UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
Not Applicable
(Translation of Registrant's name into English)
The Netherlands
(Jurisdiction of incorporation or organization)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Name of each
Title of each Class: exchange on which
registered:
NONE NONE
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None Title of Class
Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close February 29, 2000: 6,246,869
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 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.
PART I
Item 1. Description of Business
Unless the context indicates otherwise, all references herein to the "Company" include ICTS, its consolidated subsidiaries (including Huntleigh USA Corporation as of January 1, 1999), Demco Consultants, Ltd. ("Demco", an Isreali affiliate) and Procheck International B.V. ("PI", the Dutch affiliate).
ICTS International N.V. (the "Company" or "ICTS") is a leading provider of enhanced aviation security services, and provides such services primarily to the European operations of the major U.S. carriers. The Company's principal service in this category is the implementation of passenger risk evaluation and classification procedures, generally described as "advanced passenger screening". The Company also provides in Europe other airport security services such as the operation of check-points and hold-baggage screening systems, and, to a lesser extent, certain aviation passenger handling services and certain general security services. In the USA the Company provides airport services such as pre-departure screening, skycaps, wheelchair attendants, agents, guards, janitorial personnel, maintenance, ramp and shuttle services. The Company is also engaged in security consulting, training and auditing for airlines and airports.
Strategy
The Company historically has focused on providing aviation security services to the European operations of the major U.S. airlines. However, in response to the expected growth in the demand for aviation security services such as those provided by the Company, the Company's strategy is to pursue certain opportunities and participate in certain industry trends which it believes may lead to significant growth. These opportunities include:
In addition, the Company seeks to become the vendor of choice for the various services it provides.
1. internal growth by maintaining a leadership position in the enhanced aviation security market and participating in the general increase in air travel, and by leveraging on the Company's active participation in the privatisation of airport security services in Germany and the operation of hold-baggage screening systems in the UK, to increase revenues from these services.
2. expansion into the U.S. market by acquiring, as of January 1, 1999, an 80% interest (together with an option to acquire the remaining 20% at an agreed upon price formula) in Huntleigh USA Corporation ("Huntleigh"), a Saint-Louis based company providing airport services such as pre-departure screening, skycaps, wheelchair attendants, agents, guards, janitorial personnel, maintenance, ramp and shuttle services, in approximately fifty (50) airports in the USA. Following this acquisition the Company transferred to Huntleigh its interest in SSI, a Chicago-based company providing passenger check-in services to American Airlines at O'Hare Airport.
3. development of technology-based products and services by focusing on the penetration of the Advanced Passenger Screening System (formerly referred to as the "Automated Profiling System"; "APS") into the market and by seeking to create within the Company the technological ability to diversify the range of products and services it provides to its clients. During 1999, the Company expanded the implementation of the APS, and has by 1999 executed with several airlines five year contracts for the installation and operation of the APS for use in their European operations.
In December 1999 the Company have agreed Gilat Communication Ltd ("Gilat"), a NASDAQ listed company (GICOF) to form a new company in which the Company will have 80.1% interest (the "new subsidiary"). The new subsidiary will provide Interactive Distance Learning (IDL) solutions to the aviation industry, with special focus on airlines and airports operators specific training needs in Europe and the US.
The new subsidiary intends to establish service centers in the US and Europe which will facilitate IDL services to specific customers as well as provide generic courseware and training for airlines and airport operators. For this purpose, the new subsidiary purchased equipment from Gilat in the amount of $2,260.
4. acquisitions of complementary and related businesses by targeting businesses similar to its current business, businesses engaged in passenger handling (including check-in, baggage processing and certain customer service activities), and aviation station management companies, as well as other security and safety-related businesses. Factors to be considered in making acquisitions would include current geographic presence at the locations involved, the degree to which the business to be acquired provides services complementary to those currently provided by the Company and opportunities to leverage the Company's customer base through cross-selling.
Services Provided
Services provided in Europe:
Advanced Passenger Screening
The principal service currently provided by the Company to its airline clients in Europe is the implementation of RAPS, a set of sophisticated procedures which seek to identify a potential threat, before it materializes, through a methodology of risk evaluation and classification of passengers. The risk evaluation and classification is effected by a comparison of various characteristics of a specific passenger to a preset standard of characteristics of a potential aggressor by means of interviewing, document verification and behavior analysis. RAPS results in the classification of the vast majority of passengers as low risk, thereby enabling more scrutiny to be focused on higher risk passengers. Since RAPS entails the identification of potential threats through recognizable patterns, the Company believes that it provides a better and more practical response to such threats than certain other available alternative security measures (such as simple guard positioning or a complete body and baggage search of each passenger). In addition, by focusing on the primary risks, the Company considers RAPS to be more cost-effective and passenger-friendly than other available alternative security measures.
The concept of risk analysis through APS has been utilized in various forms by certain U.S. carriers since 1986.
In 1995, the FAA mandated that all U.S. carriers adopt a uniform methodology of risk analysis through advanced passenger screening at all of their "high-risk" stations. Previously, the Netherlands security authorities had adopted such methodology as the standard for enhanced flight-related security for airlines subject to their authority. In April 1996, the United States enacted an anti-terrorism law which, among other things, mandates that foreign air carriers flying to and from airports in the United States adhere to security measures identical to those required of U.S. airlines serving the same airports. In July 1996, as an initial response to the explosion of TWA Flight 800, the FAA issued a "security directive," applicable to all international flights originating in the United States, which requires the implementation of certain passenger and cargo classification and verification procedures similar to some of the profiling procedures included in RAPS.
The Company believes that it is recognized for its expertise with regard to the RAPS method and its implementation. Although competitors implement procedures similar to those which are included in RAPS, the Company believes that its expertise with respect to screening procedures is substantially greater than that of its competitors. The Company's expertise allows it to (i) adapt and customize the method to the need of the client and the criteria of various authorities (for example, the FAA or UK DETR), (ii) effectively train personnel in the procedures and requirements associated with RAPS, and (iii) supervise the proper implementation of the method by such personnel.
Consulting, Auditing and Training
The Company provides consulting services to airlines and airports, which do not currently constitute a significant portion of the Company's revenues. The Company's consulting services include recommending the adoption of specified security procedures, developing recruitment and training programs for clients to hire necessary security personnel and working with airport authorities to ensure that such clients comply with applicable local requirements. The Company owns a 37% interest in Demco, a privately-held firm based in Israel. Demco is engaged in the design, planning and implementation of, and provides consulting services with
respect to, emergency systems and contingency procedures for government agencies and large organizations.
The Company provides certain security auditing services for airlines and airports. These services include evaluation and audit of existing security measures, testing security procedures through exercises and drills and the recommendation of measures to improve security procedures.
The Company frequently trains airline employees in profiling and other security measures. Such training consists of extensive courses and written training manuals. The Company has also been engaged by clients to develop and establish internal training programs.
Other Services
Operation of Checkpoints. The Company operates security checkpoints at airports. Although the Company's personnel who provide such services work closely with local authorities, which may be armed, neither the Company nor any of its personnel is engaged, nor does the Company intend to engage in the future, in any armed services.
Travel Documents Verification. Many countries hold the carrier of an arriving passenger responsible for the validity of the passenger's travel documentation (including, for example, the passenger's passport, visa and entry permit). In these countries, the airline is subject to fines and other penalties in the event that a passenger it carried is found, at the port of entry, with invalid or insufficient travel documentation. The Company was the first to offer a service which consists of verification of the travel documents of passengers to ensure compliance with the requirements of the authorities at the port of entry.
Baggage Reconciliation. The Company's baggage reconciliation service is designed to ensure that each piece of luggage on an aircraft is matched to a passenger on that aircraft.
machines and manual devices) designed to identify weapons and explosives carried by passengers or secreted in their luggage. The Company operates such systems, known as "Hold-baggage screening systems" primarily in the UK. The Company believes that the market for such services is rapidly growing, as more European countries are expected to require 100% screening of luggage in the near future.
Cargo Classification Control. The Company utilizes the expertise that it has gained through passenger screening to evaluate and classify commercial cargo transported on passenger airlines. The Company expects an increased demand for this service as international trade increases.
General Security Services. The Company also provides general security services not related to aviation (e.g., design and overall management of security systems and security guards) to various institutional clients such as banks, retail chains and universities in the United States, the United Kingdom, Spain and France.
Premium Customer Services. During 1999 the Company started to manage VIP lounges and to provide special treatment services to premium passengers such as the BusinessElite services of Delta Airlines.
Services in the USA
Following its acquisition of Huntleigh, the Company became one of the USA's leading providers of airport passenger terminal services and is the only provider in the industry that dedicates its business almost solely to airport services.
The Company now provides nine separate services at 50 airports in 28 states of the U.S. Within each service are specific job classifications. As more and more airlines continue to outsource many of the services they once provided, the Company believes that the number and type of services it offers may increase. These services currently include:
Pre-departure Screening
Skycap Services
Wheelchair Attendants
Agent Services
Guard Services
Janitorial Services
Maintenance
Ramp Services
Shuttle Service
Pre-departure Screening
The goal of a pre-departure screener is to prevent or deter the carriage of any explosive, incendiary device, weapon or other dangerous object into the sterile area of an airport concourse and aboard the aircraft.
Skycap Services Provider
A skycap performs two basic services in assisting passengers with their luggage. Located at the curbside of the check-in at airports, skycaps check-in passengers' luggage and meet security requirements established by the Federal Aviation Administration to profile passengers. The skycap is responsible for checking the baggage to the passenger's final destination. Skycaps also assist arriving passengers with transporting luggage from the baggage carousel to their transportation or other designated areas.
Skycaps also may operate electric carts for transporting passengers through the airport and transport checked baggage from the curbside check-in to the airline counter. One unusual job duty of skycaps is termed Concierge Service and involves a skycap monitoring the baggage carousel to ensure that passengers do not remove luggage that does not belong to them. In many airports, skycaps perform positive claim at the baggage claim area by checking to see if the passenger's baggage tags match those on the luggage to ensure that a passenger is removing his or her own luggage from the claim area.
Wheelchair attendants
Wheelchair attendants transport passengers through the airport in airline-owned wheelchairs. Working closely with the attendants are dispatch agents who monitor requests and
assignments for wheelchairs and dispatch the attendants as needed.
Agent Services
Agent services include Passenger Service Representative, Baggage Service, Priority Parcel, Cargo and Express Check-in. Though a Company employee, an agent is an actual representative of the airlines.
Guard Services
Guard services involve manning positions to guard secure areas, including the aircraft itself.
Janitorial Services
A growing service for the Company is the cabin cleaning of aircraft. This service has expanded to include cleaning of portions of the airport as well.
Maintenance
In one airport, the Company provides workers to maintain equipment used in service.
Ramp Services
Ramp services involve the actual aircraft. It includes directing aircraft into the arriving gate and from the departing gate, cleaning the aircraft, conducting cabin searches, stocking supplies and de-icing. An interline baggage service involving moving luggage from one airplane to another is also a ramp service.
Shuttle Service
The Company is responsible for shuttling airline crews from their hotel to the aircraft.
The Company's customers are the airlines themselves. If an airline is the sole occupant of a concourse or a terminal in which the Company provides service, the Company has an exclusive contract with that airline. If more than one airline shares a concourse or terminal, the Company maintains a
contract with the host or "custodian" airline and bills services to each airline based on its share of passenger boardings.
Restrictions on Company Operations
In certain cases, the Company is restricted in its operations by the terms of agreements that ICTS has entered into with its affiliates.
On October 9, 1991, the Company entered into a joint venture agreement with respect to PI. Pursuant to this agreement, the Company may not provide security services in The Netherlands other than through PI.
As of July 1, 1995, the Company transferred to its affiliate, ICTS Global Security (1995) Ltd. ("ICTS Global Security"), for no consideration, its activities, know-how and goodwill with respect to such services, along with a right to use the name "ICTS" in connection therewith. ICTS Global Security is minority owned by an executive of the Company and by a member of the supervisory board of the company. There were no assets or liabilities transferred in connection therewith. Pursuant to the terms of its arrangements with ICTS Global Security, the Company may not provide general security services in Latin America, Turkey or the former Soviet Union, and ICTS Global Security may not provide aviation security services anywhere in the world or general security services in Western Europe. In addition, the Company and ICTS Global Security agreed that each company will offer the other company the right to participate in any general security services project in North America which it may obtain.
Airline and Airport Customers
The Company's four largest airline customers based on revenue in 1999 collectively, accounted for approximately 50% of the Company's revenues. Any cessation or termination by any such customers of their present contracts with the Company, or reduction in the value of such contracts, could have a material adverse effect on the Company's business. The Company has over 120 clients in over 80 locations world-wide.
The Company's largest airport customer is Hamburg Airport (through the German Ministry of the Interior), which accounted for approximately 6% of the revenues of the Company in 1999.
Marketing and Sales
The Company maintains long-standing relationships with its U.S. airline clients. It has provided services to most of the major U.S. airlines. The provision of services to U.S. clients required the Company to establish a presence in the numerous destinations of such airlines. This resulted in the Company establishing and conducting operations in most of the important European international airports. Following the acquisition of Huntleigh the Company now also conducts operations in approximately 50 USA airports. The Company views its widespread presence as an advantage over competitors who lack such an international infrastructure.
European operations:
Matters of airline security and customers relations in Europe are, in most cases, the responsibility of each airline's headquarters. Accordingly, with respect to European operations such matters are handled and coordinated by ICTS headquarters and not by each subsidiary independently. Overall framework contracts are negotiated by ICTS with the airline at the airline headquarters level. Fees are determined separately for each airport, with the input of the local management of the relevant subsidiary. The performance of the contract in each separate location is then assumed by the applicable subsidiary. In addition, the subsidiary may supply ancillary services that are beyond the scope of the framework contract. The subsidiary bills the client directly and collects the fees due for all of the services it provides.
The Company's contracts with its airline clients concerning European operations usually have a term of one to five years and are normally subject to termination by the airline at any time with or without cause upon 90 days' prior notice.
Contracts are awarded as part of a bid process. Contracts may have a time period of duration or may be of indeterminate length. In most instances, either party can cancel with 30 days notice. Labor market conditions at a particular airport location may require the Company to increase its prices, at which time an airline may put the contract out for alternative bid.
Product Control and Training
The Company is engaged on an ongoing basis in efforts to improve and further develop the RAPS method and to adapt it to the varying needs of the clients. These improvements are intended to achieve faster processing of passengers by shortening screening procedures, which result in cost reduction and improvement of passenger service without jeopardizing the client's compliance with its required standards of security. Cost reduction and passenger service are both valued as extremely important components by the Company's clients. The Company strives to maintain the quality and level of the expertise of its personnel, through (i) periodic courses and training programs for its security agents and supervisors, (ii) the provision of professional material to its managers, (iii) the performance of audits, exercises and tests, (iv) the publishing of standards and manuals, and (v) the provision of information as to current terrorist activity and security threats.
Product Development
APS has been developed by a joint venture in which each of the Company, the Company's Dutch affiliate and A.M.S. (as hereinafter defined) holds a one-third interest (the "APS JV"). In January, 2000 the Company exercised an option it had to acquire 51% of the outstanding share capital of A.M.S.The Company has an exclusive licence from the APS JV to market and utilize the APS. The APS analyzes flight and passenger information and helps screening airline passengers in a faster and more efficient manner than other methods. The Company has entered into contracts with several airlines for the installation and operation of APS in those carriers' European operations. The Company believes that APS may provide the Company with a significant competitive advantage. However, there can be no assurance either that APS will be successfully
implemented or that it will be utilized by other airlines as a part of their security procedures.
Competition
The Company operates in a competitive international environment for enhanced security services. The factors which enable the Company to compete successfully are its expertise and reputation in the marketplace, its ability to serve a client in numerous international locations and the prices which it charges for its services.
Competition in the European Market
In the 1980's, the Company faced no competition in the enhanced security services market. This allowed the Company to attain professional recognition, develop strong client relationships with major airlines and airport authorities and establish a physical presence in 43 European airports.
The growth of the market for enhanced airline security services has attracted competition. The Company is currently aware of the following two principal competitors:
Aviation Defense International, Inc. ("ADI") is a subsidiary of Argenbright Holding, Ltd. ADI has been active in the security field mostly in the U.S. and began in 1991 to extend its activities to Europe. ADI provides security services in Europe principally to several major carriers in the UK, France, Germany, and Poland.
International Aviation Security, Inc., a wholly-owned subsidiary of TWA, provides security services in Europe principally to TWA and, to a lesser extent, to two other U.S. airlines.
Numerous other companies provide aviation security services other than profiling and consulting to airlines in almost all of the airports where the Company operates. In general, basic aviation security operations attract more intense competition and generate lower profit margins than profiling and consulting services.
Some international airports in European countries (for example, France, UK and Germany) have privatized and/or outsourced certain segments of their security operations, such as the operation of check-points and the operation of hold- baggage screening systems. The Company believes that other international airports may privatize or outsource certain segments of their security operations in the near future, although there can be no assurance that such trends will not diminish or even be reversed. Contracts for the provision of aviation security services other than profiling and consulting awarded as a part of such privatization and outsourcing processes tend to be large scale and long-term and attract competitors which are local or large international providers. Although privatization or outsourcing bids do not require expertise in RAPS, the Company believes it is able to compete for such projects on the basis of its overall reputation in the security field and its experience in managing large numbers of personnel at airports.
Competition in the US market
In the US market the Company competes with numerous other companies, many of which have greater resources, financial and other, than the Company.
Employees
The Company employs approximately 7,000 people on a regular basis. During summer months, when the Company's business reaches a seasonal high, approximately 250 additional employees are added. During the "off season", the Company recruits and trains these seasonal employees. Although the Company experienced a one-day work stoppage at certain of its locations in France in June 1997 and several days in July 1999, such work stoppage did not have a material adverse impact on the Company's operations or financial condition, and the Company believes that its relationships with employees are generally good.
In the USA, approximately 1,050 employees of the Company in 16 locations, are unionized. Most of these unionized employees are skycaps and screeners .
Regulatory Matters
Certain of the Company's clients, which together represent a significant portion of the Company's revenues, are subject to various regulations imposed by the FAA, the United Kingdom Department of Environment Transportation and Region(the "UK DETR") immigration authorities in various other countries as well as various local and federal agencies holding jurisdiction in the areas serviced. The FAA regulations cover all security aspects of passenger handling, baggage handling and aircraft security, as well as the training systems utilized in connection therewith. The UK DETR regulations relate to all security aspects of baggage handling, freight handling and employee background checks. Various immigration authorities impose a fine on airlines in the event that passengers carried by such airlines do not have proper travel documentation.
The Company is subject to random periodic tests by government authorities with regard to the professional level of the services and training which it provides, including adherence to FAA regulations relating to all aspects of passenger handling, baggage handling and aircraft security and to the training systems utilized, and UK regulations relating to baggage handling and employee background checks. Any failure to pass such a test may result in the loss of a contract or a license to perform services and would also be likely to have an adverse effect on the reputation of the Company.
In numerous airports in which the Company operates (including most of the major international airports in Western Europe), a license to operate is required from the airport authority. Such licenses are usually issued for a period of 12 months and are renewable. Some airport authorities limit the number of licenses they issue. The Company currently has a license to operate in all of the major international airports in Western Europe where such licenses are required. However, the loss of, or failure to obtain, a license to operate in one or more airports could result in the loss of, or the inability to compete for, a major contract.
Exchange Rate Fluctuations
Most of the Company's revenues in fiscal year 1999 were received, and most of its operating costs were incurred, in non U.S. currencies. The Company generally retains the funds which it receives in the locations and in the currencies in which such funds are paid. Thus, the Company's working capital resources are generally kept in a substantial number of different (primarily Western European) currencies. Because the Company's financial statements are presented in U.S. dollars, any significant fluctuation in the currency exchange rates between the Western European currencies and the U.S. dollar will affect the Company's results of operations and its financial condition. In the last quarter of 1998, the Company entered into currency hedging transactions in order to protect against currency fluctuations. These hedging operations were terminated at the end of the second quarter of 1999.
Non-Core Business Investments
In March 1997, the Supervisory Board of the Company authorized the Company to allocate $5 million, representing the approximate net proceeds to the Company from the sale in 1996 of its investment in Maman, to non-core investment opportunities. The Company has invested certain of these funds as follows:
During 1997, the Company procured bank guarantees of various debt obligations of a third party, arising from such party's trading in commodities in Eastern Europe. On December 31, 1998 these guarantees totaled $2,291,000. On December 31, 1999, the guarantees totaled $1,891,000. In January, 2000, the Company agreed, in exchange for a release of $1,000,000 of such guarantees, and receipt of satisfactory security for the release of the balance by June 30, 2000, to purchase from unaffiliated parties a $1,000,000 interest bearing debenture due November 26, 2004, issued by Pioneer Commercial Funding Corp. The interest bearing debenture is guaranteed by Leedan Business Enterprise Ltd. Leedan Business Enterprise Ltd. is a major shareholder of the Company and is indirectly wholly owned by Messrs. Ezra Harel and Menachem Atzmon, both directors of the Company. In addition, as a part of the same agreement, the Company provided a bank guarantee of $400,000, valid for a period of 18 months, to another entity
unaffiliated with the Company and has been designated by the above mentioned third party.
In August 1997, the Company, as part of a group consisting of Leedan Systems and Properties Enterprises (1993) Ltd., Pioneer Commercial Funding Corp. and Rogosin Development and Holdings Ltd., each an affiliate of Leedan (the "Leedan Group"), 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, the Company contributed $259,000 and has guaranteed $2,915,000 of debt obligations of Bilu. In 2000 Bilu issued to an unaffiliated party shares in Bilu representing 25% of its outstanding share capital, in consideration for an equity investment of USD MM 2 and the provision of guarantees for debt obligations of Bilu in an amount of USD 3.8 Million. As a result, the Company's equity interest in Bilu has been diluted to 7%.
During 1998, the Company purchased 300,000 shares of Common Stock of Pioneer Commercial Funding Corp.("Pioneer") from Leedan for a purchase price of $2.50 per share. Pioneer is a sister corporation through common ownership through Leedan.
Insurance
As a provider of security services, the Company faces potential claims
in the event of any successful terrorist attempt in circumstances associated
with the Company. Any such claim could have a material adverse effect on the
financial position and results of operations of the Company and on the Company's
ability to conduct its business. Any such claim could also be for amounts far
exceeding the financial capability of the Company. The Company maintains
insurance coverage against such potential liabilities including (i) third-party
aviation liability coverage; (ii) third-party general liability coverage; and
(iii) errors and omissions coverage.
Item 2. Description of Properties
Each of the Company's offices and other operating facilities is leased pursuant to an arrangement, entered into in the ordinary course of its business, which can be replaced without any material consequence to the Company.
For its USA corporate office located at 10332 Old Olive Street Rd. in St. Louis, the Company rents a 4,000 square foot building owned by Sandy and Bill Glassman, former owners of Huntleigh. Huntleigh pays $5,000 per month plus property taxes, maintenance and insurance. The lease expires April 30, 2002.
Item 3. Legal Proceedings
The Company is not currently engaged in (or, to its knowledge, threatened with) any material legal proceedings, other than as described below.
The Company was served two Grand Jury subpoenas to produce documents relating to its operation in Philadelphia, PA. The records include:
1. Personnel records of all present and former employees who performed services for Huntleigh at the Philadelphia airport.
2. Records regarding the training and background checks of such employees.
3. Personnel records relating to Huntleigh employees who directly supervised the Philadelphia employees.
4. Other related documents.
Prior to subpoena, the Federal Aviation Administration (FAA) seized personnel documents of Philadelphia employees without a subpoena. On May 27, 1999, Huntleigh submitted documents in response to the second subpoena. Huntleigh's attorneys were informed by the U.S. Attorney that six of it's Philadelphia employees would be subpoenaed to testify before the Grand Jury, but to the best of Huntleigh's attorneys knowledge that has not yet occurred. The U.S. Department of Transportation had contacted one of the former employees requesting that she supply certain information to the department about the incidents subject of the Grand Jury investigation. According
to Huntleigh's attorneys, this individual has not yet supplied any information to the department of Transportation.
Item 4. Control of Registrant
Leedan, through wholly-owned subsidiaries, owns approximately 36.1% of the issued and outstanding Common Shares. Mr. Menachem J. Atzmon and Mr. Ezra Harel own, indirectly 100% of the outstanding shares of Leedan and may be deemed to control such company. Leedan, Mr. Atzmon and Mr. Harel may be able to appoint all the directors of ICTS and control the affairs of ICTS.
The following table sets forth certain information regarding the beneficial ownership of the Common Shares of ICTS, as of the date of this Annual Report, by each person who is known by ICTS to own beneficially more than 10% of the outstanding Common Shares:
Amount of Shares Percent of
Beneficially Owned Class Owned
Leedan...................... 2,255,000 36.1%
Ezra Harel.................. 2,920,000(1) 46.7%
Menachem J. Atzmon.......... 2,645,000(2) 42.3%
Directors and Executive
Officers as a Group....... 3,970,400(3) 59.0%
(11 persons)
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1 For purposes of U.S. Securities laws, Mr. Harel may be deemed to beneficially own Leedan's Common Shares by reason of his control of Leedan. This amount includes 275,000 Common Shares owned by Mr. Harel, 390,000 shares owned by a company controled by Mr. Harel and Mr. Atzmon and 2,255,000 Common Shares owned by Leedan.
2 For purposes of U.S. Securities laws, Mr. Atzmon may be deemed to beneficially own Leedan's Common Shares by reason of his control of Leedan and 390,000 shares owned by a company controled by Mr. Harel and Mr. Atzmon.
3 Includes (a) 2,255,000 Common Shares held by Leedan and (b) 480,400 Common Shares issuable upon the exercise of options granted to certain directors and executive officers of the Company which have vested or which become exercisable within 60 days.
Item 5. Nature of Trading Market.
The Common Shares have been quoted on the NASDAQ National Market under the symbol "ICTS". The following table sets forth, for the periods indicated, the high and low last reported sale prices for the Company's Common Shares:
High Low
First Quarter 1998..................... $8.625 $6.4375
Second Quarter 1998.................... $8.375 $6.25
Third Quarter 1998..................... $7.375 $5.125
Fourth Quarter 1998.................... $6.375 $3.8125
First Quarter 1999..................... $6.125 $3.6875
Second Quarter 1999.................... $6.0625 $4.6875
Third Quarter 1999..................... $6.1875 $4.5625
Fourth Quarter 1999.................... $6.25 $4.500
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On March 15, 2000, the last reported sale price of the Company's Common Shares as reported by Bloomberg Business News was $6.00 per Common Share. As of March 15, 2000, the Company had 21 shareholders of record. The Company believes it has more than 1700 beneficial shareholders in the U.S. There is currently no trading market for the Company's Common Shares outside the U.S.
Item 6. Exchange Controls and Other Limitations Affecting Security Holders.
The Company does not expect to pay dividends in the foreseeable future. To the extent that dividends are distributed by the Company, such dividends ordinarily would be subject under Netherlands tax law to withholding tax at the rate of 25%. Share dividends would also be subject to Netherlands dividend withholding tax, unless certain conditions were met under Netherlands tax law. See Item 7 - "Taxation - Netherlands Taxes."
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.
Item 7. Taxation
The following discussion is of a general and summary nature only and is not intended to be, nor should it be considered to be, legal or tax advice to any particular shareholder. Accordingly, prospective investors should consult their own tax advisors with respect to the specific tax consequences of receiving dividends from the Company or disposing of their Common Shares, including, in particular, the effect of any foreign, state or local taxes.
Netherlands Taxes
The following is a summary of Netherlands tax consequences to an owner of Common Shares who is not, or is not deemed to be, a resident of The Netherlands for purposes of the relevant tax codes (a "non-resident Shareholder") and is based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change, possibly on a retroactive basis. The summary does not address taxes imposed by The Netherlands and its political subdivisions, other than the dividend withholding tax, the individual income tax, the corporate income tax, the net wealth tax and the gift and inheritance tax. The discussion does not address the tax consequences under non-Netherlands tax laws.
Netherlands Dividend Withholding Tax
ICTS does not expect to pay dividends in the foreseeable future. To the extent that dividends are distributed by ICTS, such dividends ordinarily would be subject under Netherlands tax law to 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 Netherlands tax purposes, recognized paid-in capital. Share dividends are also subject to Netherlands dividend withholding tax, unless distributed out of the paid-in share premium of ICTS as recognized for Netherlands tax purposes.
A non-resident Shareholder can be eligible for a reduction or a refund of Netherlands 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, Netherlands dividend withholding tax 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 entitled to the benefits of the Treaty (each, a "U.S. Treaty Shareholder") are generally eligible for a reduction in the rate of Netherlands dividend withholding to 15%, unless such U.S. Treaty Shareholder has a permanent establishment in The Netherlands to which the Common Shares are attributable.
Generally, no Netherlands dividend withholding tax applies 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 Netherlands dividend withholding tax may apply.
Netherlands Income Tax and Corporate Income Tax
A non-resident Shareholder will not be subject to Netherlands income tax and corporate income tax with respect to dividends distributed by ICTS on the Common Shares or with respect to capital gains derived from the sale or disposal of Common Shares, 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
Netherlands tax code or, in the event the non-resident Shareholder does have such a substantial interest, such interest forms part of the assets of an enterprise of that non-resident Shareholder; and
(c) the non-resident Shareholder is not entitled to a share in the profits of an enterprise effectively managed in the Netherlands, other than through ownership of securities or through employment, to which enterprise the Common Shares are attributable.
Generally, a substantial interest in the share capital of ICTS does not exist if the non-resident Shareholder, alone or together with certain close relatives, does not own, directly or indirectly, 5% or more of the issued capital of any class of shares in ICTS, options to acquire 5% or more of the issued capital of any class of shares or certain profit-sharing rights. In case of a substantial interest claims the non- resident Shareholder has on ICTS International N.V. 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.
The above paragraph concerning substantial interest holders refers to tax legislation which became effective January 1, 1997 and January 1, 1998. 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.
Netherlands Net Wealth Tax
A non-resident Shareholder who is an individual is not subject to Netherlands net wealth tax with respect to the Common Shares, provided (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. Corporations are not subject to Netherlands net wealth tax.
Netherlands Gift, Inheritance Tax and Transfer Tax Upon Gift or Death
A gift or inheritance of Common Shares from a non-resident Shareholder will not be subject to Netherlands gift, inheritance tax, and transfer tax upon gift or death 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 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 Netherlands citizen at the time of the gift or death; and
(c) 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.
Item 8. Selected Financial Data
The following table sets forth selected financial data for the Company for the five years ended December 31, 1999. The selected financial data presented below for each of the five fiscal years in the period ended December 31, 1999 have been derived from the financial statements of the Company, which have been audited by Kesselman & Kesselman for the three fiscal years ended December 31, 1997, 1998 and 1999. Kesselman & Kesselman is a member of PriceWaterhouse Coopers International Limited, a company limited by guarantee registered in England and Wales. Effective July 1, 1997, the Company had reacquired 100% control of ICTS GmbH. Accordingly, the financial data for ICTS are presented on a consolidated basis for 1997, 1998 and 1999, except that ICTS GmbH is presented on the equity method for the period ending June 30, 1997 and on a consolidated basis thereafter. The information set forth below for 1997 and 1998 and 1999 is qualified by reference to, and should be read in conjunction with, the financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Annual Report.
U.S. $ in Thousands (except per share data)
The Company (1) (2) (3)
Year Ended December 31,
1995 1996 1997 1998 1999
---------------- ----------------- ---------------- ---------------- ------------
Revenues......................... $29,826 $38,943 $53,798 $64,130 $134,819
Costs of revenues..... 25,061 32,610 45,016 54,109 118,915
Gross profit...................... 4,765 6,333 8,782 10,021 15,904
Amortization of goodwill 164 154 321 485 840
Selling, general and administrative
Operating income 1,634 2,080 2,467 2,698 4,918
Financial (expenses) Income, net (296) 381 3,589 (490) 184
Other income (expense), net (9) 4,547 226 (703) (86)
Income before taxes on income 1,329 7,008 6,282 1,505 5,016
Income taxes (339) (449) (2,357) (837) (2,645)
Income from operations of the company and its
Share in profits of associated companies, net
Minority interest - - - - (2)
Income before cumulative effect of an
Cumulative effect, at beginning of year
Net income for the year $1,113 $6,764 $4,046 $882 $2,330
================ ================= ================ ================ =============
Net income per share $0.28 $1.35 $0.62 $0.14 $0.37
================ ================= ================ ================ =============
Net income per share - fully diluted $0.28 $1.33 $0.61 $0.14 $0.37
================ ================= ================ ================ =============
Weighted average number of shares
Adjusted weighted average number of shares
outstanding 4,024 5,098 6,681 6,517 6,274
================ ================= ================ ================ =============
Balance Sheet Data:
Cash and cash equivalent $1,899 $16,366 $13,699 $11,273 $6,795
Short term investments 8,888 4,344 6,380 9,653
Working (deficit) capital (934) 23,535 15,905 14,622 18,960
Total assets 13,908 41,947 45,719 53,832 69,522
Short term bank debts and current maturities
Long term debt, net 237 250 1,607 6,174 14,951
Retained earnings 743 7,507 11,553 12,435 14,765
Shareholder's equity 3,946 30,073 30,132 30,899 28,286
(1) See note1 to financial statements as to operations and basis of presentation
(2) See Note 2(b) to financial statements as to principles of consolidation. For
years ended December 31, 1995 and 1996, the financial statements of the Company
show ICTS GmbH on the equity method as 55% of such company was sold in 1994. For
1997, the financial statements of the Company show ICTS GmbH on the equity
method for the period ending June 30, 1997 and on a consolidated basis
thereafter as, effective July 1, 1997, the Company had reacquired control over
ICTS GmbH.
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Item 9. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The financial information with respect to the Company for 1995, 1996, 1997,1998 and 1999 which is included in this Annual Report describes the consolidated operating results and the consolidated financial condition of the Company for such periods.
General
No single currency accounts for a predominant portion of the Company's revenues, expenses, other assets or liabilities. A majority of the Company's cash balances are held in United States Dollars. The Company has selected the United States dollar as the reporting currency for its consolidated financial statements. ICTS and each of its subsidiaries and affiliates separately record their transactions in the currency of their locality, translating their assets and liabilities into dollars at the exchange rate prevailing on the respective balance sheet dates and translating revenues, expenses, gains and losses into dollars at the average exchange rate for the relevant period. In general, the Company's results of operations, as reported in U.S. dollars, may be affected by fluctuations between the U.S. dollar and the currencies of the Western European countries in which the Company derives most of its revenues and incurs most of its expenses.
The Company's revenues are primarily affected by the rates it charges, the number of flights it services and the number of billable hours of service provided. The rates which the Company is able to charge at any location are primarily affected by competitive conditions at such location. In general, competition tends to be more intense (with a consequent negative impact on rates) at the airports where the Company is most active. However, inasmuch as the Company generally serves more customers and services more flights at such airports, it is generally able to operate there more efficiently through higher utilization of its employees and facilities.
Corporate Income Taxes
Each subsidiary of ICTS is subject to taxation according to the tax rules applying 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. ICTS receives from its subsidiaries and
affiliates(with the exception of ICTS 1994 (USA) Inc. and the Company's Israeli subsidiary) management fees or royalty payments under license agreements by which ICTS provides such companies with a license to utilize the expertise of ICTS. The payment of the royalties by such subsidiaries and affiliates to ICTS is subject to corporate income tax in the Netherlands and withholding taxes at varying rates according to the country of incorporation or residency of such subsidiary or affiliate.
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 Netherlands corporate income tax 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 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, 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) of entities related to ICTS or assets of such entities). The Company currently fulfills these requirements. Consequently, all 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 is exempt from Netherlands corporate income tax.
Results of Operations
The following table sets forth for the periods indicated the relationship (in percentages) of selected items of the Company's statements of income to its total revenues.
Year Ended December 31,
1997 1998 1999
Revenues..................... 100% 100% 100%
Cost of revenues............. 83.7 84.4 88.2
---- ---- ----
Gross profit........... 16.3 15.6 11.8
Selling, general and
administrative expenses..... 11.1 10.7 7.5
Operating income .............. 4.6 4.2 3.6
Net income ............ 7.5% 1.4% 1.7%
==== ==== ====
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Year Ended December 31, 1999 Compared to Year Ended December 31, 1998.
Revenues:
Revenues in the year ended December 31, 1999 increased by 110% as compared to
the year ended December 31, 1998. This increase ($70.7 million) is attributable
to the consolidation of Huntleigh, since January 1st, that increased the
revenues by $58 million and an increase of $12.7 million in the revenues from
operations in Europe, mainly in UK, Germany and France. In general, Huntleigh
serves the same clients as the rest of ICTS companies do, which means that the
increased revenues was achieved from both existing and new airline customers.
Gross Profit. Gross profit is defined as revenues less costs directly related to the provision of services 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 margin decreased in the year ended December 31, 1999 as compared to the year ended December 31, 1998 by 3.8%. The decrease is mainly due to the low margins in the operations of the company in the USA. Part of the decrease is also related to Start- up costs with respect to the opening of new locations (Detroit, Portland, Seattle and Anchorage) and new facilities for airlines as
well as costs of expanding the operation of the APS system totaled approximately $700,000.
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of revenues decreased by 3.2% in the year ended December 31, 1999 as compared to the year ended December 31, 1998, but increased in an amount of $3.3 million. Such increase, resulted primarily from additional expenses of approximately $2.5 million attributable to the consolidation of Huntleigh as of January 1, 1999. Other general expenses were incurred in order to facilitate growth.
Financial (Expenses) Income, Net. Financial (expenses) income, net includes interest income (net of interest expense) and foreign currency translation gains or losses. Financial income, net also includes adjustments due to the impact of exchange rate differences on financial instruments. The income increase of approximately $674,000 is mainly attributable to a gain due to the impact of exchange rate differences, as a result of the strengthening of the U.S. dollar in European markets. The Company has made efforts to limit the currency fluctuation effect on its results by financial forward and hedging transactions.
Income on cash deposits has slightly decreased primarily due to the decrease in interest rates on US dollars deposits in the financial markets from approximately 4.5% in 1998 to approximately 4.0% during most of 1999.
Other Income (Expense), Net. Other expenses for the year ended December 31, 1999 consist of approximately $85,000 of acquisition expenses for the Huntleigh acquisition.
Income Taxes. The Company's consolidated effective income tax rate in the year ended December 31, 1999 was 52.7% as compared to 55.6% in the year ended December 31, 1998. The main reasons for this tax rate are (i) an increase in 1999 as compared to 1998 in earnings before tax of subsidiaries in countries where high tax rates are levied i.e. Germany and Italy, while the tax rate of subsidiaries which incurred losses i.e. USA, were lower, and (ii) an expense for amortization of goodwill, representing a non-deductible expense for tax purposes. A dividend distribution by the German subsidiary to the parent company in the Netherlands allowed a substantial tax saving which decreased the overall effective tax rate in 1999 as compared to 1998.
Equity in Results of Affiliates, Net. Equity in results of affiliates, net, for the year ended December 31, 1999, includes the Company's share of the profits of PI, Demco and an amortization on account of the Company's investment in the APS JV. The Equity in results of Affiliates in the year ended December 31, 1998, consisted only the Company's share of the profits of PI
Net Income. As a result of the foregoing, the Company's net income increased by approximately $1.5 million in 1999, to approximately USD 2.3, as compared to approximately $0.8 million in the year ended December 31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997.
Revenues: Revenues in the year ended December 31, 1998 increased by 19.2% as compared to the year ended December 31, 1997. This increase ($10.3 million) is attributable to increased revenues from both existing and new airline customers. Revenues increased $0.5 million, $1.9 million and $3.6 million respectively from the Company's three largest customers. A portion of this increase is attributed to the Company's consolidation of FIS GmbH which was effective July 1, 1997.
Gross Profit. Gross profit is defined as revenues less costs directly related to the provision of services 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 margin decreased in the year ended December 31, 1998 as compared to the year ended December 31, 1997 by 0.7%. Part of this decrease is related to start-up costs with respect to the opening of new locations (Dublin, Shannon, Stockholm) and new facilities for airlines. In addition, the Company incurred start-up costs to get the APS system operational. Increased wages in the UK also affected gross profit margins.
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of revenues decreased by 0.5% in the year ended December 31, 1998 as compared to the year ended December 31, 1997. In dollars there was an increase of $844,000. Such increase, resulted from additional expenses of approximately $486,000 attributable to the
consolidation of FIS GmbH as of July 1, 1997. Other general expenses were incurred in order to facilitate growth, part of which is expected to be realized during 1999.
Financial (Expenses) Income, Net. Financial (expenses) income, net includes interest income (net of interest expense) and foreign currency translation gains or losses. Financial income, net also includes adjustments due to the impact of exchange rate differences on financial instruments. The decrease of approximately $4.1 million is mainly attributable to a loss of approximately $1.1 million due to the impact of accounting principles on exchange rate differences, as a result of the weakening of the U.S. dollar in European markets, compared with the gain of $2.7 million recorded during 1997. The Company has made efforts to limit the currency losses by financial forward and hedging transactions.
Income on cash deposits have slightly decreased primarily due to the interest decrease in the financial markets from approximately 6% in 1997 to approximately 4.5% at the end of 1998.
Other Income (Expense), Net. Other expenses for the year ended December 31, 1998 consist of approximately $410,000 of write- off of investment in computerized systems for the training of manpower. An amount of $122,000 expenses was recorded in connection with an unsuccessful attempt to acquire a ground handling company operation in the UK. In addition, an amount of $166,000 was accrued as a success fee for the Huntliegh acquisition.
During the year ended December 31, 1997 net income attributable to the Company's disposition of its interest in ICTSAP, the Company's former Hong Kong affiliate, of $352,000 was offset by losses on sale of fixed assets of $126,000.
Income Taxes. The Company's consolidated effective income tax rate in the year ended December 31, 1998 was 55.6% as compared to 37.5% in the year ended December 31, 1997. The main reason for the relatively high tax percentage is the increase in earnings before tax of subsidiaries in countries where high tax rates are levied i.e. Germany and Italy, while the tax rate of subsidiaries which incurred losses, were lower, i.e. Austria and the Netherlands.
With respect to fiscal year 1997, the effective income tax rate for FIS GmbH, was 60.0%, while the proceeds of the Company's divestiture of ICTSAP were tax exempt. Furthermore, approximately
$1 million of income taxes for the year ended December 31, 1997 is attributable to the effect of exchange rate differences, as discussed above in Financial (Expenses) Income, Net. The Company's effective tax rate will also vary from period to period depending on the breakdown of earnings and losses among the various operating subsidiaries, the amount of management fees and royalties paid to ICTS by its subsidiaries and affiliates, the treatment of such items by the relevant tax authorities and income tax effects deferred from prior periods.
Equity in Results of Affiliates, Net. Equity in results of affiliates, net, for the year ended December 31, 1998, includes the Company's share of the profits of its Dutch affiliate, PI. Compared with the net equity results of the year ended December 31, 1997, which included(i) its Dutch affiliate, (ii) its Israeli affiliate, subsequent to the Company's acquisition of a 37% interest in such company in August, 1997 and (iii) FIS GmbH, for the period January 1, 1997 until such company's consolidation with ICTS effective July 1, 1997. In December 1997, the Company sold its interest in ICTSAP. Equity in results of affiliates, amounted to $121,000.
Net Income. As a result of the foregoing, the Company's net income decreased by approximately $3.1 million in 1998, from approximately $4.0 million in the year ended December 31, 1997.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996.
Revenues: Revenues in the year ended December 31, 1997 increased by $14.9 million as compared to the year ended December 31, 1996. This increase is attributable in part to the Company's consolidation of ICTS GmbH and its wholly-owned subsidiary, FIS GmbH, effective July 1, 1997. As a result of such consolidation, the $6.6 million in revenues earned by ICTS GmbH, through such subsidiary, during the period July 1, 1997 to December 31, 1997 is included in the Company's revenues. The increase is also attributable to increased revenues from both existing airline customers and certain new airline customers and increased revenues from non-airline customers. Revenues increased $2.9 million, $2.0 million and $1.5 million, respectively from the Company's three largest customers, portions of which are attributable to the consolidation of ICTS GmbH and FIS GmbH.
Gross Profit. Gross profit is defined as revenues less costs directly related to the provision of services 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 margin did not change in the year ended December 31, 1997 as compared to the year ended December 31, 1996.
Selling, General and Administrative Expenses. Selling, general and administrative expenses as a percentage of revenues increased 0.6% in the year ended December 31, 1997 as compared to the year ended December 31, 1996. Such increase, representing increased selling, general and administrative expenses of approximately $1.9 million, consisted primarily of additional expenses of approximately $500,000 attributable to the consolidation of ICTS GmbH as of July 1, 1997, expenses incurred in adding and relocating personnel to the Company's Netherlands headquarters and the headquarters of ICTS USA (1994), Inc., the wholly-owned U.S. subsidiary of the Company, expenses attributable to increased costs of compliance with reporting requirements on account of the Company's first full year of being publicly traded since its June 1996 initial public offering and, generally, due to increased costs attributable to the Company's expanded operations.
Financial (Expenses) Income, Net. Financial (expenses) income, net includes interest income (net of interest expense) and foreign currency translation gains or losses. Financial income, net also includes adjustments due to the impact of exchange rate differences on financial instruments. The increase in financial income, net of approximately $3.2 million from the year ended December 31, 1996 to the year ended December 31, 1997 is attributable primarily to income of approximately $2.7 million due to the impact of the exchange rate differences, primarily as a result of the strengthening of the U.S. dollar in overseas markets, and approximately $1 million income representing interest on bank deposits.
Other Income (Expense), Net. Other income for the year ended December 31, 1997 consists primarily of approximately $352,000 of net income attributable to the Company's disposition of its interest in ICTSAP, the Company's former Hong Kong affiliate. The decrease in other income, net of approximately $4.321 million for the year ended December 31, 1997, compared to the year ended December 31, 1996, is attributable primarily to a non-recurring transaction in fiscal year 1996. In November 1996, the Company disposed of its interest in Maman Cargo Terminal & Holding
("Maman"), realizing other income, net of approximately $4.65 million from such transaction.
Income Taxes. The Company's consolidated effective income tax rate in the year ended December 31, 1997 was 37.5% as compared to 6.4% in the year ended December 31, 1996. Such effective income tax rate increase is primarily attributable to the treatment of certain non-recurring transactions which reduced the effective income tax rate for the year ended December 31, 1996. The proceeds of the sale of the Company's Maman investment in 1996 (described above) were tax exempt. Additionally, in fiscal year 1996, the Company realized a tax benefit due to a reversal of a valuation allowance relating to the Company's Israeli subsidiary. Without giving effect to such transactions, the Company's consolidated effective income tax rate in the year ended December 31, 1996 would have been 37.1%. With respect to fiscal year 1997, the effective income tax rate for ICTS GmbH, was 60.0%, while the proceeds of the Company's divestiture of ICTSAP were tax exempt. Furthermore, approximately $1 million of income taxes for the year ended December 31, 1997 is attributable to the effect of exchange rate differences, as discussed above in Financial (Expenses) Income, Net. The Company's effective tax rate will also vary from period to period depending on the breakdown of earnings and losses among the various operating subsidiaries, the amount of management fees and royalties paid to ICTS by its subsidiaries and affiliates, the treatment of such items by the relevant tax authorities and income tax effects deferred from prior periods.
Equity in Results of Affiliates, Net. Equity in results of affiliates, net, for the year ended December 31, 1997, includes ICTS' share of the profits of (i) its Dutch affiliate, (ii) its Israeli affiliate, subsequent to the Company's acquisition of a 37% interest in such company in August, 1997 and (iii) ICTS GmbH, for the period January 1, 1997 until such company's consolidation with ICTS effective July 1, 1997. The carrying value of ICTS' share in ICTSAP was written down to $0 as of December 31, 1995. In December 1997, the Company sold its interest in ICTSAP. Equity in results of affiliates, net amounted to $121,000 in the year ended December 31, 1997 and $205,000 in the year ended December 31, 1996.
Net Income. As a result of the foregoing, the Company's net income decreased by approximately $2.8 million in 1997, from approximately $6.8 million in the year ended December 31, 1996 to approximately $4.0 million in the year ended December 31, 1997.
Liquidity and Capital Resources
The Company's principal cash requirement is the payment of wages. Employees are typically paid during the first ten days of the month for the preceding month, while payments from customers are generally received within 30 days of the date of invoice. Working capital is financed primarily by cash from operating activities and, as necessary, by short-term borrowings. Due to the seasonality of the Company's business, working capital requirements are relatively higher during the summer months. For 1997 and 1998, net cash provided by operations was $3,318,000 and $511,000, respectively.
The effect of Huntleigh's working capital requirement and its needs to finance growth resulted in a total group's negative cash flow result from operating activities in 1999 of $490,000.
In 1999 the Company's investing activities consisted of the purchase of equipment, representing capital expenditures of $994,000, and the investment in the transactions discussed below. The Company's current primary sources of short-term liquidity and capital resources are cash flow from operating activities and short-term credit facilities of approximately $3.1 million. During 1999, the Company increased its long term loans by $5.8 million mainly for the purpose of financing the growth of Huntleigh U.S.A. Corporation, which was realized during the first two quarters of 1999. During 1999 $1.8 million was collected on long term loans to John Bryce (as hereinafter defined) and A.M.S.
During 1999 an amount of $553,000 served for a repurchase of shares by the Company. The Company was authorized by its shareholders to invest up to $6,500,000 to repurchase shares of its common stock in the open market at prices not to exceed $10.00 per share.
The Company currently funds its activities with operating cash flow and bank borrowings at the subsidiary level, as well as the short-term credit facilities referred to the above. There are no material commitments for capital expenditures.
The Company believes that current cash balances, cash flow from operating activities and its bank facilities should be sufficient to fund continued expansion and to meet all its anticipated cash requirements for at least the next 12 months.
Strategic Investments
In January 1997 the Company purchased an 82.5% interest in Service Service, Inc. ("SSI") for approximately $573,000. SSI, a Chicago- based company provides passenger check-in services to American Airlines at O'Hare Airport. On February 25, 1999, the Company acquired the remaining 17.5% of SSI so that it became a 100% subsidiary.
In April 1997, the Company acquired 5% of FIS GmbH which resulted in the Company owning 50% of the outstanding equity in FIS GmbH. Subsequently, effective July 1, 1997, the Company acquired the remaining 50% of FIS GmbH. As a result of these transactions, effective July 1, 1997, the Company became the owner, directly and indirectly, of 100% of the equity of FIS GmbH.
In August 1997, the Company acquired 37% of the outstanding shares of Demco for approximately $1.2 million. In 1998, the Company sold 18% of the Demco shares, which shares were reacquired in 1999. Demco, a privately-held firm based in Israel, is engaged in the design, planning and implementation of, and provides consulting with respect to, emergency systems and contingency procedures for government agencies and large organizations.
In November 1997,the Company entered into the series of transactions discussed below with John Bryce Systems Ltd. and A.M.S. Advanced Maintenance Systems Ltd. ("A.M.S." and, together with John Bryce Systems Ltd., "John Bryce"), Israeli companies under common control. John Bryce is an Israel-based software specialist with a focus on the aviation industry. Each of the Company, the Company's Dutch affiliate and A.M.S. held a one-third interest in the APS. In the initial transaction, in return for providing a guarantee of $225,000 of obligations of John Bryce and a payment of $25,000 to John Bryce, the Company acquired exclusive marketing rights for an airline operations control system and an aircraft maintenance management system developed by A.M.S. The Company subsequently made a commitment to provide up to $2,915 million of loans to John Bryce, and provided such loan in the course of 1998 and 1999. In connection with such commitment, in November 1997 the Company acquired, for $500,000, a ten-year, zero coupon bond of John Bryce with a face value at maturity of $1.062 million. The Company was granted a four-year option to purchase a 51% equity interest in John Bryce. In January 2000 the Company exercised its options to acquire 51% of the shares of John Bryce
for approximately $2.7 million. Subsequently, the company sold its shares in John Bryce Systems Ltd. to Gilat in consideration for 388,189 unregistered common shares of Gilat, while retaining its 51% interest in AMS Advance Maintenance System Ltd. Gilat is a NASDAQ listed company (GICOF).
As of January 1, 1999 the Company acquired 80% of the issued and outstanding capital stock of Huntleigh Corporation and has an option to acquire the remaining 20% at an agreed upon price formula. Huntleigh is a provider of aviation services in the United States.
New Accounting Standards
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Cost of Start-Up Activities" (SOP 98-5). This standard requires companies to expense the costs of start-up activities and organization costs as incurred.
In June 1998, the FASB issued FAS 133, "Accounting for Derivative Instruments and Hedging Activities." FAS 133 established a new model for accounting for derivatives and hedging activities. FAS 133 requires companies to record derivatives on the balance sheet as assets or liabilities, measured at fair value. Gains or losses resulting from changes in the values of those derivatives would be accounted for depending on the use of the derivative and whether it qualifies for hedge accounting. FAS 133 is effective for calendar year companies beginning January 1, 2001. As of December 31, 1999, the company has no derivative instruments.
Other Matters
The Company did not experience any Y2K problems. The Company is still on alert for any future Y2K issues.
On January 1,1999 the Euro was introduced in several countries in Europe. Since the Company has three years to convert its accounting systems, management information systems, billing and related financial reporting programs, the Company has established a policy of reviewing what other companies are doing to implement the changes required for the Euro introduction. The Company does not expect that when the Company changes over its accounting and other systems to accommodate Euro reporting and information retrieval
that it will experience any significant problems in doing so and that the cost to do so will not be material.
FACTORS AFFECTING OUR OPERATING RESULTS, BUSINESS AND PROSPECTS
This report on Form 20-F contains forward-looking statements which involve risks and uncertainties. The factors described below, among others, could cause our actual results to differ materially from those anticipated.
International Operations Concerns.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 one 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 (especially those involving the ability of U.S. carriers to land at foreign airports) or economic or political instability in the areas where the Company operates could have an adverse effect on the Company's business, results of operations or financial condition. For example, the Company currently provides services at several airports in states of 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 in the former Soviet Union.
Customers Financial Condition. The financial condition of the Company's airline clients is likely to have a material impact upon the nature and extent of the services which such airlines procure from independent suppliers and the prices which such airlines will be willing to pay for such services. In addition, consolidation in the airline industry may result in the Company gaining or losing contracts. Finally, financial difficulties of airlines, whether temporary or permanent, regardless of the cause of such financial difficulties, may cause such airlines to either partially or completely cease operations, or may result in such airlines being forced to seek protection under bankruptcy and similar statutes. Any of these events could have a material adverse effect on the Company's business, results of operations or financial condition.
Fluctuations in Demand for the Company's Services. The Company is affected by the extent of terrorist activity in the world generally and, specifically, in the aviation industry. In addition, the Company's results of operations and financial condition are affected by the determination by government agencies (e.g., the FAA and the United Kingdom Department of Transportation) of the level of security to be required, from time to time, of airlines and airports. Typically, demand for the Company's services rises after events involving or potentially involving terrorist activity and may thereafter decline as the threat is perceived to diminish. There can be no assurance that the Company will be able to manage fluctuations in the demand for its services successfully or that changes in the factors discussed in this paragraph will not have a material effect on the Company's business, results of operations or financial condition. See "Business -- Background."
The level of air travel throughout the world has seen almost uninterrupted growth since the early 1970's, but there can be no assurance that such growth will continue. Because the Company's typical billing arrangements are based on the number of hours served or flights serviced, a decrease in the level, of air travel would have an adverse effect on the Company's business,. results of operations and financial condition.
Fluctuations in Operating Results; Seasonality. The Company's operating results fluctuate significantly from quarter to quarter as a result of a variety of factors, primarily relating to the seasonality of air travel. Specifically, there has historically been a significant increase in air travel in the Northern Hemisphere during the summer months. Since the Company's revenues are typically based on the number of hours served (which is directly related to the number of flights serviced), the increase in air travel during those months results in increased revenues during the Company's third quarter. Consequently, the Company's revenues vary significantly by quarter and the Company's operating results experience significant fluctuations.
Failure to Meet Performance Requirements. The continued success of the Company is dependent upon its ability to continue to meet the performance requirements set by its clients and the government agencies which regulate them. The Company is subject to random periodic tests by government authorities with regard to the professional level of the services and training which it provides, including adherence to FAA regulations relating to all aspects of passenger handling, baggage handling and aircraft security and to
the training systems utilized, and government regulations relating to baggage handling and employee background checks. Any failure to pass such a test may result in the loss of a contract or a license to perform services and would also be likely to have an adverse effect on the reputation of the Company.
Potential for Liability Claims. 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. Although the Company maintains insurance coverage against such potential liabilities, any such claim against the Company might exceed the amount of such insurance coverage or fall outside of the types of activities covered by such insurance. Any of these situations could have a material adverse effect on the Company's business, results of operations or financial condition.
Loss of Required Licenses. In numerous airports in which the Company operates (including most of the major international airports in Western Europe), a license to operate is required from the airport authority. Such licenses are usually issued for a period of 12 months and are renewable. Some airport authorities limit the number of licenses they issue. Although the Company currently has a license to operate in each of the major international airports in Western Europe where such licenses are required, the loss of, or failure to obtain, a license to operate in one or more airports could result in the loss of, or the inability to compete for, a major contract.
Loss of Contracts with Airports and/or Airlines. The Company's services are typically provided pursuant to contracts ranging in term from one to three & years, which are cancelable on short notice at any time, with or without cause. There can be no assurance that an existing client will not decide to terminate or fail to renew a contract. Any such termination or failure to renew a contract with the Company could have a material adverse effect on the Company's business, results of operations or financial condition.
Development of Competing Products or Services. Most of the services currently offered by the Company utilize a large number of personnel and include the direct interviewing of each passenger boarding an aircraft. If developed, alternative passenger classification methodologies or technologies requiring less manpower could be more cost-effective than the Company's current services. Similarly, the development of equipment capable of
detecting all, or most, types of weapons and explosives could reduce the need for the services presently provided by the Company. The cost associated with the performance of profiling services, and its impact on passenger service, may serve as an incentive for airlines to seek the development of technological alternatives to the present methods. The Company is aware of existing efforts and investments of certain airlines towards that end. The development of such competing products and services could have a material adverse effect on the Company's business, results of operations or financial condition.
Privatization of Services. There can be no assurance that the trend toward privatization of services will not diminish or even be reversed. In addition, the trend by airlines to select a single vendor to provide all or a large part of their required aviation security services may not continue; even if it does continue, there can be no assurance that the Company will be selected as the single vendor to provide such services. The realization of any of these negative outcomes could have a material adverse effect on the Company's business, results of operations or financial condition.
Item 10. Directors and Officers of Registrant.
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 that the shareholders adopt the annual financial statements of ICTS. 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. Non-executive officers are appointed by and serve at the pleasure of the Management Board.
The members of the Supervisory Board are Ezra Harel, Boaz Harel, Savinoam Avivi, Michael Barnea, Gerald Gitner, Menachem Atzmon and Amos Lapidot. The sole member of the Management Board is Lior Zouker. The Supervisory Board currently has two committees, an Audit Committee, whose members are Amos Lapidot, Savinoam Avivi Menachem J. Atzmon and Gerald Gitner, and a Compensation Committee, whose members are Ezra Harel, Gerald Gitner and Michael Barnea. The Audit Committee is responsible for overseeing the Company's accounting, reporting and financial control practices. The Compensation Committee is responsible for
overseeing director and executive officer compensation plans and arrangements.
The Articles of Association of ICTS provide for one or more members of the Management Board and one or more members of the Supervisory Board, but do not provide for a maximum number of members of such boards. The number of members of the Management Board and the Supervisory Board is to be determined by the general meeting of shareholders. 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.
Directors and Executive Officers
The following table lists the directors and executive
officers of ICTS:
Age Position
Ezra Harel........49 Member of the Supervisory Board
Boaz Harel........36 Member of the Supervisory Board
Savinoam Avivi....61 Member of the Supervisory Board
Michael Barnea....44 Member of the Supervisory Board
Gerald Gitner ....54 Member of the Supervisory Board
Menachem Atzmon..56 Member of the Supervisory Board
Amos Lapidot .....65 Member of the Supervisory Board
Lior Zouker.......51 Member of the Management Board
and Chief Executive Officer
Yoav Navon .......49 Chief Operating Officer and Vice
President- Business Development
Joseph Yahav .....43 Vice President- International
Ranaan Nir........51 Chief Financial Officer, Vice
President-Finance, and Treasurer
M. Albert Nissim..66 Secretary
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Ezra Harel is the controlling shareholder of Leedan, an investment holding company. Mr. Ezra Harel has been the Vice Chairman of the Board of Directors of Rogosin Enterprises Ltd., an affiliate of Leedan ("Rogosin"), since 1994. Rogosin has been one of the largest independent manufacturers of tire cord in the world and is now an investment company. He has also served as Chairman of the Board of Directors of Dash 200+ (a company involved with the
conversion of Boeing 747 aircraft from passenger to cargo use) since 1991 and of Tuffy Associates Inc. (an automotive service franchise company) since 1993. Mr. Ezra Harel is the brother of Mr. Boaz Harel.
Boaz Harel has been the Managing Director of Leedan between 1993 and December 31, 1997. Since September 1996, and in addition to his capacity as the Managing Director of Leedan, Mr. Boaz Harel has relocated to New York and serves as the Chairman of ICTS USA (1994), Inc., the wholly owned U.S. subsidiary of the Company, and in this capacity is responsible for the business development of the Company in the U.S. Mr. Boaz Harel is the Chairman of Pioneer Commercial Funding Corp. ("Pioneer"), a publicly-traded mortgage warehouse lender, serving in such capacity since November 1996. Pioneer is an affiliate of Leedan. Mr. Boaz Harel is the brother of Mr. Ezra Harel.
Savinoam Avivi is currently a Member of the Executive Board and Vice President of Koor Industries Ltd. ("Koor"), having served in those capacities since 1988. Mr. Avivi also serves as a director of Home Centers (DVI) Ltd., a company publicly traded in Israel and an affiliate of Koor, and various subsidiaries of Koor. Koor is publicly traded on the New York and Tel Aviv Stock Exchanges and is the largest industrial conglomerate in Israel.
Michael Barnea has been a senior executive and a member of the Board of Directors of Leedan since 1994.
Gerald Gitner from 1992 until 1998 he was Chairman of Avalon Group, Ltd., an investment banking firm and President of Avalon Securities Ltd., its affiliate and an NASD member broker- dealer. Since 1993, he is a director of Trans World Airlines, Inc. In December, 1997, he was appointed to serve as CEO and in February 1997 as Chairman of Trans World Airlines, Inc. He served as CEO until May, 1999. Mr. Gitner is a Trustee of Rochester Institue of Technology.
Amos Lapidot is a Lieutenant General (reserve) in the Israeli Defense Forces and has served in the past as Commander-in-Chief of the Israeli Air Force. Mr. Lapidot has been a Special Assistant to the Israeli Ministry of Defense since 1988. He has also been a director of El Al since 1995. Mr. Lapidot is President of the Israeli Technion.
Menachem J. Atzmon is a Chartered accountant (Isr). Mr. Atzmon is a controlling shareholder of Leedan, an investment
holding company. As of 1995 Mr. Atzmon serves as a Director of Spencer Corporation Ltd., an Investment company. Since 1996 he is the Managing Director of Albermale Investment Ltd. and Kent Investment Holding Ltd., both investment companies. Since January 1998 he is serving as CEO of Seehafen Rostok Umschlagsgesellschaft mbH, Germany, a company engaged in sea port activities. Mr. Atzmon served as director of Zim Navigation Co. Ltd. From 1984 to 1987, a company engaged in freight transport, mainly sea transport and from 1984 to 1987 as a joint managing director and CEO of the Israel Corporation, one of the largest investment corporations in Israel and the Israeli Refineries, a company engaged in oil refinery and distribution.
Lior Zouker has been the Chief Executive Officer and a member of the Management Board of ICTS since January 1, 1996. From 1994 to 1995, he functioned as Chief Operating Officer of ICTS International B.V. and from 1991 to 1993, he served as Executive Vice President of ICTS Holland B.V.
Yoav Navon has been the Chief Operating Officer of the Company since January 1, 1996 and Vice President, Business Development since September 1996. From August 1994 to December 1995, he was a consultant on corporate development to certain affiliates of Leedan Business Enterprise Ltd., including ICTS International B.V. From 1992 to 1994, he was self-employed and from 1991 to 1992, he was the General Manager of Modular Ltd., a subsidiary of Malibu Ltd., an Israeli publicly-traded company in the modular home construction business. From 1993 to the present, Mr. Navon has been a director of Tuffy Associates Corp., a franchise company affiliated with Mr. Ezra Harel. Since August 1996, Mr. Navon has been a director of, and from time to time provides advisory and management services to, Leedan and certain of its affiliates. Mr. Navon became Chairman of John Bryce Systems Ltd., effective January 1, 1998.
Joseph Yahav has been Vice President, International of the Company since August 1995. From 1991 to 1995, he was Director of the Professional Department of the Company.
Ranaan Nir From 1994 to 1998, Mr. Nir served as the Chief Financial Officer of Netagco Holding B.V., a Dutch corporation engaged in the manufacture of agricultural machinery.
M. Albert Nissim has served as Secretary of the Company since January 1994. Mr. Nissim also serves as President of ICTS USA
(1994), Inc. From 1994 to 1995, he functioned as the Managing Director of ICTS International B.V. and from 1990 to the present, he has been Vice President and a director of Tuffy Associates Corp., a franchise company affiliated with Mr. Ezra Harel. Mr. Nissim is also a Managing Director of Leedan International Holdings B.V., an affiliate of Leedan and the largest shareholder of the Company. Mr. Nissim is the President of Pioneer Commercial Funding Corp., serving in such capacity since January 1997.
Employment Contracts
On December 28, 1995, the Company entered into an employment contract with Lior Zouker, its Chief Executive Officer and a member of its Management Board, pursuant to which the Company agreed to employ Mr. Zouker in those capacities for a 30 month term. The contract was extended on November 25, 1997, effective January 1, 1998, for a period of three years. Pursuant to such contract, Mr. Zouker agreed to relocate his residence to Amsterdam and, in connection therewith, has obtained the requisite Dutch work permit. Pursuant to such contract, Mr. Zouker is entitled to a bonus which is calculated as a percentage of net income.
During 1998, the Company entered into an agreement with Mr. Ezra Harel for his services to the Company, providing for compensation of $120,000 until terminated on 30 days written notice.
Item 11. Compensation of Directors and Officers.
The aggregate direct remuneration paid to all persons who functioned as directors and officers of the Company during the year ended December 31, 1999 was approximately $1,200,000. This figure does not include business expenses reimbursed to such persons. This figure includes approximately $16,000, which was set aside or accrued to provide pension, retirement or similar benefits. This figure also includes a bonus paid to Mr. Lior Zouker, the Company's Chief Executive Officer.
Each member of the Supervisory Board who is not an employee of the Company or Leedan receives an annual fee of $10,000 and a fee for each Board or committee meeting attended of $1,000.
Item 12. Options to Purchase Securities from Registrant or Subsidiaries.
In 1995, ICTS adopted a share option plan (the "1995 Equity Incentive Plan") pursuant to which 600,000 Common Shares were reserved for issuance upon the exercise of options to be granted to employees, consultants and members of the Supervisory Board of the Company. The Supervisory Board of ICTS has established a Compensation Committee consisting of Ezra Harel, Gerald Gitner and Michael Barnea to administer such option plan. Such committee is empowered, among other things, to designate the optionees, dates of grant and the exercise price of options. The options will be for one to five-year terms and will be non-assignable except by the laws of descent. The grantee is responsible for all personal tax consequences of the grant and the exercise thereof.
As of the date of this Annual Report, ICTS has granted options to purchase 599,700 Common Shares, of which options to purchase 330,400 Common Shares have been granted to directors and executive officers of the Company as a group, at exercise prices ranging from $6.50 to $10.75 per share under the 1995 Equity Incentive Plan. These options vest over various terms, ranging from immediately to five years. Outstanding options expire at various times, but not later than December 2002. Of such granted options, 111,520 shares have expired and 4,480 options have been exercised.
In addition to options granted or reserved for grant under the 1995 Equity Incentive Plan, during 1995 the Company also granted options to purchase 108,000 Common Shares at $7.00 per share to an unaffiliated consultant as partial consideration for his assistance in connection with the planning for the Company's initial public offering.
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. 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 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 be not less than 100% of the fair market value of such shares on the date of grant; provided that if an ISO is granted to an employee who, at the time of the grant, is a 10% shareholder, then the exercise price of the shares covered by the incentive stock option shall be not less than 110% of the fair market value of such shares on the date of grant. The exercise price of shares covered by a non-qualified stock option shall be not less than 85% of the fair market value of such shares on the date of grant.
The Plan shall be administered by the Compensation Committee of the Supervisory Board, which shall be appointed by the Supervisory Board of the Company, and which shall consist of a minimum of two members of the Supervisory Board of the Company.
As of the date of this Annual Report, 150,000 options have been granted under the Plan to two executive officers of the Company at an exercise price of $5.00.
Item 13. Interest of Management in Certain Transactions.
During 1998, the Company purchased 300,000 shares of Common Stock of Pioneer Commercial Funding Corp.("Pioneer") from
Leedan for a purchase price of $2.50 per share. Pioneer is a sister corporation through common ownership through Leedan.
During 1998, the Company sold to ICTS Global Security, B.V., an affiliated company, for $565,000 18% of the shares of Demco. In July, 1999 the Company repurchased these shares for the same price.
During 1998, the Company made loans to four officers of the Company aggregating $60,000.
During 1998, the Company entered into an agreement with Mr. Ezra Harel for his services to the Company, providing for compensation of $120,000 until terminated on 30 days written notice.
During 1999, the Company paid $166,000 to three officers of the Company as a success fee, in connection with the Huntleigh acquisition.
During 1997, an affiliate of Leedan provided the Company with services relating to certain short-term investments made by the Company, for which such affiliate received fees aggregating $136,000.
In connection with the acquisition by the Company of 100% of the equity of ICTS GmbH and its wholly-owned subsidiary, FIS GmbH in July 1997, the Company paid to each of Ezra Harel and Leedan a fee of $150,000 and to Michael Barnea, a fee of $40,000, in consideration for investment advisory services rendered.
In connection with the acquisition by the Company of 37% of the equity in Demco in August 1997, the Company paid Leedan a fee of $50,000 in consideration for investment advisory services rendered.
In August 1997, the Company, as part of a group consisting of Leedan, Rogosin Development and Holdings Ltd. and Pioneer, each an affiliate of Leedan (the "Leedan Group"), 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, the Company contributed $259,000 and has guaranteed $2,915,000 of debt obligations of Bilu.
In connection with the Company's investment in John Bryce, the Company paid Leedan a fee of $200,000 and, to an affiliate of Leedan, a fee of $30,000, in consideration for investment advisory services rendered.
In connection with the Company's divestiture of its interest in ICTSAP in December 1997, the Company paid Leedan a fee of $25,000 in consideration for investment advisory services rendered in connection therewith.
ICTS has granted to Leedan the right to demand on three occasions the registration of the Common Shares that Leedan owns, provided that such demands may not be made more than once in any twelve-month period. The first registration will be at the expense of ICTS and the two subsequent registrations will be at the expense of Leedan and any other selling shareholders. In addition, Leedan, Ezra Harel and Lior Zouker will have the right to have their shares included in future registration statements of ICTS. All such registration rights are subject to customary terms and conditions.
On December 31, 1996, effective as of September 1, 1996, the Company's wholly-owned U.S. subsidiary, ICTS USA (1994), Inc. entered into an employment agreement with Boaz Harel, a brother of Ezra Harel, pursuant to which the subsidiary employed Mr. Harel as Chairman for a one-year term during which Mr. Harel received approximately $124,000 in compensation. Said contract is automatically renewable for successive one-year terms unless terminated by either party on 90 days' notice.
PART II
Item 14. Description of Securities to be Registered.
Not applicable.
PART III
Item 15. Defaults Upon Senior Securities.
Not applicable.
Item 16. Changes in Securities and Changes in Security for Registered Securities.
Not applicable.
PART IV
Item 17. Financial Statements
The Company has elected, pursuant to instruction G(c) to Form 20-F, to provide financial statements pursuant to Item 18.
Item 18. Financial Statements
See Item 19(a).
Item 19(a) Financial Statements
ICTS INTERNATIONAL N.V.
Report of Independent Auditors
Consolidated Financial Statements:
Consolidated Balance Sheets
Consolidated Statements of Operations and Comprehensive Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated of Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 19(b) Exhibits
1. Articles of Association of the Company.*
2. Specimen of the Company's Common Stock.*
* Filed herewith.
ICTS INTERNATIONAL N.V.
1999 ANNUAL REPORT
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of independent auditors F-2
Consolidated financial statements:
Consolidated balance sheets F-3 - F-4
Consolidated statements of operations and comprehensive income F-5
Consolidated statements of changes in shareholders' equity F-6
Consolidated statements of cash flows F-7 - F-8
Notes to consolidated financial statements F-9 - F-36
F-1
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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. and its subsidiaries ("the Company") as of December 31, 1999
and 1998, and the related consolidated statements of operations and
comprehensive income, changes in shareholders' equity and cash flows for each of
the three years ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a fair 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, 1999 and 1998, and the consolidated results of its
operations and comprehensive income, changes in shareholders' equity and the
cash flows for each of the three years ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
Ramat Gan, Israel Kesselman & Kesselman
March 15, 2000 Certified Public Accountants (Isr.)
F-2
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ICTS INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS
(US $ in thousands)
December 31,
1999 1998
A s s e t s
CURRENT ASSETS:
Cash and cash equivalents (note 2c) $ 6,795 $ 11,273
Short-term investments (note 3) 9,653 6,380
Accounts receivable - trade 24,214 10,454
Other current assets 2,565 1,965
------- -------
T o t a l current assets 43,227 30,072
------- -------
INVESTMENTS AND LONG-TERM RECEIVABLES:
Investments in associated companies (note 5) 1,958 1,795
Deferred income taxes (note 14) 1,338 1,367
Other investments and long-term receivables, net of current
maturities (note 6) 3,797 9,813
------- -------
7,093 12,975
------- -------
-
MINORITY INTEREST 98
-------
PROPERTY AND EQUIPMENT (note 7):
Cost 7,584 3,771
L e s s - accumulated depreciation 2,891 1,817
------- -------
4,693 1,954
------- -------
GOODWILL, net of accumulated amortization of $2,070 in -
1999 and $1,435 in 1998 (note 2g) 14,175 8,582
------- -------
OTHER ASSETS AND DEFERRED CHARGES 236 249
------- -------
$ 69,522 $ 53,832
======= =======
F-3
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December 31,
1999 1998
Liabilities and shareholders' equity
CURRENT LIABILITIES:
Short-term bank credit (note 8) $ 3,118 $ 3,663
Current maturities of long-term loans (note 10) 1,851 562
Accounts payable - trade 4,169 1,421
Accrued expenses and other liabilities (note 9) 15,129 9,804
------- -------
-
T o t a l current liabilities 24,267 15,450
------- -------
LONG-TERM LIABILITIES:
-
Deferred income taxes (note 14) 591
Accrued severance pay (note 11) 1,427 1,309
Long-term loans, net of current maturities (note 10) 14,951 6,174
------- -------
T o t a l long-term liabilities 16,969 7,483
------- -------
-
COMMITMENTS AND CONTINGENT
LIABILITIES (note 12)
------- -------
T o t a l liabilities 41,236 22,933
------- -------
SHAREHOLDERS' EQUITY:
-
Share capital - ordinary shares of NLG 1 par value:
authorized - 17,000,000 shares; issued and outstanding -
6,569,480 shares 3,564 3,564
Additional paid-in capital 19,090 19,090
Retained earnings 14,765 12,435
Cumulative other comprehensive loss (7,358) (2,968)
------- -------
30,061 32,121
Treasury stock - ordinary shares repurchased (322,611 in
December 31, 1999 and 209,400 in December 31, 1998) - at cost (1,775) (1,222)
------- -------
T o t a l shareholders' equity 28,286 30,899
------- -------
$ 69,522 $ 53,832
======= =======
The accompanying notes are an integral part of the financial statements.
F-4
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ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(US $ in thousands, except per share data)
Year ended December 31,
1999 1998 1997
REVENUES $ 134,819 $ 64,130 $ 53,798
COST OF REVENUES 118,915 54,109 45,016
------- ------- -------
GROSS PROFIT 15,904 10,021 8,782
AMORTIZATION OF GOODWILL 840 485 321
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES 10,146 6,838 5,994
------- ------- -------
OPERATING INCOME 4,918 2,698 2,467
INTEREST INCOME 960 1,149 1,253
INTEREST EXPENSE (1,467) (533) (396)
EXCHANGE RATE DIFFERENCES 691 (1,106) 2,732
OTHER INCOME (EXPENSES), NET (note 13) (86) (703) 226
------- ------- -------
INCOME BEFORE TAXES ON INCOME 5,016 1,505 6,282
TAXES ON INCOME (note 14) 2,645 837 2,357
------- ------- -------
INCOME FROM OPERATIONS OF THE COMPANY
AND ITS CONSOLIDATED SUBSIDIARIES 2,371 668 3,925
SHARE IN PROFITS OF ASSOCIATED COMPANIES -
NET (note 5b) 74 214 121
MINORITY INTERESTS IN PROFITS OF
CONSOLIDATED SUBSIDIARIES (2)
------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF AN
ACCOUNTING CHANGE 2,443 882 4,046
CUMULATIVE EFFECT, AT BEGINNING OF YEAR, OF
AN ACCOUNTING CHANGE (note 2q) (113)
------- ------- -------
NET INCOME FOR THE YEAR $ 2,330 $ 882 $ 4,046
------- ------- -------
OTHER COMPREHENSIVE INCOME (LOSS):
Translation adjustments (4,262) 1,830 (4,035)
Unrealized gains (losses) on marketable securities (128) (723) 20
------- ------- -------
(4,390) 1,107 (4,015)
------- ------- -------
COMPREHENSIVE INCOME (LOSS) FOR THE YEAR $ (2,060) $ 1,989 $ 31
EARNINGS PER SHARE (note 2k): -
Basic $ 0.37 $ 0.14 $0.62
Diluted $ 0.37 $ 0.14 $0.61
The accompanying notes are an integral part of the financial statements.
F-5
|
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(US $ in thousands, except share data)
Accumulated
Ordinary shares Additional other
Number paid-in Retained comprehensive Treasury
of shares Amount capital earnings income (loss) stock
Total
CHANGES DURING 1997:
Stock options exercised 4,480 2 26 28
-------
Comprehensive income:
Net income 4,046 4,046
Other comprehensive income:
Translation adjustments (4,035) (4,035)
Unrealized gains on marketable
securities 20 20
-------
Total comprehensive income 31
-------- ------- -------- ------ -------- -------
BALANCE AT DECEMBER 31, 1997 6,569,480 3,564 19,090 11,553 (4,075) 30,132
-------- ------- -------- ------ -------- -------
CHANGES DURING 1998:
Ordinary shares repurchased (209,400) $(1,222) (1,222)
-------
Comprehensive income:
Net income 882 882
Other comprehensive income (loss):
Translation adjustments 1,830 1,830
Unrealized losses on marketable
securities (723) (723)
-------
Total comprehensive income 1,989
-------- ------- -------- ------ -------- -------- -------
BALANCE AT DECEMBER 31, 1998 6,360,080 3,564 19,090 12,435 *(2,968) (1,222) 30,899
-------- ------- -------- ------ -------- -------- -------
CHANGES DURING 1999:
Ordinary shares repurchased (113,211) (553) (553)
-------
Comprehensive income (loss):
Net income 2,330 2,330
Other comprehensive income (loss):
Translation adjustments (4,262) (4,262)
Unrealized losses on marketable
securities. (128) (128)
-------
Total comprehensive loss (2,060)
-------- ------- -------- ------ -------- -------- -------
BALANCE AT DECEMBER 31, 1999 6,246,869 $ 3,564 $ 19,090 $ 14,765 $ * (7,358) $ (1,775) $ 28,286
======== ======= ======== ====== ======== ======== =======
* Composed as follows:
December 31,
1999 1998
Cumulative translation adjustments $(6,527) $(2,265)
Cumulative unrealized losses on marketable securities (831) (703)
------- -------
$(7,358) $(2,968)
======= =======
The accompanying notes are an integral part of the financial statements.
F-6
|
(Continued) - 1
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ in thousands)
Year ended December 31,
1999 1998 1997
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the year $ 2,330 $ 882 $ 4,046
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization. 1,565 938 680
Deferred income taxes (410) (628) 1,207
Increase in accrued severance pay 282 1 177
Capital loss (gain) on fixed assets (7) 3 2
Capital gain on investment in associated company (352)
Realized loss (gain) on marketable securities and
exchange rate loss (gain) on loans (359) 118 (1,339)
Write off of loans 410
Exchange rate on long-term loans 705
Minority interests 2
Imputed interest income (1) (8) (16)
Share in profits of associated companies (74) (214) (121)
Changes in assets and liabilities:
Accounts receivable (7,668) (1,513) (1,076)
Other current assets (263) 195 (305)
Accounts payable 449 (94) (224)
Accrued expenses and other liabilities 2,959 461 639
------ ------- -------
Net cash provided by (used in) operating activities (490) 551 3,318
------ ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits and marketable securities (8,102) (5,300) (7,025)
Proceeds from sale of short-term investments 3,860 3,233 12,906
Other investments (885) (6,945) (3,491)
Proceeds from sale of other investments 1,763
Purchase of equipment (994) (511) (682)
Short-term loans (600) (1,036)
Collection of short-term loans 1,436 332
Acquisitions, net of cash acquired* 17 (38) (4,214)
Proceeds from sale of investment in associated companies 89
Investments in associated companies (205) (1,769)
Collection of long-term receivable 217
Proceeds from sale of equipment 61 54 39
Decrease (increase) in other assets 6 (45) 51
----- ------- -------
Net cash used in investing activities (4,274) (8,921) (4,583)
------ ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock option exercise 28
Treasury stock-ordinary shares repurchased (553) (1,222)
Long-term loan received 5,858 5,056 188
Discharge of long-term loans (1,136) (289) (592)
Net increase (decrease) in short-term bank credit (52) 1,543 1,397
------ ------- -------
Net cash provided by financing activities 4,117 5,088 1,021
------ ------- -------
EFFECT OF FOREIGN CURRENCY EXCHANGE
RATES ON CASH AND CASH EQUIVALENTS (3,831) 856 (2,423)
DECREASE IN CASH AND CASH EQUIVALENTS (4,478) (2,426) (2,667)
------ ------- -------
BALANCE OF CASH AND CASH EQUIVALENTS
AT BEGINNING OF YEAR 11,273 13,699 16,366
------ ------- -------
BALANCE OF CASH AND CASH EQUIVALENTS
AT END OF YEAR $ 6,795 $ 11,273 $ 13,699
====== ======= =======
F-7
|
(Concluded) - 2
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ in thousands)
Year ended December 31,
1999 1998 1997
SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES -
cash paid during the year for:
Interest $ 1,239 $ 346 $ 227
======= ======= =======
Taxes on income $ 2,563 $ 1,235 $ 1,119
======= ======= =======
-
SUPPLEMENTAL DISCLOSURES OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of current liabilities to long-term debt $ 780
=======
Sale (repurchase) of an investment in associated company for
US dollar loan (see note 5(a)) $ (565) $ 565
======= =======
Dividend receivable from associated company $ 317 $ 156
======= =======
Purchase of fixed assets, which had not been paid $ (2,260)
=======
* Acquisitions, net of cash acquired (divestitures, net of
cash sold) (see note 4):
Assets and liabilities of the subsidiaries at date of
acquisition (sale):
Working capital, excluding cash and cash
equivalents $ 3,730 $ (129) $ (1,781)
Property, equipment and investments 474 (22) 889
Other investments 133
Other assets 15 89
Long-term liabilities (5,526) (816)
Deferred tax liabilities (880)
Accrued severance pay (150)
------- ------- -------
(2,187) (151) (1,636)
------- ------- -------
Liability assumed (330)
-------
Minority interest 101
-------
Decrease in long-term receivable (691)
Increase in other investments (5,434) 189
------- ------- -------
Excess of cost over fair value upon acquisition 7,503 - 6,871
------- ------- -------
Cash sold and cash paid for acquisitions, net of cash
acquired $ (17) $ 38 $ 4,214
======= ======= =======
The accompanying notes are an integral part of the financial statements.
F-8
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 1 - GENERAL:
a. Operations:
ICTS international N.V. ("ICTS"), including its subsidiaries
and associated companies (all referred to herein as "the
Company") is a leading provider of enhanced aviation security
services and provides such services primarily to the European
operations of the major U.S. carriers. The Company's principal
service in this category is the implementation of passenger
risk evaluation and classification procedures, generally
described as "advanced passenger screening." The Company also
provides in Europe other airport security services such as the
operation of check-points and hold-baggage screening systems,
and, to a lesser extent, certain aviation passenger handling
services and certain general security services. In the USA the
Company provides airport services such as pre-departure
screening, skycaps, wheelchair attendants, agents, guards,
janitorial personnel, maintenance, ramp and shuttle services.
The Company is also engaged in security consulting, training
and auditing for airlines and airports.
Two. Investment in Huntleigh USA Corporation ("Huntleigh")
On January 6, 1999, the Company acquired 80% of the
outstanding shares of Huntleigh , based in St. Louis,
Missouri, for $5,395. Both the Company and the seller have
options to acquire and sell, respectively, the remaining 20%
at an agreed upon price formula.
c. Definitions:
1) Subsidiaries are companies which are controlled by ICTS
through majority voting ownership.
2) Associated companies are companies which are not
subsidiaries, in which ICTS has voting rights giving
significant influence over the operating and financial
policies of these companies. Investments in associated
companies are accounted for by the equity method.
d. Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with
U.S. GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and
liabilities at the dates of the financial statements and the
reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates.
F-9
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States ("U.S. GAAP").
The significant accounting policies, applied on a consistent basis
except for the reporting on the cost of "start-up" activities as
explained in (q) below, are as follows:
a. Functional currency
The accompanying financial statements have been prepared in US
dollars ("dollars" or "$"). Substantially all of the revenues
of ICTS and its subsidiaries are received, and substantially
all of their operating costs are incurred, in local
currencies. The functional currencies of ICTS and its
subsidiaries are the local currencies in which each such
entity operates. Their financial statements 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 United States
("FASB"). Assets and liabilities of the Company 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. Cumulative
translation adjustments are reflected in a separate component
of shareholders' equity, under "other comprehensive income
(loss)". Thus, any significant fluctuation in the currency
exchange rates between the Western European currencies and the
dollar will affect the Company as follows: balances which are
denominated in dollars will affect the result of operations
but will have no effect on the financial position; balances
which are denominated in Western European currencies will
affect the Company's financial position and will have no
effect on its result of operations. As of December 31, 1999
and 1998, most of the Company's current assets are kept in
dollars.
Under the laws of The Netherlands, dividends may be paid in
any currency. Although ICTS does not presently intend to pay
or declare cash dividends on its ordinary shares in the
foreseeable future, in the event that such a cash dividend is
declared, ICTS intends to pay it in dollars.
b. Principles of consolidation:
1) The consolidated financial statements include the
accounts of ICTS and its subsidiaries. Significant
inter-company accounts and transactions have been
eliminated. Profits from intercompany transactions, not
yet realized outside the Company, have also been
eliminated.
2) As discussed more thoroughly in note 4, in July 1997 ICTS
increased its ownership in its German affiliate to 100%.
As a result, commencing July 1, 1997, the accounts of the
German company are consolidated. Until that date, the
results of that company were included on the equity
method.
F-10
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
c. Cash and 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,
short-term government bonds and other marketable government
debentures, the period to maturity of which did not exceed
three months at time of investment, to be cash equivalents.
d. Marketable securities and other investments:
1) Marketable securities
Marketable securities, which are classified as
available-for-sale securities, are stated at market
value. The difference between the market value of those
securities and their cost is recorded as a separate
component of other comprehensive income. Governmental
bonds held-to-maturity are carried at amortized cost.
2) Other investments
Investments in a less than 20%-owned privately-held
companies are stated at cost.
e. Investments in associated companies
Investments in associated companies are accounted for by the
equity method.
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 4 - 10
Vehicles 4 - 5
Rented property 23
Office furniture and equipment 5 - 10
F-11
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
g. Goodwill
Goodwill represents the excess cost of acquisition of
subsidiaries and associated companies over the fair value of
their identifiable net assets, at acquisition dates. Goodwill
is amortized by the straight-line method, primarily over 20
years, based on the businesses' established position in their
industries.
h. Impairment in value of fixed assets
The Company evaluates impairment of long lived assets under
the provisions of Statement of Financial Accounting Standards
("FAS") No. 121 of the FASB", "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed
of." FAS 121 requires that long-lived assets, identifiable
intangibles and goodwill related to those assets to be 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 121, 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
will be recognized.
i. Treasury stock
Shares repurchased are presented as a reduction of
shareholders' equity, at their cost, under "Treasury stock -
ordinary shares repurchased".
j. Revenue recognition
Revenue is recognized upon rendering of service.
k. Earnings per share ("EPS"):
1) Basic EPS are computed based on the weighted average
number of ordinary shares outstanding during each year.
2) Diluted EPS are computed using the weighted average
number of shares outstanding during the year plus the
incremental shares from the assumed exercise of options
granted by the Company.
l. 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 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.
F-12
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
Deferred tax liabilities and assets are classified as current
or non-current, based on the classification of the related
asset or liability for financial reporting, or according to
the expected reversal date of the specific temporary
differences, if not related to an asset or liability for
financial reporting.
Deferred taxes in respect of disposal of investments in
subsidiaries and associated companies have not been taken into
account in computing the deferred taxes, due to the fact that
under the laws of Netherlands, such disposal of investments
are tax exempt.
m. Fair value of financial instruments:
1) Based on borrowing rates currently available to the
Company for bank loans with similar terms and maturities,
the fair 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 valuation risk (principally consisting of cash
and cash equivalents, time deposits and marketable
securities, accounts receivable and accounts payable)
also approximates fair value. Certain financial
instruments, included in other investments, do not have
quoted market prices and, accordingly, a reasonable
estimate of fair market value could not be made without
incurring excessive costs. However, the Company believes
that the fair value of the assets would not differ
significantly from their carrying value.
2) The Company guarantees debts of third parties (notes 6
and 12). Due to the absence of any market for these
financial instruments, the Company does not believe it is
practicable to estimate their fair value.
n. Concentrations of credit risks - allowance for doubtful accounts
Most of the Company's operations are in Europe, the U.S. and
other countries to a large number of customers. Accordingly,
the Company's trade balances do not represent a substantial
concentration of credit risks at December 31, 1999.
The provision for doubtful accounts is determined for specific
debts doubtful of collection. The provisions at December 31,
1999 and 1998 were $82 and $103, respectively.
o. Derivatives
ICTS enters, from time to time, into forward exchange and
currency option contracts to hedge its deposits, which are
denominated in US dollars. Gains and losses on these contracts
are recognized in income commensurate with the results from
those assets; balances receivable or payable in respect of
such derivatives are included in the balance sheets among
current assets or liabilities, as appropriate. Cash flows from
derivatives are recognized in the statements of cash flows
together with results from the hedged item.
The net premiums received for currency options are presented
in the balance sheets among accrued expenses and other
liabilities and credited to financial income over the term of
the options.
As of December 31 1999, the Company had no derivative instruments.
F-13
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued):
p. Comprehensive income
In 1998, the Company adopted FAS No. 130, "Reporting
Comprehensive Income", which was issued in June 1998. FAS No.
130 requires the reporting and display of comprehensive income
and its components. In addition to net income, the
comprehensive income of the Company includes two items of
other comprehensive income: foreign currency translation
adjustments and unrealized gains and losses on
available-for-sale marketable securities.
q. Reporting on the cost of "start-up" activities
In April 1998, the American Institute of Certified Public
Accountants issued Statement of Position 98-5, "Reporting on
the Cost of Start-Up Activities" (SOP 98-5). This standard
requires companies to expense the costs of start-up activities
and organization costs as incurred.
Commencing 1999, the Company has adopted this standard, and as
a result, the reported pre tax income decreased by $565. The
decrease on income relating to years prior to 1999 (pre tax -
$ 166 and after tax - $ 113) is presented in the 1999 income
statement as "cumulative effect, at beginning of year, of an
accounting change".
r. Recently issued accounting pronouncement
In June 1998, the FASB issued FAS 133, "Accounting for
Derivative Instruments and Hedging Activities." FAS 133
established a new model for accounting for derivatives and
hedging activities. FAS 133 requires companies to record
derivatives on the balance sheet as assets or liabilities,
measured at fair value. Gains or losses resulting from changes
in the values of those derivatives would be accounted for
depending on the use of the derivative and whether it
qualifies for hedge accounting. FAS 133 is effective for
calendar year companies beginning January 1, 2001. As of
December 31, 1999, the company has no derivative instruments.
s. Reclassification
Certain amounts in prior years' financial statements have been
reclassified to conform with the current year's presentation.
F-14
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 3 - SHORT-TERM INVESTMENTS:
December 31,
1999 1998
Time deposits, dollar-denominated $ 8,649 $ 4,674
Governmental bonds, held to maturity 5 39
Marketable securities 777 587
Short-term loans:
A.M.S. Advanced Maintenance Systems Ltd. ("AMS") - bears 7%
interest as of December 31, 1999 108 103
Related company 101
Current maturities of long-term receivables (see note 6) 114 876
------ ------
$ 9,653 $ 6,380
====== ======
As of December 31, 1999, time deposits and marketable securities
of $ 5,385 are pledged as collateral for the Company's obligations
to a lessor, short-term loans and third party bank guarantees.
NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES:
a. On January 6, 1999, the Company acquired 80% of the
outstanding shares of Huntleigh , based in St. Louis,
Missouri, for $5,395. The purchase price exceeded the fair
value of 80% of the tangible net assets of Huntleigh by
approximately $7,503, which was allocated to goodwill. Both
the Company and the seller have options to acquire and sell,
respectively, the remaining 20% at an agreed upon price
formula.
b. In November 1994, ICTS sold 55% of ICTS Consultants on
Targeted Security GmbH ("ICTS GmbH") for $1,277. In April
and July 1997, ICTS reacquired the 55% interest in ICTS GmbH
for $6,052. The purchase price exceeded the fair value of
55% of the net assets of ICTS GmbH by $5,692, which was
allocated to goodwill. The operating results of ICTS GmbH
have been included in the consolidated financial statements
since July 1, 1997.
F-15
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 4 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES (continued):
c. On March 31, 1999, ICTS, through its wholly-owned U.S.
subsidiary, acquired the remaining 17.5% of the outstanding
shares of Service Service Inc. ("SSI"), an Illinois
corporation, for $30 (thus, the total investment in that
company reached $573). The total purchase price exceeded the
fair value of the net assets of SSI by approximately $473,
which was allocated to goodwill. On April 1, 1999 ICTS sold
all the outstanding shares of SSI to Huntleigh (see a. above)
at book value.
d. ICTS and Gilat Communications Ltd. ("Gilat") have agreed to
form a new company in which ICTS will have 80.1% interest (the
"new subsidiary"). The new subsidiary will provide Interactive
Distance Training (IDL) solutions to the aviation industry,
with a special focus on airline and airport operators'
specific training needs in the US and Europe.
The new subsidiary intends to establish service centers in the
US and Europe which will facilitate IDL services to specific
customers as well as provide generic courseware and training
for airlines and airport operators. For this purpose, the new
subsidiary purchased from Gilat equipment in amount of $
2,260, which is included among property and equipment.
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES:
December 31,
1999 1998
Investment in 49% of Procheck International B.V. (PI) ,including
unamortized goodwill of $166 and $206 for December 31,
1999 and 1998, respectively $ 280 $ 339
Investment in 37% (December 31, 1998, 19%) of Demco
Consultants Ltd., including unamortized goodwill of $721 and
$459 for December 31, 1999 and 1998, respectively (1) 1,112 639
Investment in 33.33% of a joint venture (2) 566 817
------ ------
$ 1,958 $ 1,795
====== ======
(1) In August 1997, the Company acquired 37% interest in
Demco Consultants Ltd. ("Demco"), a privately-held
company based in Israel, for $1,199. The purchase price
exceeded the fair value of 37% of the net assets of
Demco by approximately $805, which was allocated to
goodwill. In January 1998, the Company sold 18% of
Demco to a related company for its carrying value -
$565 for U.S. dollar loan. On July 1, 1999 the company
repurchased the 18% of Demco for $565 for the
abovementioned loan.
(2) In 1997, the Company, together with its associated
company PI and with AMS, signed an agreement to set up
a joint venture in which each party would have a 33.33%
interest.
F-16
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):
b. Share in profits (losses) of associated companies included in
the consolidated statements of operations, is composed
as follows:
Year ended December 31,
1999 1998 1997
PI $ 289 $ 214 $ 96
Investment in 33% of a joint venture (see a. above) (225)
Demco 10 (20)
ICTS GmbH (note 4b) 45
------ ------ ------
$74 $214 $121
====== ====== ======
Share in profits (losses) of associated companies is
shown net of amortization of goodwill: 277 10 64
====== ====== ======
c. Below is summarized financial data of PI, ICTS GmbH and Demco :
PI:
Balance sheet data:
December 31,
1999 1998
Current assets $ 1,541 $ 889
====== ======
Non-current assets $ 119 $ 118
====== ======
Current liabilities $ 1,428 $ 738
====== ======
Shareholders' equity $ 232 $ 269
====== ======
Year ended December 31,
1999 1998 1997
Operating results data:
Revenues $ 2,248 $ 1,910 $ 1,438
======= ======= =======
Gross profit $ 941 $ 710 $ 345
======= ======= =======
Net income $ 614 $ 471 $ 227
======= ======= =======
F-17
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 5 - INVESTMENTS IN ASSOCIATED COMPANIES (continued):
December 31,
1999 1998
Demco:
Balance sheets data:
Current assets $ 1,220 $ 1,238
======= =======
Non-current assets $ 312 $ 358
======= =======
Current liabilities $ 317 $ 411
======= =======
Non-current liabilities $ 159 $ 239
======= =======
Shareholders' equity $ 1,056 $ 946
======= =======
Year ended
December 31,
1999 1998
Operating data:
Revenues $ 2,463 $ 2,990
======= =======
Gross profit $ 699 $ 884
======= =======
Net income $ 114 $ 113
======= =======
Year ended
December 31,
1997
ICTS GmbH:
Operating data (see note 4b):
Revenues. $ 12,850
========
Gross profit $ 2,257
========
Net income $ 373
========
F-18
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 6 - OTHER INVESTMENTS AND LONG-TERM RECEIVABLES:
December 31,
Dollar-denominated loans: 1999 1998
John Bryce (a):
Bearing 7.5% interest $ 1,696 $ 3,302
Bearing 6.0% interest 208 191
Bonds 544 547
------- -------
2,448 4,040
Long-term loans bearing Libor *+ 1.25%; 7% interest (b) 891
Related company 465
------- -------
3,339 4,505
Less - current maturities (106) (869)
------- -------
Total U.S. dollar-denominated loans ** 3,233 3,636
Cash held for acquisition of 80% of Huntleigh and
acquisition costs 5,434
Investment in 5.4% of Pioneer Commercial Funding Corp. (c) 77 189
Investment in 9.3% of Bilu Investments Ltd. (d) 259 302
Long-term receivables (e) 150 176
Severance pay fund 78 76
------- -------
$ 3,797 $ 9,813
======= =======
* As of December 31, 1999 the $ LIBOR was 6.13%.
** The loans and bonds mature in the following years after December 31, 1999:
2001 $ 1,801
2002 884
2003 68
2004 68
2005 and thereafter 412
-------
$ 3,233
=======
F-19
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 6 - OTHER INVESTMENTS AND LONG-TERM RECEIVABLES (continued):
(One) ICTS lent $2,915 to AMS and John Bryce Systems Ltd.
("JBS"), Israeli companies under common control
(hereinafter together - "John Bryce"). ICTS also
acquired, for $500, a ten-year zero-coupon bond of
John Bryce, with a face value at maturity of $1,062.
ICTS has also been granted a four-year option to
purchase a 51% equity interest in John Bryce. Costs of
$281, related to the agreements, have been reported as
part of the loan and bond balances. The loans and the
bond are collateralized by a second priority floating
lien on John Bryce's assets.
During 1999 John Bryce paid ICTS a total amount of $
1,606 in respect of the above mentioned loans.
Interest of $159 was incurred in 1998 and 1999.
In January 2000, ICTS exercised its option to purchase
51% equity interest in John Bryce for approximately $
2,700. ICTS subsequently sold its entire holding in
JBS with a stock transaction with Gilat. As a result
of this transaction, ICTS will record in the first
quarter of 2000 an income of approximately $ 7,000
(see note 20b).
(b) The loans are to shareholders in JBS. The borrowers
pledged to ICTS 6,388 shares of JBS and the right to
purchase 329 ordinary shares of JBS (hereinafter
together - "the pledged shares"). ICTS has a "call"
option to purchase the pledged shares for up to $1,653
(see also note 20b).
(c) In March 1998, ICTS acquired 5.4% of Pioneer
Commercial Funding Corp. ("Pioneer") from Leedan
International Holding B.V, a subsidiary of Leedan.
Pioneer is a publicly held company which securities
are traded on NASDAQ Bulletin Board. ICTS acquired the
shares for $750, which was the market value on that
date. Management of the Company is of the opinion that
the decrease in the market value of these shares,
which occurred after their acquisition is temporary.
(d) 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"), an affiliated company of Leedan. Rogosin
and Leedan held another 24% in Bilu. In January 1998,
ICTS acquired additional 3.3% in Bilu for $ 95. ICTS
has guaranteed $2,915 of Bilu's obligations, out of
which $ 1,800 on behalf of Leedan and Rogosin.
F-20
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 6 - OTHER INVESTMENTS AND LONG-TERM RECEIVABLES (continued):
(e) Long-term receivable - a restructured trade receivable, denominated in French francs:
December 31,
----------------------------------
1999 1998
--------------- --------------
Total receivable before discount $ 200 $ 241
Less - discount (42) (58)
------- -------
Total receivable, net of discount 158
Less - current maturities (8) (7)
------- -------
$ 150 $ 176
======= =======
The receivable does not bear-interest ; accordingly, it has been discounted
at the rate of 5%.
The receivable as of December 31, 1999 matures in the year 2003 and
thereafter.
NOTE 7 - PROPERTY AND EQUIPMENT:
a. Property and equipment are composed as follows:
December 31,
---------------------------------
1999 1998
-------------- -------------
Cost:
Equipment and facilities $ 4,674 $ 1,017
Vehicles 396 340
Rented property 912 938
Office furniture and equipment 1,602 1,476
------- -------
7,584 3,771
Less - accumulated depreciation (2,891) (1,817)
------- -------
$ 4,693 $ 1,954
======= =======
b. Depreciation expense totaled $ 723, $ 466 and $ 386 in 1999, 1998 and 1997, respectively.
c. A portion of the Company's equipment is pledged as collateral for bank loans.
d. The rented property is rented to third parties pursuant to
long-term and short-term leases. The rented property
collateralizes three mortgages, denominated in German marks,
the balance of which is $ 694 at December 31, 1999.
F-21
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 8 - SHORT-TERM BANK CREDIT
Short-term bank credit, classified by currency and interest rates,
is summarized as follows:
Interest rate
as of
December 31, December 31,
1999 1999 1998
ICTS:
In dollars 7.12%-8.5%; $ 2,621 $ 3,361
Libor* + 1%
In other currencies --- 113
Subsidiaries:
In pound sterling 8.0% 491 92
In other currencies --- 6 97
------- -------
$ 3,118 $ 3,663
======= =======
o As of December 31, 1999 the $ LIBOR was 6%.
Pursuant to the agreement with the bank, ICTS has undertaken not to
transfer or pledge more than 50% of its assets on consolidated
basis. ICTS has also undertaken further covenants, including
maintenance of certain financial ratios and other restrictions
(inter-alia - as to the minimum of tangible net worth, as defined
by the agreement, and its ratio to total assets), as stipulated by
the agreement.
NOTE 9 - ACCRUED EXPENSES AND OTHER LIABILITIES:
December 31,
1999 1998
Payroll and related liabilities $ 10,093 $ 6,866
Taxes to government institutions, including taxes payable 2,773 1,908
Related parties 331 219
Accrued expenses and other 1,932 811
------- -------
$ 15,129 $ 9,804
======= =======
F-22
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 10 - LONG-TERM LOANS:
a. Composed as follows:
December 31,
1999 1998
Banks and financial institutions $ 16,321 $ 5,930
Other 481 806
------- -------
16,802 6,736
Less - current maturities (1,851) (562)
------- -------
$ 14,951 $ 6,174
======= =======
b. The long-term loans, classified by currency and interest rates are as follows:
Interest rate as of
December 31, -----------------------------
December 31,
1999 1999 1998
ICTS - in dollars** Libor*+1% $ 4,706 $ 5,000
Subsidiaries:
In dollars 7% - 8.5% 11,003 310
In Italian lire 7.0% 263 433
In German marks 5.0% 694 827
In pounds sterling 10.06% - 11% 100 126
In other currencies 36 40
------- -------
$ 16,802 $ 6,736
======= =======
* As of December 31, 1999 the $ LIBOR was 6.13%.
** The long-term bank loan received by ICTS is secured by a
negative pledge agreement with a bank. Pursuant to that
agreement, ICTS has undertaken not to create or permit to
exist any pledge or charge or any security interest over
any of its present or future assets or services. ICTS has
also undertaken further covenants, including maintenance of
certain financial ratios and other restrictions (inter alia
- as to the minimum of shareholders' equity and its ratio
to total assets), as stipulated by the agreement.
c. The long-term loans (net of current maturities) mature in the following years:
2001 $ 1,376
2002 1,225
2003 1,371
2004 24
2005 and thereafter 613
Repayment date not fixed 10,342
-------
$14,951
=======
F-23
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 11 - ACCRUED SEVERANCE PAY
The Company provides for severance pay liability pursuant to
either law or custom. The liability is computed on the basis of
the latest salary and the period of employment.
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES:
a. The Company leases premises under long-term leases, in most
cases with renewal options. Rental expenses for the years
ended December 31, 1999, 1998 and 1997 were $ 1,108, $1,300,
and $1,164, respectively.
Future minimum lease payments under long-term leases, as of
December 31, 1999, are as follows:
2000 $ 966
2001 729
2002 636
2003 574
2004 541
-------
$ 3,446
=======
b. Restrictions on operations
The Company is restricted in its operations by the terms of an
agreement with an associated company. Pursuant to the
agreement, the Company may not provide security services in
The Netherlands, other than through the associated company.
Pursuant to the terms of its arrangement with ICTS Global
Security (1995) Ltd. ("Global Security"), the Company may not
provide general security services in Latin America, Turkey or
the former Soviet Union. Global Security may not provide
aviation security services anywhere in the world or general
security services in Western Europe. In addition, the Company
and Global Security have agreed that each company will offer
the other company the right to participate in any general
security services project in North America which it may
obtain. Global Security is an Israeli Company in which
minority interest is owned by executive of ICTS and by a
member of supervisory board of ICTS.
F-24
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
c. Effective January 1, 1998, ICTS extended the employment
contract with its Chief Executive Officer and a member of its
Management Board, for a period of three years. The contract is
automatically renewable for one-year terms unless terminated
by either party with 90 days' notice. Pursuant to such
contract, the Chief Executive Officer is entitled to a bonus,
which is calculated as a percentage of net income.
d. As a provider of security services, the Company faces
potential claims in the event of any successful terrorist
attempt, in circumstances associated with the Company. Any
such claim may be for amounts far exceeding the financial
capability of the Company. The Company maintains insurance
coverage against such potential liabilities with an insurance
company.
e. In 1997, ICTS guaranteed various debt obligations of a third
party arising from its trading in commodities in Eastern
Europe. As of December 31, 1998, guarantees totaled $ 2,291.
During 1999, $ 400 were reduced and as of December 31, 1999
guarantees totaled $ 1,891. In January 2000, the third party
released an amount of $ 800 and two shareholders of the third
party provided ICTS personal guarantees securing the release
of $ 800 from the remaining guarantees. In addition, ICTS
provided an affiliated company of one of the two shareholders
of the third party, a bank guarantee in an amount of $ 400
(see note 20a).
f. 1) In 1998, the liquidator of one of John Bryce's shareholders and others commenced a transaction that, upon
completion, might nullify ICTS' option to purchase its interest in John Bryce (see note 6). ICTS sought an
injunction to prevent that move in the Tel-Aviv District Court and then in the Israeli Supreme Court. Based on
its legal counsel's advice, ICTS' management is of the opinion that its arguments and claims have substantial
legal basis. As a security for the temporary injunction granted by the Israeli Supreme Court in the said
proceedings, ICTS provided a bank guarantee of NIS 1,094 (approximately $265) to cover possible damages, if
any, to the defendants.
2) In August 1997, ICTS signed an agreement with John Bryce,
which granted ICTS to exclusive marketing rights for an
airline operations control system and an aircraft
maintenance management system developed by John Bryce. In
consideration for these rights, ICTS paid John Bryce $25
and guaranteed $225 in obligations of John Bryce.
3) ICTS guaranteed $200 in debt obligations of John Bryce.
g. As mentioned in Note 6d, ICTS guaranteed $2,915 in debt obligations of Bilu Investments Ltd.
h. ICTS guaranteed up to $ 15,000 (principal amount) of a loan agreement of its
subsidiary - Huntleigh (see note 4a). As of December 31, 1999,
the total amount of the loan (including interest) was $10,880.
F-25
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 12 - COMMITMENTS AND CONTINGENT LIABILITIES (continued):
i. Huntleigh was served two Grand Jury subpoenas to produce documents relating to its operation in Philadelphia, Pa.
The records include:
(1) Personnel records of all present and former employees who
performed services for Huntleigh at the Philadelphia
airport.
(2) Records regarding the training and background checks of such employees.
(3) Personnel records relating to Huntleigh employees who directly supervised the Philadelphia employees.
(4) Other related documents.
Prior to subpoena, the Federal Aviation Administration (FAA)
seized personnel documents of it's Philadelphia employees
without a subpoena. On May 27, 1999, Huntleigh submitted
documents in response to the second subpoena. Huntleigh's
attorneys were informed by the U.S. Attorney that six of it's
Philadelphia employees would be subpoenaed to testify before
the Grand Jury, but to the best of Huntleigh's attorneys
knowledge that has not yet occurred. The U.S. Department of
Transportation had contacted one of the former employees
requesting that she supply certain information to the
department about the incidents subject of the Grand Jury
investigation. According to Huntleigh's attorneys, this
individual has not yet supplied any information to the
Department of Transportation.
NOTE 13 - OTHER INCOME (EXPENSES):
Year ended December 31,
1999 1998 1997
Realized gain from sale of investment in affiliate (a) $352
Write off of loans (b) $(410)
Other expenses $(86) (293) (126)
-------- -------- --------
$(86) $ (703) $226
======== ======== ========
(a) In January 1997, the Company made a loan of $1,036 to its
affiliate ICTS (Asia Pacific) Ltd., denominated in Hong Kong
dollars, bearing 9% annual interest. The loan was to be repaid
on or before January 2000. In December 1997, the Company sold
its share, together with the above-mentioned loan, including
accrued interest of $114, to the major shareholder of that
affiliate, for $1,634. As a result of this sale, the Company
recorded a net gain of $352.
(b) In 1998, ICTS made four loans, amounting to $410, to
Trainsoft. The loans were denominated in US dollars and bore
6% annual interest. Each of the loans was to be repaid after
twelve months. The management decided to write off these loans
due to Trainsoft's financial position and the absence of any
collateral.
F-26
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 14 - INCOME TAXES:
a. Each subsidiary of ICTS is subject to taxation 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,
country of incorporation or residency of the payer.
b. The components of the provision for income taxes are as follows:
Year ended December 31,
1999 1998 1997
Current taxes $ 3,055 $ 1,465 $ 1,150
Deferred taxes (410) (628) 1,207
------- ------- --------
$ 2,645 $ 837 $ 2,357
======= ======= ========
c. Deferred taxes:
1) Deferred tax assets have been computed in respect of the following:
December 31,
1999 1998
Carryforward losses $ 947 $ 1,214
Severance pay 378 200
Cash to accrual adjustments (591)
Other 159 139
------- -------
$ 893 $ 1,553
======= =======
2) Deferred taxes are presented in the balance sheets
as follows:
Among other current assets $ 146 $ 186
Among investments and long-term receivables 1,338 1,367
Among long-term liabilities (591)
------- -------
$ 893 $ 1,553
======= =======
d. Income (loss) before taxes on income is composed as follows:
Year ended December 31,
1999 1998 1997
ICTS and subsidiary in The Netherlands $ 1,145 $ (1,436) $ 4,035
Subsidiaries outside of The Netherlands 3,871 2,941 2,247
------- ------- -------
$ 5,016 $ 1,505 $ 6,282
======= ======= =======
F-27
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 14 - INCOME TAXES (continued):
e. Taxes on income included in the income statements:
Year ended December 31,
1999 1998 1997
Current:
In The Netherlands $ 156 $ 28 $ 5
Outside of The Netherlands 2,899 1,437 1,145
------- ------- -------
3,055 1,465 1,150
------- ------- -------
Deferred:
In The Netherlands 262 (612) 1,173
Outside of The Netherlands (672) (16) 34
------- ------- -------
(410) (628) 1,207
------- ------- -------
$ 2,645 $ 837 $ 2,357
======= ======= =======
f. The Company's effective income tax rate differs from The Netherlands statutory rate of 35% due to the following:
Year ended December 31,
1999 1998 1997
Income before taxes and equity in results of
associated companies $ 5,016 $ 1,505 $ 6,282
======= ======= =======
Statutory tax rate 35% 35% 35%
======= ======= =======
Expected tax at statutory rate $ 1,756 $ 527 $ 2,199
Reconciliation for earnings taxed at different rates 505 206 231
Expenses not deductible for tax purposes, principally
goodwill 554 205 182
Non-taxable income (123) (115) (231)
Reversal of valuation allowance (27)
Other (47) 41 (24)
------- ------- -------
Income taxes $ 2,645 $ 837 $ 2,357
======= ======= =======
g. Carryforward tax losses
The Company has carryforward tax losses as of December 31,
1999 in the amount of approximately $ 1,950 of which $ 1,650
can be utilized indefinitely.
NOTE 15 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company operates in Europe, the United States of America and
other countries, which gives rise to exposure to market risks from
changes in foreign exchange rates. The Company utilized derivative
financial instruments to reduce those risks, but does not hold or
issue financial instruments for trading purposes.
As of December 31, 1999, the Company had no derivative
instruments.
F-28
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 15 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued):
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.
At December 31, 1999, four customers amounted to 46% of accounts
receivable (at December 31, 1998, three major customers amounted
to 32% of accounts receivable). For the years ended December 31,
1999, 1998 and 1997, sales to major customers (constituting 10% or
more of the Company's consolidated revenues) amounted to 50%, 44%
and 41% of revenues, respectively, as set forth below:
Year ended December 31,
------------------------------------------------
1999 1998 1997
------------- ----------- -------------
(% of consolidated revenues)
Customer A 16% 17% 18%
Customer B 14% 16% 14%
Customer C 10% 11% 9%
Customer D 10%
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash
equivalents, trade accounts receivable, short-term investments,
(see note 3), and long-term receivables (see note 6). The Company
places its cash and cash equivalents and time deposits with high
credit quality institutions. The Company provides normal trade
credit, in the normal 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.
The Company guarantees debts of third parties, as discussed in
notes 6 and 12. Regarding these guarantees, the Company does not
believe exposure to loss is likely.
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 (especially those involving the ability of US
carriers to land at foreign airports) 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 in the former Soviet
Union.
F-29
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 16 - SEGMENT INFORMATION
The Company adopted FAS131, which sets out disclosure and
reporting requirements in respect of segments.
The Company's operations involve a single business segment,
providing personnel and consulting services in aviation and
general security.
a. Geographic information
The following is a summary of revenues and long-lived assets
by geographic area:
1) Revenues - attributed to countries based on where the
services were rendered:
Year ended December 31,
1999 1998 1997
Germany $ 17,096 $ 12,839 $ 6,630
France 16,991 14,018 12,744
United Kingdom 22,389 17,757 16,087
Italy 5,737 5,218 4,751
North America 58,728
Other 13,878 14,298 13,586
------- ------- -------
Total $ 134,819 $ 64,130 $ 53,798
======= ======= =======
2) The Company's long-lived assets and investments in
associated companies, net of accumulated depreciation and
amortization, are located in the following geographical
areas:
December 31,
1999 1998 1997
Netherlands $ 4,252 $ 1,149 $ 2,079
Germany 680 816 827
England 414 411 518
North America 648
Other 658 673 476
------- ------- -------
Total $ 6,652 $ 3,049 $ 3,900
======= ======= =======
b. As to the Company's major customers, see note 15.
F-30
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 17 - RELATED PARTY TRANSACTIONS AND BALANCES:
a. Revenues from and expenses to, related parties:
Year ended December 31,
1999 1998 1997
Revenues $ 94 $ 61 $ 223
======= ======= =======
Cost of revenues $ 556 $ 13 $ 38
======= ======= =======
Selling, general and administrative expenses $ 170 $ 68 $ 517
======= ======= =======
Interest expense $ 136
=======
Interest income $ (203) $ (96)
======= =======
b. Balances with related parties:
December 31,
1999 1998
Other current assets $ 495 $ 215
======= =======
Short term investments $ 108 $ 100
======= =======
Other investments and long-term liabilities $ 2,448 $ 465
======= =======
Accrued expenses and other liabilities $ 331 $ 219
======= =======
c. Leedan provides the Company with certain management,
administrative, consulting and advisory services, as well as
advice and assistance with respect to potential acquisition
transactions and investor relations. Such services are
provided on an ad hoc basis as authorized by the unaffiliated
members of the ICTS supervisory board. In 1997, the Company
paid $591 to Leedan and its affiliate for such services.
d. In 1996, ICTS, through a subsidiary, entered into a verbal
agreement with another company, according to which this
company receives 7.5% commissions out of a portion of the
income from a general security project. One of the
unaffiliated members of the supervisory board of ICTS was,
until 1998, a major shareholder of the abovementioned company.
F-31
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 17 - RELATED PARTY TRANSACTIONS:
e. In 1997, the Company paid $190 to related parties for
assistance provided by them in connection with the purchase
of 55% of ICTS GmbH (note 4).
f. Regarding options granted by ICTS to Mr. Lior Zouker, the Chief Executive Officer, see
note 19.
g. Regarding interest income on loan to ICTS (Asia Pacific) Ltd., see note 13(a).
h. Regarding acquisitions of investments from Leedan and its affiliate, see note 6(c).
i. In 1998, the Company paid $90 to Mashik Research & Systems for Business Development Ltd., a
subsidiary of Leedan, for its assistance in the Huntleigh purchase.
j. Regarding the exercise of options to purchase 51% equity
interest in John Bryce and AMS in January 2000, see note
6(a) and 20 b.
k. Regarding guarantees given in the favor of related parties - see note 6(d).
NOTE 18 - EARNINGS PER SHARE
The following table shows the computation of basic and diluted
earnings per share:
Year ended December 31,
------------------------------------------------
1999 1998 1997
----------- ------------- ----------------
Basic:
Net income $ 2,330 $ 882 $ 4,046
======== ======== ========
Weighted average ordinary shares outstanding 6,271,424 6,497,688 6,565,747
======== ======== ========
Diluted:
Net income $ 2,330 $ 882 $ 4,046
======== ======== ========
Weighted average number of ordinary shares outstanding 6,271,424 6,497,688 6,565,747
Incremental ordinary shares from stock options -
calculated under the treasury stock method. 2,264 19,652 115,493
-------- -------- --------
Adjusted weighted average number of ordinary shares 6,273,688 6,517,340 6,681,240
======== ======== ========
Options granted under Share Option Plan (see note 19) were not
included in the computation of diluted earnings per share since
their exercise price was higher than the average market price of
the ordinary shares. The options, which expire on various dates,
but in no event later than July 2002, were still outstanding at
December 31, 1999.
F-32
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands, except share and per share data)
NOTE 19 - STOCK OPTIONS
Pursuant to a Share Option Plan for the grant of 600,000 options,
since 1995 the Company has granted 599,700 options to purchase
ordinary shares to certain employees, members of the supervisory
board and a consultant.
In addition, in 1995 the Company granted 108,000 options to
purchase ordinary shares at the initial public offering price to
an unaffiliated consultant as partial consideration for his
assistance in connection with the public offering. The options
were granted at an exercise price of $ 7 per share, and expire in
September 1999. During 1999, the expiration date was extended to
July 2000.
In 1995, the Company granted certain employees and a consultant
343,200 options to purchase ordinary shares at $6.50 per share,
which was the fair market value of the ordinary shares underlying
such options at the time of grant. Those options vested over a
period ending April 1999 at the latest, and expire on various
dates, but in no event later than July 2000. In 1997, 4,480
options were exercised. In 1999, 111,520 options expired. As of
December 31, 1999, all the remaining 227,200 options were
exercisable.
In December 1996, the Company granted 36,000 options to three
unaffiliated members of the supervisory board and 6,000 options to
an employee, to purchase ordinary shares at $10.75 per share,
which was the fair market value of the ordinary shares underlying
such options at the time of each grant. Those options vested in
December 1996 and expire in December 2001.
In 1997, the Company granted 22,000 options to one unaffiliated
member of the supervisory board and 72,500 options to three
employees, to purchase ordinary shares at exercise prices of
between $7.5 to $9.25 per share, which were the fair market values
of the ordinary shares underlying such options at the time of
grant. The options expire on various dates, but in no event later
than December 2002. As of December 31, 1999, 84,500 options were
exercisable.
In November 1997, the Company granted 120,000 options to Mr.
Zouker, its Chief Executive Officer, to purchase ordinary shares
at $8 per share, which was more than the fair market value of the
ordinary shares underlying such options at the time of grant.
Those options vested in November 1997 and expire in December 2002.
During 1999, the company and its shareholders adopted the 1999
incentive option plan pursuant to which 600,000 shares were
reserved under the plan. The plan is similar to the 1995 plan. In
August 1999, the Company granted 150,000 options to two
executives, to purchase ordinary shares at $5 per share, which was
the fair market value of the ordinary shares underlying such
options at the time of each grant. Those options vested
immediately and expire in August 2003.
The Company accounts for the stock-based compensation by using the
intrinsic value-based method provided in APB Opinion 25,
"Accounting for Stock Issued to Employees." The Company has
adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock Based Compensation." Since the options that
were granted by the Company had no intrinsic value at their grant
dates, no compensation cost has been recognized for stock option
plans. Had compensation cost been determined based on the fair
value at the grant date for stock options awarded in 1999, 1997,
1996 and 1995, consistent with the provisions of SFAS No. 123, the
Company's net income for 1999, 1998 and 1997 would have decreased
by approximately $585, $96 and $635, respectively. The Company's
basic and diluted earnings per ordinary share for 1999, 1998, and
1997, would have decreased by $ 0.09, $ 0.01 and $ 0.09 per share,
respectively.
F-33
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands, except share and per share data)
NOTE 19 - STOCK OPTIONS (continued):
The weighted average fair values for options granted in 1997 and
1996, were $3.80 and $1.95 on the dates of grant, respectively.
The fair value of options granted in 1997 was estimated using the
Black & Scholes option-pricing model, while the fair value of
options granted in 1996 was based on their minimum value, with the
following weighted average assumptions:
For options granted in
-------------------------
1997 1996
---------- -----------
Expected life of options (years) 5 5
Expected volatility 39.5 -
Risk free interest rate 6% 4%
Expected dividend yield 0 0
Information regarding options for 1999, 1998 and 1997 is as follows:
1) Options to employees:
1999 1998 1997
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
(in thousands) price (in thousands) price (in thousands) price
Options outstanding at
beginning of year 438 7.29 438 7.29 249 6.6
Options granted 150 193 8.17
Options exercised (4) (6.50)
Option expired (112) (6.5)
----- ------ ------ ------ ----- ------
Options outstanding at
end of year 476 7.52 438 7.29 438 7.29
===== ====== ====== ====== ===== ======
Options exercisable at
end of year 466 400 326
===== ====== =====
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ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands, except share and per share data)
NOTE 19 - STOCK OPTIONS (continued):
2) Options to non-employees:
1999 1998 1997
Weighted Weighted Weighted
average average average
Shares exercise Shares exercise Shares exercise
(in thousands) price (in thousands) price (in thousands) price
Options outstanding at
beginning of year 266 7.2 266 7.2 244 7.13
Options granted 22 8
----- ----- ------ ------- ------- ------
Options outstanding at
end of year 266 7.2 266 7.2 266 7.2
----- ----- ------ ------- ----- ------
----- ----- ------ ------- ----- ------
Options exercisable at
end of year 266 266 266
===== ====== =====
3) Total options:
Total options outstanding
at end of year 742 704 704
===== ====== =====
Total options exercisable
at end of year 732 666 592
===== ====== =====
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ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 20 - SUBSEQUENT EVENT:
a. As discussed in note 12e, in January 2000, ICTS signed an agreement with a
third party concerning the release of guarantees granted to the third
party. According to that agreement:
1) The third party released an amount of $ 1,000 of guarantees provided by ICTS, of which $ 200 were released in
October 1999.
2) The third party provided personal guarantees of two of its shareholders, securing the release of $800 from
the remaining guarantees. The entire outstanding guarantees should be released by June 30, 2000.
3) ICTS acquired a $ 1,000 bearing 10% interest per annum debenture
issued by Pioneer. The note is due in November 2004, and its
repayment is guaranteed by Leedan Business Enterprise Ltd.
4) ICTS provided a company affiliated with one of the two shareholders (see 2 above), a bank guarantee in an
amount of $ 400, valid for a period of 18 months.
b. As discussed in note 6(a), in January 2000, ICTS exercised its option to
purchase 51% equity interest in John Bryce for approximately $ 2,700. ICTS
subsequently sold all of its shares in JBS to Gilat. In exchange for its
shares in JBS, ICTS obtained 388,189 unregistered common shares of Gilat,
which Gilat is obligated to register in the course of year 2000.
In conjunction with the above, ICTS entered into certain agreements with
other shareholders of JBS who exchanged their shares for shares of Gilat,
pursuant to which ICTS acquired from them additional shares in Gilat and
obtained an option to purchase 113,796 shares of Gilat (most of it
relating to the pledged shares of JBS, see note 6b) at US $ 13.2 to $ 14.5
per share. The option will expire on December 31, 2001.
c. On February 28, 2000 ICTS entered into an agreement with Global Digital
Media.com ("GDM") to jointly market the Digital Media HubTM to the
aviation industry. That product provides interactive digital e-Advertising
solutions. ICTS has also purchased 65,000 shares of GDM for $325 and is
entitled to receive 250,000 warrants (125,00 are vested immediately and
the rest on December 31,2000 under certain circumstances) to purchase
additional 250,000 shares for consideration of $1,250. The warrants shall
expire on February 28, 2003. If all warrants are exercised, ICTS will own
approximately 10% of GDM.
d. On March 13, 2000 the company became aware that a contract for agent work in
Chicago would be terminated during early 2000. Approximately $392 of goodwill is
reflected on the December 31, 1999 Financial statements, relating to this
contract.
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Annual Report to be signed on its behalf by the undersigned, thereunto duly authorized.
ICTS INTERNATIONAL N.V.
By:/S/Lior Zouker
Name: Lior Zouker
Title:Chief Executive Officer
Date: March , 2000
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