Amendment to Annual Report by a Foreign Private Issuer — Form 20-F
Filing Table of Contents
Document/Exhibit Description Pages Size
1: 20-F/A Amendment to Annual Report by a Foreign Private 101 499K
Issuer
7: CORRESP ¶ Comment-Response or Other Letter to the SEC 1 2K
2: EX-10 Consent 2 12K
5: EX-13.1 Annual or Quarterly Report to Security Holders 1 6K
6: EX-13.2 Annual or Quarterly Report to Security Holders 1 6K
3: EX-12.1 Statement re: Computation of Ratios 2± 9K
4: EX-12.2 Statement re: Computation of Ratios 2± 9K
‘20-F/A’ — Amendment to Annual Report by a Foreign Private Issuer
Document Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F/A
[_] 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, 2004
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
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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)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each Class: Name of each exchange on which registered:
None None
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, par value .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 December 31, 2004: 6,672,980
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [_]
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 [_] Item 18 [X]
When used in this Form 20-F, the words "may", "will", "expect", "anticipate",
"continue", "estimates", "project", "intend" and similar expressions are
intended to identify Forward-Looking Statements within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934 regarding events, conditions and financial trends that may affect the
Company's future plans of operations, business strategy, operating results and
financial position. Prospective investors are cautioned that any Forward-Looking
Statements are not guarantees of future performance and are subject to risks and
uncertainties and that actual results may differ materially from those included
within the Forward-Looking Statements as a result of various factors.
INTRODUCTORY NOTE
This Amendment to Annual Report on Form 20-F/A is being filed by ICTS
International N.V (the "Registrant") solely to correct and amend the following
in the Registrant's Annual Report on Form 20-F for the year ended December 31,
2004,filed with the Securities and Exchange Commission on July 26, 2005 (the
"Form 20-F" or "Annual Report"):
- revised disclosure of Item 15 of the Form 20-F; and
- correction of an inadvertent omissions in Exhibits 12.1 and 12.2 of
the Form 20-F; and
- correction of an inadvertent omissions of Exhibit 13.1 of the Form
20-F; and
- repositioning the Reports of independent auditors of associated
companies for the year ended December 31, 2003 as exhibits 10.
Other than as expressly set forth herein, this Form 20-F/A does not, and does
not purport to, amend or restate any other information contained in the Form
20-F nor does this Form 20-F/A reflect any events that have occurred after the
Form 20-F was filed.
Table of Contents
Part I
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Item 1 Identity of Directors, Senior Management and Advisers
Item 2 Offer Statistics and Expected Timetable
Item 3 Key Information
Item 4 Information on the Company
Item 5 Operating and Financial Review and Prospects
Item 6 Directors, Officers and Employees
Item 7 Major Shareholders and Related Party Transactions
Item 8 Financial Information
Item 9 The Offering and Listing
Item 10 Additional Information
Item 11 Quantitative and Qualitative Disclosures about Market Risk
Item 12 Description of Securities other than Equity Securities
Part II
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Item 13 Defaults, Dividend Arrearages and Delinquencies
Item 14 Material Modifications to the Rights of Security Holders
and the Use of Proceed
Item 15 Controls and Procedures
Part III
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Item 17 Financial Statements
Item 18 Financial Statements
Item 19 Exhibits
Exhibits
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Exhibit 8 List of Subsidiaries (incorporated by reference to Item 4--
Information on the Company--Organizational Structure)
Exhibit 10 Reports of independent auditors of associated companies, as
referred to investment in certain associated companies in
the report of independent auditors for the year ended
December 31, 2003
Exhibit 12.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 12.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 13.1 Certification of Chief Executive Officer pursuant to 18
U.S.C. Section 1350
Exhibit 13.2 Certification of Chief Financial Officer pursuant to 18
U.S.C. Section 1350
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.
Selected Financial Data. Selected Consolidated Statements of Income Data
set forth below have been derived from ICTS Consolidated Financial Statements
which were prepared in accordance with US GAAP. The Selected Consolidated
Financial Data set forth below should be read in conjunction with Item 5
Operating and Financial Review and ICTS Consolidated Financial Statements and
the Notes to those financial statements included in Item 18 in this Annual
Report.
[Enlarge/Download Table]
(U.S Dollars in thousands)
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2004 2003 2002 2001 2000
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Cash and cash equivalents 3,426 7,660 32,465 17,414 6,306
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Current Assets 24,668 30,863 73,235 47,776 48,852
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Total Assets 54,962 84,500 125,444 73,963 77,775
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Current Liabilities 26,660 28,099 58,308 36,519 35,625
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Shareholders' equity 21,506 46,961 61,378 37,260 27,475
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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, 2000, 2001, 2002, 2003 and 2004:
[Enlarge/Download Table]
Year ended December 31,
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2004 2003 2002 2001 2000
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(U.S Dollars in thousands except per share data)
REVENUES $ 62,778 $ 71,571 $ 279,931 $ 212,137 $ 147,364
COST OF REVENUES 57,904 57,562 214,054 189,925 131,540
---------- ---------- ---------- ---------- ----------
GROSS PROFIT 4,874 14,009 65,877 22,212 15,824
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,212 9,216 25,636 18,641 11,631
IMPAIRMENT OF ASSETS AND GOODWILL 15,422 14,352 9,156 820 1,151
---------- ---------- ---------- ---------- ----------
OPERATING INCOME (LOSS) (23,760) (9,559) 31,085 2,751 3,042
INTEREST INCOME 470 2,248 2,072 1,649 733
INTEREST EXPENSE (1,160) (1,222) (1,678) (1,637) (1,927)
EXCHANGE DIFFERENCES (83) (242) 2,356 1,965 851
OTHER INCOME (EXPENSES), net (2,907) (353) 41,229 29,520 (1,145)
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INCOME (LOSS) BEFORE TAXES ON INCOME (27,440) (9,128) 75,064 34,248 1,554
INCOME TAXES BENEFIT (EXPENSE) 3,184 (3,115) (16,442) (4,919) (737)
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INCOME (LOSS) FROM OPERATIONS OF THE
COMPANY AND ITS SUBSIDIARIES (24,256) (12,243) 58,622 29,329 817
SHARE IN LOSSES OF ASSOCIATED
COMPANIES - net (1,706) (6,661) (1,807) (395) 25
MINORITY INTERESTS IN PROFITS OF
SUBSIDIARIES B net (2,736) 28
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NET INCOME (LOSS) FOR THE YEAR $ (25,962) $ (18,904) $ 56,815 $ 26,198 $ 870
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OTHER COMPREHENSIVE INCOME (LOSS):
Translation adjustments 1,043 3,456 710 (1,811) (2,516)
Unrealized gains (losses) on marketable securities (616) 794 731 (345) (7,748)
Reclassification adjustment for losses for available
for sale securities included in net income -- 237 (771) 368 7,627
---------- ---------- ---------- ---------- ----------
427 4,487 670 (1,788) (2,637)
---------- ---------- ---------- ---------- ----------
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE
YEAR $ (25,535) $ (14,417) $ 57,485 $ 24,410 $ (1,767)
========== ========== ========== ========== ==========
EARNINGS (LOSSES) PER SHARE:
Basic $ (3.98) $ (2.90) $ 8.85 $ 4.18 $ 0.14
========== ========== ========== ========== ==========
Diluted $ (3.98) $ (2.90) $ 8.80 $ 4.09 $ 0.14
========== ========== ========== ========== ==========
Weighted average shares of common stock outstanding 6,524,250 6,513,100 6,419,575 6,263,909 6,248,536
Adjusted Diluted weighted average shares of common stock
outstanding 6,524,250 6,513,100 6,453,447 6,412,535 6,292,631
========== ========== ========== ========== ==========
Risk Factors
You should carefully consider the risks described below
regarding the business and the ownership of our shares. If any of the risks
actually occur, our business, financial condition or results of operations could
be adversely affected, and the price of our common stock could decline
significantly.
Developments that have had a significant impact on our operations.
Two major events in 2001 and early 2002 significantly changed
our business operations: (i) the sale of substantially all of our European
operations and (ii) the passage of the Aviation and Transportation Security Act
(the "Security Act") by the United States Congress in response to the terrorist
attacks on September 11, 2001 pursuant to which the Federal government through
the Transportation Security Administration (the "TSA") took over aviation
security services in the U.S. in November 2002. As a result of these events, we
have limited aviation security operations in Europe and in the U.S. We
previously derived most of our revenues from the provision of aviation security
services and we have developed substantial experience and expertise in that
field. If we are unable to increase revenues from aviation security services,
our financial condition and results of operations will be adversely affected.
If we are unsuccessful in resolving our disagreements with the
TSA there may be a significant material adverse effect on our financial
condition.
In February 2002, we entered into an aviation security
services contract with the TSA to continue to provide aviation security services
in all of our current airport locations until the earlier of either the
completed transition of these security services on an airport by airport basis
to the U.S. Federal Government or November 2002.
In connection with payments made by the TSA to Huntleigh USA,
a wholly owned subsidiary of the Company, for aviation security services
provided in 2002, the Defense Contract Management Agency has indicated that it
believes that Huntleigh should not have been paid on a fixed price basis as
believed by Huntleigh, but on an actual costs plus what the TSA would consider a
reasonable profit. On that later basis Huntleigh may be required to repay to the
TSA the difference between such amount and the actual amounts paid to it.
Huntleigh however has various claims for additional amounts it considers are due
to it for the services provided to the TSA.
The Company estimates that if the TSA will claim such
difference from Huntleigh and will prevail in all of its contentions, and none
of Huntleigh's claims will be recognized, then the Company may suffer a loss in
an amount of about $41 Million. No provisions have been made by the Company with
respect to the above potential claims.
Claim for Loss of Business
The Security Act provides that all aviation security services
in the U.S. will be handled by the federal government through the TSA. As a
result of the passage of the Security Act the TSA took over aviation security in
the U.S. For the year ended December 31, 2002, the TSA accounted for 73% of our
revenues and for the years ended December 31, 2003 and 2004 the TSA accounted
for -0-% of our revenues. Our failure to be able to meet the TSA's requirements
or to secure contracts from the TSA will have a material adverse affect on our
business.
As a foreign corporation, the Company is not eligible to bid
for security service contracts with the TSA.
Huntleigh's main business was providing airport security
services to airlines and airports as a result of the creation of the TSA and the
requirement that the TSA take over airport security Huntleigh has lost its
principal business. Huntleigh has commenced legal action against the U.S.
Government for the "Taking" of its business and to protect its rights under the
Fifth Amendment of the U.S. Constitution. Huntleigh seeks to recover the going
concern value of the lost business. The suit was brought in the U.S. Court of
Claim and is in the early stages. The Court has rejected the U.S. Governments
motion to dismiss the Complaint for failure to state a cause of action. A motion
for reconsideration has been filed by the defendant, but denied. No discovery
has taken place to date. Discovery is
scheduled for July 15, 2005. There can be no assurance as to the ultimate
outcome of such claim and whether or not Huntleigh will be successful in
prosecuting the same.
We face significant potential liability claims.
As a result of the September 11th terrorists attacks numerous
lawsuits have been commenced against us and our U.S. subsidiary. The cases arise
out of airport security services provided for United Flight 175 out of Logan
Airport in Boston, Massachusetts which crashed into the World Trade Center. In
addition, to the present claims additional claims may be asserted. The outcome
of these or additional cases is uncertain. If there is an adverse outcome with
respect to any of these claims which is not covered by insurance, then there may
be a significant adverse impact on us.
We have incurred major losses in recent years
We incurred net losses of approximately $19 million in 2003
and $26 million in 2004. We cannot assure you that we can achieve profitability.
The losses were accompanied by net cash used in operating activities of $19.1
million and $1.3 million in 2003 and 2004, respectively, and as of December 31,
2004 we had a working capital deficiency of $2 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.
We are dependent on our key personnel.
Our success will largely depend on the services of our senior
management and executive personnel. The loss of the services of one or more of
such key personnel could have a material adverse impact on our operations. Our
success will also be dependent upon our ability to hire and retain additional
qualified executive personnel. We cannot assure you that we will be able to
attract, assimilate and retain personnel with the attributes necessary to
execute our strategy. We cannot assure you that one or more of our executives
will not leave our employment and either work for a competitor or otherwise
compete with us.
We will be dependent on major customers.
If our relationship with our major customers is impaired, then
there may be a material adverse affect on our results of operations and
financial condition. Our major customers consist of the major airlines servicing
the United States. If such airlines encounter financial difficulty this may have
a material adverse impact on our business.
Our success will be dependent upon our ability to change our
business strategy.
Under our new business strategy we intend to develop
technological solutions and systems for the aviation security industry, develop
or acquire security activities other than aviation security, invest in security
related and non-security related businesses, such as entertainment projects and
seek other revenue producing businesses and business opportunities.
We cannot assure you that we will be able to develop new
systems or develop systems that are commercially viable. Our success in
developing and marketing our systems will also depend on our ability to adapt to
rapid technology changes in the industry and to integrate such changes into our
systems.
We cannot assure you that we will be successful in our
attempts to change or implement our business strategy. We may not have the
expertise to be successful in developing our business in areas that are not
related to the security industry. Our failure to change our business strategy or
implement it successfully will have a material adverse affect on our financial
condition and results of operations.
We compete in a highly competitive industry and our
competitors, who may have many more resources than us, may be more successful in
developing new technology and achieving market acceptance of their products.
7
Competition in the aviation security industry as well as in
the non-security related aviation services industry is intense. Many of our
competitors have greater financial, technical and marketing resources. We expect
that our competitors will develop and market alternative systems and
technologies that may have greater functionality or be more cost effective than
the services we provide or the systems that we may develop. If our competitors
develop such systems we may not be able to successfully market our systems. Even
if we are able to develop systems with greater functionality which are more cost
effective than those developed by our competitors,
we may not be able to achieve market acceptance of our systems because our
competitors have greater financial and marketing resources.
The aviation security industry is subject to extensive
government regulation, the impact of which is difficult to predict.
The Security Act has had a significant negative impact on our
aviation security business. In addition, our ability to successfully market new
systems will be dependent upon government regulations over which we have no
control. Any existing or new regulation may cause us to incur increased expenses
or impose substantial liability upon us. The likelihood of such new legislation
is difficult to predict.
The markets for our products and services may be adversely
affected by legislation designed to protect privacy rights.
From time to time, personal identity data bases and
technologies utilizing such data bases have been the focus of organizations and
individuals seeking to curtail or eliminate the use of personal identity
information technologies on the grounds that personal information and these
technologies may be used to diminish personal privacy rights. In the event that
such initiatives result in restrictive legislation, the market for our products
may be adversely affected.
Our operations are dependent upon obtaining required licenses.
A license to operate is required from the airport authority in
the airports in which we currently operate. Our licenses are usually issued for
a period of 12 months and are renewable. The loss of, or failure to obtain, a
license to operate in one or more of such airports could result in the loss of
or the inability to compete for contracts in the airports in which we have
licenses.
Our contracts with airports or airlines may be canceled.
Our revenues are primarily provided from services pursuant to
contracts, which are cancelable on short notice at any time, with or without
cause. We cannot assure you that an existing client will decide not to terminate
us or fail to renew a contract. Any such termination or failure to renew a
contract with us could have a material adverse effect on our results of
operations or financial condition.
Our financial condition is subject to currency risk.
Part of our income is derived in foreign countries. We
generally retain our income in local currency at the location the funds are
received. Since our financial statements are presented in United States dollars,
any significant fluctuation in the currency exchange rate between such currency
and the United States dollar would affect our results of operations and our
financial condition.
The market price of our common stock may be volatile, which
may make it more difficult for you to resell your shares when you want at prices
you find attractive.
The market price of our common stock may from time to time be
significantly affected by a large number of factors, including, among others,
variations in our operating results, the depth and liquidity of the trading
market for our shares, and differences between actual results of operations and
the results anticipated by investors and securities analysts. Many of the
factors which affect the market price of our common stock are outside of our
control and may not even be directly related to us.
8
Certain shareholders own approximately 51.8% of our shares;
their interests could conflict with yours; significant sales of shares held by
them could have a negative effect on our stock price.
Mr. Menachem Atzmon, a director of the Company, as a
representative of the Atzmon Family Trust owns or controls 51.8% of our issued
and outstanding common stock. 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. In addition, sales of significant
amounts of shares controlled by the Atzmon Family Trust or the prospect of these
sales, could adversely affect the market price of our common stock.
We cannot assure you that we will pay dividends.
Although we have paid cash dividends in the past, we cannot
assure you that any future dividends will be declared or paid.
We are subject to the laws of The Netherlands.
As a Netherlands "Naamloze Vennootschap" (N.V.) public limited
company, we are subject to certain requirements not generally applicable to
corporations organized under the laws of jurisdictions within the United States.
Among other things, the authority to issue shares is vested in the general
meeting of shareholders, except to the extent such authority to issue shares has
been delegated by the shareholders or by the Articles of Association to another
corporate body for a period not exceeding five years. The issuance of the common
shares is generally subject to shareholder preemptive rights, except to the
extent that such preemptive rights have been excluded or limited by the general
meeting of shareholders (subject to a qualified majority of two-thirds of the
votes if less than 50% of the outstanding share capital is present or
represented) or by the corporate body designated to do so by the general meeting
of shareholders or the Articles of Association. Such a designation may only take
place if such corporate body has also been designated to issue shares.
In this regard, the general meeting of shareholders has
authorized our Supervisory Board to issue any authorized and unissued shares at
any time up to five years from June 26, 2001 the date of such authorization and
has authorized the Supervisory Board to exclude or limit shareholder preemptive
rights with respect to any issuance of common shares prior to such date. Such
authorizations may be renewed by the general meeting of shareholders from time
to time, for up to five years at a time. This authorization would also permit
the issuance of shares in an acquisition, provided that shareholder approval is
required in connection with a statutory merger (except that, in certain limited
circumstances, the board of directors of a surviving company may resolve to
legally merge the company). Shareholders do not have preemptive rights with
respect to shares which are issued against payment other than in cash.
Our corporate affairs are governed by our Articles of
Association and by the laws governing corporations incorporated in The
Netherlands. Our public shareholders may have more difficulty in protecting
their interests in the face of actions by the Supervisory Board or the
Management Board, or their members, or controlling shareholders, than they would
as shareholders of a company incorporated in the United States. Under our
Articles of Association, adoption of our annual accounts by the shareholders
discharges the Supervisory Board, the Management Board and their members from
liability in respect of the exercise of their duties for the particular
financial year, unless an explicit reservation is made by the shareholders and
without prejudice to the provisions of Netherlands law, including provisions
relating to liability of members of supervisory boards and management boards
upon the bankruptcy of a company pursuant to the relevant provisions of The
Netherlands Civil Code. However, the discharge of the Supervisory Board and the
Management Board and their members by the shareholders is not absolute and will
not be effective as to matters misrepresented or not disclosed to the
shareholders. An individual member of the Supervisory Board or the Management
Board who can prove that he is not at fault for such an omission or
misrepresentation would not be liable.
A U.S. judgment may not be enforceable in The Netherlands.
A significant number of our assets are located outside the
United States. In addition, members of the Management and Supervisory Boards
[and certain experts named herein are residents of countries other than the
United States]. As a result, it may not be possible for investors to effect
service of process within the United States upon such
9
persons or to enforce against such persons judgments of courts of the United
States predicated upon civil liabilities under the United States federal
securities laws.
There is no treaty between the United States and The
Netherlands for the mutual recognition and enforcement of judgments (other than
arbitration awards) in civil and commercial matters. Therefore, a final judgment
for the payment of money rendered by any federal or state court in the United
States based on civil liability, whether or not predicated solely upon the
federal securities laws, would not be directly enforceable in The Netherlands.
In order to enforce any United States judgment obtained against us, proceedings
must be initiated before a court of competent jurisdiction in The Netherlands. A
court in The Netherlands will, under current practice, normally issue a judgment
incorporating the judgment rendered by the United States court if it finds that
(i) the United States court had jurisdiction over the original proceeding, (ii)
the judgment was obtained in compliance with principles of due process, (iii)
the judgment is final and conclusive and (iv) the judgment does not contravene
the public policy or public order of The Netherlands. We cannot assure you that
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" include ICTS International N.V. ("ICTS" or the "Company"), its
consolidated subsidiaries, Demco Consultants, Ltd. ("Demco"), an Israeli
affiliate, Procheck International B.V. ("PI", an affiliate in The Netherlands)
and ICTS USA, Inc., a New York corporation, Huntleigh USA Corp. ("Huntleigh"), a
Missouri corporation and Explore USA Corp., a Delaware Corporation.
ICTS is a public limited liability company organized under the
laws of The Netherlands in 1992. ICTS's offices are located at Biesboch 225,
1181 JC Amstelveen, The Netherlands and its telephone number is +31-20-347-1077.
The Company's predecessor, International Consultants on
Targeted Security Holland B.V. ("ICTS Holland"), was founded in The Netherlands
in 1987. Until 1994, subsidiaries and affiliates of ICTS Holland conducted
similar business in which the Company is currently engaged. As of January 1,
1994, ICTS Holland's interest in its subsidiaries (other than three minor
subsidiaries) was transferred to ICTS International B.V. ("ICTS International").
Thereafter, ICTS International purchased from a third party all of the
outstanding shares of ICTS, incorporated in The Netherlands in 1992 without any
operations prior to its acquisition by ICTS International. As of January 1,
1996, the Company acquired all of the assets and assumed all of the liabilities
of ICTS International.
As of January 1, 1999 the Company acquired 80% of the issued
and outstanding capital stock of Huntleigh and in January 2001 the Company
exercised its option to acquire the remaining 20% at an agreed upon price
formula making Huntleigh a wholly owned subsidiary. Huntleigh is a provider of
aviation services in the United States.
In 2001 and 2002 ICTS sold substantially all of its European
operations in two stages, for an aggregate purchase price of $103 million. As a
result of the sale, ICTS fully divested itself from its European operations,
except for its operations in The Netherlands and Russia.
In the wake of the events which occurred on September 11,
2001, the federal government of the United States, in November, 2001, enacted
the Aviation and Transportation Security Act (the "Security Act") Public Law
107-71. Under the Security Act, entities may provide aviation security services
in the United States only if they are owned and controlled at least 75% by U.S.
citizens. As a company organized under the laws of The Netherlands ICTS may be
unable to comply with the ownership requirements under the Security Act. The
Security Act is administered through the Transportation Security Administration
(the "TSA").
10
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 security services
in the United States.
On December 23, 2003 the Company through wholly owned
subsidiaries purchased from ITA International Tourist Attractions, Ltd., ("ITA")
(a company under the control of one of ICTS's shareholders) certain assets owned
by ITA and used by it in the development, establishment and operation of
motion-based entertainment theaters. The assets purchased consist primarily of
intangible property and certain equipment. ITA is a company in which a principal
shareholder of the Company owned in the aggregate in excess of 50% of the
shares. The purchase price for the assets purchased was $5,429,151.00. The
purchase price was paid by set-off against certain debts owed by ITA to the
Company, cash and notes. As a part of the transaction, certain agreements made
between the Company and ITA in 2001 were terminated, with the result that the
Company is no longer committed to involve ITA in its existing and future
entertainment projects. Prior to entering into the transaction the Company
obtained a fairness opinion as to the fairness of the consideration and the
transaction to the Company.
The Company currently operates a fully owned motion-based
entertainment theater in Baltimore, MD and a new fully-owned multi-experience
motion-based entertainment theater in Atlantic City, NJ. The Company is also a
partner (42.5%) in a movie-based entertainment facility in Niagara Falls, NY.
Shortly after the facilities were opened and based on its
performances, the Company's management revaluated these three investments and
determined that the forecasted cash flows from these projects will not cover the
investments. Based on the fair value using discounted cash flows model, the
Company had recognized impairment losses in 2003 and 2004 totaled $20.8 million
in respect of its entertainment investments.
In February 2005, as the non-competition restrictions, related
to the sale of the European aviation security operations as mentioned above,
expired, the Company made a strategic decision to reenter the European aviation
security market. In March 2005 the Company established a wholly-owned
subsidiary, I-SEC International Security B.V, under which all the European
aviation security activities provided by ICTS will be operated.
Business Overview
General
ICTS had specialized until 2002 in the provision of aviation
security services. Following the sale of its European operations in 2002 and the
taking of its aviation security business in the United States by the TSA in
2002, ICTS engages primarily in non-security related activities. These
activities consist of non-aviation security services, operation of entertainment
related projects and the development of technological services. In addition,
ICTS provides non-security related aviation services and develops technological
systems and solutions for the security market.
Business Strategy
ICTS is currently pursuing the following business strategy:
Developing Security Related Technology.
ICTS is focusing on developing security systems and technology
for the aviation security and non-aviation security markets. ICTS is using the
know-how and expertise it has acquired in the provision of enhanced aviation
security services to develop such security systems and technology.
Aviation Security Operations in The Netherlands.
ICTS is engaged in aviation security operations in The
Netherlands. In 2002 ICTS increased its stake in its Dutch affiliate, ProCheck
International to 100%. ICTS also formed a partnership with ICTS Europe through
which it further expanded its aviation security operations in The Netherlands.
ICTS Europe was sold by ICTS in 2002
11
to an unaffiliated third party. The Company is entering into the aviation
security business in Europe since its restrictive covenant expired, which was
part of the terms of the sale of ICTS Europe.
U.S. Operations.
ICTS continues to provide limited security services and
non-security aviation services in the U.S.
Other Investments.
ICTS has made investments in companies and properties which
management believes have long-term benefits. It is anticipated that future
investments will be in industries related to the security industry.
Services
Services Offered in Europe. Prior to the sale of its European
operations, ICTS primarily provided aviation security services, operated airport
checkpoints, verified travel documents, provided baggage reconciliation
services, operated electronic equipment, such as x-ray screening devices, and
operated manual devices. Following the sale, ICTS primarily provides advanced
passenger-screening services in The Netherlands and Russia.
The Company is currently doing an evaluation in Rotterdam, The
Netherlands, with respect to railroad security. The Company plans to utilize its
security technology for the railroad industry.
Services Offered in the United States. Prior to the enactment
of the Security Act, Huntleigh was one of the leading providers of non-security
aviation services in the United States. Immediately following the enactment of
the Security Act, but prior to the TSA taking over aviation security services in
the United States, in November 2002, Huntleigh experienced a substantial
increase in its aviation security services.
Huntleigh currently provides limited aviation security
services and nine other separate services at approximately 37 airports in 29
states which were not affected by the enactment of the Security Act. Each of the
non-aviation security services involves one of the following specific job
classifications:
Agent Services.
Agent services include: Passenger Service, Baggage Service,
Priority Parcel, and Cargo. Although an agent is a Huntleigh employee, the
employee is considered a representative of specific airlines.
Guard Services.
Guard services involve guarding secured areas, including
aircraft.
Janitorial Services.
Huntleigh provides cleaning services for aircraft cabins and
portions of airports.
Maintenance.
Huntleigh provides workers to maintain equipment in one
airport.
Aircraft Search.
Search of entire aircraft of international flights to detect
dangerous objects.
Ramp Services.
Ramp services include:
12
. directing aircraft into the arrival gate and from the
departure gate
. cleaning the aircraft
. conducting cabin searches
. stocking supplies
. de-icing the aircraft and
. moving luggage from one airplane to another.
Shuttle Service. Huntleigh shuttles airline crews from their
hotels to the aircraft in one airport.
Skycap Services Provider. A skycap assists passengers with
their luggage. Located at the curbside of the check-in at airports, a skycap
checks in passengers' luggage and meets security requirements established by the
TSA to screen passengers. A skycap also assists arriving passengers with
transporting luggage from the baggage carousel to ground transportation or other
designated areas.
A skycap also may operate electric carts for transporting
passengers through the airport and transport checked baggage from the curbside
check-in to the airline counter. Concierge Service involves a skycap monitoring
the baggage carousel to ensure that passengers do not remove luggage not
belonging to them. In many airports, a skycap at the baggage claim area checks
to see if the passengers' luggage tags match those on the specific luggage to
ensure that a passenger is only removing his or her own luggage from the claim
area.
Wheelchair attendants. Wheelchair attendants transport
passengers through the airport in airline and/or Company owned wheelchairs.
Working closely with the attendants are dispatch agents who monitor requests and
assignments for wheelchairs and dispatch the attendants as needed.
Aviation Security Services
ICTS provides pre-departure screening services at airports in
The Netherlands and Russia. Prior to the enactment of the Security Act,
Huntleigh provided such services in the U.S. Such services are designed to
prevent or deter the carriage of any explosive, incendiary device, weapon or
other dangerous objects into the sterile area of an airport concourse and aboard
the aircraft. In 2002 Huntleigh provided such services in the United States
exclusively to the TSA.
Technological Systems and Solutions
The accumulated know-how and expertise of ICTS in the
implementation of processors for advanced passenger screening enabled ICTS to
develop its APS technology and system. The APS system is an automated
computerized system that enables the pre-departure analysis of passenger
information and is designed to screen airline passengers in a faster and more
efficient manner. The APS system is currently being operated by ICTS under
contract for services provided by ICTS Europe, an unaffiliated third party, to
major United States airlines on flights from Europe to the United States.
New Technology Initiatives.
IP@SS. ICTS launched in 2003 a trial phase of its IP@SS
project. IP@SS consists of a computerized platform integrating various
technologies, including document readers, biometrics identification systems and
a smart-card. The system is modular and may be used on a stand-alone basis or
integrated into an existing check-in system. The system has been designed to
protect passenger privacy. The system is designed to speed up and simplify the
processes of identification and security checks of passengers at airports. The
system enhances customer service provided by airlines and airports to outbound
passengers.
The project is being developed by ICTS and is performed in
cooperation with various partners. The pilot program is being tested at Schiphol
Airport in Amsterdam, The Netherlands and at Newark Liberty International
Airport, and is planned to be expanded in the near term to other European
airports as well as other North American airports.
13
TravelDoc
ICTS has designed and developed the TravelDoc system for
airlines to quickly scan travel documents, to verify their accuracy and
authenticity and to ensure that they fulfill the requirements of the country of
destination. The TravelDoc system utilizes a full-page scanner, a small computer
and an operator screen or can be installed on an existing workstation to meet
immigration requirements and reduce fines imposed on the carrier.
APIS
ICTS has designed and developed a system to assist airlines to
meet the requirements of the U.S. Customs Advance Passenger Information System
Program. The Security Act requires that all international carriers transmit data
to U.S. Customs about passengers and crewmembers on inbound flights prior to
their arrival in the U.S. at high levels of accuracy. ICTS has developed
advanced algorithms for scanning passports and visas that extracts the
information required by U.S. Customs. The system utilizes a full-page scanner, a
small computer and an operator screen or can be installed on an existing
workstation.
Consulting, Auditing and Training
ICTS provides consulting services to airlines and airports.
ICTS recommends the adoption of specified security procedures develops
recruitment and training programs for clients to hire necessary security
personnel and works with airport authorities to ensure that they comply with
applicable local requirements. ICTS trains airline employees to screen
passengers and to perform other security measures through extensive courses and
written training manuals. ICTS provides these services in The Netherlands and
Russia, but does not expect to derive significant revenues from these services.
Airline and Airport Customers
In 2002, the TSA accounted for 73% of ICTS's total revenues.
In 2003 and 2004, ICTS had over 50 clients of which seven clients accounted for
over 50% of ICTS's aviation services revenues, in over 40 locations worldwide.
Entertainment Projects
ICTS develops tourist attractions combining motion based
platforms and synchronized movies and sound effects ("Time Elevators").
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. The assets purchased consist
primarily of intangible property and certain equipment. ITA is a company in
which a principal shareholder of the Company owned in the aggregate in excess of
50% of the shares. The purchase price for the assets purchased was
$5,429,151.00. The purchase price was paid by set-off against certain debts owed
by ITA to the Company, cash and notes. As a part of the transaction, certain
agreements made between the Company and ITA in 2001 were terminated, with the
result that the Company is no longer committed to involve ITA in its existing
and future entertainment projects. Prior to entering into the transaction the
Company obtained a fairness opinion as to the fairness of the consideration and
the transaction to the Company.
The Company currently operates fully owned motion-based
entertainment theaters in Baltimore, MD and in Atlantic City, NJ. The Company is
also a partner in a movie-based entertainment facility in Niagara Falls, NY.
Marketing and Sales
Marketing and Sales in the U.S. In 2004, 78% of the revenues
of ICTS were derived in the U.S. ICTS derived most of its revenues through
contracts with airlines which were secured by ICTS as a result of competitive
bidding.
14
Marketing and Sales in The Netherlands. Contracts for aviation
security services in The Netherlands are obtained through competitive bids that
are issued by the applicable airport authorities or agencies.
Marketing of Security Systems and Technology. ICTS intends to
market its new technology systems and technologies by establishing pilot
projects with airports and airlines. Upon the demonstration of the viability of
the systems or technology ICTS intends to develop a marketing plan to distribute
the systems and technology.
Leasing Operation
In June 2002 ICTS purchased equipment for an aggregate
purchase price of $23.5 million. The purchase price payable was $14.5 million in
cash and the balance subject to an $8.5 million self amortizing non-recourse
promissory note payable over five years. Pursuant to an operating lease, the
equipment was leased to an unaffiliated private Dutch company. The lease
provides for annual lease payments in the amount of Euro 2.6 million (at
December 31, 2004 - $3.6 million) and an option to purchase the equipment after
five or seven years based upon the then fair market value. In the event that the
lessee does not exercise the option to purchase the equipment upon the
expiration of the lease term, then ICTS will be obligated to pay license fees in
connection with intellectual property associated with the equipment in an amount
equal to 5% of the revenue derived from the use of the equipment if ICTS
exercises its option to operate the equipment.
In 2003 and 2004, ICTS determined that the future cash flows
from the leased equipment will not recover its investment, and as a result
recorded in 2003 and 2004 impairment losses totaled $8 million. The value of the
equipment at the option exercise date was based on an external assessment.
In June 2005, the Company has granted the lessee an option to
purchase the leased equipment for an amount of $5 million plus an amount equal
to the related loan balance at the exercise date thus providing for the
possibility of the early termination of the leasing agreement. The option can be
exercised from June 1, 2005 until September 30, 2006. As consideration for
granting the option the lessee will pay to ICTS advanced lease
installments of $1,000,000. The payment of the purchase price will be reduced by
advance payments on lease installments of $1m received in July 2005 and an
additional advance payment of $500 thousands due in January 2006 covering the
lease periods from June 2005 forward. As of June 30, 2005 the depreciated value
of the leased equipment is $13.5 million.
Competition
Competition in the aviation security industry as well as in
the non-security related aviation services industry is intense. Many of our
competitors have greater financial, technical and marketing resources.
We expect that our competitors will develop and market
alternative systems and technologies that may have greater functionality or be
more cost effective than the services we provide or the systems that we may
develop. If our competitors develop such systems we may not be able to
successfully market our systems. Even if we are able to develop systems with
greater functionality which are more cost effective than those developed by our
competitors, we may not be able to achieve market acceptance of our systems
because our competitors have greater financial and marketing resources.
Restrictions on Competition
Pursuant to an agreement dated as of July 1, 1995 with ICTS
Global Security (1995) Ltd. ICTS may not provide non-aviation security services
in Latin America, Turkey or Russia. ICTS Global Security is partially owned by
Lior Zouker, the former Managing Director of the Company and the Estate of Ezra
Harel, the former Chief Executive Officer and the former Chairman of Supervisory
Board of ICTS and a principal shareholder.
Aviation Security Regulatory Matters
ICTS aviation security activities are subject to various
regulations imposed by authorities and various local and federal agencies having
jurisdiction in the serviced area. ICTS on behalf of its clients was responsible
for adherence to such regulations relating to certain security aspects of their
activities. ICTS is also responsible to prevent
15
passengers without proper travel documentation from boarding a flight, thereby
avoiding fines otherwise imposed on its clients by immigration authorities.
ICTS is subject to random periodic tests by government
authorities with regard to the professional level of its services and training.
Any failure to pass such a test may result in the loss of a contract or a
license to perform services or a fine or both.
In the airports in which ICTS operates in The Netherlands and
Russia, a license to operate is required from the respective airport authority.
ICTS currently holds the licenses required to operate in such locations.
Prior to the enactment of the Security Act, the FAA regulated
the activities of Huntleigh with respect to security services offered at U.S.
airports. Presently such activities are regulated by the FAA and the TSA.
In order for ICTS to engage in aviation activities in the U.S.
it may be necessary for ICTS to demonstrate that it meets the TSA requirement of
being at least 75% owned and controlled by U.S. citizens.
Organizational Structure.
The following are the significant subsidiaries of ICTS
(Exhibit 8):
ICTS USA, Inc., New York - 100%
Huntleigh USA Corporation. (Missouri - 100%)
Explore USA, Inc. (Delaware - 100%)
(i) Explore Atlantic City, LLC (Delaware - 100%)
(ii) Explore Baltimore, LLC (Delaware - 100%)
(iii) Explore Niagara, LLC (New York - 100%)
ICTS Technologies B.V. (The Netherlands - 100%)
ICTS Technologies USA, Inc. (Delaware - 100%)
ICTS Leasing B.V. (The Netherlands - 100%)
Procheck International B.V. (The Netherlands - 100%)
I-SEC International Security B.V. (The Netherlands - 100%)
Property, Plant and Equipment.
The Company leases premises under long-term operating leases,
in most cases with renewal options. Lease expenses for the years ended December
31, 2004, 2003 and 2002 were $1,405, $1,166, $928 thousands, respectively. The
increase in the lease expenses is primarily attributable to the entertainment
sites.
Future minimum lease payments under long-term leases are as
follows:
December 31,
2004
----
(in thousands)
2005 $ 1,571
2006 1,435
2007 1,222
2008 984
2009 and afterwards 9,498
-----------
$ 14,710
===========
16
Item 5. Operating and Financial Review and Prospects
Operating Results
General
This section contains forward-looking statements within the
meaning of the U.S. Private Securities Litigation Reform Act of 1995 concerning
ICTS's business, operations and financial condition. All statements other than
statements of historical facts included in this annual report on Form 20-F
regarding ICTS's strategy, future operations, financial position, costs,
prospects, plans and objectives of management are forward-looking statements.
When used in this annual report on Form 20-F the words "expect", "anticipate",
"intend", "plan", "believe", "seek", "estimate", and similar expressions are
intended to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. Because these
forward-looking statements involve risks and uncertainties, actual results could
differ materially from those expressed or implied by these forward-looking
statements for a number of important reasons, including those discussed under
"Risk Factors" and elsewhere in this annual report on Form 20-F.
ICTS cannot guarantee any future results, levels of activity,
performance or achievements. The forward-looking statements contained in this
annual report on Form 20-F represent management's expectations as of the date of
this annual report on Form 20-F and should not be relied upon as representing
ICTS's expectations as of any other date. Subsequent events and developments
will cause management's expectations to change. However, while ICTS may elect to
update these forward-looking statements, ICTS specifically disclaims any
obligation to do so, even if its expectations change.
ICTS had specialized until 2002 in the provision of aviation
security services. Following the sale of its European operations in 2002 and the
taking of its aviation security business in the United States by the TSA in
2002, ICTS engages primarily in non-security related activities. These
activities consist of non-security aviation security services, operation of
entertainment related projects and the development of technological services. In
addition, ICTS provides non-security related aviation services and develops
technological systems and solutions for the security market. ICTS also engages
in certain other activities, including constructing and developing entertainment
related projects.
In 2001 and 2002 ICTS sold substantially all of its European
operations in two stages, for an aggregate purchase price of $103 million. As a
result of the sale, ICTS has fully divested itself from its European operations,
except for its operations in The Netherlands and Russia.
In the fourth quarter of 2002, pursuant to the Security Act
the Federal government through the TSA took over substantially all of the
aviation security operations in U.S. airports. As a result, ICTS through its
wholly-owned subsidiary Huntleigh USA Corp. ("Huntleigh") provides limited
aviation security services in the United States.
Critical Accounting Policies
The preparation of ICTS's consolidated financial statements in
conformity with accounting principles generally accepted in the United States
requires management to make estimates and assumptions in certain circumstances
that affect amounts reported in the accompanying consolidated financial
statements and related footnotes. Actual results may differ from these
estimates. To facilitate the understanding of ICTS's business activities,
described below are certain ICTS accounting policies that are relatively more
important to the portrayal of its financial condition and results of operations
and that require managements subjective judgments. ICTS bases its judgments on
its experience and various other assumptions that it believes to be reasonable
under the circumstances. Please refer to Note 2 to ICTS's consolidated financial
statements included in this Annual Report on Form 20-F for the year ended
December 31, 2004 for a summary of all of ICTS's significant accounting
policies.
The Company considers its most significant accounting policies
to be those discussed below.
17
Contract with the TSA
In February 2002, we entered into an aviation security
services contract with the TSA to continue to provide aviation security services
in all of its current airport locations until the earlier of either the
completed transition of these security services on an airport by airport basis
to the U.S. Federal Government or November 2002.
In connection with payments made by the TSA to Huntleigh USA,
a wholly owned subsidiary of the Company, for aviation security services
provided in 2002, the Defense Contract Management Agency has indicated that it
believes that Huntleigh should not have been paid on a fixed price basis as
believed by Huntleigh, but on an actual costs plus what the TSA would consider a
reasonable profit. On that later basis Huntleigh may be required to repay to the
TSA the difference between such amount and the actual amounts paid to it.
Huntleigh however has various claims for additional amounts it considers are due
to it for the services provided to the TSA.
The Company estimates that if the TSA will claim such
difference from Huntleigh and will prevail in all of its contentions, and none
of Huntleigh's claims will be recognized, then the Company may suffer a loss in
an amount of about $41 million. In view of the nature of the above potential
claims and counter-claims management could not determine if, or to what extent,
the TSA may be successful in any claim it may assert. Therefore, no provisions
have been made by the Company with respect to the above potential claims. In
addition, the accounts receivable -trade includes $2.9 million as of December
31, 2004 and 2003 which are due from the TSA and relate to the dispute.
Labor Department Issue
In a letter dated November 21, 2003, the US Department of
Labor ("DOL") advised Huntleigh that it had failed to comply with a clause
included in its contract with the TSA under which Huntleigh had supposedly been
required to pay its employees certain minimum wages. The DOL claims that under
this clause Huntleigh owes such employees an amount of approximately $ 7.5
million and has requested that Huntleigh makes such payment forthwith. On any
amount so due, Huntleigh will also be required to pay certain employment taxes
of approximately 20%.
Huntleigh believes that it has valid defenses to the DOL
claim. These issues are under discussion with the DOL and no assurance can be
given as to the ultimate outcome or success to Huntleigh with the position it is
taking. The Company has made a provision in its financial statements in an
amount the Company deemed sufficient to account for its exposure for the above
claim.
Goodwill
As from January 1, 2002, pursuant to Statement of Financial
Accounting Standard ("FAS") No.142 of the Financial Accounting Standards Board
of the United States (the "FASB"), "Goodwill and Other Intangible Assets",
goodwill is no longer amortized but rather is tested for impairment annually.
During 2002, the Company identified its various reporting units, which consist
of its operating segments. The Company has utilized expected future discounted
cash flows to determine the fair value of the reporting units and whether any
impairment of goodwill existed as of the date of adoption of FAS 142. As a
result of the application of the transitional impairment test, the Company does
not have to record a cumulative effect of accounting change for the estimated
impairment of goodwill. The Company has designated December 31 of each year as
the date on which it will perform its annual goodwill impairment test.
In 2004, as a result of the impairment of the entertainment
projects, management has decided to write off the goodwill related to the
entertainment acquisition amounted to $5.3 million.
On December 31, 2003, an impairment test was conducted on the
unamortized goodwill pursuant to which it was determined that, as of the date of
the impairment test, an impairment existed concerning Demco of $797 thousands.
In 2002, as a result of the enactment of the Security Act (as
described above), ICTS performed quarterly interim impairment tests, taking into
account the expected future cash flows from the TSA contract through
18
November 2002, and subsequently wrote off, as of September 30, 2002 the balance
of the goodwill attributable to the U.S. aviation security operations in the
amount of $8.5 million.
Changes in the fair value of the reporting units following
material changes in the assumptions as to the future cash flows and/or discount
rates could result in an unexpected impairment charge to goodwill.
Functional and reporting currency
As of January 1, 2002, subsequent to the sale of ICTS's
interest in ICTS Europe, the functional currency of ICTS and its U.S. operations
is the U.S. dollar because substantially all of the revenues and operating costs
are in dollars. Prior to January 1, 2002 the functional currency was primarily
the euro. The financial statements of subsidiaries whose functional currency is
not the dollar are translated into dollars in accordance with the principles set
forth in Statement of Financial Accounting Standards ("FAS") No. 52 of the
Financial Accounting Standards Board of the USA ("FASB"). Assets and liabilities
are translated from the local currencies to dollars at year-end exchange rates.
Income and expense items are translated at average exchange rates during the
year.
Revenue recognition
Revenue is recognized when services are rendered to customers,
which are performed based on terms contracted in a contractual arrangement
provided the fee is fixed and determinable, the services have been rendered and
collection of the related receivable is probable. Revenue from leased equipment
is recognized ratably over the year.
Impairment in value of long-lived assets
ICTS has adopted FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective January 1, 2002. FAS 144 requires that
long-lived assets, held and used by an entity be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the assets may not be recoverable. Under FAS 144, if the sum of the expected
future cash flows (undiscounted and without interest charges) of the long-lived
assets is less than the carrying amount of such assets, an impairment loss would
be recognized, and the assets would be written down to their estimated fair
values.
During 2004 impairment tests were conducted on the carrying
amount of the long-lived assets of the Company pursuant to which it was
determined that, as of the date of the impairment test, an impairment existed in
connection with the leased equipment in an amount of $2 million and with the
entertainment sites in the amount of $8.1 million, as a result an impairment
loss totaled to $10.1 million was recognized.
On December 31, 2003 an impairment test was conducted on the
carrying value of long-lived assets of the Company pursuant to which it was
determined that, as of the date of the impairment test, the impairment existed
in connection with equipment at Explore's facilities in Baltimore, Maryland and
Atlantic City, New Jersey in the amount of $7.5 million and leased equipment of
$6 million, as a result an impairment loss totaled $13.5 million was recognized.
19
Discussion and Analysis of Results of Operations
The following table summarizes certain statement of operations data for
ICTS for the years ended December 31, 2002, 2003 and 2004:
[Enlarge/Download Table]
Year ended December 31
------------------------------------------------
2004 2003 2002
------------------------------------------------
(U.S Dollars in thousands except per share data)
REVENUES $ 62,778 $ 71,571 $ 279,931
COST OF REVENUES 57,904 57,562 214,054
----------- ----------- -----------
GROSS PROFIT 4,874 14,009 65,877
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 13,212 9,216 25,636
IMPAIRMENT OF ASSETS AND GOODWILL 15,422 14,352 9,156
----------- ----------- -----------
OPERATING INCOME (LOSS) (23,760) (9,559) 31,085
INTEREST INCOME 470 2,248 2,072
INTEREST EXPENSE (1,160) (1,222) (1,678)
EXCHANGE DIFFERENCES (83) (242) 2,356
OTHER INCOME (EXPENSES), net (2,907) (353) 41,229
----------- ----------- -----------
INCOME (LOSS) BEFORE TAXES ON INCOME (27,440) (9,128) 75,064
INCOME TAXES BENEFIT (EXPENSE) 3,184 (3,115) (16,442)
----------- ----------- -----------
INCOME (LOSS) FROM OPERATIONS OF THE COMPANY
AND ITS SUBSIDIARIES (24,256) (12,243) 58,622
SHARE IN LOSSES OF ASSOCIATED
COMPANIES - net (1,706) (6,661) 1,807)
MINORITY INTERESTS IN PROFITS OF
SUBSIDIARIES - net
----------- ----------- -----------
NET INCOME (LOSS) FOR THE YEAR $ (25,962) $ (18,904) $ 56,815
----------- ----------- -----------
OTHER COMPREHENSIVE INCOME (LOSS):
Translation adjustments 1,043 3,456 710
Unrealized gains (losses) on marketable securities (616) 794 731
Reclassification adjustment for losses for available for sale
securities included in net income -- 237 (771)
427 4,487 670
----------- ----------- -----------
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE
YEAR $ (25,535) $ (14,417) $ 57,485
=========== =========== ===========
EARNINGS (LOSSES) PER SHARE:
Basic $ (3.98) $ (2.90) $ 8.85
=========== =========== ===========
Diluted $ (3.98) $ (2.90) $ 8.80
=========== =========== ===========
Weighted average shares of common stock outstanding 6,524,250 6,513,100 6,419,575
Adjusted Diluted weighted average shares of common stock
outstanding 6,524,250 6,513,100 6,453,447
=========== =========== ===========
20
The following table sets forth, for the annual periods indicated, certain
statement of operations data as a percentage of revenues:
Year Ended December 31,
2004 2003 2002
--------------------------
Revenues ................ 100% 100% 100%
Cost of revenues ........ 92.2% 80.4% 76.5%
Gross profit ............ 7.8% 19.6% 23.5%
Selling, general and
administrative expenses 21.0% 12.9% 9.2%
Operating income (loss) (37.8%) (13.4%) 11.1%
Net income (loss) ...... (41.4%) (26.4%) 20.3%
Year Ended December 31, 2004 Compared to Year Ended December 31, 2003
Revenues. Revenues for the year ended December 31, 2004 were $62.8 million
(2003: $71.6 million), and consisted of $49.6 million (2003: $59.1 million) from
U.S. operations, and $13.2million (2003: $12.4 million) from other operations.
The decrease in revenues from U.S. operations is primarily the result of
tough competition and the weakness of the aviation industry. As a result of the
Security Act since November 2002, ICTS provides limited aviation security
services within the United States. In 2003 the Company did not generate any
revenues pursuant to a contract with the TSA.
Almost all revenues in the U.S. ($49.6 million) are derived from other
than aviation security services.
Gross Profit. Gross profit is defined as revenues less costs directly
related to such revenues as well as certain indirect expenses such as airport
offices, airport fees, local training and other direct labor related expenses
such as uniforms and transportation.
Gross profit for the year ended December 31, 2004 was $4.9 million, 7.8%,
as a percentage of revenue (2003: $14 million, 19.6% as a percentage of
revenue). The decrease in gross profit as a percentage of revenues is primarily
attributable to the fact that the gross profit for the year 2003 was positively
impacted by a non-recurring contribution of $8.6 million. The non-recurring
contribution is primarily the result of a reversal in the amount of $17.8
million of Warn Act related accrual made in 2002. This was partly offset by an
accrual concerning a dispute with the U.S. Department of Labor totaling $7.3
million. Excluding this non-recurring contribution of $8.6 million, the
comparable adjusted gross profit as a percentage of revenue in 2003 would have
been 7.5% as compared to 7.8% in 2004.
Impairment of Assets. For the year ended December 31, 2004, ICTS incurred
expenses of $15.4million (2003: $14.3 million) attributable to impairment of
assets and goodwill. The expense is attributable to the impairment of equipment
related to the Company's entertainment business in the U.S.A. amounted to $13.4
million and $2 million related to the leased equipment.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $13.2 million for the year ended December 31, 2004,
21% as a percentage of revenues, as compared to $9.2 million, 12.9% as a
percentage of revenues for the year ended December 31, 2003. The increase in
selling, general and administrative expenses is primarily attributable to the
implementation of restructuring measures imposed by the new management of the
Company aiming into focusing to the main core business of security and disposing
of non core segments. These measures increased costs such as compensation to
previous employees, hiring new professional personnel and legal fees.
Operating Loss. Operating loss for the year ended December 31, 2004 was
$23.8 million as compared to an operating loss of $9.6 million for the year
ended December 31, 2003.
Interest Income. Interest income in2004 was $470 thousands compared to
$2.2 million in 2003. The decline in interest income is due to decrease of
interest bearing deposits and marketable securities.
Interest Expenses. $1.2 million in 2004 was in the same level of 2003.
Other Income (Expense), Net. Other income for the year ended December 31,
2004 was $2.9 million negative as compared to $353 thousands for the year ended
December 31, 2003. $2.7 million were attributable to a write-off of the
Company's investment in Bilu.
Taxes On Income. In 2004 the Company recorded tax benefit of $3.2 million
attributable mainly to tax refunds on carried back losses against tax paid on
income in 2002 in the USA. Out of the $27.4 million Loss before
21
Taxes On Income, $20 million was attributable to non-USA entities and to
non-deductible expenses (mainly due to impairment of assets).
Share in Losses of Associated Companies. $1.7 million in 2004, consists
mainly of write-off of the equity investment in Pioneer ($1.8 million), loss in
Inksure ($1 million) and income in NAS ($1.2 million). (see note 5 to the
financial statement).
Net loss. As a result of the foregoing, ICTS's net loss amounted to $26
million for the year ended December 31, 2004, as compared to $18.9 million loss
for the year ended December 31, 2003.
Notes as to specific segments
Amounts in thousands
------------------------ ------------------ ------------------------
Aviation Segment 2004 2003
------------------------ ------------------ ------------------------
Revenues 56,044 66,872
------------------------ ------------------ ------------------------
Operating Income 609 12,215
------------------------ ------------------ ------------------------
Revenues for the Aviation segment for the year ended December 31, 2004
were $56 million (2003: $66.9 million). Operating income for the Aviation
segment in 2004 totaled $609 thousands compared to an operating income for 2003
of $12.2 million. The decline in the operating income is attributable to two
main factors, decline in revenue and a positive impact on the operating income
in 2003 of a non recurring contribution in the amount of $8.6 million.
------------------------ ------------------ ------------------------
Leasing Segment 2004 2003
------------------------ ------------------ ------------------------
Revenues 3,294 2,995
------------------------ ------------------ ------------------------
Operating Income (loss) (1,163) (5,476)
------------------------ ------------------ ------------------------
Revenues for the Leasing segment were up from $3 million in 2003 to $3.3
million in 2004. The reason for the increase was due to foreign exchange rates.
The Company recorded an impairment loss in an amount of $2million (as compared
to $6 million in 2003) related to lease equipment in The Netherlands which
caused the operating loss in this segment.
------------------------ ------------------ ------------------------
Entertainment Segment 2004 2003
------------------------ ------------------ ------------------------
Revenues 1,491 643
------------------------ ------------------ ------------------------
Operating Income (loss) (15,563) (10,114)
------------------------ ------------------ ------------------------
Entertainment segment related revenues in 2004 were $1,5 million as
compared to $643 thousands in 2003. The increase in revenues is attributable to
the fact that three entertainment sights were operating as compared to 2003
where only two sites were in operation and not for the full year. Operating loss
in 2004 was $15.6 million ($10.1 in 2003). The main reason for the loss increase
in 2004 is due to an impairment of assets and goodwill in the amount of $13.4
million compared to $7.5 million in 2003.
As to the geographical segments please see note 18b in the financial
statements.
Year Ended December 31, 2003 Compared to Year Ended December 31, 2002
Revenues. Revenues for the year ended December 31, 2003 were $71.6 million
(2002: $279.9 million), and consisted of $59.1 million (2002: $274 million) from
U.S. operations, and $12.4 million (2002: $5.9 million) from other operations.
The decrease in revenues from U.S. operations is primarily the result of
decreased sales of aviation security services pursuant to contracts with the TSA
following the September 11th events. Revenues derived from such services in 2002
were $205.7 million (73% of ICTS's total revenues in that year). As a result of
the Security Act since November 2002, ICTS provides limited aviation security
services within the United States. Therefore, in 2003 the Company did not
generate any revenues pursuant to a contract with the TSA.
Almost all revenues in the U.S. ($59.1 million), are derived from other
than aviation security services, compared with $39.0 million for 2002. Such
increase is primarily attributable to an increase in sales to existing airline
customers through expanding ICTS's location base and the offering of new
services.
Gross Profit. Gross profit is defined as revenues less costs directly
related to such revenues as well as certain indirect expenses such as airport
offices, airport fees, local training and other direct labor related expenses
such as uniforms and transportation.
Gross profit for the year ended December 31, 2003 was $14.0 million,
19.6%, as a percentage of revenue (2002: $65.9 million, 23.5% as a percentage of
revenue). Management believes that the decrease in gross profit as a percentage
of revenues is primarily attributable to the decrease in aviation security
services as per the TSA contract. Gross profit was positively impacted by a
non-recurring contribution of $8.6 million in the third quarter. The non-
22
recurring contribution is primarily the result of a reversal in the amount of
$17.8 million of Warn Act related accrual made in 2002. This was partly offset
by an accrual concerning a dispute with the US Department of Labor totaling $7.2
million.
Impairment of Assets. For the year ended December 31, 2003, ICTS incurred
expenses of $14.3 million (2002: 9.2 million) attributable to impairment of
assets. The expense is primarily attributable to the impairment of equipment
related to the Companies' entertainment business in the U.S.A. In addition, the
Company recorded an
impairment loss in an amount of $6,042 related to lease equipment in The
Netherlands and goodwill impairment related to Demco, an Israeli subsidiary.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $9.2 million for the year ended December 31, 2003,
12.9% as a percentage of revenues, as compared to $25.6 million, 9.2% as a
percentage of revenues for the year ended December 31, 2002. The decrease in
selling, general and administrative expenses is primarily attributable to the
decrease in aviation security services.
Operating Profit. Operating loss for the year ended December 31, 2003 was
$9.6 million as compared to an operating profit of $31.1 million for the year
ended December 31, 2002.
Financial (Expenses) Income, Net. Financial (expenses) income, net
includes interest income (net of interest expense), and adjustments due to the
impact of exchange rate fluctuations. The interest and financial income
increased due the sale of certain traded shares during 2003.
Other Income (Expense), Net. Other income for the year ended December 31,
2003 was $353 thousand negative as compared to $41.2 million for the year ended
December 31, 2002. Other expenses during 2003 included mainly accounting
provisions related to the Companies' investments in Artlink. Other income for
the year ended December 31, 2002 includes the profit on the sale of 55% interest
in ICTS Europe which resulted in gross proceeds, in the amount of $41.2 million.
Income Taxes. Although the company incurred a loss from operations before
taxes on a consolidated basis, it still incurred taxes in its USA subsidiary,
Huntleigh. The reason being that Huntleigh is a separate entity for tax purposes
and as such incurs taxes on its profits.
Share in Profits and (Losses) of Associated Companies. The share in losses
of associated companies which includes amortization of intangible assets for the
year ended December 31, 2003 was $6.7 million.
Net income. As a result of the foregoing, ICTS's net loss totaled
approximately $18.9 million in the year ended December 31, 2003, as compared to
approximately $56.8 million profit for the year ended December 31, 2002.
Notes as to specific segments
Amounts in thousands
------------------------ ------------------ ------------------------
Aviation Segment 2003 2002
------------------------ ------------------ ------------------------
Revenues 66,872 289,899
------------------------ ------------------ ------------------------
Operating Income 12,215 37,731
------------------------ ------------------ ------------------------
Revenues for the Aviation Security segment for the year ended December 31,
2003 were $66.9 million (2002: $289.9 million). Operating income for the
Aviation segment totaled $12.2 compared to an operating income for 2002 of $37.7
million. The reason for the decline is the loss of the TSA related contracts as
described above.
------------------------ ------------------ ------------------------
Leasing Segment 2003 2002
------------------------ ------------------ ------------------------
Revenues 2,995 1,370
------------------------ ------------------ ------------------------
Operating Income (loss) (5,476) 271
------------------------ ------------------ ------------------------
Revenues for the Leasing segment were up from $1.4 million in 2002 to $3.0
million in 2003. The reason for the increase being that the contract started mid
2002 only and therefore 2003 was the first full year. The Company recorded an
impairment loss in an amount of $6,0 million related to lease equipment in The
Netherlands which caused the operating loss in this segment.
------------------------ ------------------ ------------------------
Entertainment Segment 2003 2002
------------------------ ------------------ ------------------------
Revenues 643 0
------------------------ ------------------ ------------------------
Operating Income (loss) (10,114) (517)
------------------------ ------------------ ------------------------
Entertainment segment related revenues are derived in 2003 only ($643,000)
whereas revenues in 2002 were still zero. The reason being that the
entertainment operations opened during 2003 only. The Company recorded an
impairment loss of $7.5 million which caused the loss in this segment.
23
As to the geographical segments please see note 18b in the financial
statements. Revenues in the USA were negatively impacted by loss of the TSA
contract. Revenues in the Netherlands increased due to a favorable exchange rate
of the euro to the dollar and first full year of operation leasing segment.
Year Ended December 31, 2002 Compared to Year Ended December 31, 2001
Revenues. Revenues for the year ended December 31, 2002 were $279.9
million (2001: $212.1 million), and consisted of $274.0 million (2001: $96.7
million) from U.S. operations, no revenues (2001: $113.1 million) from ICTS
Europe and $5.9 million (2001: $2.3 million) from other operations. The lack of
revenue from ICTS Europe in 2002 is the result of the sale of ICTS's 55%
interest in ICTS Europe in February 2002.
The increase in revenues from U.S. operations is primarily the result of
increased sales of aviation security services pursuant to contracts with the TSA
following the September 11th events. Revenues derived from such services were
$205.7 million (73% of ICTS's total revenues). For the first month and one-half
for 2002 the Company provided aviation security services to its airline clients
generating revenues of approximately $30 million. As a result of the Security
Act since November 2002, ICTS does not provide aviation security services within
the United States.
Revenues derived in the U.S., other than from aviation security services,
were $39.0 million (2001: $27.7 million). Such increase is primarily
attributable to an increase in sales to existing airline customers through
expanding ICTS's location base and the offering of new services.
Gross Profit. Gross profit is defined as revenues less costs directly
related to such revenues as well as certain indirect expenses such as airport
offices, airport fees, local training and other direct labor related expenses
such as uniforms and transportation.
Gross profit for the year ended December 31, 2002 was $65.9 million,
23.5%, as a percentage of revenue (2001: $22.2 million, 10.5% as a percentage of
revenue). Management believes that the increase in gross profit as a percentage
of revenues is primarily attributable to the increase in the provision of
aviation security services.
Impairment of Intangible Assets. For the year ended December 31, 2002,
ICTS incurred expenses of $9.2 million attributable to impairment of intangible
assets. The expense is primarily attributable to the impairment of goodwill in
the U.S. subsidiaries as a result of the TSA taking over aviation security
activities in the U.S. in November 2002.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $25.6 million for the year ended December 31, 2002,
9.2% as a percentage of revenues, as compared to $19.4 million, 9.2% as a
percentage of revenues for the year ended December 31, 2001. The increase in
selling, general and administrative expenses is primarily attributable to
increases in provisions for bad debts in the amount of $5 million, legal and
insurance costs in the amount of $2.6 million, payroll expenses in the amount of
$700,000 and offset by the reduction of selling, general and administrative
expenses attributable to ICTS Europe in the amount of $4.8 million.
Operating Profit. Operating profit for the year ended December 31, 2002
was $31.1 million as compared to $2.8 million for the year ended December 31,
2001.
Financial (Expenses) Income, Net. Financial (expenses) income, net
includes interest income (net of interest expense), and adjustments due to the
impact of exchange rate fluctuations. The interest income increased due to the
stronger cash position of ICTS, despite the decrease in interest rates on time
deposits over the course of 2002. Interest expenses increased compared to 2001,
as a result of additional credit facilities that were at ICTSss.s disposal
during 2002.
Other Income (Expense), Net. Other income for the year ended December 31,
2002 was $41.2 million as compared to $29.5 million for the year ended December
31, 2001. Other income for the year ended December 31, 2002 includes the profit
on the sale of 55% interest in ICTS Europe which resulted in gross proceeds, in
the amount of $41.2 million.
Income Taxes. ICTS's effective income tax rate for the year ended December
31, 2002 was 21.9% as compared to 14.4% in the year ended December 31, 2001. The
increase in the effective tax rate is primarily attributable
24
to an increase in non-deductible expenses for the year ended December 31, 2002
as well as a decrease in non-taxable capital gains in The Netherlands as a
percentage of total income.
Share in Profits and (Losses) of Associated Companies. The share in
profits (losses) of associated companies which includes amortization of
intangible assets for the year ended December 31, 2002 was $1.8 million.
Net income. As a result of the foregoing, ICTS's net income increased by
approximately $30.6 million in the year ended December 31, 2002, to $56.8
million, as compared to approximately $26.2 million for the year ended December
31, 2001.
Liquidity and Capital Resources
ICTS's principal cash requirement for its operations is the payment of
wages. Working capital is financed primarily by cash from operating activities,
liquidations of long-term assets and by short-term borrowings. As of December
31, 2004, we had cash and cash equivalents of $3.4 million as compared to $7.7
million on December 31, 2003, and restricted cash and short-term investments of
$4.7 million as compared to $3.1 million on December 31, 2003.
During the years ended December 31, 2004 and 2003, the Company has
incurred $26 million and $18.9 million net losses, respectively, which were
accompanied by net cash used in operating activities of $1.3 million and $19.1
million, respectively. As of December 31, 2004 the Company had a working capital
deficiency of $2 million. In 2005, the Company's management commenced
liquidating its position in several long-term assets. Management anticipates
that continuing that program will provide the Company with the sufficient funds
to operate its business in 2005. The Company's activity, for the long term,
depends on entering into additional service contracts.
The Company's cash and cash equivalents decrease in 2004 by $4.2
million as a result of the following:
Net cash used in operating activities for the year ended December 31,
2004 was $1.3 million as compared to net cash used in operating activities of
$19.1 million for the year ended December 31, 2003 and net cash provided by
operating activities of $61.6 for the year ended December 31, 2002. The decrease
in cash for the year ended December 31, 2004 was primarily attributable to net
loss of $26 million offset by non-cash expenses such as impairment of assets
amounted to $15.4 million, write off of investments amounting to $2.9 million
and share in losses of associated companies of $1.7 million. Changes in
operating assets and liabilities amounting to $0.4 million. The changes in
operating assets and liabilities were primarily attributable to $1.9 million
decrease in accounts receivable and a decrease of $2.2 million in accrued
expenses and other liabilities.
Net cash used in investing activities was $0.3 million for the year
ended December 31, 2004 as compared to net cash used in investing activities of
$3.2 for the year ended December 31, 2003 and net cash used in investing
activities of $0.3 million for the year ended December 31, 2002. Net cash used
in investing activities was primarily attributable to the purchase of equipment
of $4 million, of that $3.8 were related to the entertainment sites, $1.7
million increase in time deposit and $1.7 million for increase in associated
companies. This was offset by proceeds from sale of long term deposits $5.7
million, sale of equipment $1 million and 0.5 million decrease in other assets.
Net cash used in financing activities was $3 million for the year ended
December 31, 2004 as compared to net cash used in financing activities of $2.4
million for the year ended December 31, 2003 and December 31, 2003, and net cash
used in financing activities of $46.1 million for the year ended December 31,
2002. In 2004, net cash used in financing activities was attributed primarily to
repayment of long- tern loans and decrease in short- term bank credit. This was
partially offset by $1 million funding advance received as an arrangement from
the landlord related to the entertainment site.
In April, 2005, a Company's subsidiary in the U.S. entered into a Loan
and Security Agreement with a financial institution which replaces the revolving
line of credit which has expired in January 2005. The new agreement provides for
revolving loans up to $8 million limited by 85% of defined eligible accounts
receivable plus 95% of the balance of required certificates of deposit less
letter of credit obligations. The line of credit is secured by the Company
guaranty, by a first priority security interest in all existing and future
property of the subsidiary and the subsidiary has undertaken to comply with
financial covenants and non-financial provisions. In June 2005, the subsidiary
was notified
25
by the financial institution that it is in default in three covenants of its
loan agreement. The subsidiary failed to maintain the tangible net worth, as
defined in the loan agreement, of $654, failed to maintain the minimum interest
coverage ratio of 1.50 and that the subsidiary chief executive officer did not
remain in office, due to his resignation. The financial institution provided
notice of these defaults, but did not accelerate the loan nor provided a waiver.
The subsidiary and the financial institution are in discussions to resolve these
issues. The outstanding balance of the credit facility as of June 30, 2005 was
$3.5 million. If the subsidiary does not cure these breaches of the covenants or
if the subsidiary does not obtain a waiver, the financial institution will have
the right to declare the outstanding balance due and payable and proceed to
foreclose on any security interest granted to them by us which will have a
significant adverse impact on us.
In June 2002 ICTS purchased equipment for an aggregate purchase price
of $23.5 million. The purchase price was payable $14.5 million in cash and the
balance subject to an $8.5 million self amortizing non-recourse promissory note
payable over five years. Pursuant to an operating lease, the equipment was
leased to a private Dutch company. The lease provides for annual lease payments
in the amount of Euro 2.6 million and an option to purchase the equipment after
five or seven years based upon the then fair market value. In the event that the
lessee does not exercise the option to purchase the equipment upon the
expiration of the lease term, then ICTS will be obligated to pay license fees in
connection with intellectual property associated with the equipment in an amount
equal to 5% of the revenue derived from the use of the equipment if ICTS
exercises its option to operate the equipment. In June 2005, the Company granted
the lessee an option to purchase the leased equipment for an amount of $5
million plus an amount equal to the related loan balance at the exercise date
thus providing for the possibility of the early termination of the leasing
agreement. The option can be exercised from June 1, 2005 until September 30,
2006. As consideration for granting the option the lessee paid to ICTS by
advance lease payments of $1 million received in July 2005 and an additional
advance payment of $500 due in January 2006 covering the lease installments
periods from June 2005 forward. As of June 30, 2005 the depreciated value of the
leased equipment is $13.5 million.
On February 17, 2002, ICTS entered into an aviation security services
contract with the TSA to continue to provide aviation security services in all
of its current airport locations until the earlier of either the completed
transition of these security services on an airport by airport basis to the U.S.
Federal Government or November 2, 2002. The TSA, in accordance with standard
practices of auditing ICTS's billings pursuant to the contract, has sent the
Company a notice indicating that it believes that the Company should not have
been paid on fixed cost basis but on an actual cost plus what the TSA would
consider a reasonable profit and thereof stated that the Company owed
approximately $31 million. ICTS however has various claims for additional
amounts it considers are due to it for the services provided to the TSA. The
Company estimates that if the TSA will prevail in all of its contentions, and
none of the Company's claims will be recognized, then there may be a material
adverse effect on ICTS's financial condition.
As a result of the September 11th terrorists attacks numerous lawsuits
have been commenced against ICTS and its U.S. subsidiary. The cases arise out of
airport security services provided for United Flight 175 out of Logan Airport in
Boston, Massachusetts which crashed into the World Trade Center. In addition, to
the present claims additional claims may be asserted. The outcome of these or
additional cases is uncertain. If there is an adverse outcome with respect to
any of these claims which is not covered by insurance, then there may be a
significant adverse impact on us.
The following table summarizes ICTS's obligations to make future
payments under contracts as of December 31, 2004:
[Enlarge/Download Table]
Contractual Obligations Payments due by Period (in thousands)
----------------------- -------------------------------------
Total Less than a year 1-3 years 3-5 years more than 5 years
----- ---------------- --------- --------- -----------------
Long-term debt ................ $ 9,490 $2,779 $6,686(2) $ 25 $ --
Accrued severance pay ......... 65 -- -- -- 65
Operating lease obligations (1) 14,710 1,571 2,657 1,968 8,514
------- ------ ------ ------ ------
$24,265 $4,350 $9,343 $1,993 $8,579
26
(1) The Company leases premises under long-term operating leases, in
most cases with renewal options. Lease expenses for the years ended December 31,
2004, 2003 and 2002 were $1,405, $1,166, $928, respectively, the increase in the
lease expenses is primarily attributable to the entertainment sites.
(2) On July 7, 2005, the Company has signed an agreement, with a
related party, to sell its rights of ownership in the long -term deposit in the
amount of $5.4 million as of June 30, 2005 (see notes 6(a) and 22 to the
financial statements) and to transfer the related long-term loan, in the amount
of $4.2 million as of June 30,2005, which was received as part of the
arrangement with a bank and was due to be payable in January 2006 (see note
12(a)(1) to the financial statements), for a net consideration of $1 million. As
of June 30, 2005 the net book value of the deposit and the long-term loan is
$1.2 million.
ICTS's guarantees and their expiration dates:
The Company has provided bank guarantees for operational property
leases in the amount of $63, which are outstanding during the term of the
leases.
The Company has renewal outstanding bank guaranties to Bilu
Investments, Ltd. ("Bilu") in the amount of $2,515, as collateral to these
guaranties the Company has long-term restricted deposits in equivalent amounts.
In December 31, 2004, as a result of continuance deterioration in the financial
results of Bilu, the Company has determined to write off its investment in Bilu
and to fully provide of its bank guaranties.
Off-balance sheet arrangements
The Company is not a party to any material off -balance sheet
arrangements. In addition, ICTS has no unconsolidated special purpose financing
or partnership entities that are likely to create material contingent
obligation.
Our future capital requirements, the timing and amount of expenditures
will depend on our success in developing and implementing our new business
strategy. Based on our current plans, we believe that our existing cash
balances, cash flows from operating and available borrowing will be sufficient
to satisfy our capital requirements for year 2005.
Research and development, patents and licenses, etc.
ICTS has recently launched a trial phase of its IP@SS project. IP@SS
consists of a computerized platform integrating various technologies, including
document readers, biometrics identification systems and a smart-card. The system
is modular and may be used on a stand-alone basis or integrated into an existing
check-in system. The system has been designed to protect passenger privacy. The
system is designed to speed up and simplify the processes of identification and
security checks of passengers at airports. The system enhances customer service
provided by airlines and airports to outbound passengers.
The project is being developed by ICTS and is performed in cooperation
with various partners. The pilot program is being tested at Schiphol Airport in
Amsterdam, The Netherlands, and at Newark Liberty International Airport, New
Jersey in the United States and is planned to be expanded in the near term to
other European airports as well as other North American airports.
Trend information
Labor market conditions at a particular airport location may require
the Company to increase its prices. Cost of labor is the most important variable
in determining any cost increases.
27
Item 6. Directors, Senior Management and Employees
The following table lists the directors and executive officers of ICTS:
Age Position
--- --------
Menachem Atzmon 61 Chairman of the Supervisory Board
M. Albert Nissim 71 Member of the Supervisory Board
Elie Housman 68 Member of the Supervisory Board
Gordon Housmann 60 Member of the Supervisory Board
David W. Sass 69 Member of the Supervisory Board
Philip M. Getter 68 Member of the Supervisory Board and
Chairman of the Audit Committee
Lynda Davey 50 Member of the Supervisory Board
Avraham Dan 60 Managing Director
Ran Langer 59 Managing Director
Benny Barzilay 44 Chief Financial Officer
Menachem J. Atzmon is a CPA (Isr). Mr. Atzmon is a controlling
shareholder of Harmony Ventures B.V. Since 1996 he has been the managing
director of Albermale Investment Ltd. and Kent Investment Holding Ltd., both
investment companies. Since January 1998 he has served as CEO of Seehafen
Rostock. He has been a member of the Supervisory Board of ICTS since 1999.
M. Albert Nissim has served as Secretary of ICTS since January 1994 and
became a member of the Supervisory Board in 2002. Mr. Nissim also serves as
President of ICTS - USA, Inc. From 1994 to 1995, he worked as the managing
director of ICTS and from 1990 to the present, he has been Vice-President and a
director of Tuffy Associates. Mr. Nissim has been the President of Pioneer
Commercial Funding Corp. ("Pioneer") since January 1997 and also serves as the
Chairman.
Elie Housman has served as Chairman of Inksure Technologies, Inc. since
February 2002. Mr. Housman was a principal at Charterhouse Group International,
a privately held merchant bank, from 1989 until June 2001. At Charterhouse, Mr.
Housman was involved in the acquisition of a number of companies with total
sales of several hundred million dollars. Mr. Housman was the Chairman of Novo
Plc. in London, a leading company in the broadcast storage and services
industry. He is also a director of EUCI Career Colleges, Incorporated, which is
listed no the Nasdaq Small Cap Market and the Boston Stock Exchange and Top
Image System, Ltd. At present, Mr. Housman is a director of a number of
privately held companies in the United States. He became a member of the
Supervisory Board of ICTS in 2002.
Gordon Housmann is the senior partner of his own law firm which he
founded in London 24 years ago. He specialises in business finance and banking
law. He holds office as a Board Member of the UK subsidiaries of various quoted
companies, Company Secretary of Superstar Holidays Ltd., a subsidiary of El Al
Airlines Ltd., Director of Dominion Trust Co. (UK) Ltd., associated with a
private Swiss Banking Group, and a Governor of the Hebrew University.
David W. Sass for the past 44 years has been a practicing attorney in
New York City and is currently a senior partner in the law firm of McLaughlin &
Stern, LLP. He has been a director of ICTS since 2002. He is also corporate
secretary and a director of Pioneer Commercial Funding Corp. Mr. Sass became a
director of Inksure Technologies, Inc. in 2003, a company which develops,
markets and sells customized authentication systems designed to enhance the
security of documents and branded products and to meet the growing demand for
protection from counterfeiting and diversion. He is also a director of several
privately held corporations.
Philip M. Getter, since 2000 is a partner of DAMG Capital, LLC
Investment Bankers. Prior thereto he was most recently head of Investment
Banking and a member of the board of directors of Prime Charter, Ltd. He has
more than thirty years of corporate finance experience. Having served as
Administrative Assistant to the Director of United States Atomic Energy
Commission from 1958 to 1959, he began his Wall Street career as an analyst at
Bache & Co. in 1959. He was a partner with Shearson, Hammill & Company from 1961
to 1969 and a Senior Partner of Devon Securities, an international investment
banking and research boutique from 1969 to 1975. Mr. Getter was a member of the
New York Society of Security Analysts. From 1975 to 1983 he was President and
CEO of Generics Corporation of America, a public company that was one of the
largest generic drug manufacturers in the United States. As Chairman and CEO of
Wolins Pharmacal from 1977 to 1983 he led the reorganization and restructuring
one of the oldest and
28
largest direct to the profession distributors of pharmaceuticals. He has been a
member of the League of American Theatres and Producers, Advisory Board of the
American Theatre Wing, Trustee of The Kurt Weill Foundation for Music, a member
of the Tony Administration Committee and has produced for Broadway, television
and film. He writes frequently concerning the communications, education and
entertainment industries. Mr. Getter received his B.S. in Industrial Relations
from Cornell University. He is a member of several industry organizations and
serves on various boards of both public and private organizations and is
Chairman of the Audit Committees of EVCI Career Colleges, Inksure Technologies,
Inc. as well as the Company.
Lynda Davey is Chief Executive Officer of Avalon Group, Ltd. a private
investment banking firm she co-founded in 1992. She also serves as Chairperson
of Avalon Securities, Inc., a NASD member broker-dealer, and NY Venture Space,
LLC, a provider of interim office space. From 1988 throughout 1991, Ms. Davey
was Managing Director of The Tribeca Corporation, a New York based buyout firm.
Prior to 1988, Ms. Davey was Vice President in the corporate finance department
of Salomon Brothers Inc. She is a director of Tuffy Associates Corp. Ms. Davey
also serves on the Advisory Council of the Center for Women's Business Research
and Retail Finance Group of Wells Fargo Bank. She became a member of the
Supervisory Board of ICTS in 2002.
Avraham Dan is a CPA (Isr). joined ICTS in June 2004 as Chief Financial
Officer. In September 2004 to the present he became a Managing Director. From
1995 to 2001 he was Chief Executive Office and a Director of Pazchem Limited, an
Israeli chemical company. Mr. Dan holds an MBA degree from Pace University, NY,
Ran Langer joined ICTS in 1988 through 1998 as General Manager of the
German subsidiaries of ICTS. From 1998 to the present, he serves as General
Manager of Seehafen Rostock Umschlagsgesellschaft mbH, the operator of the
Seaport in Rostock, Germany. Mr. Langer became a Managing Director of ICTS in
September 2004.
Benny Barzilay, CPA (Isr.) was appointed Chief Financial Officer of the
company in May 2005. As chief financial officer, he is responsible for all
worldwide financial management including financial and risk management, planning
and reporting. Prior to joining ICTS in December 2004 he was the controller from
2002 to 2004 for Tadiran Appliances Ltd. (Tadiran) a subsidiary of United
Technologies Corp.(UTC). Tadiran is a leading global provider of advanced air
conditioning solutions in over 50 countries worldwide, where he managed the
integration with UTC and was responsible for the financial reporting. Before
joining Tadiran, Mr. Barzilay was employed as a senior manager for Kesselman &
Kesselman, PriceWaterhouseCooper's Israel from 2000 to 2002 and as a senior
manager for BDO, Toronto Canada, from 1995 to 1999. Mr. Barzilay holds a B.A in
Accounting and Statistics from Tel-Aviv University.
Compensation
Each member of the Supervisory Board who is not an employee of the
Company receives an annual fee of $10,000 and a fee for each Board or committee
meeting attended of $1,000 and the Chairman of the Audit Committee receives an
additional $10,000 per year.
Mr. Dan has been employed as a Managing Director under a five years
employment agreement commencing September 1, 2004, at monthly compensation of
$15,000.
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, 2004:
Pension, retirement
Salaries, fees, commissions and other similar
and bonuses benefits
--------------------------- -------------------
All directors and officers $3,364,000 $51,000
as a group (18 persons)
Board practices
ICTS has a Supervisory Board and a Management Board. The Supervisory
Board has the primary responsibility for supervising the policies of the
Management Board and the general course of corporate affairs and recommending
the adoption of the annual financial statements of ICTS by its shareholders. The
Management Board is responsible for the day-to-day operations of ICTS. Members
of the Supervisory Board and the Management Board are appointed by the
shareholders for a term of one year. Non-executive officers are appointed by and
serve at the pleasure of the Management Board.
The members of the Supervisory Board and their period of service on the
Supervisory Board are as follows: Menachem Atzmon (1999), M. Albert Nissim
(2003), Elie Housman (2002), Gordon Hausmann (2005), David W. Sass (2002),
Philip M. Getter (2003) and Lynda Davey (2003).
The Audit Committee consists of Philip M. Getter, Chairman, Gordon
Housmann and Lynda Davey, all of whom are independents and have financial
expertise. The audit committee evaluates ICTS's accounting policies and
29
practices and financial reporting and internal control structures, selects
independent auditors to audit the financial statements and confers with the
auditors and the officers. The Audit Committee has an Operating Charter as well.
ICTS's Compensation Committee consists of Elie Housman, Chairman and
Lynda Davey. The compensation committee determines salaries, incentives and
other forms of compensation for ICTS's executive officers and administrators
stock plans and employee benefit plans.
The Supervisory Board of the Company has adopted a Code of Ethics for
principal Executive Officers and Senior financial Officers.
The Articles of Association of ICTS require at least one member for
both the Management Board and the Supervisory Board, but do not specify a
maximum number of members for such boards. The general meeting of shareholders
determines the exact number of members of both the Management Board and the
Supervisory Board. Under the laws of the Netherlands and the Articles of
Association, each member of the Supervisory Board and Management Board holds
office until such member's resignation, death or removal, with or without cause,
by the shareholders or, in the case of members of the Supervisory Board, upon
reaching the mandatory retirement age of 72.
Employees
The number of employees in Europe is approximately 150.
In the United States, prior to the enactment of the Security Act, ICTS
employed approximately 5,000 people, of which approximately 1,300 were
unionized. Subsequent to the enactment of the Security Act, but prior to
November 2002 ICTS employed approximately 11,000 people, of which approximately
1,300 were unionized. Most of the unionized employees are skycaps and screeners.
ICTS believes that its relationships with employees are generally good. As a
result of the TSA taking over airport security ICTS currently employs
approximately 3,000 persons in the U.S.
Share ownership.
See tables under Item 7. "Major Shareholders and Related Party Transactions"
below.
30
Options to Purchase Securities.
On June 22, 1999 shareholders adopted the 1999 Equity Incentive Plan
(the "Plan"). The Plan provides a means whereby employees, officers, directors,
and certain consultants and independent contractors of the Company ("Qualified
Grantees") may acquire the Common Shares of the Company pursuant to grants of
(I) Incentive Stock Options ("ISO") and (ii) "non-qualified stock options". A
summary of the significant provisions of the Plan is set forth below. The
following description of the Plan is qualified in its entirety by reference to
the Plan itself.
The purpose of the Plan is to further the long-term stability,
continuing growth and financial success of the Company by attracting and
retaining key employees, directors and selected advisors through the use of
stock incentives, while stimulating the efforts of these individuals upon whose
judgment and interest the Company is and will be largely dependent for the
successful conduct of its business. The Company believes that the Plan will
strengthen these individuals' desire to remain with the Company and will further
the identification of their interests with those of the Company's shareholders.
The Plan provides that options to purchase up to 600,000 Common Shares
of the Company may be issued to the employees and outside directors. All present
and future employees shall be eligible to receive incentive awards under the
Plan, and all present and future non-employee directors shall be eligible to
receive non-statutory options under the Plan. An eligible employee or
non-employee director shall be notified in writing, stating the number of shares
for which options are granted, the option price per share, and conditions
surrounding the grant and exercise of the options.
The exercise price of shares of Company Stock covered by an ISO shall
not be less than 100% of the fair market value of such shares on the date of
grant; provided that if an ISO is granted to an employee who, at the time of the
grant, is a 10% shareholder, then the exercise price of the shares covered by
the incentive stock option shall not be less than 110% of the fair market value
of such shares on the date of the grant. The exercise price of shares covered by
a non-qualified stock option shall be not less than 85% of the fair market value
of such shares on the date of the grant. The Plan shall be administered by the
Compensation Committee.
As of March 31, 2005 ICTS has granted options to purchase 212,500
Common Shares, all of which have been granted to directors and executive
officers of the Company as a group, at exercise prices ranging from $4.50 to
$5.30 per share under the Plan. These options vest over various terms, ranging
from immediately to five years. Outstanding options expire at various times, but
not later than January 2007. There remains available for grant under the Plan
547,500 shares. The Plan expires by its terms in June 2009.
The Management Board and the Supervisory Board on November 30, 2004
have approved and the shareholders have adopted on February 12, 2005 the 2005
Equity Incentive Plan, (the "Plan").
The Plan provides a means whereby employees, officers, directors, and
certain consultants and independent contractors of the Company ("Qualified
Grantees") may acquire the Common Shares of the Company
31
pursuant to grants of (i) Incentive Stock Options ("ISO"), (ii) non-qualified
stock options (the ANQSO@) and (iii) restricted stock. A summary of the
significant provisions of the Plan is set forth below. A copy of the full Plan
is annexed as Exhibit A to this Proxy Statement. The following description of
the Plan is qualified in its entirety by reference to the Plan itself.
The purpose of the Plan is to further the long-term stability,
continuing growth and financial success of the Company by attracting and
retaining key employees, directors and selected advisors through the use of
stock incentives, while stimulating the efforts of these individuals upon whose
judgment and interest the Company is and will be largely dependent for the
successful conduct of its business. The Company believes that the Plan will
strengthen these persons' desire to remain with the Company and will further the
identification of those persons' interests with those of the Company's
shareholders.
The Plan shall be administered by the Compensation Committee of the
Supervisory Board, which shall be appointed by the Supervisory Board of the
Company, and which shall consist of a minimum of three members of the
Supervisory Board of the Company.
The Plan provides that options to purchase up to 1,500,000 Common
Shares of the Company may be issued to the employees, certain consultants and
directors. All present and future employees shall be eligible to receive
incentive awards under the Plan, and all present and future non-employee
directors shall be eligible to receive non-statutory options under the Plan. An
eligible employee or non-employee director shall be notified in writing, stating
the number of shares for which options are granted, the option price per share,
and conditions surrounding the grant and exercise of the options.
The exercise price of shares of Company Stock covered by an ISO and
NQSO shall be not less than 100% of the fair market value of such shares on the
date of grant; provided that if an ISO is granted to an employee who, at the
time of the grant, is a 10% shareholder, then the exercise price of the shares
covered by the incentive stock option shall be not less than 110% of the fair
market value of such shares on the date of grant. The Plan also provides for
cashless exercise of Options at the discretion of the Compensation Committee. In
such event, there may be a charge to the earnings of the Company with respect to
the cashless exercise of the Options.
The Compensation Committee may determine the number of shares that may
be awarded to a participant as restricted stock and the provisions relating to
risk of forfeiture and may determine that the restricted stock is only earned
upon the satisfaction of performance goals established by the Committee. The
Committee shall also determine the nature, length and starting date of any
performance period and the terms thereof.
The Compensation Committee has recommended and the Supervisory Board and
the Management Board have approved the granting of the following options under
the 2005 Equity Incentive Plan as follows:
1. Menachem Atzmon (Chairman of the Board) - 550,000 options of which
250,000 shall be immediately vested and 300,000 options to be vested equally
over the next three years. With respect to the Options for 200,000 shares they
are granted in lieu of a current salary for Mr. Atzmon. Options are exercisable
at $1.35 per share representing the fair market value on the date of grant.
2. Doron Zicher (Key Employee) - 45,000 options to be vested equally over
the next three years. Options are exercisable at $1.35 per share representing
the fair market value on the date of grant.
3. Ran Langer (Managing Director) - 65,000 options to be vested equally in
the next three years. Options are exercisable at $1.35 per share representing
the fair market value on the date of grant.
4. Avraham Dan (Managing Director) - 55,000 options to be vested equally
in the next three years. Options are exercisable at $1.35 per share representing
the fair market value on the date of grant.
5. Udi Bechor (Key Employee) - 45,000 options to be vested equally in the
next three years. Options are exercisable at $1.35 per share representing the
fair market value on the date of grant.
6. Oded Shoam (Key Employee) - 50,000 options to be vested equally in the
next three years. Options are exercisable at $1.35 per share representing the
fair market value on the date of grant.
32
7. (Directors) There be granted 30,000 options each to the Directors,
namely, Elie Housman, Philip Getter, Lynda Davey, M. Albert Nissim and David W.
Sass. The Options shall be immediately vested as to 10,000 shares and shall vest
10,000 shares on each anniversary in the event such person is a Director of the
Company at that time. The options are exercisable at $1.35 per share
representing the fair market value on the date of grant.
8. (Committee Chairs) The Chairman of the Audit Committee and the Chairman
of the Compensation Committee should each be granted 30,000 additional Options.
The Options shall be immediately vested as to 10,000 shares and shall vest
10,000 shares on each anniversary in the event such person is a Director of the
Company at that time. The options are exercisable at $1.35 per share
representing the fair market value on the date of grant.
A summary of the Options granted is as follows:
All current executive officers (Managing Directors) (2 persons) as a
group: 120,000 Options
All current directors (6 persons) as a group: 760,000 Options
All current employees and non-executive officers (3 persons) as a
group: 140,000 Options
U.S. Federal Income Tax Consequences
The rules governing the U.S. federal tax treatment of stock options,
restricted stock and shares acquired upon the exercise of stock options are
quite technical. Therefore, the description of U.S. federal income tax
consequences set forth below is necessarily general in nature and does not
purport to be complete. Moreover, the statutory provisions are subject to
change, as are their interpretations, and their application may vary in
individual circumstances. In particular, the "American Jobs Creation Act of
2004" imposed new rules concerning the taxation of various deferred compensation
arrangements. It is not clear whether, and to what extent, these new rules apply
to awards under the Plan. Although the Company does not believe that awards
under the Plan are affected by the new rules, there can be no assurance to that
effect until adequate guidance is forthcoming from the U.S. Treasury Department.
Finally, the tax consequences under applicable state, local and foreign income
tax laws may not be the same as under the U.S. federal income tax laws.
INCENTIVE STOCK OPTIONS. ISOs granted pursuant to the Plan are intended to
qualify as incentive stock options within the meaning of Section 422A of the
Internal Revenue Code. If the participant makes no disposition of the shares
acquired pursuant to exercise of an ISO within one year after the transfer of
shares to such participant and within two years from grant of the option, such
participant will realize no taxable income as a result of the grant or exercise
of such option, and any gain or loss that is subsequently realized may be
treated as long-term capital gain or loss, as the case may be. Under these
circumstances, neither the Company nor any subsidiary will be entitled to a
deduction for federal income tax purposes with respect to either the issuance of
the ISOs or the issuance of shares upon their exercise.
If shares acquired upon exercise of ISOs are disposed of prior to the
expiration of the above time periods, the participant will recognize ordinary
income in the year in which the disqualifying disposition occurs, the amount of
which will generally be the lesser of (i) the excess of the fair market value of
the shares on the date of exercise over the option price, or (ii) the gain
recognized on such disposition. Such amount will ordinarily be deductible for
federal income tax purposes by the Company or subsidiary for whom the
participant performs services ("service recipient") in the same year, provided
that the amount constitutes reasonable compensation for services that would
result in a deduction for U.S. federal income tax purposes and that certain
federal income tax withholding requirements are satisfied. In addition, the
excess, if any, of the amount realized on a disqualifying disposition over the
market value of the shares on the date of exercise will be treated as capital
gain.
The foregoing discussion does not consider the impact of the
alternative minimum tax, which may be particularly applicable to the year in
which an ISO is exercised.
NONQUALIFIED 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
33
income tax withholding requirements are satisfied. Subsequent appreciation or
decline in the value of the shares on the sale or other disposition of the
shares will generally be treated as capital gain or loss.
RESTRICTED STOCK. A participant granted shares of restricted stock under
the Plan is not required to include the value of such shares in ordinary income
until the first time such participant's rights in the shares are transferable or
are not subject to substantial risk of forfeiture, whichever occurs earlier,
unless such participant timely files an election under Section 83(b) of the
Internal Revenue Code to be taxed on the receipt of the shares. In either case,
the amount of such income will be equal to the excess of the fair market value
of the stock at the time the income is recognized over the amount (if any) paid
for the stock. The service recipient will ordinarily be entitled to a deduction,
in the amount of the ordinary income recognized by the participant, for the
service recipient's taxable year in which the participant recognizes such
income, provided that the amount constitutes reasonable compensation for
services that would result in a deduction for U.S. federal income tax purposes
and that certain federal income tax withholding requirements are satisfied.
Item 7. Major Shareholders and Related Party Transactions
Major Shareholders
The following table sets forth certain information regarding ownership
of the Company's Common Shares as of July 15, 2005 (including options
exercisable within 60 days from July 15, 2005) with respect to:
(1) Each person who is known by the Company to own beneficially more
than five percent of the Company's outstanding Common Shares.
(2) Each director or officer who holds more than 1% of the Common
shares.
(3) All directors and officers as a group. None of the directors or
officers, excluding Mr. Menacham Atzmon, owns 1% or more of ICTS outstanding
share capital.
--------------------------------------------------------------------------------
Name of Five Percent Amount Beneficially Percent of Common Shares
Shareholders Owned (a) Outstanding (b)
--------------------------------------------------------------------------------
Atzmon Family Trust(1)(2) 4,198,500 62%
--------------------------------------------------------------------------------
All officers and directors
as a group (10 persons) 4,334,500 64%
--------------------------------------------------------------------------------
(a) The amount includes common shares owned by each of the above,
directly or indirectly and options immediately exercisable or that exercisable
within 60 days from July 15, 2005.
(b) As to each shareholder, the percentage is calculated using the
amount beneficially owned by such shareholder (as determined in accordance with
(a) above) divided by the number of total outstanding common shares and the
shares issuable pursuant to the exercise of options exercisable within 60 days
from July 15,2005, if any held by such shareholder. Common shares subject to
options that are immediately exercisable or exercisable within 60 days of July
15, 2005 are deemed outstanding for computing the ownership percentage of the
shareholder holding such options, but are not deemed outstanding for computing
the ownership of any other shareholder.
The shareholders listed above do not have any different voting rights from any
other shareholders of ICTS with respect to their shares.
1. Harmony Ventures BV, owns directly and indirectly approximately 60%
of the issued and outstanding Common Shares. A family trust for the benefit of
the family of Mr. Menachem J. Atzmon (the "Atzmon Family Trust") owns 90% of
Harmony Ventures BV and the Estate of Ezra Harel owns 10% of the outstanding
shares of Harmony Ventures BV and both may be deemed to control Harmony Ventures
BV. Mr. Atzmon disclaims any beneficial interest in the Atzmon Family Trust.
Harmony Ventures BV and the Atzmon Family Trust may be able to appoint all the
directors of ICTS and control the affairs of ICTS.
2. Includes 250,000 of 550,000 options to Menachem Atzmon (Chairman of
the Board) of which 250,000 shall be immediately vested and 300,000 options to
be vested equally over the next three years. With respect to the Options for
200,000 shares they are granted in lieu of a current salary for Mr. Atzmon.
Options are exercisable at $1.35 per share representing the fair market value on
the date of grant.
----------
34
Related Party Transactions.
In 2001 and 2002, as part of the sale of its European operations, ICTS in
exchange for services rendered by the members of the Supervisory Board and
certain executives paid out the following bonuses:
Name 2001 2002
---- ---- ----
Ezra Harel $1,800,000(1) $2,451,000(1)
Boaz Harel $ 169,000(2) $ 71,000
Savinoam Avivi $ 18,000 $ 23,000
Michael Barnea $ 225,000(3) $ 293,000(3)
Gerald Gitner $ 118,000 $ 24,000
Menachem Atzmon $ 412,000(4) $ 541,000(4)
Amos Lapidot $ 18,000 $ 23,000
Lior Zouker $1,080,000(5) $1,499,000(5)
Albert Nissim $ 30,000 $ 36,000
Stefan Vermeulen $ 0 $ 45,000
Eli Talmor $ 21,000 0
Doron Zicher $ 163,000(6) $ 146,000
Leedan $1,000,000 $1,208,000
(1) This amount was due to Mr. Harel pursuant to his employment agreement
and was designated by him to be paid to Leedan, on behalf of Harmony.
(2) Mr. Harel resigned as a member of the Supervisory Board on November
12, 2001. In exchange for this cash payment Mr. Harel also
surrendered 16,667 stock options.
(3) In consideration for services provided by Pinkhill Business Ltd.
(4) Was assigned to Harmony BV in favor of the shareholder and was paid
to Leedan.
(5) This amount was paid pursuant to Mr. Zouker's employment agreement.
(6) In exchange for part of this cash payment Mr. Zicher surrendered
6,667 of stock options.
In August 1997, ICTS, as part of a group consisting of Leedan Systems
and Properties Enterprises (1993) Ltd. and Rogosin Development and Holdings Ltd.
("Rogosin"), each at the time, an affiliate of Leedan, invested in a joint
venture, Bilu Investments Ltd. ("Bilu"). Bilu is engaged in the financing of
real estate projects in Israel, primarily in the residential market. In
consideration for a 9.3% equity interest in Bilu, ICTS contributed $259,000 and
has guaranteed $2,915,000 of debt obligations of Bilu. In 2000 Bilu issued 25%
of its shares to an unaffiliated party in consideration for an equity investment
of US $2,000,000 and the provision of guarantees for debt obligations of Bilu in
an amount of US $3,800,000. As a result, ICTS's equity interest in Bilu has been
diluted to 7% and ICTS's guarantee was reduced to $2,515,000 of which $700,000
is on behalf of each of Leedan and Rogosin, respectively. Rogosin became an
unaffiliated party in 2002. In December 31, 2004, as a result of continuance
deterioration in the financial results of Bilu and the financial position of
Leedan and Rogosin, the Company has determined to write off its investment in
Bilu and to fully provide of its bank guaranties.
During 1998, ICTS purchased 150,000 shares of common stock of Pioneer
from Leedan for a purchase price of $5.00 per share. Pioneer is a sister
corporation through common ownership through Harmony. ICTS purchased 29,000
additional shares on October 10, 2001 at $2.25 per share. In addition, on
February 1, 2002, ICTS subscribed for an additional 260,000 shares at $2.00 per
share. In January 2003, ICTS purchased 235,300 shares of common stock of Pioneer
Commercial Funding Corp. at a purchase price of $0.90 per share in a private
placement. Mr. Albert Nissim, the secretary and member of the ICTS Board is the
president of Pioneer, Mr. Boaz Harel, a former chairman of the ICTS Supervisory
Board is the Chairman of Pioneer, Lynda Davey, a member of the ICTS Supervisory
Board was a director of Pioneer and David W. Sass, a member of the ICTS
Supervisory Board is secretary of Pioneer and currently a director of that
company along with Mr. Boaz Harel and M. Albert Nissim. The Estate of Ezra Harel
and the Atzmon Family Trust are also principal shareholders of Pioneer.
35
On July 24, 2001, ICTS, through an assignment from Noaz Management
Company, invested $400,000 in Artlink Inc, a company with expertise in curating
and producing art exhibits, servicing and representing young artists. Mr. Ezra
Harel was a principal shareholder of Noaz Management Company. ICTS wrote off its
entire investment in Artlink Inc. in 2003.
In connection with release of certain guarantees of various debt
obligations of a third party procured by ICTS in 1997, in 2000 ICTS purchased
from unaffiliated parties a $1 million debenture bearing interest at 10% per
annum, due November 26, 2004, issued by Pioneer. Pioneer defaulted on the Note
and the Company wrote off its entire investment in Pioneer in 2004 totaled $1.8
million. The debenture is guaranteed by Leedan, an affiliate of the Estate of
Ezra Harel and Mr. Atzmon. Due to the financial position of Leedan the Company
did not exercised the guaranty granted by Leedan in connection with its
investment in Pioneer.
In July 2000, each of ICTS and International Tourist Attractions Ltd.
("ITA), a company under the control of ICTS's principal shareholders, purchased
16 common shares for $16,000 each of Ramasso Holding B.V ("Ramasso") from
Leedan, representing 40% each of the outstanding share capital of Ramasso. The
remaining 20% shares in Ramasso are held by a company controlled by Leedan. ICTS
provided loans to Ramasso from time to time until December 2003 aggregating
approximately $3 million bearing an annual interest rate of 4.25% which has no
fixed repayment. Ramasso owns and operates, a Time Elevator in Rome, Italy.
Through December 31, 2002, ICTS has accounted for its share in
Ramasso's losses, in the total amount of $1.4 million, in view of these losses;
the Company has decided to write off the balance of the investment in Ramasso at
December 31, 2002, in the amount of $1 million. In April, 2003 the Company
provided a financial institution that financed the Time Elevator in Rome, with a
guaranty securing the repayment of such financing. At the time the guaranty was
provided the amount of the financing provided by such financial institution to
Time Elevator in Rome has been net 1,838,390 Euro's. In December 31, 2003 ICTS
has fully provided for the guaranty in the amount of $1.1 million. Subsequent to
December 31, 2003 ICTS was required by the financial institution to cover its
guaranty and the Company have reached a agreement with the financial institution
for the repayment terms. As of December 31, 2004 the amount due payable by the
Company is $1.3 million.
In December 2000, ICTS exercised an option to purchase 100 common
shares of ITA for $600,000, representing 10% of the outstanding share capital of
ITA. On October 14, 2001, ICTS agreed to increase its investment in ITA under
the following principal terms: (a) ICTS provided ITA with a $3,000,000 loan
[which released a $1,000,000 bank guaranty previously provided by ICTS in favor
of ITA]; (b) ICTS was granted with a warrant to purchase 12% of ITA shares
exercisable during a period of three years, at an exercise price that shall be
determined according to an evaluation of ITA to be made by an independent
consultant; (c) ICTS was granted [a right of first refusal] to establish and
own, on its own account, any Time Elevator project to be initiated by ITA in the
United States [and Europe]; (d) ITA will supervise and manage the establishment
of such projects for a fee that shall be equal to 20% of the projects costs; (e)
ICTS has the option to acquire from ITA 20% of ITA's stake in each Time Elevator
project of ITA in Europe for a period of two years from the start of such
project; and (f) ITA has the option to acquire from ICTS 20% of ICTS's stake in
each Time Elevator project of ICTS for a period of two years from the start of
such project. The first project for which ICTS exercise its right of first
refusal is in Atlantic City, New Jersey where ICTS is currently operates a Time
Elevator site. The second project, in which ICTS exercised its right of first
refusal, is in Baltimore, Maryland where ICTS is currently operates a Time
Elevator project. In December 2003, based on the entertainment projects
performances, the Company revaluated the two facilities and determined that the
forecasted cash flows from them will not cover the investments and based on
their fair value which was calculated using discounted cash flows model, wrote
off $7.5 million of its investments in the two sites.
On December 23, 2003 the Company through wholly owned subsidiaries
purchased from ITA certain assets owned by ITA and used by it in the
development, establishment and operation of motion-based entertainment theaters.
The assets purchased consist primarily of intangible property and certain
equipment. The purchase price for the assets purchased was $5.4 out of which
$5.2 million was allocated to goodwill. The purchase price was paid by set-off
against certain debts owed by ITA to the Company, cash and notes. As a part of
the transaction, certain agreements made between the Company and ITA in 2001
were terminated, with the result that the Company is no longer committed to
involve ITA in its existing and future entertainment projects. Prior to entering
into the transaction the Company obtained a fairness opinion as to the fairness
of the consideration and the transaction to the Company. Subsequent to December
31, 2003, as a result of the poor results of the entertainment projects and
their impairment, management
36
resolved to cease the development of this business and not to start the new
projects in the foreseeable future. As a result, the Company has written off the
entire amount of the goodwill $5.2 million. In addition, during 2004 the Company
recognized impairment losses on its entertainment tangible assets amounted to
$8.1 million, in addition to the impairment loss of $7.5 million in 2003.
During the period from April to September 2002, ICTS purchased
4,106,895 shares of Inksure Technologies Inc. ("Inksure"), which represents
34.3% of Inksure's outstanding shares for a purchase price of $5,986,000. In
October 2002, Mr. Elie Housman, the Chairman of the Board of Inksure, was
appointed to the ICTS Supervisory Board. Mr. Getter and Mr. Sass, members of the
ICTS Supervisory Board and our directors were elected to the Board of Inksure.
Messrs. Housman, Getter and Sass, as well as an entity associated with the
Atzmon Family Trust, own shares and warrants in Inksure. In addition, Messrs.
Housman, Getter and Sass hold options to purchase Inksure securities. Inksure
develops markets and sells customized authentications systems designed to
enhance the security of documents and branded products and to meet the growing
demand for protection from counterfeiting and diversion. In June 2003 and April
2004 the Company participated in Inksure's private placements purchasing 174,542
and 544,118 additional shares, respectively at an aggregate purchase price of
$192,000 and $370,000, respectively. As of December 31, 2004 the Company owns
approximately 32% of the outstanding shares of Inksure.
On July 7, 2005, the Company has signed an agreement, with a related
party, to sell its rights of ownership in a long-term deposit, and to transfer
the related long-term loan which was received as part of the arrangement with a
bank, (see notes 6(a) and 12(a)(1) to the financial statements), for
consideration of $1 million. As of June 30, 2005 the net book value of the
deposit and the long-term loan is $1.2 million.
Item 8. Financial Information
Consolidated Statements and Other Financial Information.
See pages F-1 through F-49 incorporated herein by reference.
Legal Proceedings
As a result of the September 11th terrorists attacks numerous lawsuits
have commenced against Huntleigh and ICTS. Huntleigh has been named in
approximately 70 lawsuits and ICTS in approximately 70 lawsuits All of the cases
were filed in the United States District Court, Southern District of New York.
The cases arise out of Huntleigh's airport security service for United Flight
175 out of Logan Airport in Boston, Massachusetts. All of the cases involve
wrongful death except one which involves property damage. The cases are in their
early stages.
Although these are the only claims brought against Huntleigh and ICTS
with respect to the terrorist attacks of September 11, 2001, Huntleigh and ICTS
anticipate additional related claims. See " Risk Factors-Potential For Liability
Claims."
Under current legislation Huntleigh and one other security company have
their liability limited to the amount of insurance coverage that they carry. The
legislation applies to Huntleigh, but not ICTS.
The Company has commenced an action against the U.S. Government with
regard to the Fifth Amendment rights relating to the taking of its business. In
December 2004 the Court denied the Government's Motion to Dismiss the case. A
motion for reconsideration has been filed by the defendant and denied. No
discovery has taken place to date.
Dividend Policy
On each of July 23, 2001 and May 13, 2002, ICTS declared and paid a
$2.25 dividend per Share ($1.69 net of all withholding taxes required by The
Netherlands) and on December 10, 2002 ICTS declared and paid a dividend of $3.00
per share (net of all withholding taxes required by The Netherlands). For a
discussion of the applicable taxes on such dividends see, "Netherlands Dividend
Withholding Tax". The declaration of dividends will be at the discretion of our
board of directors and will depend upon our earnings, capital requirements,
financial position, general economic conditions, and other pertinent factors. We
cannot assure you that dividends will be paid in the future.
37
Significant Changes.
None
Item 9. The Offer and Listing
ICTS's shares of common stock have traded on the NASDAQ National Market
since 1996 under the symbol ICTS.
The reported high and low closing sales prices per share during each quarter as
reported on NASDAQ were as follows:
2002: High Low
---- ---
First quarter $7.75 $6.71
Second quarter 10.20 6.04
Third quarter 7.72 5.00
Fourth quarter 8.62 4.91
2003: High Low
---- ---
First quarter $6.14 $5.08
Second quarter 5.10 3.99
Third quarter 4.42 3.12
Fourth quarter 3.63 2.49
2004: High Low
---- ---
First quarter $3.98 3.03
Second quarter $8.42 3.25
Third quarter $3.47 1.37
Fourth quarter $2.07 1.35
2005: High Low
---- ---
First quarter $3.23 $1.58
Item 10. Additional Information
Memorandum and Articles of Association
Introduction
The material provisions of the Company's Articles of Association are
summarized below. Such summaries do not purport to be complete statements of
these provisions and are qualified in their entirety by reference to such
exhibit. The Company was established by the Department of Justice at Amstelveen,
The Netherlands on October 9, 1992. The objectives of the Company are generally
to manage and finance businesses, extend loans and invest capital as described
in greater detail in Article 2 of the Company's Articles of Association.
Shares
The Company's authorized share capital is currently divided into
17,000,000 common shares, par value 0.45 Euro per common share. The common
shares may be in bearer or registered form.
Dividends
Dividends on common shares may be paid out of annual profits shown in the
Company's annual accounts, which must be adopted by the Company's Supervisory
Board.
The Management Board, with the prior approval of the Supervisory Board,
may decide that all or part of the Company's profits should be retained and not
be made available for distribution to shareholders. Those profits that are not
retained shall be distributed to holders of common shares, provided that the
distribution does not reduce shareholders' equity below the issued share capital
increased by the amount of reserves required by Netherlands law. At its
discretion, subject to statutory provisions, the Management Board may, with the
prior approval of the Supervisory Board, distribute one or more interim
dividends on the common shares before the annual accounts have been approved by
the Company's shareholders. Existing reserves that are distributable in
accordance with Netherlands law may be
38
made available for distribution upon proposal by the Management Board, subject
to prior approval by the Supervisory Board. With respect to cash payments, the
rights to dividends and distributions shall lapse if such dividends or
distributions are not claimed within five years following the day after the date
on which they were made available.
Voting Rights
Members of the Company's Supervisory Board are appointed by the general
meeting. The Company's Articles of Association provide that the term of office
of each Supervisory Director will expire no later than June in each calendar
year. Members of the Supervisory Board may be re-appointed.
General Meetings of Shareholders
The Company's general meetings of shareholders will be held at least once
a year, not later than six months after the end of the fiscal year. Notices
convening a general meeting will be mailed to holders of registered shares at
least 15 days before the general meeting and will be published in national
newspapers in The Netherlands and abroad in countries where the Company's bearer
shares are admitted for official quotation. In order to attend, address and vote
at the general meeting of shareholders, the holders of the Company's registered
shares must notify it in writing of their intention to attend the meeting and
holders of the Company's bearer shares must direct the depository to their
bearer shares, each as specified in the published notice. The Company currently
does not solicit from or nominate proxies for its shareholders and is exempt
from the proxy rules of the Securities Exchange Act of 1934. However,
shareholders and other persons entitled to attend the general meetings of
shareholders may be represented by proxies with written authority.
Other general meetings of shareholders may be held as often as deemed
necessary by the Supervisory Board or the Management Board and must be held if
one or more shareholders or other persons entitled to attend the general meeting
of shareholders jointly representing at least 10% of the Company's issued share
capital make a written request to the Supervisory Board or the Management Board
that a meeting must be held and specifying in detail the business to be dealt
with at such meeting. Resolutions are adopted at general meetings of
shareholders by a majority of the votes cast, except where a different
proportion of votes is required by the Articles of Association or Netherlands
law, in a meeting in which holders of at least one-third of the outstanding
common shares are represented. Each share carries one vote.
Amendment of Articles of Association and Winding Up
A resolution presented to the general meeting of shareholders amending the
Company's Articles of Association or winding up the Company may only be taken
after a proposal made by the Management Board and approved by the Supervisory
Board. A resolution to dissolve the Company must be approved by at least a
three-fourths majority of the votes cast.
Approval of Annual Accounts
The Company's annual Netherlands statutory accounts, together with a
certificate of its auditors, will be submitted to the general meeting of
shareholders for approval. Consistent with business practice in The Netherlands
and as provided by the Company's Articles of Association, approval of the annual
accounts by the shareholders discharges the Management Board and the Supervisory
Board from liability for the performance of their respective duties for the past
financial year. Under Netherlands law, this discharge is not absolute and will
not be effective with respect to matters which are not disclosed to the
shareholders.
Liquidation Rights
In the event of the Company's dissolution and liquidation, the assets
remaining after payment of all debts and liquidation expenses are to be divided
proportionately among the holders of the common shares.
Issues of Shares; Pre-emptive Rights
The Company's Supervisory Board has the power to issue shares. The
shareholders have by a authorizing resolution provided such authority for a five
year period ending June 30, 2006. The number of shares the Supervisory Board is
authorized to issue must be set at the time of the resolution and may not exceed
17,000,000 shares of the common shares then outstanding.
39
Shareholders have a pro rata pre-emptive right of subscription to any
common shares issued for the purpose of raising capital, which right may be
limited or eliminated. If designated for this purpose by the general meeting of
shareholders (whether by means of any authorizing resolution or an amendment to
the Company's Articles of Association).
Repurchase and Cancellation of Shares
The Company may repurchase its common shares, subject to compliance
with the requirements of certain laws of The Netherlands (and provided the
aggregate nominal value of the Company's common shares acquired by it at any one
time amounts to no more than one-tenth of its issued share capital). Common
shares owned by the Company may not be voted or counted for quorum purposes. Any
such purchases are subject to the approval of the Supervisory Board and the
authorization of the general meeting of shareholders. Authorization is not
effective for more than 18 months. The Company may resell shares it purchases.
Upon a proposal of the Management Board and approval of the Supervisory Board,
the Company's shareholders at the general meeting shall have the power to decide
to cancel shares acquired by the Company or to reduce the nominal value of the
common shares. Any such proposal is subject to general requirements of
Netherlands law with respect to reduction of share capital.
Shares may only be cancelled by vote of the shareholders at the general
meeting. Only shares which the Company holds or for which it holds the
depository receipts may be cancelled. However, an entire class may be cancelled
provided the Company repays the par value to the holders of such shares.
Material contracts
For material contracts See "Item 8 - Financial Information, B. Significant
Changes".
Exchange controls
There are no governmental laws, decrees or regulations in The Netherlands,
the Company's jurisdiction of organization, that restrict the Company's export
or import of capital in any material respect, including, but not limited to,
foreign exchange controls.
There are no limitations imposed by Netherlands law or the Company's
charter documents on the right of nonresident or foreign owners to hold or vote
Common Shares.
Taxation
United States Federal Income Tax Consequences
The following discussion summarizes the material anticipated U.S. federal
income tax consequences of the acquisition, ownership and disposition of shares
by a U.S. Holder (as defined below). This summary deals only with shares held as
capital assets and does not deal with the tax consequences applicable to all
categories of investors some of which (such as tax-exempt entities, banks,
broker-dealers, investors who hold shares as part of hedging or conversion
transactions and investors whose functional currency is not the U.S. dollar) may
be subject to special rules. This summary does not deal with the tax
consequences for U.S. Holders who own at any time directly or indirectly through
certain related parties 10% or more of the voting stock or nominal paid-in
capital of the Company.
The summary does not purport to be a complete analysis or listing of all
the potential tax consequences of holding shares, nor does it purport to furnish
information in same detail or with attention to an investor's specific tax
circumstances that would be provided by an investor's own tax adviser.
Accordingly, prospective purchasers of shares are advised to consult their own
tax advisers with respect to their particular circumstances and with respect to
the effects of U.S. federal, state, local, or other laws to which they may be
subject.
As used herein, the term "U.S. Holder" means a beneficial owner of shares
that is (I) for United States federal income tax purposes a citizen or resident
of the United States, (ii) a corporation or other entity created or organized in
or under the laws of the United States or any political subdivision thereof, or
(iii) an estate or trust the income of which is subject to United States federal
income taxation regardless of its source.
40
The summary is based on the Internal Revenue Code of 1986, as amended (the
"Code"), judicial decisions, administrative pronouncements, and existing and
proposed Treasury regulations, changes to any of which after the date of this
Annual Report on Form 20-F could apply on a retroactive basis and affect the tax
consequences described herein.
Taxation of Dividends
For U.S. federal income tax purposes, the gross amount of distributions
(including any withholding tax thereon) made by the Company out of its current
or accumulated earnings and profits (as determined under U.S. federal income tax
principles) will be included in the gross income of a direct U.S. Holder as
foreign source dividend income on the date of receipt but will not be eligible
for the dividends received deduction generally allowed to U.S. corporations.
Distributions in excess of the earnings and profits of the Company will be
treated, for U.S. federal income tax purposes, first as a nontaxable return of
capital to the extent of the U.S. Holder's basis in the shares (thereby
increasing the amount of any gain and decreasing the amount of any loss realized
on the subsequent disposition of such shares) and then as a gain from the sale
or exchange of the shares. The amount of any dividend paid in euro will be equal
to the U.S. dollar value of the euro on the date of receipt regardless of
whether the U.S. Holder converts the payment into U.S. dollars. Gain or loss, if
any, recognized by a U.S. Holder resulting from currency exchange fluctuations
during the period from the date the dividend is includable to the date such
payment is converted into U.S. dollars and any exchange gain or loss will be
ordinary income or loss.
On each of July 23, 2001 and May 13, 2002, ICTS declared and paid a $2.25
dividend per Share ($1.69 net of all withholding taxes required by The
Netherlands) and on December 10, 2002 ICTS declared and paid a dividend of $3.00
per share (net of all withholding taxes required by The Netherlands). For a
discussion of the applicable taxes on such dividends see, "Netherlands Dividend
Withholding Tax". The declaration of dividends will be at the discretion of our
board of directors and will depend upon our earnings, capital requirements,
financial position, general economic conditions, and other pertinent factors. We
cannot assure you that dividends will be paid in the future.
Foreign Tax Credits
U.S. Holders will generally be entitled to claim a credit against their
United States federal income tax liability for the amount of Netherlands
dividend withholding tax imposed on dividends paid to U.S. Holders. See
Netherlands Dividend Withholding Tax.. U.S. Holders who are entitled to the
benefits of a reduced rate of Netherlands dividend withholding tax under the
U.S. Tax Treaty will be allowed a credit for only the amount of withholding tax
provided for under the U.S. Tax Treaty (i.e. 15%). However, the full amount of
the dividend, including any withheld amounts in excess of 15%, will be subject
to current United States federal income taxation whether or not such Holder
obtained a refund of the excess amount withheld. The U.S. Holder is also
entitled to a U.S. foreign tax credit for Dutch corporate taxes assessed on the
earnings and profits that are distributed. To the extent that Dutch corporate
income tax has reduced the accumulated earnings and profits (i.e. the taxes have
been paid or at least accrued with an assessment), these taxes accompany the
dividend at the same pro-rata percentage as the dividend to the accumulated
earnings and profits. The dividend income against which U.S. tax is assessed
must be grossed up by the amount of Dutch taxes to be claimed as a credit in
order to reverse the effect of the reduction to taxable earnings and profits.
The amount of the credit for Netherlands income tax in accordance with the U.S.
Tax Treaty will be subject to limitations contained in the foreign tax credit
provisions of the Code. In the event the Company pays a dividend to a U.S.
Holder out of the earnings of a non-Dutch subsidiary, however, it is possible
that under certain circumstances such U.S. Holder would not be entitled to claim
a credit for a portion of any Dutch taxes withheld by the Company from such
dividend. The portion of Dutch withholding tax that may not be creditable in
this instance equals a maximum of 3% of the gross amount of such dividend (or
20% of the Dutch taxes withheld in the case of a U.S. Holder entitled to claim a
15% withholding rate under the U.S. Tax Treaty). This limitation could only
potentially apply under circumstances where the Company pays dividends on the
shares.
Depending on the particular circumstances of the U.S. Holder, dividends
accrued from shares will generally be classified, for foreign tax credit
purposes, as passive income or financial services income. A U.S. Holder who
finds it more advantageous because of such limitations, to claim The Netherlands
dividend withholding tax as a deduction instead of a credit may do so, but only
for a year for which such Holder does not claim a credit for any foreign taxes.
If the U.S.Holder is a U.S. partnership, trust, or estate, any tax credit is
available only to the extent that the income derived by such partnership,
trusts, or estate is subject to U.S. tax on the income of a resident either in
its hands or in the hands of its partners or beneficiaries, as the case may be.
41
Taxation on Sale or Disposition of Shares
U.S. Holders will recognize capital gain or loss for U.S. federal income
tax purposes on the sale or other disposition of shares in an amount equal to
the difference between the U.S. dollar value of the amount realized and the U.S.
Holder's adjusted tax basis in the shares. In general, a U.S. Holder's adjusted
tax basis in the shares will be equal to the amount paid by the U.S. Holder for
such shares. For shares held less than a year, any such gain or loss will
generally be treated as short-term gain or loss and taxed as ordinary gain or
loss. If the shares have been held for more than a year, any such gain or loss
will generally be treated as long-term capital gain or loss. Rates of tax on
long-term capital gains vary depending on the holding period. U.S. Holders are
advised to consult a competent tax adviser regarding applicable capital gains
tax provisions and sourcing of capital gains and losses for foreign tax credit
purposes.
Gift and Estate Tax
An individual U.S. Holder may be subject to U.S. gift and estate taxes on
shares in the same manner and to the same extent as on other types of personal
property.
Backup Withholding and Information Reporting
Payments in respect of the shares may be subject to information reporting
to the U.S. Internal Revenue Service and to a 31% U.S. backup withholding tax.
Backup withholding generally will not apply, however, to a Holder who furnishes
a correct taxpayer identification number or certificate of foreign status and
makes any other required certification or who is otherwise exempt from backup
withholding. Generally, a U.S. Holder will provide such certification on Form
W-9 (Request for Taxpayer Identification Number and Certification) and a non-US
Holder will provide such certification on Form W-8 (Certificate of Foreign
Status).
Foreign Personal Holding Companies
The Company or any of its non-US subsidiaries may be classified as a
"foreign personal holding company" ("FPHC") if in any taxable year five or fewer
persons who are U.S. citizens or residents own (directly or constructively after
the application of certain attribution rules) more than 50% of the Company's
stock (a "US Group") and more than 60% of the gross income of the Company or of
any subsidiary consists of passive income for purposes of the FPHC rules. There
is a look-through rule for dividends and interest received from related persons.
Accordingly, dividends and interest received by the Company from its
subsidiaries will be re-characterized based on the income of the subsidiaries.
If the Company or any of its subsidiaries is or becomes a FPHC, each
U.S.Holder of the Company (including a U.S. corporation) who held stock in the
Company on the last day of the taxable year of the Company, or, if earlier, the
last day of its taxable year in which a U.S. Group existed with respect to the
Company, is required to include in gross income as a dividend such shareholder's
pro rata portion of the undistributed FPHC income of the Company or the
subsidiary, even if no cash dividend was actually paid. In this case, if the
Company is a FPHC, a U.S. Holder is entitled to increase its tax basis in the
shares of the Company by the amount of a deemed dividend from the Company. If a
subsidiary of the Company is a FPHC, a U.S. Holder in the Company should be
afforded similar relief, although the law is unclear as to the form of the
relief.
Taxes in the Netherlands
The following is a general discussion of the tax laws in the Netherlands
as they relate to the operations of the Company:
Corporate Income Taxes
Each subsidiary of ICTS is subject to taxation according to the applicable
tax laws with respect to its place of incorporation, residency or operations.
ICTS is incorporated under the laws of the Netherlands and is therefore subject
to the tax laws of the Netherlands. In 2004 the standard corporate income tax
rate was 29% applicable for taxable profits up to EUR 22,689 and 34.5% for the
excess. In 2005 these rates are 27% and 31.5% respectively.
For Dutch corporate income tax purposes business affiliates should
calculate their profits at arms length. Therefore, if in transactions between
such affiliates, certain benefits are bestowed on either entity because of such
42
affiliation and if any profits are realized due to such association, then both
entities should include such profits as part of their income.
Participation exemption
In addition, all income of ICTS arising from dividends paid by its
subsidiaries or affiliates or capital gains from the sale of its shares in
subsidiaries or affiliates is exempt from corporate income tax in the
Netherlands if the following conditions are fulfilled: (i) ICTS must hold at
least 5% of the nominal paid-in capital of the subsidiary or affiliate, (ii) the
subsidiary or affiliate must be an operating company, (iii) the subsidiary or
affiliate must be subject to taxation of its profits in its jurisdiction of
incorporation or residence and (iv) for non-European Community subsidiaries or
affiliates or for European Community subsidiaries or affiliates in which ICTS
owns less than 25% of the nominal paid-in capital, as well as for larger
shareholdings if the EU company is to benefit from the participation exemption,
ICTS must not hold the shares in the subsidiary or the affiliate merely as a
portfolio investment (which is deemed to be the case if the activities of the
subsidiary or affiliate consist mainly of the financing (directly or indirectly)
entities related to ICTS or assets of such entities). Furthermore, the
participation exemption is denied if 70 percent or more of the assets of any
participation would consist of interests in companies which would not be
considered qualifying participations if the interests would have been directly
held by ICTS. The participation exemption will also be excluded for
participations in EU companies with foreign branches if the branches would not
have been exempted in case they would have been held directly by ICTS.
Consequently, income of ICTS arising from dividends paid by its
subsidiaries or affiliates or capital gains from the sale of its shares in its
subsidiaries or affiliates may be exempt from corporate income tax in the
Netherlands.
Thin-capitalization rules
As of January 1 2004, expenses relating to participations in all
companies, regardless of whether they are resident in the Netherlands or abroad,
are deductible. The deduction of interest expenses will be reduced with regard
to loans provided to group companies or related companies that have been
excessively financed by debt.
The non-deductible amount of interest in any fiscal year will be equal
to the portion of the interest on loans, including expenses incurred in
connection with loans, that is proportional to the ratio between excess debt and
average debt. The thin capitalisation rules do not apply to currency exchange
results and currency gains and losses on acquisition debts. These items will be
taxable or deductible.
A company is regarded as excessively financed by debts if the average
annual debt for tax purposes exceeds three times the average annual equity for
tax purposes and the excess is greater than EUR 500,000. In this respect, the
amount of the debts is defined as the net amount of cash loans receivable and
cash loans payable.
Limitations on set-off of losses
As from 1 January 2004, new rules have been introduced that may affect
the carry forward of losses of prior years against profits made in 2004 and
subsequent years. Generally, the new rules provide that, if the activities of a
company for the entire year entirely or almost entirely (i.e. 90%) consist(ed)
for 90% or more of the holding of participations or (in)directly financing
related companies, losses resulting from these activities can only be set off
against the profits of years in which the activities of the taxpayer for
(almost) the entire year also (almost) entirely consisted of the holding of
participations or (in)directly financing of related companies; and the book
value of debt claims on related companies less the book value of debts to these
companies in (almost) the entire year does not exceed the book value of other
comparable debts less the book value of other comparable debts at the end of the
year in which the loss was realized.
The new rules clarify that the activities of a company will not be
deemed to be (almost) entirely consisting of the holding of participations or
(in)directly financing related companies if at least 25 employees are engaged in
other activities on a full-time basis.
The following is a non-exhaustive summary of Netherlands tax
consequences to a holder of Common Shares who is not, or is not deemed to be, a
resident of The Netherlands for purposes of the relevant tax codes (a
"non-resident
43
Shareholder") and is based upon laws and relevant interpretations thereof in
effect as of the date of this Annual Report, all of which are subject to change,
possibly on a retroactive basis. The summary does not address taxes imposed by
the Netherlands and its political subdivisions, other than the dividend
withholding tax, the individual income tax, the corporate income tax, the net
wealth tax and the gift and inheritance tax. The discussion does not address the
tax consequences under tax laws in any other jurisdiction besides the
Netherlands.
Netherlands Tax Consequences of Holding Shares
The following is a general discussion of the tax laws in The
Netherlands as they relate to the holding shares of the Company:
Dividend Withholding Tax in the Netherlands
ICTS currently does not anticipate paying any dividends in the
foreseeable future. To the extent that dividends are distributed by ICTS, such
dividends ordinarily would be subject, under the tax laws of the Netherlands, to
a withholding tax at a rate of 25%. Dividends include distributions in cash or
in kind, constructive dividends and redemption and liquidation proceeds in
excess of, for the Netherlands tax purposes, recognized paid-in capital. Share
dividends are also subject to the Netherlands dividend withholding tax, unless
distributed out of the paid-in share premium of ICTS as recognized for tax
purposes in The Netherlands.
A non-resident Shareholder can be eligible for a reduction or a refund
of the Dutch dividend withholding tax under a tax convention which is in effect
between the country of residence of the shareholder and the Netherlands. The
Netherlands has concluded such conventions with, among others, the United
States, most European Community countries, Canada, Switzerland and Japan. Under
most of these conventions, a dividend withholding tax in the Netherlands is
reduced to a rate of 15% or less.
Under the tax convention currently in force between the United States
and the Netherlands (the "Treaty"), dividends paid by ICTS to an individual
shareholder resident in the United States or a corporate shareholder organized
under the laws of the United States or any State or territory thereof, holding
less than 10% of the voting power in ICTS (each, a "U.S. Treaty Shareholder"),
are generally eligible for a reduction in the rate of the Netherlands dividend
withholding to 15%, provided that they are entitled to the benefits of the
Treaty, unless such U.S. Treaty Shareholder has a permanent establishment in the
Netherlands to which the Common Shares are attributable.
Generally, there is no dividend withholding tax applicable in the
Netherlands on the sale or disposition of Common Shares to persons other than
ICTS or its subsidiaries or affiliates. In case of sale or disposition of common
shares to ICTS or any of its subsidiaries, the dividend withholding tax in the
Netherlands may apply. However, after January 1, 2001, in limited circumstances,
the Dutch dividend withholding tax will not apply to repurchases of shares by
ICTS.
In addition, in an effort to reduce the practice of dividend stripping
to reduce or avoid the applicable taxes, the Dutch tax authorities have
introduced new laws to avoid such practices effective retroactively from April
27, 2001.
Income Tax and Corporate Income Tax in the Netherlands
A non-resident Shareholder will not be subject to income tax and
corporate income tax in the Netherlands with respect to dividends distributed by
ICTS on the Common Shares or with respect to capital gains derived from the sale
or disposal of Common Shares, provided that:
(a) the non-resident Shareholder does not carry on a business in
the Netherlands through a permanent establishment or a permanent representative
to which or to whom the Common Shares are attributable; and
(b) the non-resident Shareholder does not have a direct or
indirect substantial interest or deemed substantial interest in the share
capital of ICTS as defined in the tax code in the Netherlands or, in the event
the non-resident Shareholder does have such a substantial interest, such
interest forms part of the assets of an enterprise of that non-resident
Shareholder; and
44
(c) the non-resident Shareholder is not entitled to a share in
the profits of an enterprise effectively managed in the Netherlands, other than
through ownership of securities or through employment, to which enterprise the
Common Shares are attributable.
Generally, a substantial interest in the share capital of ICTS does not
exist if the non-resident Shareholder, alone or together with certain close
relatives, does not own, directly or indirectly, 5% or more of the issued
capital of any class of shares in ICTS, options to acquire 5% or more of the
issued capital of any class of shares or certain profit-sharing rights. In case
of a substantial interest claims the non-resident Shareholder has on ICTS may
belong to such substantial interest. Non-resident Shareholders owning a
substantial interest in ICTS may be subject to income tax upon the occurrence of
certain events, for example when they cease to own a substantial interest.
Special rules may apply to non-resident Shareholders who owned a
substantial interest or deemed substantial interest under the rules applicable
before such dates and to non-resident Shareholders who own a substantial
interest or deemed substantial interest as a result of modifications of the
special tax regime for substantial interest holders as of such dates.
As of January 1, 2001, a non-resident individual taxpayer can opt to be
treated like a resident of the Netherlands for tax purposes. This choice will
allow the individual to benefit from deductions and other tax benefits only
available to residents of the Netherlands. However, in most cases, this choice
may not prove beneficial since then the individual will be liable for its
worldwide income as well as its entire worldwide holdings to taxes in the
Netherlands.
Gift, Inheritance Tax and Transfer Tax Upon Gift or Death in the
Netherlands
A gift or inheritance of Common Shares from a non-resident Shareholder
will not be subject to gift, inheritance tax, and transfer tax upon gift or
death in the Netherlands provided that:
(a) (i) the Common Shares are not an asset attributable to a
resident enterprise or to a permanent establishment or a permanent
representative of a non-resident enterprise, as well as the Common Shares are
not an asset that comes of a co-entitlement other than being a shareholder, in
such an enterprise and (ii) the non-resident Shareholder is not entitled to a
share in the profits of an enterprise effectively managed in the Netherlands,
other than through ownership of securities or through employment, to which
enterprise the Common Shares are attributable.
(b) the Common Shares held by the non-resident do not qualify as
"fictitious real estate holdings" for Dutch real estate transfer tax purposes.
(c) the non-resident Shareholder has not been a resident of the
Netherlands at any time during the ten years preceding the time of the gift or
death or, in the event he or she has been a resident of the Netherlands in that
period, the non-resident Shareholder is not a citizen of the Netherlands at the
time of the gift or death; and
(d) for purposes of the tax on gifts, the non-resident
Shareholder has not been a resident of the Netherlands at any time during the
twelve months preceding the time of the gift.
(e) the beneficiaries of a deceased non-resident Shareholder have
not requested the treatment of the deceased Shareholder as a resident of the
Netherlands according to the Dutch inheritance taxes.
(f) In case of a grant of the Common Shares by a non-resident
Shareholder, the donee has not requested to have the donor treated as a resident
of the Netherlands for Dutch gift tax purposes.
Tax assessment in the U.S.
Under an ongoing tax examination, started in early 2005, by the U.S.
tax authorities of the U.S. subsidiaries of the Company, through the years ended
December 31, 2003. The U.S. subsidiaries were required to provide information
regarding their treatment of certain expenses. Based on the issues raised, the
tax authorities' position and a professional opinion the Company has received,
the Company has included a provision in its accounts. The Company's management
believes that the applicable provision in its financial statements as of
December 31, 2004 is adequate to cover probable
45
costs arising from this tax examination if and when they will become to Tax
assessments.
Documents on display
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended. In accordance with these
requirements, the Company files reports and other information with the United
States Securities and Exchange Commission ("SEC"). These materials may be
inspected at the Company's office in Amstelveen, The Netherlands. Documents
filed with the SEC may also be read and copied at the SEC's public reference
room at Room 1024, Judiciary Plaza Building, 450 Fifth Street N.W., Washington,
D.C. 20549 and at the regional offices of the SEC located at 500 West Madison
Street, Suite 1400, Chicago, IL 60661. Please call the SEC at 1-800-SEC-0330 for
further information on the public reference rooms. The SEC also maintains a web
site at http://www.sec.gov that contains reports, proxy statements and other
information regarding registrants that file electronically with the SEC.
Subsidiary Information
Not applicable
Item 11. Quantitative and Qualitative Disclosure About Market Risk
Foreign Currency Exchange Risk - Only applies to Companies operations
outside the USA. In 2003 about 90 percent of the Companies revenues were derived
in the USA.
See financial statements note 17.
Item 12. Description of Securities Other than Equity Securities
Not applicable
PART II
Item 13. Defaults, Dividend Arrearages and Delinquencies
Not applicable
Item 14. Material Modifications to the Rights of Security Holders and Use of
Proceeds
Not applicable
Item 15. Controls and Procedures.
(a) The Company performed an evaluation of the effectiveness of its disclosure
controls and procedures that are designed to ensure that the material
financial and non-financial information required to be disclosed on Form
20-F and filed with the SEC is recorded, processed, summarized and
reported timely. Based on the Company's evaluation, the Company's
management, including the Chief Executive Officer and Chief Financial
Officer, has concluded that the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange
Act) as of the end of the period covered by this report are effective.
Notwithstanding the foregoing, there can be no assurance that the
Company's disclosure controls and procedures will detect or uncover all
failures of persons within ICTS to disclose material information otherwise
required to be set forth in the Company's reports.
(b) There have been no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls
subsequent to the date of the evaluation thereof. Therefore, no corrective
actions were taken with regard to significant deficiencies and material
weaknesses.
Item 16A. Audit Committee Financial Experts
The financial expert and Chairman of the Audit Committee is Mr. Philip
M. Getter. Mr. Getter is an independent Director and has no relationship with
management.
Item 16B. Code of Ethics
The Company has adopted a Code of Ethics for principals executive
officers and senior financial officers.
46
Item 16C. Principal Accountant Fees and Services
Auditors' fees for the year 2004 were the following:
Audit fees:
-----------
Audit fees $390,000
Audit related fees $ 3,000
Sub-total
Non-Audit services:
-------------------
Tax fees $133,000
Total fees $526,000
In year 2004 the Company changed its principal auditor.
PART III
Item 17. Financial Statements See Item 18.
Item 18. Financial Statements
Reports of Independent Registered Public Accounting Firms
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations
and Comprehensive Operations ..............
Consolidated Statements of Changes in
Shareholders' Equity ......................
Consolidated of Statements of Cash Flows.
Notes to Consolidated Financial Statements.
Item 19. Exhibits
1. Articles of Association of the Company.*
2. Specimen of the Company's Common Stock.*
3. Code of Ethics for Principal Executive Officers and Senior
Financial Officers.**
Certification by the Registrant's Chief Executive Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
Certification by the Registrant's Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
* Incorporated by reference to the Company's 1999 annual report filed with the
Commission on Form 20-F.
** Incorporated by reference to the Company's 2003 annual report filed with the
Commission on Form 20-F.
47
SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing on Form 20-F/A and that it has duly caused and authorized the undersigned
to sign this annual report on its behalf.
ICTS INTERNATIONAL N.V.
By: /s/ Avraham Dan
Name: Avraham Dan
Title: Managing Director
Date: August 23, 2005
48
ICTS International N.V.
2004 ANNUAL REPORT
ICTS INTERNATIONAL N.V.
2004 ANNUAL REPORT
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Reports of independent registered public accounting firms F-2 - F-3
Consolidated financial statements:
Consolidated balance sheets F-4 - F-5
Consolidated statements of operations and comprehensive
operations F-6
Consolidated statements of changes in shareholders'
equity F-7
Consolidated statements of cash flows F-8 - F-9
Notes to consolidated financial statements F-10 - F-51
---------------
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders of
ICTS INTERNATIONAL N.V.
We have audited the accompanying consolidated balance sheet of ICTS
International N.V. and subsidiaries ("the Company") as of December 31, 2004, and
the related consolidated statement of operations and comprehensive operations,
changes in shareholders' equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. 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 consolidated financial position of the
Company as of December 31, 2004, and the consolidated results of their
operations, the changes in their shareholders' equity and their cash flows for
the year then ended, in conformity with United States generally accepted
accounting principles.
As disclosed in Note 14b, a multitude of lawsuits have been commenced against
the Company in connection with the September 11, 2001 terrorist attacks in the
United States, the Company's insurance carriers have canceled all its war risk
policies, and there is a dispute between the Company and the United States
Transportation Security Administration ("TSA"), with respect to the basis of
calculation of payments for security services rendered by the Company in 2002,
in respect of which, the TSA might be claiming refund of material amounts.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
May 13, 2005, except for Notes 6c(2) and 22b) for which
the date is May 26, 2005, Notes 22a) and 22d) for which the
date is June 30, 2005, and Note 22e) for which the date is
July 7, 2005
F-2
PRICEWATERHOUSECOOPERS [LOGO]
--------------------------------------------------------------------------------
|
| Kesselman & Kesselman
| Certified Public Accountants (Isr.)
| Trade Tower, 25 Hamered Street
| Tel Aviv 68125 Israel
| P.O. Box 452 Te1 Aviv 61003
| Telephone +972-3-7954555
| Facsimile +972-3-7954556
REPORT OF INDEPENDENT AUDITORS
To the Shareholders of
ICTS INTERNATIONAL N.V.
We have audited the accompanying consolidated balance sheets of ICTS
International N.V. ("the Company") and its subsidiaries as of December 31, 2003
and the related consolidated statements of operations and comprehensive income,
changes in shareholders' equity and cash flows for each of the two years in the
period ended December 31, 2003. These financial statements are the
responsibility of the Company's board of directors and management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We did not audit the financial statements of certain subsidiaries, whose
revenues included in consolidation constitute approximately 0.3% of total
consolidated revenues for the year ended December 31, 2002. We did not audit the
financial statements of certain associated companies, the Company's share in
excess of losses over profits of which is a net amount of $1.7 million and $1.6
million in 2003 and 2002, respectively. The financial statements of the above
subsidiaries and associated companies were audited by other independent
auditors, whose reports have been furnished to us, and our opinion, insofar as
it relates to amounts included for those companies, is based on the reports of
the other independent auditors.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United State) and auditing standards generally
accepted in Israel, including those prescribed by the Israeli auditors (Mode of
performance) Regulations, 1973. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by the Company's Supervisory board of directors and management,
as well as evaluating the overall financial statement presentation. We believe
that our audits and reports of the other independent auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other independent
auditors, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of the
Company and its subsidiaries as of December 31, 2003, and the consolidated
results of their operations and comprehensive income, the changes in their
shareholders' equity and their cash flows for each of the two years in the
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
Without qualifying our opinion, we draw attention to Note 14b(3), regarding a
dispute between the company's subsidiary in the U.S.A. and the Transportation
Security Administration ("TSA"), with respect to the basis of calculation of
payments for security services rendered in 2002, in respect of which, the TSA
might be claiming refund of material amounts.
As discussed in note 2g to the consolidated financial statements, effective
January 1, 2002, the Company changed its method of accounting for goodwill to
conform with FASB Statement of Financial Accounting Standard No. 142 "Goodwill
and Other Intangible Assets".
/s/ Kesselman & Kesselman
Kesselman & Kesselman
Certified Public Accountants (Isr.)
Tel Aviv, Israel
July 13, 2004
F-3
ICTS INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS
(US $ in thousands, except share data)
[Download Table]
December 31,
--------------------
2004 2003
---- ----
Assets
CURRENT ASSETS:
Cash and cash equivalents (note 2c) $3,426 $7,660
Restricted cash and short term investments (note 3) 4,773 3,114
Accounts receivable (net of allowance for doubtful
accounts of $2,708 and $1,989 as of December 31,
2004 and 2003, respectively) 11,972 13,798
Prepaid expenses 1,131 1,323
Deferred income taxes (note 16b) - 385
Other current assets 3,366 4,583
------- -------
Total current assets 24,668 30,863
------- -------
INVESTMENTS:
Investments in associated companies (note 5) 3,975 5,308
Other investments (note 6) 7,118 16,287
Deferred income taxes (note 16b) 3 33
------- -------
11,096 21,628
------- -------
PROPERTY AND EQUIPMENT (note 7):
Cost 27,547 30,629
Less - accumulated depreciation and amortization 10,417 6,666
------- -------
17,130 23,963
------- -------
GOODWILL (note 8) 314 5,580
------- -------
OTHER ASSETS, net of
accumulated amortization (note 9) 1,754 2,466
------- -------
Total assets $54,962 $84,500
======= =======
F-4
[Enlarge/Download Table]
December 31,
------------------
2004 2003
---- ----
Liabilities and shareholders' equity
CURRENT LIABILITIES:
Short-term bank credit (note 10) $4,416 $4,387
Current maturities of long-term liabilities (note 12) 2,779 2,752
Accounts payable - trade 2,579 964
Liabilities for losses of associated companies (note 5) - 2,130
Accrued expenses and other liabilities (note 11) 16,886 17,865
------- -------
Total current liabilities 26,660 28,098
------- -------
LONG-TERM LIABILITIES:
Accrued severance pay (note 13) 65 90
Deferred income taxes (note 16b) 20 19
Long-term liabilities, net of current maturities (note 12) 6,711 9,332
------- -------
Total long-term liabilities 6,796 9,441
------- -------
COMMITMENTS AND CONTINGENT
LIABILITIES (note 14)
------- -------
Total liabilities 33,456 37,539
------- -------
SHAREHOLDERS' EQUITY:
Share capital - shares of common stock, par value 0.45 Euro, December
31, 2004 and 2003:
Authorized - 17,000,000 shares; issued - 6,672,980 shares 3,605 3,605
Additional paid-in capital 19,670 19,670
Retained earnings 4,650 30,612
Accumulated other comprehensive loss (5,520) (5,947)
------- -------
22,405 47,940
Treasury stock at cost - December 31, 2004 and 2003 -
144,880 and 159,880 shares, respectively (899) (979)
------- -------
Total shareholders' equity 21,506 46,961
------- -------
Total liabilities and shareholders' equity $54,962 $84,500
======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-5
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
(US $ in thousands, except per share data)
[Enlarge/Download Table]
Year ended December 31,
-------------------------------------
2004 2003 2002
---- ---- ----
REVENUES (note 1b,c) $62,778 $71,571 $279,931
COST OF REVENUES 57,904 57,562 214,054
------- ------- -------
GROSS PROFIT 4,874 14,009 65,877
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 13,212 9,216 25,636
IMPAIRMENT OF ASSETS (notes 7,8,9) 15,422 14,352 9,156
------- ------- -------
OPERATING INCOME (LOSS) (23,760) (9,559) 31,085
INTEREST INCOME 470 2,248 2,072
INTEREST EXPENSE (1,160) (1,222) (1,678)
EXCHANGE DIFFERENCES (83) (242) 2,356
OTHER INCOME (EXPENSES), net (note 15) (2,907) (353) 41,229
------- ------- -------
INCOME (LOSS) BEFORE TAXES ON INCOME (27,440) (9,128) 75,064
INCOME TAXES BENEFIT (EXPENSE) (note 16) 3,184 (3,115) (16,442)
------- ------- -------
INCOME (LOSS) FROM OPERATIONS OF THE COMPANY
AND ITS SUBSIDIARIES (24,256) (12,243) 58,622
SHARE IN LOSSES OF ASSOCIATED
COMPANIES - net (note 5) (1,706) (6,661) (1,807)
------- ------- -------
NET INCOME (LOSS) FOR THE YEAR $(25,962) $(18,904) $56,815
------- ------- -------
OTHER COMPREHENSIVE INCOME:
Translation adjustments 1,043 3,456 710
Unrealized gains (losses) on marketable securities (616) 794 731
Reclassification adjustment for losses for available for sale
securities included in net income -- 237 (771)
------- ------- -------
427 4,487 670
------- ------- -------
TOTAL COMPREHENSIVE INCOME (LOSS) FOR THE
YEAR $(25,535) $(14,417) $57,485
======= ======= =======
EARNINGS (LOSSES) PER SHARE (note 20):
Basic $(3.98) $(2.90) $8.85
======= ======= =======
Diluted $(3.98) $(2.90) $8.80
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-6
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(US $ in thousands, except share data)
[Enlarge/Download Table]
Shares of common stock
---------------------- Additional Other
Number of Paid-in Capital
shares Amount capital surplus
------ ------ ------- -------
BALANCE AT JANUARY 1, 2002 6,332,400 $ 3,592 $ 19,537 $ 25
CHANGES DURING 2002:
Stock options exercised 32,400 13 133
Cost of acquisition of treasury
stock (120,000)
Options issued to consultants
(note 21) 29
Stock options exercised from
treasury
Stock 268,300 (54)
Dividend
Comprehensive income:
Net income
Other comprehensive income
(loss):
Translation adjustments
Unrealized losses on marketable
Securities
Total comprehensive income
--------- ------- --------- -----
BALANCE AT DECEMBER 31, 2002 6,513,100 3,605 19,670 -,-
--------- ------- --------- -----
CHANGES DURING 2003:
Comprehensive loss:
Loss
Other comprehensive income:
Translation adjustments
Unrealized gains on marketable
Securities
Total comprehensive income
--------- ------- --------- -----
BALANCE AT DECEMBER 31, 2003 6,513,100 3,605 19,670 -,-
--------- ------- --------- -----
CHANGES DURING 2004:
Stock options exercised from treasury
stock
Comprehensive loss: 15,000
Loss
Other comprehensive income
(loss):
Translation adjustments
Unrealized losses on marketable
Securities
Total comprehensive loss
--------- ------- --------- -----
BALANCE AT DECEMBER 31, 2004 6,528,100 $ 3,605 $ 19,670 $-,-
========= ======= ========= =====
Accumulated
other
Retained Comprehensive Treasury
earnings loss stock Total
-------- ---- ----- -----
BALANCE AT JANUARY 1, 2002 $ 26,930 $ (11,104) $ (1,720) $ 37,260
CHANGES DURING 2002:
Stock options exercised 146
Cost of acquisition of treasury
stock (907) (907)
--------
Options issued to consultants
(note 21) 29
--------
Stock options exercised from
treasury
Stock (36) 1,648 1,558
Dividend (34,193) (34,193)
--------
Comprehensive income:
Net income 56,815 56,815
Other comprehensive income
(loss):
Translation adjustments 710 710
Unrealized losses on marketable
Securities (40) (40)
--------
Total comprehensive income 57,485
-------- --------- -------- --------
BALANCE AT DECEMBER 31, 2002 49,516 * (10,434) (979) 61,378
-------- --------- -------- ========
CHANGES DURING 2003:
Comprehensive loss:
Loss (18,904) (18,904)
Other comprehensive income:
Translation adjustments 3,456 3,456
Unrealized gains on marketable
Securities 1,031 1,031
--------
Total comprehensive income (14,417)
-------- --------- -------- --------
BALANCE AT DECEMBER 31, 2003 30,612 * (5,947) (979) 46,961
-------- --------- -------- ========
CHANGES DURING 2004:
Stock options exercised from treasury
stock
Comprehensive loss: 80 80
Loss (25,962) (25,962)
Other comprehensive income
(loss):
Translation adjustments 1,043 1,043
Unrealized losses on marketable
Securities (616) (616)
--------
Total comprehensive loss (25,535)
-------- --------- -------- --------
BALANCE AT DECEMBER 31, 2004 $ 4,650 $* (5,520) $ (899) $ 21,506
======== ========= ======== ========
* Composed as follows:
[Enlarge/Download Table]
December 31,
------------------------------------
2004 2003 2002
Cumulative translation adjustments $(5,634) $(6,677) $(10,133)
Cumulative unrealized gains (losses) on marketable securities 114 730 (301)
------- ------- -------
$(5,520) $(5,947) $(10,434)
======= ======= =======
The accompanying notes are an integral part of the consolidated financial
statements.
F-7
(Continued) - 1
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ in thousands)
[Enlarge/Download Table]
Year ended December 31,
--------------------------------------
2004 2003 2002
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) for the year $(25,962) $(18,904) $56,815
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization. 3,618 3,417 1,481
Impairment of assets 15,422 14,352 9,156
Deferred income taxes 515 5,047 (4,273)
Increase (decrease) in accrued severance pay (26) 6 (9)
Options to service providers and consultants 29
Capital loss (gain) on fixed assets 341 6 (3)
Gain on sale of the investment in ICTS Europe (42,797)
Realized gain on sale of other investments (108)
Realized loss (gain) on marketable securities (16) (737) 89
Revaluation of other investments (217) (33)
Write off of investments and impairment of investment 2,893 400 1,672
Share in losses of associated companies 1,706 6,661 2,036
Interest from other long-term investments (derivative) (31) (52)
Interest on a loan to associated company (100)
Changes in operating assets and liabilities:
Accounts receivable - trade, net 1,909 2,097 8,784
Other current assets and prepaid expenses 572 (2,436) 469
Accounts payable 188 (44) 139
Accrued expenses and other liabilities (2,221) (28,852) 28,230
------ ------ ------
Net cash provided by (used in) operating activities (1,278) (19,118) 61,625
------ ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equipment and construction of entertainment projects (4,050) (7,895) (20,346)
Acquisitions of subsidiaries and operations (a) (711) (1,273)
Associated companies - acquisition of shares and granting of loans (1,685) (2,109) (8,448)
Other investments (5,202) (9,050)
Proceeds from sale of equipment 989 92 508
Proceeds from sale of investment in ICTS Europe, net 49,387
Proceeds from sale of other investments 5,687 1,000 1,458
Long term loans granted to a related party (1,500)
Repayment of long term loans granted to related parties 3,700
Decrease (increase) of time deposits and restricted cash (1,686) 4,735 (8,154)
Purchase of marketable securities available for sale (3,309)
Proceeds from sale of marketable securities available for sale 3,726 318
Proceeds from sale of short-term investments 7
Decrease (increase) in other assets 463 (579) 78
------ ------ ------
Net cash used in investing activities (282) (3,243) (324)
------ ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock options exercised 1,704
Cost of acquisition of treasury stock
Sale of treasury stock 80 (907)
Dividend paid (34,193)
Long-term loan received 243
Funding advances 1,000 4,113
Repayments of long-term liabilities (2,639) (2,266) (16,249)
Net increase (decrease) in short-term bank credit (1,766) (4,270) 3,587
------ ------ ------
Net cash used in financing activities (3,082) (2,423) (46,058)
------ ------ ------
EFFECT OF CHANGES IN FOREIGN CURRENCY
EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 408 (21) (192)
------ ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,234) (24,805) 15,051
BALANCE OF CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 7,660 32,465 17,414
------ ------ ------
BALANCE OF CASH AND CASH EQUIVALENTS AT END OF YEAR $3,426 $7,660 $32,465
======= ====== =======
F-8
(Concluded) - 2
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ in thousands)
[Download Table]
Year ended December 31,
--------------------------------
2004 2003 2002
---- ---- ----
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW ACTIVITIES:
Cash paid during the year for:
Interest $708 $578 $906
====== ====== =======
Taxes on income $248 $5,679 $19,876
====== ====== =======
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Investment in Subsidiary (note 4b) $589
======
Purchase of equipment (note 7d) $8,500
======
Purchase of equipment (*) $1,406
======
(*) During 2004 a Company subsidiary purchased equipment in the amount of
$5,001. The amounts paid are presented among investing activities, while the
balance of $1,406 represents suppliers' credit, which will be given
recognition in these statements upon payment.
[Enlarge/Download Table]
Year ended
December 31,
Year ended
2003
----
(a) Acquisitions of subsidiaries and operations (see notes 4 and 5a(3)):
Assets and liabilities of the subsidiaries and operations acquired at
date of acquisition, net of cash acquired:
Working capital, excluding cash and cash equivalents
Property, equipment and investments $163
Intangible assets 5,266
Accrued severance pay
------
5,429
Goodwill
Less:
Carrying amount of investments in those companies
prior to consolidation
Long term liabilities - issuance of notes (1,176)
Loan, including interest thereon, which was granted
in the past and waived (3,542)
------
$711
======
The accompanying notes are an integral part of the consolidated financial
statements.
F-9
NOTE 1 - GENERAL
a. Operations
ICTS International N.V., including its subsidiaries (collectively
referred to herein as "ICTS" or "the Company"), is a provider of
aviation security and other aviation related services through service
contracts with airline companies and airport authorities. ICTS also
engages in certain other activities, including Homeland Security,
constructing and developing entertainment related projects and leasing
of equipment. As mentioned in c. below, in 2002 one of the Company's
subsidiaries, Huntleigh USA Corporation ("Huntleigh") derived a
substantial portion of its revenues from providing aviation security
services to the United States Transportation Security Administration
("TSA"). Commencing November 2002 the Company ceased providing such
services to the TSA but continues to provide such services to aviation
companies and others. As to Segment Information see note 18.
b. The Company's financial position
During the years ended December 31, 2004 and 2003, the Company has
incurred $26 million and $18.9 million net losses, respectively, which
were accompanied by net cash used in operating activities of $1.3
million and $19.1 million, respectively. As of December 31, 2004 the
Company had a working capital deficiency of $2 million.
Subsequent to the year end, the Company's management commenced
liquidating its position in several long term assets as described in
Note 22. Management anticipates that continuing that will provide the
Company with the resources necessary to meet its obligations. The
Company's activity, for the long term, depends on entering into
additional service contracts.
c. Effect of the events of September 11, 2001 and Aviation and
Transportation Security Act
On November 19, 2001, as a result of the events of September 11, 2001,
the Aviation and Transportation Security Act was signed into law. The
Aviation and Transportation Security Act made airport security
including security screening operations for passenger air
transportation and intrastate air transportation a direct
responsibility of the Federal government as administered by the TSA. As
a result, in accordance with a contract signed with the TSA ("TSA
Contract"), the Company has provided screening services in its airport
locations during the transition period through November 2002, when all
such activities were transferred to the TSA. Through December 31, 2002,
the Company has recorded revenues of approximately $205 million from
the TSA. As a result of the foregoing the Company closed certain
locations and dismissed part of its employees. Closure and severance
expenses in the amount of $27.3 million were included in operating
expenses of 2002. As to the dispute with the TSA, see note 14b (3).
F-10
NOTE 1 - GENERAL (continued)
During 2003, the Department of Labor in the US ("DOL") finalized its
audit of the Company's subsidiary concerning the pay rates used to
compensate employees for services rendered pursuant to the TSA
Contract. The DOL concluded that in certain instances, employees had
not been paid the correct base rate, fringe benefits, vacation and
holiday pay by the subsidiary. As of December 31, 2004 a liability
relating to the audit of approximately $7.2 million was recorded in the
consolidated financial statements.
The TSA Contract indicates that the Company will receive notification
in writing at least 30 calendar days in advance of a location
transition. Under the provisions of the Worker Adjustment and
Retraining Notification Act (the "WARN Act"), the Company is required
to give 60 days written notification to its employees of an involuntary
termination. At December 31, 2002 and throughout most of fiscal 2003,
management estimated the Company's liability under the WARN Act to
approximate $18.9 million, which had been recorded by the Company in
cost of revenues in 2002. However, during the fourth quarter of fiscal
2003, the Company obtained a legal letter from an outside counsel
indicating that the Company may have meritorious defenses against the
payment of a substantial portion of the recorded accrual. Based on the
points noted in the legal letter and given the fact that no claims have
been filed to date by former employees seeking compensation under the
WARN Act provisions, the Company reviewed its original estimate and
reduced the estimated liability to approximately $0.5 million and $1.1
million at December 31, 2004 and 2003, respectively, by recording a
credit to cost of revenues of approximately $0.5 million and $17.8
million in 2004 and 2003, respectively.
As to the other outstanding issues, see note 14b.
d. Sale of ICTS Europe Holding B.V. ("ICTS Europe")
On October 5, 2000, the Company entered into a share purchase agreement
(the "Share Purchase Agreement") with Fraport AG ("Fraport"), whereby
Fraport was to acquire, in two stages of 45% and 55% in 2001 and 2002,
respectively, the shares of ICTS Europe. As a result of the sale, the
Company has fully divested itself of its European operations except for
the operations of the Company's subsidiary in the Netherlands and
countries that were formerly part of the Soviet Union republics,
including Russia, and Kazakhstan, and took upon certain restrictions on
its operations, see note 14c.
The capital gains on these sales, net of transaction expenses, were
approximately $42 million and $34 million, and were included among
"other income" in the first quarters of 2002 and 2001, respectively.
e. Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with U.S. GAAP
(as defined herein) requires management to make estimates and
assumptions
F-11
NOTE 1 - GENERAL (continued)
that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those
estimates.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the USA ("U.S. GAAP").
The significant accounting policies are as follows:
a. Functional and reporting currency
The accompanying financial statements have been prepared in U.S.
dollars ("dollars" or "$"). As of January 1, 2002, subsequent to the
sale of the Company's European activities, (see note 1c), substantially
all of the revenues of ICTS and its U.S. operations are received, and
substantially all of its operating costs are incurred in dollars.
Therefore, the functional currency of ICTS and its U.S. operations is
the dollar (prior to January 1, 2002 the Dutch Guilder was the
functional currency of the Company). The financial statements of
subsidiaries whose functional currency is not the dollar are translated
into dollars in accordance with the principles set forth in Statement
of Financial Accounting Standards ("FAS") No. 52 of the Financial
Accounting Standards Board of the USA ("FASB"). Assets and liabilities
are translated from the local currencies to dollars at year-end
exchange rates. Income and expense items are translated at average
exchange rates during the year.
Gains or losses resulting from translation are included as a separate
component of other comprehensive income (loss). Cumulative translation
adjustments are reflected as a separate component of shareholders'
equity, under "other comprehensive income (loss)".
Until December 31, 2001, the functional currency of ICTS and its
subsidiaries was the local currency in which the entity operated. The
financial statements of ICTS and its subsidiaries, in which the dollar
was not their functional currency, were translated into dollars in
accordance with the principles set forth in FAS 52.
The Company accounted for the change of the functional currency
prospectively as from January 1, 2002.
b. Principles of consolidation
The consolidated financial statements include the accounts of ICTS and
its over 50% controlled subsidiaries. Significant intercompany accounts
and transactions have been eliminated. Profits from intercompany
transactions, not yet realized outside the Company, have also been
eliminated.
F-12
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
c. Cash equivalents
The Company considers all highly liquid investments, which include
short-term bank deposits (up to three months from date of deposit) that
are not restricted as to withdrawal or use, to be cash equivalents.
d. Marketable securities and other investments:
1) Marketable securities
The Company classifies its existing marketable securities in
accordance with the provisions of FAS 115, "Accounting for Certain
Investments in Debt and Equity Securities", as available-for-sale.
Securities classified as available-for-sale are reported at fair
value (which is determined based upon the quoted market prices) with
unrealized gains and losses, net of related tax, recorded as a
separate component of accumulated other comprehensive income (loss)
in shareholders' equity until realized. Gains and losses on
securities sold are included in interest income. For all investment
securities, unrealized losses that are other than temporary are
recognized in the income statement. The Company does not hold these
securities for speculative or trading purposes. See also note 6b and
6c.
2) Other investments
Investments in less than 20%-owned, privately-held companies in
which the Company does not have the ability to exercise significant
influence are stated at cost. The Company's management evaluates its
investments from time to time and, if necessary, recognizes losses
for other than temporary declines in the value of these investments.
e. Investments in associated companies
Investments in companies in which the Company holds a 20% interest or
more or in which it has the ability to exercise significant influence,
provided it does not have control, are accounted for by the equity
method
F-13
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
f. Property and equipment
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method over the
estimated useful life of the assets. The estimated useful life used in
determining depreciation and amortization is as follows:
Years
------------
Equipment and facilities 3-16
(mainly 15)
Vehicles 3-7
Office furniture and equipment 3-14
Leased equipment and leasehold improvements are amortized by the
straight-line method over the period of the lease or the estimated
useful life of the improvements, whichever is shorter (3-5 years,
mainly 5).
g. Goodwill
On January 1, 2002, the Company adopted FAS No. 142, "Goodwill and
Other Intangible Assets ". Pursuant to FAS 142 goodwill is no longer
amortized but rather tested for impairment at least annually.
Prior to January 1, 2002 goodwill was amortized by the straight-line
method over the period of 20 years, see also note 8b.
The Company identified its various reporting units, which consist of
its operating segments. The Company has utilized expected future
discounted cash flows to determine the fair value of the reporting
units and whether any impairment of goodwill existed as of the date of
adoption.
The Company has selected December 31 of each year as the date on which
it will perform its annual goodwill impairment test. As of December 31,
2004 and 2003 goodwill of $5,266 and $797 relating to entertainment and
relating to the other operating segment were written off, respectively
(see note 4b and note 8).
In addition to the annual impairment test and as a result of the
imposed transfer of the aviation security operations to the TSA in
November 2002 (see note 1b), the Company performed interim impairment
tests, based on expected cash flows from the TSA Contract, on the
goodwill relating to its U.S.A reporting unit. The interim impairment
test performed as of September 30, 2002 resulted in an impairment and
the Company wrote off the balance of the goodwill in an amount of
$8,484 in 2002.
F-14
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
h. Other assets and Intangible assets
The intangible asset pertaining to customer relationships is being
amortized over 10 years. Technology is being amortized over 3-7 years
and presented net of write down in value. See note 9.
i. Impairment in value of long-lived assets
The Company has adopted FAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", effective January 1, 2002. FAS 144
requires that long-lived assets, held and used by an entity be reviewed
for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. Under
FAS 144, if the sum of the expected future cash flows (undiscounted and
without interest charges) of the long-lived assets is less than the
carrying amount of such assets, an impairment loss would be recognized,
and the assets would be written down to their estimated fair values.
The impairment expenses of long-lived assets were $10,156, $13,555 and
$0 in 2004, 2003 and 2002, respectively.
j. Treasury stock
The treasury stock was acquired by the Company for issuance upon the
exercise of options issued under the employee option plan. The treasury
stock is presented as a reduction of shareholders' equity, at its cost.
Gains on the sale of these shares, net of losses and of the related
tax, are recorded under "other capital surplus".
k. Revenue recognition
Revenue from services is recognized when services are rendered to the
Company's customers, based on terms contained in a contractual
arrangement, provided the fee is fixed and determinable, the services
have been rendered, and collection of the related receivable is
reasonably assured.
Revenue from leased equipment is recognized ratably over the lease
term.
l. Earnings (losses) per share ("EPS"):
1) Basic EPS is computed by dividing net income (loss) by the weighted
average number of shares of common stock outstanding during each
year, net of treasury stock.
2) Diluted EPS is computed by dividing net income (loss) by the
weighted average number of shares outstanding during the year, net
of treasury stock, taking into account the potential dilution that
could occur upon the exercise of options granted under stock options
plan, using the treasury stock method.
F-15
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
m. Deferred income taxes
Deferred income taxes are created for temporary differences between the
assets and liabilities as measured in the financial statements and for
tax purposes. Deferred taxes are computed using the enacted tax rates
expected to be in effect when these differences reverse. Measurement of
deferred tax liabilities and assets is based on provisions of the tax
laws, and deferred tax assets are reduced, if necessary, by the amount
of tax benefits the realization of which is not considered likely,
based on available evidence.
Deferred tax liabilities and assets are classified as current or
non-current, based on the classification of the related asset or
liability for financial reporting purposes, or according to the
expected reversal date of the specific temporary differences, if not
related to an asset or liability for financial reporting purposes.
Deferred taxes in respect of disposal of investments in subsidiaries
and associated companies have not been taken into account in computing
the deferred taxes, since, under the laws of The Netherlands, such
disposal of investments is tax exempt.
n. Accounts receivable
Accounts receivable are reported at their outstanding unpaid principal
balances reduced by an allowance for doubtful accounts. The Company
estimates doubtful accounts based on historical bad debts, factors
related to specific customers' ability to pay and current economic
trends. The Company writes off accounts receivable against the
allowance when a balance is determined to be uncollectible.
The allowance for doubtful accounts is mainly composed of specific
debts doubtful of collection amounting to $2,708 and $1,989 as of
December 31, 2004 and 2003, respectively. The bad debts expenses
(collection) were $798, $(264) and $5,297 in 2004, 2003, and 2002
respectively. The accounts receivable-trade includes $2.9 million as of
December 31, 2004 and 2003 which are due from the TSA, as to the
dispute with the TSA; see note 14 b (3).
o. Concentrations of credit risks - allowance for doubtful accounts
The Company and its subsidiaries operate mostly in the aviation
industry through service contracts. The Company renders services to a
large number of airline companies to which it provides credit, with no
collateral. Due to the slow-down in the aviation industry, (see also
note 1b), some airline companies may have difficulties in meeting their
financial obligations. This could have a material adverse effect on the
Company's business. The Company and its subsidiaries regularly review
the credit worthiness of their customers and determine the credit line,
if any.
F-16
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
p. Advertising costs
These costs are expensed as incurred. Advertising costs in 2003 were
$522, no advertising costs were incurred in 2004 and 2002.
q. Stock based compensation
1) Employee stock based compensation
The Company accounts for employee stock based compensation in
accordance with Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") and related
interpretations. Under APB 25 compensation cost for employee stock
option plans is measured using the intrinsic value based method of
accounting, and is amortized by the straight-line method against
income, over the expected service period.
FAS 123, "Accounting for Stock-Based Compensation", establishes a
fair value based method of accounting for employee stock options or
similar equity instruments, and encourages adoption of such method
for stock compensation plans. However, it also allows companies to
continue accounting for those plans according to the accounting
treatment prescribed by APB 25.
The Company has elected to continue accounting for employee stock
option plans under APB 25, and has accordingly complied with the
disclosure requirements set forth in FAS 123 and amended by FAS 148
for companies electing to apply APB 25.
The fair value of each option granted is estimated on the date of
grant using the Black & Scholes option-pricing model with the
following weighted average assumptions:
For options granted in
----------------------------------
2004 2002 2001
------- ------- -------
Expected life of options (years) 5 3 3
Expected volatility 101.3% 100% 46%
Risk free interest rate 3.5% 3.5% 3.5%
Expected dividend yield 0% 0% 0%
The weighted average fair value price per option granted during the
year, using the Black & Scholes option-pricing model was $1.03 and
$2.03 for 2004 and 2002, respectively. During 2003 no options were
granted.
The following table illustrates the effect on net income and
earnings per share assuming the Company had applied the fair value
recognition provisions of FAS 123 to stock-based employee
compensation:
F-17
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
Year ended December 31,
----------------------------------
2004 2003 2002
--------- --------- --------
in thousands
(except per share data)
----------------------------------
Net income as reported $(25,962) $(18,904) $56,815
Deduct: stock based employee
compensation expenses determined
under fair value method for all awards (334) (27) (493)
-------- -------- -------
Pro-forma net income $(26,296) $(18,931) $56,322
======== ======== =======
Earnings (losses) per share:
Basic - as reported $(3.98) $(2.90) $8.85
======== ======== =======
Basic - pro-forma $(4.03) $(2.91) $8.77
======== ======== =======
Diluted - as reported $(3.98) $(2.90) $8.80
======== ======== =======
Diluted - pro-forma $(4.03) $(2.91) $8.73
======== ======== =======
2) Non-employee stock based compensation
The Company accounts for options granted to non-employees in
exchange for services received, using the fair value based method of
accounting as prescribed by FAS 123, based on the fair value of the
options granted.
r. Comprehensive Income (loss)
In addition to net income, other comprehensive income (loss) includes
unrealized gains and losses on available-for-sale securities and
currency translation adjustments of non-dollar currency financial
statements of investee companies.
s. Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued Statement on Financial Accounting
Standards No. 146 ("SFAS 146"), Accounting for Costs Associated with
Exit or Disposal Activities. SFAS 146 provides guidance on the
financial accounting and reporting for costs associated with exit or
disposal activities and nullifies Emerging Issues Task Force Issue No.
94-3, Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring). The Company's adoption of SFAS 146 during the
current fiscal year did not have a material impact on the Company's
financial statements as no new restructuring activity has occurred
since the Company's adoption of SFAS 146.
F-18
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
t. Recently issued accounting pronouncements
1) In May 2004, the FASB issued FAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity" (FAS 150). FAS 150 establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. FAS 150 is effective
for financial instruments entered into or modified after May 31,
2004, and otherwise (except for certain instruments) is effective at
the beginning of the first interim period beginning after June 15,
2004. Effective July 1, 2004, the Company adopted FAS 150. The
adoption of FAS 150 did not have a material effect on the Company's
financial position or results of operations.
2) In January 2004, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" (FIN 46). Under FIN
46, entities are separated into two categories: (1) those for which
voting interests are used to determine consolidation (this is the
most common classification) and (2) those for which variable
interests are used to determine consolidation. FIN 46 explains how
to identify Variable Interest Entities ("VIE"s) and how to determine
when a public company should include the assets, liabilities,
non-controlling interests, and results of activities of a VIE in its
consolidated financial statements.
Since issuing FIN 46, the FASB has proposed various amendments to
the interpretation and has deferred its effective dates. Most
recently, in December 2004, the FASB issued a revised version of FIN
46 (FIN 46-R), which also provides for a partial deferral of FIN 46.
This partial deferral established the effective dates for the
application of FIN 46 and FIN 46-R based on the nature of the VIE
and the date upon which the public company became involved with the
VIE. In general, the deferral provides that (i) for VIEs created
before February 1, 2004, a public company must apply FIN 46- R at
the end of the first interim or annual period ending after March 15,
2004, and may be required to apply FIN 46 at the end of the first
interim or annual period ending after December 15, 2004, if the VIE
is a special purpose entity, and (ii) for VIEs created after January
31, 2004, a public company must apply FIN 46 at the end of the first
interim or annual period ending after December 15, 2004, as
previously required, and then apply FIN 46-R at the end of the first
interim or annual reporting period ending after March 15, 2004. As
of December 31, 2004 the company has no variable interests in any
VIE. Accordingly, while there can be no assurance that it will not
have variable interests in one or more VIEs in the future, the
company believes that the adoption of FIN 46 and FIN 46-R will not
have material impact on its financial position, results of
operations and cash flows.
3) In December 2004, the FASB issued SFAS No. 123 (revised 2004)
"Share-Based Payment" (SFAS 123R), which requires the measurement of
all share-based payments to employees, including grants of employee
stock options, using a fair-value-based method and the recording of
such expense in an entity's statement of income. The accounting
provisions of SFAS 123R
F-19
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
are effective for annual reporting periods beginning after June 15,
2005. The Company is required to adopt the provisions of SFAS 123R
in the quarter ending March 31, 2006. The proforma disclosures
previously permitted under SFAS 123 no longer will be an alternative
to financial statement recognition. Although the Company has not yet
determined whether the adoption of SFAS 123R will result in amounts
that are similar to the current pro forma disclosures under SFAS
123, the Company is evaluating the requirements under SFAS 123R and
expects the adoption to have a material impact on the consolidated
statements of operations and net income (loss) per share.
u. Reclassification:
Certain amounts from 2003 and 2002 have been reclassified to conform
with 2004 presentation. The reclassification had no effect on
previously reported net income (loss), shareholders' equity or cash
flows.
NOTE 3 - RESTRICTED CASH AND SHORT TERM INVESTMENTS
December 31,
----------------------
2004 2003
------- --------
Restricted cash (1) $3,500 $3,000
Time deposit (2) 1,185 --
Marketable securities - available for sale -- 26
Other 88 88
------ ------
$4,773 $3,114
====== ======
Gross unrealized gains resulting from
their presentation at market value -- $1
====== ======
(1) In connection with the revolving line of credit agreement of a
subsidiary (see note 10), the subsidiary established a time
deposit account with the lender as cash collateral security. The
amount is dollar denominated and as of December 31, 2004 bears an
annual interest at 1.95%.
(2) As of December 31, 2004, dollar denominated deposit bearing
interest at 2.19%.
NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES
a. In September 2002, ICTS increased its percentage interest in
Procheck International B.V. ("PI") to 100% for a cash consideration
of $2,845. PI provides security services in The Netherlands at
Schiphol Airport Amsterdam. The purchase price exceeded the acquired
share of the fair market value of the identified net assets of PI by
approximately $1,879, which was allocated to the contract with
Schiphol Airport. This intangible asset is amortized by the straight
-line method, over its estimated useful life, which is estimated as
10 years. PI is fully consolidated as from September 30, 2002.
F-20
NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES (continued)
b. In July 1, 2002, ICTS increased its percentage interest in Demco
Consultants Ltd. ("Demco") from 37% to 67% for cash consideration of
$410. As part of the above transaction, ICTS has been granted a 13
months option commencing July 1, 2004 to purchase the remaining 33%
equity from the minority shareholders in Demco for $589, and the
Company has granted to the minority shareholders an option to sell
the same equity to the Company for $533. As a result, the Company
had fully consolidated Demco as of July, 2002, and recorded a
liability to the minority in the amount of $589. The purchase price
exceeded the fair market value of the tangible net assets of Demco
by approximately $440, which was allocated to goodwill. The goodwill
was attributed to "other operations segment".
Demco provides services for planning, organization and establishment
of large scale national systems infrastructures designed to assist
local governments with the operations, control and the proper
decision making during national or local emergencies.
During 2003 the minority shareholder exercised its put option. The
balance of the liability (in excess of the final cost of the option
that was exercised) was written off against the goodwill that was
recorded in 2002, at the time the exercise was recorded. At the end
of the third quarter of 2003, as it turned out that Demco will not
be able to realize its business plans, the Company tested Demco's
goodwill for impairment and wrote off the balance of this goodwill
of $797.
v. Information regarding first time consolidation of PI and Demco
The following table presents the pro forma results of operations for
2002 as if the acquisitions of control in PI and Demco had occurred
on the first day of the periods presented:
Year ended
December 31,
2002
------------
Revenues $285,895
========
Gross profit $ 67,652
========
Operating income $ 34,257
========
Net income $ 58,427
========
F-21
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES
a. Composed and presented as follows:
[Download Table]
December 31,
-------------------
2004 2003
------ -------
Investment in Pioneer (1) $- $ 1,725
Investment in 32.15% ( 2003 -35.7%) interest of InkSure
Technologies Inc. (2) 2,943 3,583
Investment in 42.5% interest in Rainbow Square
Entertainment LLC(3) 201 --
Investment in 40% interest in Ramasso Holding B.V. (4) -- (1,137)
Investment in 50% interest in ICTS-NAS (5) 796 (993)
Investment in 50% interest in Aerosafe LLC 35 --
------ -------
$3,975 $ 3,178
====== =======
The investment is presented in the balance sheets as follows:
Among investments 3,975 5,308
Among current liabilities -- (2,130)
------ -------
$3,975 $ 3,178
====== =======
(1) Investment in Pioneer - Composed as follows:
December 31, 2003
-----------------
Shares (14.2%) (a) $356
Subordinated debentures (b) 1,369
------
$1,725
======
(a) In 1998, ICTS acquired 5.4% interest in Pioneer. In 2002 the
Company acquired in private placement offerings additional
shares (representing 8.8% shareholding). After these
transactions the Company holds approximately 14.2% of the
outstanding shares of Pioneer (674,300 shares). The excess of
costs of these investments over the acquired share in
Pioneer's net assets of $766 was attributed to goodwill.
In addition, Pioneer granted to the Company a 5 year warrant
(commencing February 2002) to purchase 13,000 shares at a
price of $2.25 per share and a 3 year warrant (commencing
January 2004) to purchase 5,883 shares at a price of $1.00
per share.
Following the 2002 acquisition ICTS has determined that it
had obtained significant influence, and as a result changed
its method of accounting for this investment to the equity
method. Prior years figures have been retroactively adjusted.
Effective February 20, 2003, Pioneer's shares are no longer
listed on the NASD Electronic Bulletin Board stock market and
the company
F-22
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
is no longer a reporting company under the Securities
Exchange Act of 1934.
(b) In January 2000, ICTS acquired a $1,000 non-marketable
debenture of Pioneer, bearing interest at the rate of 10% per
annum. The debenture was due in November 2004, and its
repayment was guaranteed by Leedan International Holdings B.V
a subsidiary of Leedan Business Enterprise Ltd. (hereafter -
"Leedan" - a company controlled by the Company's
shareholders). As of December 31, 2003 the loan includes an
accrued interest of $369. Due to legal procedures and based
on the opinion of its legal advisors, management estimated
that Pioneer will be able to repay the debenture, however,
not before the procedures are finalized, therefore the amount
was classified among long term assets.
(c) In December 2004 ICTS determined that as a result of an
adverse decision by the Pennsylvania Supreme Court reversing
a favorable decision of the lower court in a case involving
Pioneer, the Company has decided to write off, retroactively
to March 2004, its entire investment in Pioneer in the amount
of $1,794 and, as a result of Leedan financial position, not
to exercise the guaranty granted by Leedan.
(2) During the period from April to September 2002, ICTS purchased
4,106,895 shares, which represent 34.3% of InkSure Technologies
Inc. ("Inksure") for a consideration of $5,986. The purchase
price exceeded the fair market value of the net assets of
Inksure by approximately $3,881, of which $660 was allocated to
in process R&D and was expensed immediately (this amount was
included in "share in losses of associated companies, net"). And
the remaining $3,221 was attributed to technology purchased and
is being amortized using the straight-line method over 7 years.
As a result of a reverse merger with a non-operating public
shell corporation, performed by Inksure in October 2002, the
Company became the shareholder of the merged quoted company
(which changed its name to Inksure Technologies Inc).
In July 2003, ICTS purchased another 174,542 shares for a
consideration of $192. The amount exceeded the fair value of the
tangible net assets by $143 which was attributed to technology
purchased and is to be amortized using the straight-line method
over 5.75 years (the remaining life of the technology purchased
in 2002).
In April 2004, ICTS participated, proportionate to its share, in
a private placement in the amount of $370. The amount was at the
fair value of the tangible net assets.
Following a private placement in July 2004, in which the Company
did not participate, the Company share in Inksure was reduced to
32.15%.
F-23
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
The market value of the shares (32.15 %) as of December 31, 2004
was $5,395.
(3) The Company holds 42.5% in Rainbow Square Entertainment LLC
("Rainbow"), a partnership that was established in July 2003.
Rainbow operates an entertainment site. In 2004 the Company
recorded a loss of $81 on its share of the 2004 partnership
loss.
In December 2004, the Company determined that the further cash
flows from the partnership will not recover its investment, and
as a results recorded an impairment loss of $419.
(4)(a) The investment is comprised of investment in 40% of the
outstanding shares of Ramasso Holdings B.V. ("Ramasso") and a
loan (see below). The remaining 60% shareholdings of Ramasso
are held 40% by ITA, International Tourist Attractions Ltd. (
a company under the control of one of ICTS's shareholders)
and 20% by other affiliates. The loan, in an original amount
of $2,988 at December 31, 2003 bore annual interest of 4.25%,
and had no fixed repayment date.
Ramasso was engaged in construction of an entertainment
project in Rome owned and managed by Italian Multimedia
Attraction SPA ("IMA"), a wholly owned subsidiary of Ramasso.
In 2003 Ramasso recognized an impairment loss on its
investment in IMA's assets and recorded a loss of $2,429
which resulted in a negative equity in the amount of $4,588.
After taking into account the additional loans granted by
ICTS in 2003, and the guarantee described in (b) below, ICTS
recorded its share in the losses of Ramasso in the amount of
$2,361.
(b) In January 2002, IMA entered into a loan facility agreement
with a German bank. The Company and ITA, collectively and
individually, guaranteed the loan in full to the bank. The
guarantee is a continuing guarantee for the obligations of
IMA. As of December 31, 2003 IMA's net obligations to the
bank amounted to $1,683.
Taking into account the deferred note the Company issued to
ITA , in connection with the acquisition of ITA activities
(see note 8 (b)) of $546 (which serves as a security to this
guarantee) the Company recorded at December 31, 2003 a
liability of $1,137 in respect of this guarantee.
Subsequent to December 31, 2003 as a result of IMA not been
able to continue and finance its operations, IMA entered into
bankruptcy procedures, and ICTS was required to cover its
guaranty to the bank (see note 10(b)). Although the Company
believes that it accounted in full for its exposure as to
this investment, it is still dependent on the outcome of the
Italian court bankruptcy proceedings.
F-24
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
(5) In September 2002, ICTS and ICTS Europe established a joint
venture, ICTS Netherlands Airport Services VOF ("NAS"), owned
equally by the parties, which provides security services at
Amsterdam Schiphol Airport in The Netherlands. NAS commenced
operations in December 2002. In 2004 and 2003 the Company has
invested additional amounts in NAS of $564 and $1,399,
respectively, and recorded its share in profit (loss) on equity
in amount of $1,195 and $(2,392), respectively.
b. Below is summarized financial data of Inksure, Rainbow and NAS:
Inksure:
Balance sheet data: December 31,
------------------
2004 2003
------ ------
Current assets $2,645 $2,194
====== ======
Non-current assets $ 686 $ 745
====== ======
Current liabilities $ 616 $ 613
====== ======
Shareholders' equity $2,572 $2,207
====== ======
Operating results data:
Year ended December 31,
----------------------------------
2004 2003 2002
-------- --------- ------
Revenues $ 1,078 $ 608 $2,693
======= ======= ======
Gross profit $ 581 $ 474 $2,291
======= ======= ======
Net loss $(2,014) $(2,965) $ (821)
======= ======= ======
Rainbow:
Balance sheet data:
December 31,
2004
-------------
(unaudited)
-------------
Current assets $ 155
======
Non-current assets $1,318
======
Current liabilities $ 184
======
Partners' capital $1,289
======
F-25
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued)
Operating results data:
Year ended
December 31,
2004
-------------
(unaudited)
------------
Net loss $(190)
=====
NAS:
Balance sheet data:
December 31,
-------------------
2004 2003
------ -------
Current assets $6,076 $ 2,330
====== =======
Non-current assets $ 263 $ 277
====== =======
Current liabilities $4,746 $ 4,690
====== =======
Shareholders' equity (Capital deficiency) $1,593 $(1,986)
====== =======
Operating results data:
Year ended December 31,
-----------------------------------
2004 2003 2002
-------- --------- ------
Revenues $26,468 $ 13,759 $ 6
======= ======== ======
Gross profit (loss) $ 4,202 $ (2,852) $ (63)
======= ======== ======
Net income (loss) $ 2,392 $ (4,784) $ (182)
======= ======== ======
Ramasso:
Balance sheet data:
December 31,
---------------------
2004 2003
------- -------
(unaudited)
-----------
Current assets $ 17 $ 81
======= =======
Current liabilities $ 1,288 $ 543
======= =======
Capital deficiency $(5,398) $(4,588)
======= =======
Operating results data:
Year ended December 31,
-----------------------------------
2004 2003 2002
------- ------- -------
(unaudited)
-----------
Net loss $(812) $(2,365) $(2,247)
===== ======= =======
F-26
NOTE 6 - OTHER INVESTMENTS
[Download Table]
December 31
-------------------
2004 2003
------ -------
Long term deposits (a) $5,170 $10,107
------ -------
Restricted deposits (b) -- 2,515
------ -------
Marketable securities:
Investment in 2.8% (2003-5.3%) interest in VCON
Ltd.(c(1)) 683 686
Investment in 17.6% interest in PlanGraphics, Inc. (d) 343 1,028
------ -------
1,026 * 1,714
------ -------
Non-marketable securities:
Investment in a 7% interest in Bilu Investments Ltd. (b) -- 228
Investment in a convertible debenture of VCON Ltd. (c (2)) 880 1,520
------ -------
880 1,748
------ -------
Long term loan to an employee (e) -- 150
Other 42 53
------ -------
Total $7,118 $16,287
====== =======
*Includes:
Gross unrealized gains $ 373 $ 804
====== =======
Gross unrealized losses $ 257 --
====== =======
(a) Long term deposits: The amounts invested bear minimum annual
interests plus interests based on performance of several indices as
follows:
December 31
--------------------------------
2004 2003
Interest ------------------ -------
Rate % Index % Amount
-------- ------- -------
China Dragon 1.1% 103.40 $ 5,170 $ 4,953
Nasdaq -- 3,180
Himalaya -- 1,974
------- -------
$ 5,170 $10,107
======= =======
Both the Nasdaq and Himalaya deposits were sold in April 2004 at
106% and 99%, respectively. China Dragon deposit matures in March
2007. As regard to the bank arrangement relating to this deposit see
note 12(a).
F-27
NOTE 6 - OTHER INVESTMENTS (continued)
(b) Investment in Bilu Investments Ltd.
Bilu Investments Ltd. ("Bilu") is a privately held company based in
Israel. ICTS acquired the shares in that company from Rogosin
Development and Holding Ltd. ("Rogosin"), which was an affiliated
company of Leedan. At the time Rogosin and Leedan hold another 18%
interest in Bilu. ICTS has granted bank guarantees of $2,515 in
respect of Bilu's obligations, of which $1,400 is on behalf of Leedan
and Rogosin. To secure the bank guarantees ICTS has pledged bank
deposits at the same amounts. The recorded provision for these
guarantees is presented as a reduction to the restricted deposits that
the Company has deposited at the banks where the guarantees were
issued.
As a result of continuance deterioration in the financial results of
Bilu, on December 31, 2004 management has determined to write off its
investment in Bilu in the amount of $227 and to fully provide for its
bank guarantees in the amount of $2,515, including the guaranty share
of Leedan and Rogosin as a result of their financial positions, see
note 15.
(c) Investment in VCON Ltd. ("VCON"):
(1) In January 2002, ICTS purchased 909,091 shares of VCON for $1.10
per share and invested in a convertible note with a fare value of
$2 million, see (2) below. VCON is a publicly held company, the
shares of which are traded on Nouveau Marche. The share price as
of December 31, 2004 was $0.75.
In addition, ICTS received 3 year warrants to purchase 1,402,597
shares of VCON at a price per share of $1.40. The fair value of
the warrants as of December 31, 2004 is $0. The fair value of the
warrants was calculated using Black & Scholes Valuation model.
(2) The note, secured by a second degree floating charge to all
existing debt of VCON, is convertible into shares of VCON at a
conversion price of $1.00 per share, bears annual interest at the
rate of 2% and is repayable in quarterly installments of $160
started May 2004. The note is presented net of a current maturity
of $640, which is presented among other current assets.
In May 2005 the Company and VCON reached a prepayment agreement in
which VCON paid $825 for the outstanding principal and interest
balance totaled to $1,365. As a result of the prepayment agreement
the conversion feature expired and the Company removed its pledge,
see note 22 (b).
(d) Investment in PlanGraphics, Inc. ("PlanGraphics"):
In January 2002, ICTS purchased 17,142,857 shares (17.6%) of common
stock of PlanGraphics (formerly "Integrated Spatial Information
Solutions, Inc.") for $0.035 per share. PlanGraphics securities are
traded on the Pink sheets. The price share as of December 31, 2004 was
$0.02. Unrealized loss as of December 31, 2004 amount to $257 (2003 -
unrealized gain of $428).
F-28
NOTE 6 - OTHER INVESTMENTS (continued)
(e) Long term loan to an employee.
In December 2003 ICTS granted a loan of $150 to one of its employees.
The loan bore an interest of 2% per annum and is repayable in four
equal payments, every six months, starting January 2005. Upon review
the loan in December 2004, the Company determined that the loan will
likely not be recoverable and made a provision for writing off the
loan and the accrued interest.
NOTE 7 - PROPERTY AND EQUIPMENT
a. Property and equipment are composed as follows:
December 31,
------------------------
2004 2003
--------- ---------
Cost:
Equipment and facilities(d,e) *$ 26,026 *$ 27,794
Vehicles 418 627
Leasehold improvements 112 847
Office furniture and equipment 991 1,361
--------- ---------
27,547 30,629
Less - accumulated depreciation and amortization (10,417) (6,666)
--------- ---------
$ 17,130 $ 23,963
========= =========
* Net of impairment provisions of $23,493 (2003 - $13,555), see (d,e)
below.
b. Depreciation expense totaled $3,369, $3,169 and $1,449 in 2004, 2003
and 2002, respectively.
c. A portion of the Company's equipment is pledged as collateral for bank
loans.
d. In June 2002 equipment in the amount of $23.5 million was purchased
and leased back to the seller, an unaffiliated private Dutch company,
for 7 years in an operating lease agreement (with respect to equipment
in an amount of $12.5 million, the Company entered into a purchase and
lease agreement that replaced a predecessor acquirer, see below).
Annual rental fees are denominated in euros and amount to (euro) 2,650
(at December 31, 2004 - $3,618). The seller has the option to buy back
the assets after 5 or 7 years, at their fair value, which will be
determined by an appraiser. In case the seller does not exercise its
option to purchase the assets upon termination of the lease, use of
the assets reverts to ICTS in connection with which ICTS was granted a
license to manufacture the products that the seller had been
manufacturing with the leased assets and to use the intellectual
property and technical information required for the process. In such
case ICTS will have to pay royalties up to 5% of the revenues derived
from those assets to the seller. The term of the license will be equal
to the remaining economic life of the assets. The Company has
undertaken to repay the predecessor acquirer's liability to a bank, in
an amount of $8.7 million, and issued him a promissory note. As to the
balance and terms of the note - see note 12. The loan is non-recourse.
F-29
NOTE 7 - PROPERTY AND EQUIPMENT (continued)
In December 2004, ICTS determined that the future cash flows from the
leased equipment will not recover its investment, and as a result
recorded an impairment loss of $2,247 in addition to an impairment
loss of $6,042 that was recorded in 2003. The value of the equipment
was based on a cash flow projection that incorporated an external
appraisal of the equipments terminal value at the option exercise
date. The depreciated cost of the leased equipment as of December 31,
2004 and 2003 amounted to $16,087 and $20,981, respectively. The
minimum future lease installments to be received are $3,619, $3,619
and $1,809 in 2005, 2006 and 2007, respectively.
e. Equipment and facilities include an amount of $15,906 (cost) relating
to the entertainment sites in Maryland, Baltimore and in Atlantic
City, New Jersey. The Baltimore facility was opened and started
operations in June 2003. The facility in Atlantic City commenced
running in June 2004.
Based on the performances of the entertainment sites the Company's
management revaluated these two facilities and determined that the
forecasted cash flows from them will not cover the investments. Based
on their fair value which was calculated using discounted cash flows
model, the Company had recognized an impairment loss and wrote off its
investment in those sites in an amount of $7,691, in addition to an
impairment loss of $7,513 that was recorded in 2003.
NOTE 8 - GOODWILL
a. The changes in the carrying value of goodwill, as assigned to the
Company's reportable segments, for the years ended December 31, 2003
and 2004, are as follows:
[Download Table]
Aviation
Security Entertainment Other Total
-------- ------------- ----- -----
Balance as of December 31, 2002 $314 $853 $ 1,167
Goodwill arising on acquisition during the
year (b) $5,266 5,266
Adjustment resulting from exercising
option (see note 4b) (56) (56)
Impairment of Goodwill (see note 4b) (797) (797)
---- ------ ---- -------
Balance as of December 31, 2003 314 5,266 -- 5,580
Impairment of Goodwill (b) ~~ (5,266) (5,266)
---- ------ ---- -------
Balance as of December 31, 2004 B $314 $-,- $-,- $ 314
==== ====== ==== =======
b. In December 2003 the Company signed an agreement to buy the activities
and certain fixed assets ($163) of ITA (a company controlled by a
significant shareholder of ICTS, see note 5(4) (a)). The Company paid
a total amount of approximately $5.4 million by waiving the $3,000
loan granted to ITA and its $542 accrued interest, issuing a deferred
note of $546 and a promissory note of
F-30
NOTE 8 - GOODWILL (continued)
$685 and by paying $711 in cash to ITA. As to the terms of these notes
see note 5(4)(b) and note 12. The purchase price was based on fairness
opinion that was based on free cash generated from future projects of
ITA, in which ICTS planned to invest. The purchase price exceeding the
fair value of the net identifiable assets acquired by $5,266 which was
recorded as Goodwill. In March 2004, as a result of the impairment of
the entertainment projects, management has decided to write off the
goodwill and recognized an impairment loss of $5,266 in 2004.
NOTE 9 - OTHER ASSETS
a. As of December 31, 2004, comprised of the following:
December 31,
December 31, 2004 2003
--------------------------------- ------------
Gross
carrying Accumulated Amortized Amortized
amount amortization balance balance
-------- ------------ --------- ---------
Customer relationship (1) $1,785 $ 248 $1,537 $1,691
Technology (2) 156 120 36 130
Other (3) 181 -- 181 645
------ ------ ------ ------
$2,122 $ 368 $1,754 $2,466
====== ====== ====== ======
(1) Relating to contract with Schiphol Airport, see note 4a.
(2) Relating to technology acquired by a subsidiary.
(3) Mainly rent deposits.
Amortization expense in 2004 and 2003 totaled $248 each year. In
addition, the Company recorded as of December 31, 2002 an impairment
loss of the technology in the amount of $672. This impairment was
determined by management, under the provision of FAS 144, due to
management's evaluation of significant decrease in forecasted revenues
derived from services using the technology.
b. Estimated amortization expense for each of the following five years
amounts to: $224 for 2005 and $188 afterwards.
F-31
NOTE 10 - SHORT-TERM BANK CREDIT
Short-term bank credit, classified by currency and interest rates, is
comprised of the following:
Weighted average
interest rates
as of December 31,
December 31, -------------------
% 2004 2004 2003
---------------- ------ -------
ICTS -
In dollars (a) 2.29 $ 984 $2,560
In Euros (b) 6.65 1,290 --
Subsidiaries:
In dollars (c) 6.25 2,002 500
In other currencies (mainly
in Euros) (d) 5.5 140 1,327
------ ------
Total short-term bank credit $4,416 $4,387
====== ======
(a) These loans were received as part of an arrangement with a bank,
following which the money received and additional amounts were
deposited with the bank.
(b) Includes Euros 658 (at December 31, 2004, $897) in connection with the
payment request by the German bank to which the Company issued a
letter of guaranty securing the loan the bank had granted IMA (a
company under the control of one of ICTS's shareholders) (see note
5(a)(4)). Under a settlement agreement with the bank, the amount
outstanding as of December 31, 2004 is payable in four quarterly
payments and bears an annual interest of 3 month Euribor plus 2.58%
(4.74% at December 31, 2004).
(c) In 2002, a Company subsidiary entered into a Revolving Line of Credit
(RLC). The RLC provides a borrowing base of (i) an amount up to 60% of
Eligible Accounts receivable of the subsidiary and (ii) an amount up
to $3.5 million under some conditions stipulated in the RLC. In May
2003, the RLC was extended to May 2004 and further to March 31, 2005
(as to the new credit facility of the subsidiary see note 22(a)). As
of December 31, 2004, the revolving line of credit facility is
collateralized by the restricted cash and by the Company guaranty.
Interest accrues at the bank's prime rate plus 1% (6.25 percent at
December 31, 2004). At December 31, 2004, $5.2 million was outstanding
and $0.3 million was available under the revolving credit facility for
additional borrowings. The borrowing agreement also provides for an
additional commitment guarantee of up to a maximum of $3.5 million for
letters of credit and requires a per annum fee equal to 1.25 percent.
The Company had letters of credit outstanding of approximately $3.2
million and $2.7 million at December 31, 2004 and 2003, respectively.
F-32
NOTE 10 - SHORT-TERM BANK CREDIT (continued)
The subsidiary has undertaken to comply with financial covenants and
non financial provision in respect of its bank debt. As of December
31, 2004 the subsidiary was in compliance with the bank debt covenants
and provisions.
(d) In November 2004, a subsidiary of the Company entered into a one year
credit agreement with a bank. The agreement provides a borrowing
facility of up to Euros 400 (at December 31, 2004 -$546), limited to
60% of certain pledged accounts receivable. The borrowing facility is
also secured by the Company guaranty and is subject to certain
covenants. At December 31, 2004, $120 was outstanding and $230 was
available under the terms of the credit agreement.
NOTE 11 - ACCRUED EXPENSES AND OTHER LIABILITIES
December 31,
------------------
2004 2003
------- -------
Payroll and related liabilities $ 3,526 $ 3,603
Severance pay and employees' claims (see note 1b) 8,622 9,389
Taxes to government institutions, including taxes payable 1,077 1,199
Related parties 500 21
Deferred income taxes (see note 16 b) 160 --
Accrued expenses and other 3,001 3,653
------- -------
$16,886 $17,865
======= =======
NOTE 12 - LONG-TERM LIABILITIES
a. Composition:
Interest rate as of December 31,
December 31, -----------------------
2004 2004 2003
------------------- -------- --------
In dollars:
Banks (1) mainly - 2.97% $ 4,236 $ 4,103
Promissory Note (2) 3.12% 400 631
-------- --------
4,636 4,734
In euros - Promissory Note(3) Libor + 2.05% 4,854 6,804
Other - Deferred note (4) See (4) -- 546
-------- --------
9,490 12,084
Less - current maturities (2,779) (2,752)
-------- --------
$ 6,711 $ 9,332
======== ========
(1) Includes a loan in the amount of $4,072 ( $4,000 as of December 31,
2003), this loan was received as part of the arrangement with a bank,
following which the money received and an additional amount were
deposited with the bank, the deposit amount as of
F-33
NOTE 12 - LONG-TERM LIABILITIES (continued)
December 31, 2004 is $5,170 (see note 6(a)). The loan is payable in
January 2006.
(2) The promissory note was issued in connection with the purchase
agreement of the operations of ITA (see note 8b). The note is payable
in 13 quarterly installments of $50 plus the accrued interest, the
first installment was paid in December 2004.
(3) The Promissory Note was granted to the seller of part of the leased
equipment (as explained in note 7d). The Promissory Note bears annual
interest of Euro Libor+2.05% (4.19% as of December 31, 2004) and is
repaid in monthly installments over 5 years. The Promissory Note is
secured by a first priority security interest to a bank on part of the
leased assets ($12.3 million) and all the rights under the equipment
leases.
(4) The deferred note was issued in connection with the purchase agreement
of ITA (see note 8b) .The note was to be payable in three equal
payments every six months commencing December 2004 and bearing an
interest of 7% or The Israeli Consumer Price Index (CPI) plus 4%, the
higher of. The note served as a security to a guarantee granted by the
Company to IMA (see note 5a(4)) , subsequent to December 31, 2003 the
Company was required to repay its guaranty to the bank(see note 10(b))
and the note was removed.
b. The long term liabilities (net of current maturities) mature in the
following years after the balance sheet date:
December 31,
2004
------------
2006 $6,640
2007 46
2008 25
------
$6,711
======
F-34
NOTE 13 - ACCRUED SEVERANCE PAY
The accrued severance pay in the consolidated financial statements relates
to the Israeli subsidiaries.
Israeli law generally requires payment of severance pay upon dismissal of
an employee or upon termination of employment in certain other
circumstances. The following principal plans relate to employee rights
upon retirement, as applicable to Israeli subsidiaries.
a) Insurance policies for employees in managerial positions - these
policies provide coverage for severance pay and pension liabilities of
managerial personnel.
b) Severance pay liabilities not covered by the pension funds are fully
provided for in these consolidated financial statements, as if it was
payable at each balance sheet date on an undiscounted basis, based
upon the number of years of service and the most recent monthly salary
(one month's salary for each year worked) of the Company's employees
in Israel.
The amount of severance pay charged to income in the years ended December
31, 2004, 2003 and 2002 were approximately $135, $98 and $100
respectively. The amounts do not include expenses for severance pay in
2002 in an amount of $18.9 million and reversals of $528 and $17.8 million
in 2004 and 2003, respectively (see note 1b). The Company expects to
contribute in 2005 $160 to the insurance companies in respect of its
severance pay obligation.
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES
a. Operating leases
1) The Company leases premises under long-term operating leases, in
most cases with renewal options. Lease expenses for the years ended
December 31, 2004, 2003 and 2002 were $1,405 $1,166 and $928,
respectively.
Future minimum lease payments under long-term leases are as follows:
December 31,
2004
-------------
2005 $ 1,571
2006 1,435
2007 1,222
2008 984
2009 and afterwards 9,498
-------
$14,710
=======
2) As to income from leasing of equipment, see note 7d.
F-35
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
b. Operations in the U.S.:
1) As a result of the September 11, 2001 terrorist attacks, a multitude
of lawsuits have commenced against Huntleigh and ICTS. All of the
cases were filed in the United States District Court, Southern
District of New York. The cases are in their early stages. The
Company reviewed its security services provided at Boston's Logan
International Airport, from which one of the airplanes commandeered
by the terrorists departed, subsequent to September 11, 2001 for
evidence of non-compliance with the policies of the Federal Aviation
Administration. Based on the contracts with the airlines, the
Company may be indemnified by the airlines if the Company is found
to have followed the procedures enumerated by the Federal Aviation
Administration. However, if the Company is found to have violated
these screening regulations, it could be liable for damages. Based
on the Company's review, no evidence of non-compliance has been
identified with respect to the services provided at Boston's Logan
International Airport on September 11, 2001. The Company maintains
an aviation insurance policy, which may provide limited coverage for
liabilities that may be assessed against the Company as a result of
the events of September 11, 2001. Management is unable to estimate
the impact of the litigation or fines, as described above.
Accordingly, no provision in respect of these matters has been made.
2) As a provider of security services, the Company faces potential
liability claims in the event of any successful terrorist attempt in
circumstances associated with the Company. After the September 11th
terrorist attacks, the Company's insurance carriers canceled all war
risk insurance policies the Company carried.
3) On February 17, 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 basis to the U.S. Federal Government or
November 19, 2002. In accordance with the terms of the Contract, the
U.S. Federal Government provided the Company with a non-interest
bearing partial payment of $26 million to be paid back on a monthly
basis of $1.3 million at the beginning of every month commencing
April 1, 2002. At December 31, 2002, approximately $11.7 million of
the $26 million had been paid back to the TSA (in 2004 and 2003 no
additional payments have been paid back to the TSA). As of December
31, 2004 the amount due from the TSA in respect of services provided
under the contract aggregates $17.2 million; this amount, net of
$14.3 million-the balance of the prepayment, is presented among
trade receivables.
F-36
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
The TSA, in accordance with standard practices, is in the process of
auditing the Company's billings to the TSA pursuant to the TSA
Contract for the provision of aviation security services. This
process requires the Company to provide pricing data to the U.S.
Federal government to support its pricing structure under the TSA
Contract and eventually will result in final negotiations on the
price of the Company's services from February 17, 2002 through the
end of the Contract term.
In connection with payments made by the TSA to the Company for
aviation security services provided in 2002, the Defense Contract
Management Agency has indicated that it believes that the Company
should not have been paid on a fixed cost basis as believed by the
Company, but on the basis of actual costs plus what the TSA would
consider a reasonable profit. Under the last basis the Company may
be required to repay the TSA the difference between such amount and
the actual amounts paid to it. The Company however has various
claims for additional amounts it considers due to it for the
services provided to the TSA.
The Company's management estimates that if the TSA will claim such
difference and will prevail in all of its contentions, and none of
Company's claims will be recognized, then the Company may suffer a
loss in an amount of about $41 Million. Management and its legal
counsel are unable to estimate at this stage the final outcome of
the above mentioned dispute. Accordingly, no provision in respect of
this matter has been made.
The Company had also filed a claim against the US Federal
Government, for what it alleges to be a taking of its US aviation
security business by the TSA in 2002.
4) From time to time various claims against the Company, some of which
are in litigation, have been alleged by former employees mainly for
wrongful termination and labor related issues. Some of the claims
are in their earlier stage and it is impossible to determine the
amount of contingent liability involved, if any.
c. Restrictions on operations
As part of the sale of its European operations to ICTS Europe, the
Company was restricted from conducting in Europe (except for The
Netherlands and the former Soviet Union republics, including Russia,
Georgia and Kazakhstan) any of the activities in which ICTS Europe was
engaged prior to such sale. This restriction was effective through
February 2005.
Pursuant to an agreement dated July 1, 1995 with ICTS Global Security
(1995) Ltd. ("ICTS Global Security"), the Company may not provide
non-aviation security services in Latin America, Turkey or the former
Soviet Union republics, including Russia, Georgia and Kazakhstan.
F-37
NOTE 14 - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
d. Following the sale of the European operations, ICTS has undertaken to
indemnify ICTS Europe and its subsidiaries in respect of any liability
or loss originated prior to December 31, 2001 and not known at that
date. As of December 31, 2004, management has not received any
notification for any such liability or loss.
e. On December 28, 1995, the Company entered into an employment contract
with Mr. Lior Zouker, its former Chief Executive Officer and a former
member of its board of directors, pursuant to which the Company agreed
to employ Mr. Zouker in those capacities for a 30 month term. The
contract was extended for an additional three years on November 25,
1997 and again on December 12, 2000. Pursuant to such contract, Mr.
Zouker was entitled to a bonus, which is calculated at 3% of the net
income of ICTS and was provided in the accounts. On April 2004, Mr.
Zouker resigned as the Chief Executive Officer of the Company.
f. On December 16, 2003, the Company entered into an agreement with Mr.
Boaz Harel the former chairman of the Supervisory Board of Directors,
on which basis he received for his services to the Company a
compensation of $245 on an annual basis. In July 2004 Mr. Boaz Harel
resigned as the chairman of the Supervisory Board of Directors and the
above agreement was replaced for monthly consultancy fees of $14.
g. In 2002 the Company, and one of its subsidiaries, entered into a
consultancy services agreement with a company, owned by a former member
of the Supervisory Board of the Company. The agreement provided for
annual fees of $75 for a period of 2 years and shall be automatically
renewed for an additional period of one year. In May 2004 the
consultancy company's owner was appointed CEO and the agreement was
amended. The agreement shall be valid for 5 years with an automatic
extension of an undefined period, with a notice period of 12 months. In
August 2004 the CEO resigned and compensation was settled in the amount
of approximately $26 per month until June 2006. The accumulated amount
was provided in the accounts.
h. As to tax assessments, see note 16(g).
i. As to the guarantee given to Bilu Investment Ltd., see note 6(b).
F-38
NOTE 15 - OTHER INCOME (EXPENSES)
[Enlarge/Download Table]
Year ended December 31,
-------------------------------------
2004 2003 2002
-------- -------- -------
Sale of ICTS Europe, see note 1(c) $42,797
Write off investment and guaranty deposits related to
investment in Bilu , see note 6(b) $(2,742)
Loss on sale of fixed assets (124
Write off of Investments in start-up companies $(400)
Capital gain sale of other companies, net 43
Write-down of investment in Ramasso (932)
Loss realized on marketable securities (690)
Other (41) 47 11
-------- -------- -------
$ (2,907) $ (353) $41,229
======== ======== =======
NOTE 16 - INCOME TAXES
a. Each subsidiary of ICTS is subject to tax according to the tax rules
applying with respect to its place of incorporation or residency. ICTS
is incorporated under the laws of The Netherlands and is, therefore,
subject to the tax laws of The Netherlands. Intercompany payments are
subject to withholding taxes at varying rates according to their nature
and the payer's country of incorporation or residency.
b. Deferred taxes:
1) Deferred tax assets have been computed in respect of the following:
December 31,
-----------------------
2004 2003
-------- --------
Carryforward losses $ 10,949 $ 9,660
Fixed assets 6,372 2,554
Accruals and other reserves (640) (367)
Provision for bad debts 600 735
Other -- 31
-------- --------
17,281 12,613
Less - valuation allowance 17,458 12,214
-------- --------
$ (177) $ 399
======== ========
2) Deferred taxes are presented in the balance sheets as follows:
December 31,
-------------------
2004 2003
------- -------
Among other current assets -- $ 385
Among investments and long-term receivables $ 3 33
Among other current liabilities (160) --
Among long term liabilities (20) (19)
----- -----
$(177) $ 399
===== =====
F-39
NOTE 16 - INCOME TAXES (continued)
c. Income (loss) before taxes on income is comprised of the following:
Year ended December 31,
---------------------------------
2004 2003 2002
-------- -------- -------
ICTS and subsidiaries in The Netherlands $ (6,862) $ (7,820) $54,603
Subsidiaries outside The Netherlands (20,578) (1,308) 20,461
-------- -------- -------
$(27,440) $ (9,128) $75,064
======== ======== =======
d. Taxes (expenses) benefit on income included in the income statements:
Year ended December 31,
-------------------------------------
2004 2003 2002
------- -------- --------
Current:
In The Netherlands -- $ 85 $ 223
Outside The Netherlands $ 2,794 1,847 (20,938)
------- -------- --------
2,794 1,932 (20,715)
------- -------- --------
For previous years:
In The Netherlands (51)
Outside The Netherlands 956
------- -------- --------
905 -- --
------- -------- --------
Deferred:
In The Netherlands -- -- (187)
Outside The Netherlands (515) (5,047) 4,460
------- -------- --------
(515) (5,047) 4,273
------- -------- --------
$ 3,184 $ (3,115) $(16,442)
======= ======== ========
e. The Company's effective income tax rate differs from The Netherlands'
statutory rate of 34.5% with respect to the following:
[Enlarge/Download Table]
Year ended December 31,
---------------------------------------
2004 2003 2002
-------- ------- --------
Income (loss) before taxes and equity in
results of associated companies $(27,440) $(9,128) $ 75,064
======== ======= ========
Statutory tax rate 34.5% 34.5% 34.5%
======== ======= ========
Expected tax benefit (expense) at statutory rate $ 9,467 $ 3,149 $(25,897)
Reconciliation for earnings taxed at different rates 514 (18) (86)
Disallowable expenses (2,160) (460) (8,124)
Non-taxable (expense) income* (109) (275) 14,248
Changes in valuation allowance (5,244) (6,513) 3,330
Provision to return matters -- 812 --
Previous years 905 -- --
Other (189) 190 87
-------- ------- --------
Income taxes ( expenses) benefit $ 3,184 $(3,115) $(16,442)
======== ======= ========
* In 2002 including a tax exempted capital gain (from sale of the
European operations).
F-40
NOTE 16 - INCOME TAXES (continued)
f. Carryforward tax losses
As of December 31, 2004, the Company has carryforward tax losses in the
Netherlands, in the amount of approximately $34 million. Utilization of
such losses is limited in certain circumstances.
g. Tax assessment
Under ongoing tax examination, of the U.S subsidiaries of the Company,
by the U.S tax authorities, through the year ended December 31, 2003,
the subsidiaries were required to provide information regarding their
treatment of certain expenses, based on the issues raised and the tax
authorities' position, the Company has included a provision in its
accounts in an amount which, based on an opinion of its tax advisers,
the Company considers to be adequate to cover costs arising from the
tax examination if and when it will become tax assessment.
NOTE 17- FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
a. Fair market value of financial instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair market value of the
Company's short-term and long-term debt approximates the carrying
value. Furthermore, the carrying value of other financial instruments
potentially subject to credit risk (principally consisting of cash and
cash equivalents, time deposits and marketable securities, accounts
receivable and accounts payable) also approximates fair market value.
b. Risk management:
1) The Company operates in the USA, Europe and other countries, which
gives rise to exposure to market risks in respect of foreign
exchange rate fluctuations. The Company did not utilize derivative
financial instruments to reduce these risks.
Credit risk represents the accounting loss that would be incurred if
any party failed to perform according to the terms of the financial
instrument. Credit risk may arise from financial instruments that
have a significant exposure to individual debtors or groups of
debtors, or when they have similar economic characteristics that
would cause their ability to meet contractual obligations to be
similarly affected by changes in economic and other conditions.
F-41
NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued)
2) At December 31, 2004, two major customers accounted for 34% of
accounts receivable (at December 31, 2003, two major customers
accounted for 32% of accounts receivable). For the years ended
December 31, 2004, 2003 and 2002, sales to major customers
(constituting 10% or more of the Company's consolidated revenues),
derived from aviation service contracts, amounted to 13%, 36% and
73% of revenues, respectively, as set forth below:
Year ended December 31,
----------------------------
2004 2003 2002
------- ------ --------
(% of consolidated revenues)
----------------------------
Customer A 13% 14%
Customer B 11%
Customer C 11%
Customer D 73%
3) The Company's financial instruments that are exposed to
concentrations of credit risks, consist primarily of cash and cash
equivalents, trade accounts receivable, short-term investments, (see
note 3), and long-term investments (see note 6). The Company places
its cash and cash equivalents and time deposits with high quality
credit institutions. The Company provides normal trade credit, in
the ordinary course of business, to its customers. Based on past
experience and the identity of its current customers, the Company
believes that its accounts receivable exposure is limited.
4) The Company is currently engaged in direct operations in numerous
countries and is therefore subject to risks associated with
international operations (including economic or political
instability and trade restrictions), any of which could have a
significant negative impact on the Company's ability to deliver its
services on a competitive and timely basis and on the results of the
Company's operations. Although the Company has not encountered
significant difficulties in connection with the sale or provision of
its services in international markets, future imposition of, or
significant increases in, the level of trade restrictions or
economic or political instability in the areas where the Company
operates, could have an adverse effect on the Company. For example,
the Company currently provides services at several airports in the
former Soviet Union. The Company's ability to continue operations in
the former Soviet Union may be adversely affected by future changes
in legislation or by changes in the political environment.
F-42
NOTE 18 - SEGMENT INFORMATION
The Company adopted FAS 131, which establishes disclosure and reporting
requirements in respect of segments.
a. Business segment data:
1) Financial data relating to reportable operating segments:
Year ended December 31, 2004:
[Enlarge/Download Table]
Aviation Leasing Entertainment Other Total
-------- -------- ------------- ------- ---------
Revenues:
Unaffiliated customers $55,825 $3,294 $1,491 $2,168 $62,778
Intersegment 219 -- -- 2,976 3,195
------- -------- -------- ------- ---------
Total revenues $56,044 $3,294 $1,491 $5,144 $65,973
======= ======== ======== ======= =========
Operating income (loss) $609 $(1,163) $(15,563) $63 $(16,054)
======= ======== ======== ======= =========
Assets (at end of year) $35,626 $32,206 $9,753 $26,125 $103,710
======= ======== ======== ======= =========
Goodwill (at end of year) $314 $314
======= =========
Expenditures for segment assets $209 $5,866 $36 $6,111
======= ======== ======= =========
Depreciation and amortization $592 $2,410 $453 $133 $3,588
======= ======== ======== ======= =========
Non cash expenditures other
than depreciation and amortization $2,046 $13,375 $15,421
======== ======== =========
Year ended December 31, 2003:
[Enlarge/Download Table]
Aviation Leasing Entertainment Other Total
-------- -------- ------------- -------- ---------
Revenues:
Unaffiliated customers $66,454 $2,995 $643 $1,479 $71,571
Intersegment 418 3,884 4,302
------- -------- -------- -------- ---------
Total revenues $66,872 $2,995 $643 $5,363 $75,873
======= ======== ======== ======== =========
Operating income (loss) $12,215 $(5,476) $(10,114) $(3,603) $(6,978)
======= ======== ======== ======== =========
Assets (at end of year) $36,087 $36,340 $10,401 $51,594 $134,422
======= ======== ======== ======== =========
Goodwill (at end of year) $314 $5,266 $5,580
======= ======== =========
Expenditures for segment assets $259 $10,700 $299 $11,258
======= ======== ======== =========
Depreciation and amortization $493 $2,427 $265 $184 $3,369
======= ======== ======== ======== =========
Non cash expenditures other
than depreciation and amortization $6,042 $7,513 $797 $14,352
======== ======== ======== =========
F-43
NOTE 18 - SEGMENT INFORMATION (continued)
Year ended December 31, 2002:
[Enlarge/Download Table]
Aviation Leasing Entertainment Other Total
------- ------- ------------- -------- --------
Revenues:
Unaffiliated customers $277,636 $1,370 $925 $279,931
Intersegment 12,263 12,926 25,189
-------- ------- -------- --------
Total revenues $289,899 $1,370 $13,851 $305,120
======== ======= ======== ========
Operating income (loss) $37,731 $271 $(517) $1,963 $39,448
======== ======= ======== ======== ========
Assets (at end of year) $52,809 $38,605 $7,259 $54,840 $153,513
======== ======= ======== ======== ========
Goodwill (at end of year) $314 $853 $1,167
======== ======== ========
Expenditures for segment assets $320 $23,384 $3,618 $2,088 $29,410
======== ======= ======== ======== ========
Depreciation and amortization $206 $1,158 $79 $1,443
======== ======= ======== ========
Non cash expenditures other
Than depreciation and amortization $9,156 $932 $10,088
======== ======== ========
2) Following is a reconciliation of net revenues, operating income and
assets of the reportable segments to the data included in the
consolidated financial statements:
[Enlarge/Download Table]
Year ended December 31
---------------------------------------
2004 2003 2002
-------- -------- ---------
Revenues:
Total revenues of reportable segments $60,829 $70,510 $291,269
Other revenues 5,144 5,363 13,851
Elimination of intersegment revenues (3,195) (4,302) (25,189)
-------- -------- ---------
Total consolidated revenues $62,778 $71,571 $279,931
======== ======== =========
Operating Income:
Total operating income (loss) of reportable segments $(16,117) $(3,375) $37,485
Other 63 (3,603) 1,963
Amounts not allocated to segments:
General and administrative expenses (7,706) (2,581) (8,363)
Interest income 470 2,248 2,072
Interest expense (1,160) (1,222) (1,678)
Exchange differences (83) (242) 2,356
Other income (expenses) (2,907) (353) 41,229
-------- -------- ---------
Consolidated income (loss) before taxes on income $(27,440) $(9,128) $ 75,064
======== ======== =========
Assets (at end of year):
Total assets of reportable segments $77,585 $77,562 $98,673
Total goodwill of reportable segments 314 5,580 314
Other assets 26,125 51,594 55,693
Assets not allocated to segments 20,951 20,872 12,538
Elimination of intersegment balances (70,013) (71,108) (41,774)
-------- -------- ---------
Total consolidated assets (at end of year) $54,962 $84,500 $125,444
======== ======== =========
F-44
NOTE 18 - SEGMENT INFORMATION (continued)
b. Geographical information
Following is a summary of revenues and long-lived assets by
geographical areas:
1) Revenues - classified by country in which the services were
rendered:
Year ended December 31,
----------------------------------
2004 2003 2002
------- ------- --------
USA $49,642 $59,146 $274,082
The Netherlands 10,232 10,034 4,834
Other 2,904 2,390 1,015
------- ------- --------
Total $62,778 $71,571 $279,931
======= ======= ========
2) The Company's long-lived assets, net of accumulated depreciation,
are located in the following geographical areas:
December 31,
---------------------------------
2004 2003 2002
------- ------- -------
The Netherlands $16,130 $19,569 $23,543
USA 630 3,832 5,393
Other 370 562 480
------- ------- -------
Total $17,130 $23,963 $29,417
======= ======= =======
c. As to the Company's major customers, see note 17b (2).
F-45
NOTE 19 - RELATED PARTIES - TRANSACTIONS AND BALANCES
a. Revenues from, and expenses to, related parties:
[Download Table]
Year ended December 31,
------------------------------
2004 2003 2002
------ ------ ------
Revenues $27
======
Cost of revenues $98
======
Selling, general and administrative expenses $2,546 $1,618 $4,453
====== ====== ======
Includes compensation payments and services
provided to the Company by related parties
Interest income $517 $660
====== ======
Other expenses, see g below $1,400
======
Share in Losses of associated companies, see i
and j below $1,706 $6,661 $1,807
====== ====== ======
Bonuses related to the sale of the European
Operation, see c(2) below $4,704
======
c. Balances with related parties:
December 31,
---------------
2004 2003
----- ------
Other current assets $382
======
Long term loans to associated companies $2,988
======
Subordinated debentures including accrued interest $1,369
======
Accrued expenses and other liabilities $500 $21
====== ======
Long term liabilities and current maturities $600
======
c. 1) In 2001 and 2002, the Company lent Leedan $2,200 and $1,500,
respectively. The loans bear interest at the rate of Libor for 3
months +3% per annum. The loans were repaid in February 2003 and
April 2003, respectively.
2) Leedan provided the Company with certain management, administrative,
consulting and advisory services, as well as advice and assistance
with respect to potential acquisitions and investor relations. Such
services are provided on an ad-hoc basis as authorized by the ICTS
Supervisory Board. In 2004 and 2003 the Company recorded no expenses
for such services, in 2002 the Company recorded $1.2 million.
d. In 2002, ICTS bought vested and non vested options from its employees
and directors. The difference between the price paid and the exercise
price for the options bought back, aggregating $1,618, was recorded as
selling, general and administrative expenses.
F-46
NOTE 19 - RELATED PARTIES - TRANSACTIONS AND BALANCES
(continued):
In 2003 and 2004 ICTS did not buy any options from its employees and
directors.
e. On July 24, 2001 Noaz Management Company assigned to ICTS an investment
of $400 (out of its total investment of $1 million) in ArtLink Inc.,
representing 4.1% of the class A preferred shares. A major shareholder
of ICTS is a major shareholder in Noaz Management Company. This
investment was written off in 2003.
f. As to the Company acquisition from a related party in December 2003 of
the entertainment business of ITA, and the related impairment losses of
the tangible and intangible assets in 2003 and 2004 amounted to
$20,888, see notes 7(e) and 8(b).
g. As to guarantees issued to Bilu on behalf of related parties ('Leedan'
and 'Rogosin') in the amount of $1,400, and not exercising them in
2004, see note 6(b).
h. As to an execution in 2004 of a guaranty granted by the Company to
related party ('IMA'), in the amount of $1,137, see notes 5(a)(4)(b)
and 10(b).
i. As to write down in 2004 of the Company investment in Pioneer (a
company held by principal shareholders) in the amount of $1,794 see
note 5(a) (1).
j. As to not exercising, in 2004, a guaranty granted to the Company by
related party ('Leedan') in the amount of $1,438, in connection with
the Company investment in Pioneer, see notes 5(a)(1)(b) and (c).
NOTE 20 - EARNINGS (LOSSES) PER SHARE
The following table presents the data used for computation of basic and
diluted earnings (losses) per share:
[Enlarge/Download Table]
Year ended December 31,
----------------------------------------------
2004 2003 2002
----------- ----------- ----------
Basic:
Net income (loss) $(25,962) $(18,904) $56,815
=========== =========== ==========
Weighted average shares of common stock outstanding 6,524,250 6,513,100 6,419,575
=========== =========== ==========
Diluted:
Net income (loss) $(25,962) $(18,904) $56,815
=========== =========== ==========
Weighted average number of shares of common stock
outstanding 6,524,250 6,513,100 6,419,575
Incremental shares of common stock from stock options -
Calculated under the treasury stock method 33,872
----------- ----------- ----------
Adjusted weighted average number of shares of common stock 6,524,250 6,513,100 6,453,447
=========== =========== ==========
F-47
NOTE 21 - STOCK OPTIONS
In 1999 ICTS adopted share option plan and reserved 600,000 common shares
for issuance under the plan.
On October 28, 2004 the Compensation Committee approved the "2005 Equity
Incentive Plan", the plan was ratified in November 2004 by the Supervisory
Board and Management Board and in February 2005 a special meeting of
shareholders adopted the proposal. Under this plan the Company reserved
1,500,000 common shares for issuance.
Under the above plans, options may be granted to employees, officers,
directors and consultants at an exercise price equal to at least the fair
market value at the date of grant and are granted for periods not to
exceed ten years. Options granted under the plans generally vest over a
period of three years. Any options that are cancelled or forfeited before
expiration become available for future grants.
Pursuant to the above plans, the Company reserved for the issuance a total
of 2,100,000 common shares, out of which as of December 31, 2004 986,500
options are still available for future grant.
As of December 31, 2004, 1,113,500 options are outstanding, all of which
have been granted to directors and executive officers of the Company, at
exercise prices ranging from $1.35 to $6.375 per share. These options vest
over various terms, ranging from immediately to three years. Outstanding
options expire at various times, but not later than November 2009.
In 2002, ICTS bought vested and non vested options from its employees and
directors. The difference between the price paid and the exercise price
for the options bought back, aggregating $1,618, was recorded as selling,
general and administrative expenses in 2002.
In 2003 and 2004 ICTS did not buy any options from its employees and
directors.
The options granted under the Company's plans are exercisable for the
purchase of shares as follows:
December 31,
----------------------
2004 2003
--------- -------
At balance sheet date 400,500 224,000
During the first year thereafter 246,333 16,500
During the second year thereafter 233,333 13,000
During the third year thereafter 233,334 --
--------- -------
1,113,500 253,500
========= =======
F-48
NOTE 21 - STOCK OPTIONS (continued)
A summary of the status of the plans as of December 31, 2002, 2003 and
2004 and changes during the year ended on those dates is presented below:
[Enlarge/Download Table]
Year ended December 31,
--------------------------------------------------------------------------------------
2004 2003 2002
--------------------------- -------------------------- -------------------------
Weighted Weighted Weighted
Number of average Number of average Number of average
options exercise options exercise options exercise
(in thousands) price (in thousands) price (in thousands) price
-------------- -------- -------------- -------- -------------- --------
$ $ $
---- ---- ----
Options outstanding
at the beginning of year 253 6.99 278 6.85 958 6.43
Changes during the year
Granted 1,020 1.35 112 5.30
Exercised or bought
by the Company (15) 5.30 (767) 6.10
Forfeited and cancelled (145) 8.50 (25) 5.32 (25) 5.49
------ --- ----
Options outstanding at the
end of year 1,113 1.68 253 6.99 278 6.85
====== ==== === ==== ==== ====
Options exercisable at the
end of year 400 2.40 224 7.12 196 7.12
====== ==== === ==== ==== ====
The options outstanding as of December 31, 2004 have been separated into
ranges of exercise price as follows:
Options Options Weighted
outstanding Weighted Exercisable average
as of average Weighted as of exercise
December 31, remaining average December 31, price of
Exercise 2004 contractual exercise 2004 exercisable
price (in thousands) life Price (in thousands) options
-------- -------------- ----------- -------- -------------- -----------
$ Years $ $
----- ----- ----- -----
1.35 1,020 5 1.35 320 1.35
4.50 20 1 4.50
5.30 62 2 5.30 80 5.28
6.38 11 1 6.38
----- ----- ---
1,113 $1.68 400 2.40
===== ===== ===
F-49
NOTE 22 - SUBSEQUENT EVENTS
a) In April, 2005, a Company's subsidiary entered into a Loan and Security
Agreement with a financial institution which replaces the revolving
line of credit as describe in note 10(c). The new agreement provides
for revolving loans up to $8 million limited by 85% of defined eligible
accounts receivable plus 95% of the balance of required certificates of
deposit less letter of credit obligations.
The line of credit is secured by the Company guaranty, by a first
priority security interest in all existing and future property of the
subsidiary and the subsidiary has undertaken to comply with financial
covenants and non financial provisions.
In June 2005, the subsidiary was notified by the financial institution
that it is in default in three provisions of its loan agreement. The
subsidiary failed to maintain the tangible net worth, as defined in the
loan agreement, of $654, failed to maintain the minimum interest
coverage ratio of 1.50 and that the subsidiary chief executive officer
did not remain in office, due to his resignation.
The financial institution provided notice of these defaults, but did
not accelerate the loan nor provided a waiver. The subsidiary and the
financial institution are in discussions to resolve these issues.
The outstanding balance of the credit facility as of June 30, 2005 was
$3.5 million.
b) In May 26, 2005 the Company and VCON reached a prepayment agreement in
which VCON paid $825 for the outstanding principal and interest balance
on its loan with the Company, which totaled $1,365 at that date, see
note 6(c)(2). As a result of the prepayment agreement a loss of $540
was recorded in 2005 in other expenses, the conversion feature expired
and the Company removed its pledge.
c) In February 2005, as the non - competition restrictions, related to the
sale of ICTS Europe, see note 14(c), expired, the Company made a
strategic decision to reenter the European aviation security market. In
March 2005 the Company established a wholly-owned subsidiary under
which all the European aviation security activities provided by ICTS
will be operated.
d) In June 2005, the Company has granted the lessee, see note 7(d), an
option to purchase the leased equipment for an amount of $5 million
plus an amount equal to the related loan balance (see note 12 a(3)) at
the exercise date thus providing for the possibility of the early
termination of the leasing agreement. The option can be exercised from
June 1, 2005 until September 30, 2006. As consideration for granting
the option the lessee will pay to ICTS an option fee of $20 per month.
The payment of the purchase price will be reduced by advance payments
on lease installments of $1m in July 2005 and an additional advance
payment of $500 in January 2006 covering the lease periods from June
2005 forward.
As of June 30, 2005 the depreciated value of the leased equipment is
$13.5 million.
e) On July 7, 2005, the Company has signed an agreement, with a related
party, to sell its rights of ownership in the long -term deposit 'China
Dragon' , see
F-50
NOTE 22 - SUBSEQUENT EVENTS (continued)
note 6(a) and to transfer the related long-term loan which was received
as part of the arrangement with a bank, see note 12(a)(1), for
consideration of $1 million. As of June 30, 2005 the net book value of
the deposit and the long-term loan is $1.2 million.
--------------
-------------------------
---------------
F-51
Dates Referenced Herein and Documents Incorporated by Reference
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