Other Deductions End of
Year Expenses Accounts (1) Year
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for doubtful accounts:
Year Ended December 31, 2007 994 (299) -- (188) 507
Year Ended December 31, 2008 507 (51) -- (128) 328
Year Ended December 31, 2009 328 -- -- (78) 253
Allowance for net deferred tax assets:
Year Ended December 31, 2007 26,163 -- -- (4,331) 21,832
Year Ended December 31, 2008 21,832 950 -- -- 22,782
Year Ended December 31, 2009 22,782 544 -- -- 23,326
(1) Write-offs, net of recoveries
F-37