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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-28542
ICTS INTERNATIONAL N.V.
(Exact Name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
The Netherlands
(Jurisdiction of incorporation or organization)
Biesbosch 225, 1181 JC Amstelveen, The Netherlands
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each Class: Name of each exchange on which registered:
NONE NONE
Securities registered or to be registered pursuant to Section 12(g) of the Act:
Common Shares, par value 1.0 Dutch guilder per share
Title of Class
Exhibit Index Appears on Page
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 28, 1999: 6,351,780
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, and Procheck International B.V. (the Dutch affiliate of ICTS).
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 passanger screening." The Company also provides in the U.S. 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 and in the provision of other security services.
Background
The threat to the security of civil aviation, which has created demand for services such as those provided by the Company, initially began to manifest itself in the late 1960's in the form of skyjacking. Soon thereafter, civil aviation in general, and airports and airlines in particular, emerged as prime targets for terrorist activities, mainly due to their vulnerability and the relative ease of attack. In the 1970's and 1980's, terrorist activity expanded to include ground attacks on airport runways or inside terminal buildings and the use of explosive devices to
destroy aircraft in flight. The most notorious incident of this kind involved the successful effort of terrorists to plant an explosive device in Pan American Flight 103, which exploded over Lockerbie, Scotland in December 1988. This event led to an increase in aviation security efforts throughout the world. In spite of such increased security efforts, threats to civil aviation do not appear to be diminishing in frequency, geographic scope or intensity in the 1990's.
Although efforts continue to develop more sophisticated machinery to detect explosive devices contained in passenger luggage and cargo, the threat of terrorist activity has not been curtailed by such efforts. The increased technical sophistication, and the improvement in technique, of would-be terrorists continue to pose serious challenges to security. The Company believes that the optimal manner to counter terrorist activity is through a combination of interpersonal evaluation and screening of passengers combined with the use of advanced equipment for passenger and baggage device detection.
The technique of screening passengers was initially conceived and designed in the early 1970's by the security departments of El Al (Israel's national airline) and Ben-Gurion International Airport (Israel's principal airport) in response to threats and acts of terror against Israeli passengers, airplanes and airports. The Company was established by certain of the individuals who actively participated in the design and provision of security to El Al and Ben-Gurion International Airport. These individuals were the first to introduce passenger risk evaluation and classification ("advanced passenger screening") to commercial airlines other than El Al. The first major project undertaken by the Company was the design and implementation of an enhanced security system for American Airlines in Europe in 1986. The outcome of this project was the first fully written and documented International Security Program of American Airlines, which introduced the Company's Risk Analysis through Profiling System ("RAPS") method. In 1987, TWA commissioned the Company to design and implement a security system for, and perform the required services at, approximately 20 TWA stations in Europe. The Company performed such services for TWA until 1992, when TWA established its own subsidiary to provide security services for TWA and other carriers. Following the destruction of Pan Am Flight 103 over Lockerbie, Scotland in December 1988, numerous additional international air carriers, including Pan Am, became customers of the Company. With the onset of the Gulf War crisis in early 1991, the market for the Company's services had been clearly established.
Since its inception, the Company has developed and adapted its techniques and methodology to the changing needs of the airline
industry. Many of the Company's services are designed to enable its airline and airport clients to comply with the security requirements imposed upon them by regulatory authorities. During the 1990's, the United States government adopted legislation and administrative mandates which expanded the demand for the Company's services in Europe. In April 1996, the United States enacted a new 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. In addition, the Gore Commission was established in late 1996 to evaluate current aviation security procedures and to recommend additional measures.
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 growth which it expects 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 it to significant growth. These opportunities include:
1. internal growth by participating in the general increase in air travel. The Company intends to achieve this by servicing current clients at additional locations, by servicing new clients at both existing and new locations, and by offering other aviation related services to its current and new customers;
2. expansion into the U.S. market by acquiring in January 1997, an 82.5% interest in Service Service, Inc. ("SSI"), a Chicago-based company providing passenger check-in services to American Airlines at O'Hare Airport. As of January 1, 1999, the Company acquired an 80% interest in Huntleigh USA Corporation ("Huntleigh"). On February 25, 1999, the Company acquired the remaining 17.5% of SSI so that it became a 100% subsidiary.
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 1997, the Company expanded the implementation of the APS. During 1997 and
1998 , the Company entered into five year contracts with several airlines for the installation and operation of the APS for use in all of the carriers European operations.
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; and
5. geographic expansion, both in its principal area of operation (in Western Europe) and elsewhere throughout the world, in addition to the United States. Due to the volume and growth of air traffic in Europe and current USA and UK security regulations, the Company expects Western Europe to continue to be a large market for the Company's services in the near future. The Company believes that demand for its services exists in nations such as those comprising the former Soviet Union and that such demand will increase pending further development of such entities' political and economic systems. In April 1997 and December 1997, the Company began providing airline security services in Tblisi, Georgia and Alma Alta, Kazakhstan, respectively. A further expansion occurred during 1998 into Stockholm, Sweden and Shannon and Dublin, Ireland.
The major market trends which the Company is seeking to exploit include
(i) outsourcing and single vendor contracts and (ii) privatization. Air carriers
are actively seeking to outsource activities not directly related to their core
business, such as security, passenger check-in, cleaning, catering and aircraft
maintenance. In June 1996, the Company entered into a three-year contract with a
major U.S. airline (terminable by either party for any reason upon 90 days'
written notice), pursuant to which the Company will supply enhanced aviation
security services to all of such airlines existing locations in Europe (other
than The Netherlands and Sweden). In March and August 1997 and August, 1998, the
Company entered into five-year contracts with other airlines for the
installation and operation of its APS program for use in all of those carrier's
European operations. In certain European markets, there is a trend toward the
privatization of security services for airports, which have been traditionally
provided by local and/or federal government entities. The Company has
capitalized on its expertise in the provision of security services in order to
bid on such privatization tenders. This trend
is illustrated by the privatization of certain security services at airports in Belgium, France, Germany and The Netherlands. In this regard, in January 1996, following a competitive bidding process, the Company, through FIS GmbH, was awarded a five-year contract by the German government to provide security services at the Hamburg Airport. In October 1997, FIS GmbH was awarded a similar contract for a term of 63 months involving the Saarbrucken Airport. In addition, in November 1996, a subsidiary of the Company was selected as a provider of electronic luggage screening operations at London Gatwick Airport-South Terminal and London Stansted Airport; such operations commenced in January 1997.
Notwithstanding these developments, 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.
Services Provided
Advanced Passenger Screening
The principal service currently provided by the Company to its airline clients 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 DOT), (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. In August 1997, the Company purchased a 37% interest in Demco Consultants Ltd. ("Demco"), a privately-held firm based in Israel. In January 1998, the Company sold 18% of these shares reducing its holdings to 19% of Demco's shares. 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.
Operation of Electronic Equipment. The Company has been retained by certain of its airline and airport clients to operate electronic equipment (including x-ray screening machines and manual devices) designed to identify weapons and explosives carried by passengers or secreted in their luggage. The Company believes that the market for such services is rapidly growing, as certain European countries are expected to require 100% screening of luggage in the near future. In November 1996, a subsidiary of the Company was selected as a provider of electronic luggage screening operations at London Gatwick Airport-South Terminal and London Stansted Airport, such operations commenced in January 1997.
Cargo Classification Control. The Company utilizes the expertise that it has gained through passenger profiling 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 and France. Pursuant to an agreement with an affiliate of ICTS, the Company may not provide general security services in Latin America, Turkey or the former Soviet Union.
Huntliegh. As of January 1, 1999 the Company acquired 80% of the issued and outstanding shares of Huntleigh and has an option to acquire the remaining 20% at an agreed upon price formula. Under certain circumstances the Seller has the right to require the Company to purchase the remaining 20%. For the year ended December 31, 1998 Huntleigh had revenues of approximately $44.3 million. Huntleigh is 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.
Huntleigh provides nine separate services at 46 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 Huntleigh offers may increase.
These services currently include:
o Pre-departure Screening
o Skycap Services
o Wheelchair Attendants
o Agent Services
o Guard Services
o Janitorial Services
o Maintenance
o Ramp Services
o 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 Huntleigh 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 Huntleigh is the cabin cleaning of aircraft. This service has expanded to include cleaning of portions of the airport as well.
Maintenance
In one airport, Huntleigh 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
Huntleigh is responsible for shuttling airline crews from their hotel to the aircraft.
Huntleigh's customers are the airlines themselves. If an airline is the sole occupant of a concourse or a terminal in which Huntleigh provides service, Huntleigh has an exclusive contract with that airline. If more than one airline shares a concourse or terminal, Huntleigh maintains a contract with the host or "custodian" airline and bills services to each airline based on its share of passenger boardings.
Contracts are awarded as part of a bid process. Contracts may have a time period of duration or may be indeterminate length. In most instances, either party can cancel with 30 days notice. Labor market conditions at a particular airport location may require Huntleigh to increase its prices, at which time an airline may put the contract out for alternative bid.
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 Procheck International B.V., its Dutch affiliate ("Procheck"). Pursuant to this agreement, the Company may not provide security services in The Netherlands other than through Procheck. Although in December 1997, the Company sold its minority interest in ICTS (Asia Pacific) Ltd. ("ICTSAP"), its former Hong Kong affiliate, the Company remains restricted by the terms of a joint venture agreement which prohibits the Company from providing security services in Southeast Asia.
Until June 30, 1995, the Company was not a party to any agreements restricting its ability to provide consulting, training and security-design services in the general security field. 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 an Israeli company majority-owned by Leedan. 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 three largest airline customers based on revenue in 1998 collectively, accounted for approximately 44% 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 11% of the revenues of the Company in 1998.
In addition, from time to time, the Company is engaged in providing enhanced aviation security services and in providing training and consulting services to third parties.
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), anyone 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.
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.
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, a factor which the Company views as an advantage over competitors who lack such an international infrastructure. As opportunities develop in the United States, the Company intends to establish operations at locations where the Company will provide services.
Matters of airline security are, in most cases, the responsibility of each airline's headquarters. Accordingly, marketing and customer relations with airlines are assumed and coordinated by ICTS and not by each of its subsidiaries. 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 usually have a term of one to three years and are normally subject to termination by the airline at any time with or without cause upon 90 days' prior notice. The contracts between the Company, through FIS GmbH, and the German Ministry of the Interior, relating to the
Hamburg airport and the Saarbrucken airport, for a term of 5 years commencing January 1996 and 63 months commencing October 1997, respectively, are subject to termination upon 90 days' prior notice. There can be no assurance that an existing client will not decide to terminate or fail to renew a contract.
Product Development
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.
The Company has developed the APS in 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. In connection with the Company's commitment to provide loans and guarantees to A.M.S. (as hereinafter defined) and to John Bryce Systems Ltd., the Company was granted options to acquire up to a 63% equity interest in such entities. The Company presently uses APS to analyze flight and passenger information to help screen airline passengers in a faster and more efficient manner. In October 1996, the first commercial installation of APS took place at Schiphol Airport in The Netherlands with the approval of the FAA. In March and August 1997, the Company entered into five-year contracts with several airlines for the installation and operation of APS in those carriers' European operations. The Company intends to market APS to aviation clients on behalf of the joint venture under an exclusive marketing arrangement with the joint venture. 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. 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 29 European airports.
Huntleigh competes with numerous other companies in the US market, many of whom have greater resources, financial and other than Huntleigh.
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, Austria 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 and Germany) have privatized certain segments of their security operations. The Company believes that other international airports may privatize 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. Turn-key contracts for the provision of aviation security services other than profiling and consulting awarded as a part of such privatization processes tend to be large scale and long-term and attract competitors which are local or large international providers. Although privatization 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.
In October 1993, FIS GmbH was selected to perform a "pilot project" for the privatization of security at German airports and, in January 1996, was subsequently awarded a five-year contract to perform security services at the Hamburg airport. This was the largest single contract awarded in the process of privatization of security services at airports undertaken by the German authorities. In October 1997, FIS GmbH was awarded a five-year contract to perform security services at Saarbrucken Airport in Germany. In November 1996, another subsidiary of the Company was selected as a provider of electronic passenger and luggage screening operations at London Gatwick Airport-South Terminal and London Stansted Airport.
Employees
The Company, excluding Huntleigh, employs approximately 2,500 people on a regular basis. During summer months, when the Company's business reaches a seasonal high, approximately 200 additional employees are added. During the "off season," the Company selects and trains these seasonal employees. Although the Company experienced a one-day work stoppage at certain of its locations in France in June 1997, 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.
Huntleigh has more than 4,000 employees, of which approximately 43 percent are pre-departure screeners, approximately 34 percent perform skycap and wheelchair services. The remaining employees are divided among the other listed services. Of these employees, 870, or 22 percent, are unionized in 16 locations. Most of these union employees are skycaps, however, screeners are unionized in Pittsburgh, Pennsylvania and Providence, Rhode Island. Management believes that labor relations are good at all locations.
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
Substantially all of the Company's revenues in fiscal year 1998 were received, and substantially all 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.
Non-Core Business Investments
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. Pioneer is a mortgage warehouse lender providing short-term financing to small and medium sized mortgage bankers.
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. The Company's fees for procuring these guarantees, which were contingent on the results of said trading, totaled $291,000. Commencing December 28, 1997, a new agreement was signed by the parties which replaced the foregoing contingent fee arrangement with an annual fee of 2.5% of the guaranteed amounts outstanding from time to time. On December 31, 1997 these guarantees totaled $3,236,000, which is being reduced by $100,000 each month starting January 31, 1998, and will be released in full by December 27, 1999, subject to an option of the third party to require that such guarantees be extended to June 30, 2000. On December 31, 1998, the guarantees totaled $2,291,000.
In August 1997, the Company, as part of a group consisting of Leedan Systems and Properties Enterprises (1993) Ltd., Rogosin Development and Holdings Ltd. and Pioneer Commercial Funding Corp., 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 6.16% equity interest in Bilu, the Company contributed $187,000 and has guaranteed $2,905,000 of debt obligations of Bilu.
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 with Lloyd's underwriters in London, including (i) third-party aviation liability coverage of $150 million for any one occurrence and in the aggregate, (ii) third-party general liability coverage of $10 million for any one claim and in the aggregate and (iii) errors and omissions coverage of $10 million for any one claim.
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.
Huntleigh owns no real estate but rents space from airlines or the airport authority for airport offices at airports or off-site locations. In many cases, Huntleigh is given the office space. At present, Huntleigh rents space in 18 cities. For its corporate office located at 10332 Old Olive Street Rd. in St. Louis, Huntleigh 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.
Item 4. Control of Registrant
Leedan, through wholly-owned subsidiaries, owns approximately 35.5% of the issued and outstanding Common Shares. Mr. Ezra Harel and members of his family own, either directly or indirectly, approximately 52% of the outstanding shares of Leedan and may be deemed to control such company. The balance of Leedan's outstanding shares are held by the public and traded on the Tel Aviv Stock Exchange. Accordingly, Leedan 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 35.5%
Ezra Harel............... 2,530,0001 39.8%
Directors and Executive
Officers as a Group.... 3,537,4002 55.6%
(11 persons)
|
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 and 2,255,000 Common Shares owned by Leedan.
2 Includes (a) 2,255,000 Common Shares held by Leedan and (b) 437,400 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 "ICTSF" since June 26, 1996. 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
Fourth Quarter 1996.................... $13.000 $9.125
First Quarter 1997..................... $12.000 $7.500
Second Quarter 1997.................... $8.875 $6.500
Third Quarter 1997..................... $11.125 $7.125
Fourth Quarter 1997.................... $11.500 $7.125
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
|
On March 15, 1999, the last reported sale price of the Company's Common Shares as reported by Bloomberg Business News was $3.6875 per Common Share. As of March 1, 1999, 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 would be ordinarily 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 establish ment 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.
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 the substantial interest. Nonresident 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, 1998. The selected financial data presented below for each of the five fiscal years in the period ended December 31, 1998 have been derived from the financial statements of the Company, which have been audited by Shachak Peer Reznick & Co. and Paardekooper & Hoffman for the two fiscal years ended December 31,1994 and 1995, and audited by Shachak Peer Reznick & Co., which at January 1999 merged with Kesselman & Kesselman for the three fiscal years ended December 31, 1996, 1997 and 1998. Kesselman & Kesselman is a member of Pricewaterhouse Coopers International Limited, a company limited by guarantee registered in England and Wales. As the Company's holding company structure was created in 1994, and the Company sold 55% of ICTS GmbH in 1994, the financial data for 1994, 1995 and 1996 are presented on a consolidated basis, and ICTS GmbH is presented on the equity method. 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 and 1998, 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 1994, 1995, 1996,1997 and 1998 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,
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Statement of Operations Data:
Revenues......................................... $23,738 $29,826 $38,943 $53,798 $64,130
Costs of revenues............................. 20,810 25,061 32,610 45,016 54,109
------ ------ ------ ------ ------
Gross profit...................................... 2,928 4,765 6,333 8,782 10,021
Amortization of goodwill.................... 127 164 154 321 485
expenses......................................... 2,764 2,967 4,099 5,994 6,838
------- ------- ----- ----- -----
Operating income (loss)..................... 37 1,634 2,080 2,467 2,698
Financial (expenses) income, net......... (306) (296) 381 3,589 (490)
Other income (expense), net............... 27 (9) 4,547 226 (703)
------- ------ ----- --- ----
Income (loss) before income taxes and equity
in results of affiliates............... (242) 1,329 7,008 6,282 1,505
Income taxes.................................... (37) (339) (449) (2,357) (837)
------- -------- ------ ------- -----
Income (loss) before equity in results of
affiliates.......................................... (279) 990 6,559 3,925 668
Equity in results of affiliates, net......... (91) 123 205 121 214
------- ------- ----- --- ----
Net income (loss)(3).......................... $ (370) $ 1,113 $6,764 $4,046 $ 882
======= ======= ====== ====== =====
Net income (loss) per share................... $ 0.28 $1.35 $0.62 $0.14
======= ===== ===== =====
Net income (loss) per share - fully diluted.... $(0.09) $ 0.28 $1.33 $0.61 $0.14
======= ======= ===== ===== =====
Weighted average number of shares
outstanding.................................... 4,000 4,000 4,994 6,566 6,498
======= ======= ===== ===== ======
Adjusted Weighted average number of shares
outstanding........................... 4,024 4,024 5,098 6,681 6,517
======= ======= ===== ===== =====
1994 1995 1996 1997 1998
---- ---- ---- ---- ----
Balance Sheet Data:
Cash and cash equivalents...................... $ 1,344 $1,899 $16,366 $13,699 $11,273
Time deposits and marketable securities....... -- -- 8,888 3,301 5,300
Working Capital (deficit)......................... (2,340) (943) 23,535 15,905 14,622
Total Assets.......................................... 11,608 13,908 41,947 45,719 53,832
Short-term bank debt and current maturities
of long term debt................................ 1,115 1,563 780 2,264 4,225
Long-term debt, net............................... 402 237 250 1,607 6,174
Retained earnings (deficit)....................... (370) 743 7,507 11,553 12,435
Shareholders' equity............................... 2,497 3,946 30,073 30,132 30,899
(1) See Note 1 to financial statements as to operations and basis of presentation.
(2) See Note 2(h) to financial statements as to principles of consolidation.
For the years ended December 31, 1994, 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.
(3) ICTS has paid no cash dividends to date on its Common Shares.
|
Item 9. Management's Discussion and Analysis of
Financial Condition and Results of Operations.
The financial information with respect to the Company for 1994, 1995, 1996, 1997 and 1998 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. In order to avoid over-emphasizing any of the currencies in which it operates, 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 and/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,
1996 1997 1998
---- ---- ----
Revenues................................................... 100.0% 100% 100%
Cost of revenues............................................ 83.7 83.7 84.4
----- ---- ----
Gross profit................................................. 16.3 16.3 15.6
Selling, general and administrative expenses.......... 10.5 11.1 10.7
Operating income ............................................. 5.3 4.6 4.2
Net income ................................................... 17.4% 7.5% 1.4%
==== ====== ====
|
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, Procheck International. 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 $117,000, respectively. Considering the prospective growth of the Company, additional working capital was needed.
In 1998 the Company's investing activities consisted of the purchase of equipment, representing capital expenditures of $511,000, 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 $3.7 million. During 1998, the Company increased its long term loans by $5.0 million for the purpose of financing the acquisition of Huntleigh U.S.A. Corporation, which was realized on January 6,1999. After finalizing the divestment of ICTSAP, $1.0 million was received by the Company in 1998.
Another cash outflow transaction during 1998 was the repurchase of the Company's shares in the amount of $1.2 million. The Company was authorized by its shareholders to expand up to $6,500,000 to repurchaser 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 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 $700,000. 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 slightly less than half of 18% Demco shares. 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. holds 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. Of such $2.915 million, the Company has made a $2.5 million, four-year loan to John Bryce and,
in lieu of providing $200,000 of the $415,000 of additional loans which the Company had committed to provide to John Bryce, has guaranteed $200,000 of debt of John Bryce. In connection with such commitment, in November 1997 the Company acquired, for $500,000, a ten-year, interest-free bond of John Bryce with a face value at maturity of $1.062 million. The Company has also been granted a four-year option to purchase a 51% equity interest in John Bryce for an exercise price of $2.915 million (the "John Bryce Option"). Furthermore, under the terms of the bond purchase agreement, the previous holders of such bond have "put" options which may, under certain conditions, require the Company to purchase their respective equity interests in John Bryce, representing 24% of the equity of John Bryce (12% of the equity after giving effect to the exercise of the John Bryce Option) for up to $850,000 and the Company has a "call" option to purchase such interests for up to $1.05 million. The loans and the bond are collateralized by a second priority floating lien on John Bryce's assets. In connection with the foregoing, commencing November 1997, the Company is entitled to minority representation on the Board of John Bryce and, commencing January 1999, for so long as the Company's loans to John Bryce are outstanding and/or the John Bryce Option is in effect and unexercised, the Company will have the right to appoint the majority of the Board of John Bryce.
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
The Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"), which requires entities, other than not-for-profit entities, to include details of comprehensive income that arises in the reported period. Comprehensive income consists of net income or loss for the current period and other comprehensive income - income, expenses, gains and losses that bypass the income statement and are reported directly in a separate component of equity. That statement is effective for the Company's fiscal years ending after December 31, 1997. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of Enterprises and Related Information" ("SFAS No. 131"), which is effective for the Company's fiscal year ending December 31, 1998. That statement changes the way public companies report information about segments of their business in their annual financial statements and requires them to report
selected segment information in their quarterly reports. The sole effect of the adoption of SFAS No. 130 and SFAS No. 131 is the obligation imposed on the Company to comply with the new disclosure requirements provided thereunder.
Other Matters
The Company is in the process of identifying operating and application software problems related to the year 2000. The only production related computer based system that the Company uses are x-ray machines. The Company has been advised by the manufacturers of those machines that they are Y2K ready. The Company began its 2000 project in August 1998 and expects to be in full compliance by September 1999. The Company has budgeted $50,000 for its year 2000 project. The Company has received confirmation from most of its suppliers and customers as to their Y2K readiness. The Company also outsources a number of administrative functions to companies who have confirmed their Y2K readiness. The Company does not have any central systems or main frames that could be affected by the Y2K issue. While the Company expects to resolve year 2000 compliance issues substantially through normal replacement and upgrades of software, there can be no assurance that there will not be interruption of operations or other limitations of system functionality or that the Company will not incur substantial costs to avoid or remedy such limitations. Any failure to effectively monitor, implement or improve the Company's operational, financial, management and technical support systems, or any failure by a significant customer of the Company to effectively resolve such customer's year 2000 compliance issues, could have a material adverse effect on the Company's business and results of operations.
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.
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 Boaz Harel, Savinoam Avivi, Natenel Rotem, Michael Barnea, Gerald Gitner and Amos Lapidot. The members of the Management Board are Lior Zouker and Ezra Harel. The Supervisory Board currently has two committees, an Audit Committee, whose members are Amos Lapidot, Savinoam Avivi, Michael Barnea 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........48 Member of the Management Board
Boaz Harel........35 Member of the Supervisory Board
Savinoam Avivi....60 Member of the Supervisory Board
Michael Barnea....43 Member of the Supervisory Board
Natenel Rotem.....69 Member of the Supervisory Board
Gerald Gitner ....53 Member of the Supervisory Board
Amos Lapidot .....64 Member of the Supervisory Board
Lior Zouker.......50 Member of the Management Board and
Chief Executive Officer
Yoav Navon .......48 Member of the Management Board, Chief
Operating Officer and Vice
President- Business Development
Joseph Yahav .....42 Vice President- International
Ranaan Nir........50 Chief Financial Officer, Vice
President-Finance, and Treasurer
M. Albert Nissim..65 Secretary
|
Ezra Harel is the controlling shareholder of Leedan, an investment holding company whose shares are listed on the Tel Aviv Stock Exchange. 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 is one of the largest independent manufacturers of tire cord in the world. 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 since 1993. From 1991 to 1993, he was founder and the Managing Director of Mashik Business and Development Ltd., an engineering consulting company. 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. From 1991 to 1994, he was a partner at the law offices of Zellermayer, Pelossof in Tel Aviv, Israel.
Gerald Gitner from 1991 to 1992, was the Vice Chairman of the Tribeca Corp. 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 February, 1997, he was appointed to serve as CEO and Chairman of Trans World Airlines, Inc. He served as CEO until March, 1999.
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.
Nateniel Rotem served as Managing Director of Tower Air from September 1986 until September 1996.
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 oral understanding with Mr. Ezra Harel for his services to the Company.
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, 1998 was approximately $1.2 million. 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 462,400 Common Shares have been granted to all 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.
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.
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.
During 1998, the Company made loans to four officers of the Company aggregating $60,000.
During 1998, the Company entered into an oral agreement with Mr. Ezra Harel, a member of the Management Board, for his
services to the Company.
During 1998, the Company accrued $166,000 to be paid as a success fee to three officers of the Company, in the aggregate, in connection with the Huntliegh 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 6.16% equity interest in Bilu, the Company contributed $187,000 and has guaranteed $2,905,000 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.
During 1996, Leedan provided loans to the Company. Approximately $30,000 of interest pursuant to such loans was paid by the Company to Leedan in 1996. Commencing July 1996, there were no such loans outstanding.
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.
In 1996, the Company entered into a consulting arrangement with K-Mart to provide certain security services. Pursuant to such consulting arrangement, Avalon Group, Ltd., an investment banking firm for which Gerald Gitner, a director of the Company, previously served as Chairman, is entitled to a commission equal to 7.5% of the consulting fees payable to the Company.
Leedan provided ICTS advice and assistance with respect to the structuring and implementation of the IPO and the Offering. The out-of-pocket expenses incurred by representatives of Leedan in providing such services were paid directly by the Company.
During 1996 the Company paid four officers of the Company fees of $110,500 in the aggregate in consideration for investment advisory services rendered in connection with the Offering.
Shortly after the acquisition of the Company by Leedan in January 1994, Leedan granted to each of Messrs. Ezra Harel and Lior Zouker an option to purchase up to 20% of the shares of ICTS owned by Leedan. Mr. Harel subsequently transferred one-half of his option (relating to 10% of the shares of ICTS held by Leedan) to Mr. Amichay Wine. Immediately prior to the IPO, Messrs. Harel, Zouker and Wine exercised the options described in this paragraph.
In August 1996, TWA and the Company entered into an agreement whereby the Company would provide security services with respect to TWA flights departing from Paris, France. Such agreement may be terminated upon 90 days notice. Such agreement was negotiated on an arm's-length basis and provides for fees payable to the Company at market rates. Mr. Gerald Gitner, a member of the Supervisory Board of ICTS, is currently the Chief Executive Officer and a director of TWA. Mr. Gitner did not participate in the negotiation of such agreement in any manner.
During October and November 1996, the Company acquired a 20% interest in Maman Cargo Terminal & Handling ("Maman"), a publicly-traded Israeli company engaged in the business of cargo handling for Ben-Gurion Airport. The Company sold such interest on November 24, 1996 to a third party which became a stockholder in Maman after the Company acquired its position. In connection with such transaction, the Company agreed not to purchase shares of Maman for five years from the date thereof. The sale of such interest resulted in a net profit of approximately $4.65 million to the Company. In connection therewith, the Company paid to each of
Ezra Harel and Leedan a fee of $300,000 in consideration for investment advisory services rendered by each of them in connection with such transaction. In addition, with respect to the Maman transaction, the Company paid to Mr. Lior Zouker a bonus of $131,000 which was earned by Mr. Zouker pursuant to certain provisions of his employment agreement which provide for bonus payments based on net profits of the Company.
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
Page
ICTS INTERNATIONAL N.V. Report of Independent Auditors Consolidated Financial Statements: Balance Sheets as of December 31, 1998 and 1997 Statements of Operations for the years ended December 1998, 1997 and 1996 Comprehensive Income Statement of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Financial Statements Procheck International B.V. Report of Independent Auditors Financial Statements Balance Sheets as of December 31, 1998 and 1997 Statements of Operations for the years ended December 1998, 1997 and 1996 Statement of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 Notes to Financial Statements |
Item 19(b) Exhibits
1. Articles of Association of the Company.*
2. Speciman of the Company's Common Stock.*
* 23.1 Consent of Kesselman & Kesselman
* 23.2 Consent of PriceWaterhouseCoopers N.V.
* Filed herewith.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
F-2 Report of Independent Auditors................................
Consolidated Financial Statements:
F-3 Balance Sheets as of December 31, 1998 and 1997..............
F-4 Statements of Operations and Comprehensive Income for the years ended December 1998, 1997 and 1996
F-5 Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996......
F-6 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996.............................
F-7-F-24 Notes to Financial Statements................................
Procheck International B.V.
F-25 Report of Independent Auditors..............................
Financial Statements
F-26 Balance Sheets as of December 31, 1998 and 1997........
F-27 Statements of Operations for the years ended December 1998, 1997 and 1996...............................
F-28 Statement of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996..................
F-29 Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996...............................
F-30-F-38 Notes to Financial Statements...........................................................................
F-1
|
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, 1998
and 1997, and the related consolidated statements of operations and
comprehensive income, Changes in Shareholders' equity and cash flows for each of
the years ended December 31, 1998, 1997 and 1996. 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 audit 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 financial statements referred to above, present fairly, in
all material respects, the consolidated financial position of the Company as of
December 31, 1998 and 1997, and the consolidated results of its operations,
changes in shareholders' equity and its cash flows for each of the years ended
December 31, 1998, 1997 and 1996, in conformity with accounting principles
generally accepted in the United States.
Ramat Gan, Israel Kesselman & Kesselman
March 15, 1999 Certified Public Accountants (Isr.)
F-2
|
ICTS INTERNATIONAL N.V.
CONSOLIDATED BALANCE SHEETS
(US $ in thousands, except share data)
December 31,
------------------------------
1998 1997
-------------- -------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Note 2d).........................................$..11,273 $ 13,699
Time deposits and marketable securities (Note 3) ......................... 5,300 3,301
Accounts receivable - trade................................................. 10,454 8,627
Short-term loans and current maturities (Notes 4, 7and 9) 1,080 1,043
Other current assets........................................................ 1,965 1,967
-------------- -------------
Total current assets........................................................ 30,072 28,637
INVESTMENTS:
Investments in affiliates (Note 6).......................................... 1,156 2,000
Other investments (Note 7)................................................. .10,276 3,621
-------------- -------------
11,432 5,621
PROPERTY AND EQUIPMENT (Note 8):
Cost....................................................................... .3,771 3,286
Less - accumulated depreciation............................................. 1,817 1,386
-------------- -------------
1,954 1,900
LONG-TERM RECEIVABLE,
net of discount and current maturities (Note 9)............................. 176 163
DEFERRED INCOME TAXES (Note 16)............................................ 1,367 657
GOODWILL, net of accumulated amortization of $1,435 in 1998 and $872
in 1997 (Note 2g)......................................................... 8,582 8,542
OTHER ASSETS AND DEFERRED CHARGES................................ 249 199
10,198 9,398
-------------- -------------
Total assets.............................................................. $ 53,832 $ 45,719
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term bank debt (Note 10)..............................................$ 3,663 $ 1,987
Current maturities of long-term debt (Note 12).............................. 562 277
Accounts payable - trade.................................................. 1,421 1,516
Accrued expenses and other liabilities (Note 11)............................ 9,804 8,952
Total current liabilities................................................... 15,450 12,732
-------------- -------------
LONG-TERM DEBT, net of current maturities (Note 12)..................... 6,174 1,607
ACCRUED SEVERANCE PAY (Note 13)............................................ 1,309 1,248
Total long-term liabilities................................................. 7,483 2,855
-------------- -------------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)
SHAREHOLDERS' EQUITY:
Share capital:
Common shares, par value - NLG 1 per share, 17,000,000 shares authorized;
6,569,480 issued and outstanding shares in 1998 and
1997........................................................................ 3,564 3,564
Additional paid-in capital.................................................. 19,090 19,090
Retained earnings........................................................... 12,435 11,553
Cumulative other comprehensive loss......................................... (2,968) (4,075)
32,121 30,132
Treasury stock, 209,400 common shares, at cost,........................ (1,222) -
30,899 30,132
Total liabilities and shareholders' equity..................................$ 53,832 $ 45,719
============== =============
The accompanying notes are an integral part of the
financial statements.
F-3
|
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(US $ in thousands, except per share data)
Year ended December 31,
--------------------------------------------
1998 1997 1996
-------------- ------------- -------------
Revenues..................................................................$ 64,130 $ 53,798 $38,943
Cost of revenues.......................................................... 54,109 45,016 32,610
-------------- ------------- -------------
Gross profit.............................................................. 10,021 8,782 6,333
Amortization of goodwill.................................................. 485 321 154
Selling, general and administrative expenses.............................. 6,838 5,994 4,099
-------------- ------------- -------------
Operating income.......................................................... 2,698 2,467 2,080
Interest income........................................................... 1,149 1,253 520
Interest expense.......................................................... (533) (396) (402)
Exchange rate differences................................................. (1,106) 2,732 263
Other income (expense), net (Note 15).................................... (703) 226 4,547
-------------- ------------- -------------
Income before income taxes and equity in results of affiliates............ 1,505 6,282 7,008
Income taxes (Note 16).................................................... (837) (2,357) (449)
-------------- ------------- -------------
Income before equity in results of affiliates............................. 668 3,925 6,559
Equity in results of affiliates, net (Note 6)............................. 214 121 205
Net income.................................................................$ 882 $ 4,046 $ 6,764
Other comprehensive income (loss):
Translation adjustments................................................ 1,830 (4,035) (769)
Unrealized gains (losses) on marketable securities..................... (723) 20 -
Other comprehensive income (loss) 1,107 (4,015) (769)
Comprehensive income $ 1,989 $ 31 $ 5,995
============== ============= =============
Earnings per common share - basic (Note 2j)...............................$ 0.14 $ 0.62 $ 1.35
============== ============= =============
Earnings per common share - diluted (Note 2j)....................... $ 0.14 $ 0.61 $ 1.33
============== ============= =============
The accompanying notes are an integral part of the
financial statements.
F-4
|
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(US $ in thousands, except share data)
Accumulated
Other
Additional Retained comprehensive
Share capital paid-in Earnings income Treasury
Common Amount capital (loss) stock Total
shares
----------- ----------- ------------- ----------
Balance at January 1,
1996 4,000,000 $ 2,063 $ 431 $ 743 $ 709 $ - $ 3,946
Changes during 1996:
Initial Public Offering..1,500,000 878 7,322 8,200
Second Public Offering...1,065,000 621 11,311 11,932
Comprehensive Income:
Net income............ 6,764 6,764
Other comprehensive income:
Translation adjustments... (769) (769)
Comprehensive Income 5,995
Balance at
December 31, 1996........6,565,000 3,562 19,064 7,507 (60) - 30,073
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
Comprehensive Income 31
Balance at December 31, 1997...6,569,480 3,564 19,090 11,553 *(4,075) - 30,132
Changes during 1998:
Common stock repurchased..... (209,400) (1,222) (1,222)
Comprehensive Income:
Net income................... 882 882
Other comprehensive income:
Translation adjustments...... 1,830 1,830
Unrealized losses on marketable
securities............... (723) (723)
Comprehensive Income 1,989
Balance at December 31, 1998...6,360,080 $3,564 $19,090 $12,435 $*(2,968) $ (1,222) $30,899
=========== =========== ============= ========== ============== =========== ===========
* Comprises as follows:
December 31,
1998 1997
Cumulative translation adjustments (2,265) (4,095)
Cumulative unrealized gains (losses) on marketable securities (703) 20
(2,968) (4,075)
=========== ============
The accompanying notes are an integral part of the financial statements.
F-5
|
ICTS INTERNATIONAL N.V.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US $ in thousands)
Year ended December 31,
-----------------------------------------
1998 1997 1996
---------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income for the year..............................................$ 882 $ 4,046 $ 6,764
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................ 938 680 423
Deferred income taxes................................................ (628) 1,207 (115)
Increase in accrued severance pay.................................... 1 177 138
Loss (gain) on sale of equipment .................................... 3 2 (6)
Gain on sale of investment in affiliate ........................... - (352) -
Realized loss (gain) on marketable securities and exchange rate
loss (gain) on loans .............................................. 118 (1,339) (4,661)
Write off of loans 410 - -
Imputed interest income.............................................. (8) (16) (62)
Equity in results of affiliates...................................... (214) (121) (188)
Changes in assets and liabilities:
Accounts receivable..................................................(1,513) (1,076) (2,473)
Other current assets................................................ 195 (305) (399)
Long-term debt..................................................... - (178)
Accounts payable..................................................... (94) (224) 667
Accrued expenses and other liabilities.............................. 461 639 1,273
---------- ------------ -------------
Net cash provided by operating activities............................ 551 3,318 1,183
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of time deposits and marketable securities..................(5,300) (7,025) (8,874)
Purchase of short-term investments.................................. - - (16,605)
Proceeds from sale of short-term investments........................ 3,233 12,906 21,614
Other investments....................................................(6,945) (3,491) -
Purchase of equipment................................................ (511) (682) (552)
Short-term loans......... ........................................... (600) (1,036) -
Collection on short-term loans............ .......................... 1,436 332 -
Acquisitions net of cash acquired (*)................................ (38) (4,214) -
Proceeds from sale of investment in affiliates...................... - 89 -
Investments in affiliates............................................ (205) (1,769) 13
Collection on long-term receivable................................... - 217 219
Proceeds from sales of equipment..................................... 54 39 34
Decrease (increase) in other assets.................................. (45) 51 (131)
---------- ------------- -------------
Net cash used in investing activities............................... (8,921) (4,583) (4,282)
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of shares................................................... - - 18,780
Stock option exercise................................................ - 28 -
Repurchases of common shares......................................... (1,222) - -
Proceeds from long-term borrowings................................... 5,056 188 204
Payments on long-term borrowings..................................... (289) (592) (141)
Increase (decrease) in net borrowings under short-term bank facilitie 1,543 1,397 (798)
---------- ------------- -------------
Net cash provided by financing activities........................... 5,088 1,021 18,045
EFFECT OF FOREIGN CURRENCY EXCHANGE RATES ON CASH
AND CASH EQUIVALENTS................................................. 856 (2,423) (479)
---------- ------------- -------------
Increase (decrease) in cash and cash equivalents..................... (2,426) (2,667) 14,467
Balance of cash and cash equivalents at beginning of year 13,699 16,366 1,899
---------- ------------- -------------
Balance of cash and cash equivalents at end of year..................$11,273 $ 13,699 $ 16,366
========== ============= =============
Supplemental disclosures of cash flow activities: Cash paid during the year for:
Interest.............................................................$ 346 $ 227 $ 188
Taxes on income......................................................$ 1,235 $ 1,119 $ 290
========== ============= =============
Supplemental disclosures of non-cash investing and financing activities:
Deferred income taxes due to offering costs, credited to additional paid $ - $ - $ 1,908
in capital ========== ============= ============
Non-cash offering costs.............................................. $ - $ - $ 556
Non-cash costs of short-term investments............................. ..$ - $ - $ 357
Conversion of current liabilities to long-term debt.....................$ - $ 780 $ -
========== ============= =============
Selling of an investment in affiliate for US dollar loan ............ $ 565 $ - $ -
========== ============= =============
(*) Acquisitions, net of cash acquired (divestitures, net of cash sold) (Note 5)
Assets and liabilities of the subsidiaries at date of acquisition (sale):
Working capital, excluding cash and cash equivalents.................$ (129) $ (1,781)
Property, equipment and investments................................. (22) 889
Other investments.................................................... - 133
Other assets......................................................... - 89
Long-term liabilities................................................ - (816)
Accrued severance pay................................................ - (150)
----------
(151) (1,636)
Liability assumed.................................................... - (330)
Decrease in long-term receivable..................................... - (691)
Increase in other investments 189 -
Excess of cost over fair value upon acquisition...................... - 6,871
Cash sold and cash paid for acquisitions, net of cash acquired.......$ 38 $ 4,214
========== =============
The accompanying notes are an integral part of the financial statements.
F-6
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS
(US $ in thousands)
NOTE 1 - GENERAL
a. Operations
ICTS INTERNATIONAL N.V. ("ICTS"), its subsidiaries and affiliates (all
referred to herein as "the Company") is a leading provider of enhanced aviation
security services. The Company primarily serves the Western European operations
of the major US carriers. The Company's principal service is the implementation
of passenger risk evaluation and classification procedures, generally described
as "Advanced passengers screening." The Company is also engaged in security
consulting, training and auditing for airlines and airports and in the provision
of other security services.
The Company's predecessor, International Consultants on Targeted Security
HOLLAND B.V. ("ICTS HOLLAND"), was founded in the Netherlands in 1987. Until
1994, subsidiaries and affiliates of ICTS HOLLAND (20% of which is owned
indirectly by each of Mr. Ezra Harel and Mr. Lior Zouker) conducted the business
in which the Company is currently engaged. In connection with the acquisition of
the Company by Leedan Business Enterprise Ltd. ("Leedan"), as of January 1,
1994, ICTS HOLLAND's interest in its subsidiaries and affiliates (other than
three insignificant subsidiaries) was transferred to ICTS International B.V.
("ICTS International"), which became an indirect wholly-owned subsidiary of
Leedan. As of January 1, 1996, ICTS acquired all of the assets and assumed all
of the liabilities of ICTS International in exchange for shares of common stock
which would result in its owning 4,000,000 shares of common stock. As discussed
in Note 1b below, the January 1, 1996 exchange was treated similar to a
recapitalization.
b. Basis of Presentation
The cost of the acquisition at January 1, 1994 of $2,494, which was paid by
Leedan to ICTS HOLLAND, has been "pushed down" to the financial statements.
Since the recapitalization of January 1, 1996 was among companies under
common control, the assets, liabilities and operating results have been
presented in the accompanying consolidated financial statements at ICTS'
carrying value, as if the recapitalization had occurred as of the date ICTS
acquired the operations (January 1, 1994) as described above.
C. Definitions
1. Subsidiaries are companies which are controlled by ICTS through
majority voting ownership.
2.Affiliates are companies which are not subsidiaries, in which ICTS has
voting rights giving significant influence over the operating and
financial policies of these companies. Investments in affiliates are
accounted for by the equity method.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
The significant accounting policies, applied on a consistent basis, are as
follows:
a. Financial statements in US dollars
The accompanying financial statements have been prepared in US dollars
("dollar" or "$"). 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 US dollars in accordance with the
principles set forth in Statement of Financial Accounting Standards ("SFAS") No.
52. Assets and liabilities of the Company are translated from their respective
currencies to U.S dollars at year-end exchange rates. Income and expense items
are translated at average exchange rates during the year.
F-7
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
a. Financial statements in US dollars (continued)
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 "cumulative other
comprehensive loss". Thus, any significant fluctuation in the currency exchange
rates between the Western European currencies and the US dollar will affect the
Company as follows: balances which are denominated in US 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, 1998 and 1997, most of the Company's current assets are kept in US
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
common shares in the foreseeable future, in the event that such a cash dividend
is declared, ICTS intends to pay it in US dollars, which is the Company's
reporting currency.
b. Derivatives
ICTS enters 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.
c. Revenue recognition
Revenue is recognized upon rendering of service.
d. Cash equivalents
The Company considers all highly liquid investments, which include
short-term bank deposits (up to three months from date of deposit) that are not
restricted as to withdrawal or use, 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
e. Marketable securities
1. Marketable securities
Marketable securities and other investments, 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 a 20% - owned privately-held companies, are
stated at cost.
f. Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful life of the assets. The
estimated useful life used in determining depreciation is as follows:
Years
Equipment and facilities..................................... 4 - 10
Vehicles..................................................... 4 - 5
Rented property.............................................. 23
Office furniture and equipment................................ 5 - 10
F-8
|
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 acquired businesses 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. Management reviews the
valuation and amortization of goodwill, on an ongoing basis, to determine
possible impairment, by comparing the carrying value to the non-discounted cash
flows of the related assets. Should the company determine that goodwill is
impaired, it will adjust the goodwill to reflect the fair value at that time.
h. 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.
2. As discussed more thoroughly in Note 5, in July 1997 the Company increased
its ownership in its German affiliate to 100%. As a result, commencing July 1,
1997, the Company has consolidated the accounts of the German company. Until
that date, the results of the German affiliate were included on the equity
method.
i. Investments in affiliates
Investments in affiliates are accounted for by the equity method.
j. Earnings per share
Earnings per share (EPS) are presented according to SFAS No. 128. Earnings
per common share (basic EPS) are computed based on the weighted average shares
outstanding during each year and giving retroactive effect for the 4,000,000
shares and the recapitalization of the Company described in Note 1, net of
treasury stock. Earnings per common share (diluted EPS), are computed by taking
into account the dilutive effect of the stock options described in Note 21.
k. Income taxes
Income taxes are created in accordance with SFAS No. 109, "Accounting for
Income Taxes" which requires recognition of deferred income taxes under the
asset and liability method. Deferred tax assets and liabilities are recognized
for the estimated future tax effects attributable to temporary differences
between income tax bases of assets and liabilities and their reported amounts in
the financial statements, and to tax loss carryforwards. Measurement of deferred
tax liabilities and assets is based on provisions of the enacted tax laws, and
deferred tax assets are reduced, if necessary, by the amount of tax benefits the
realization of which is not considered likely, based on available evidence.
Deferred tax liabilities and assets are classified as current or
non-current, based on the classification of the related asset or liability for
financial reporting, or according to the expected reversal date of the specific
temporary differences, if not related to an asset or liability for financial
reporting.
l. Fair value of financial instruments
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 short-term
loans and 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, by reference to stated
interest rates, the fair value of the assets would not differ significantly from
carrying value.
F-9
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (continued)
l. Fair value of financial instruments (continued)
The Company guarantees debts of third parties (Notes 7 and 14). Due to the
absence of any market for these financial instruments, the Company does not
believe it is practicable to estimate their fair value.
m. Treasury stock
Common shares repurchased by ICTS are presented as a reduction of
"shareholder's equity", at their cost to ICTS, under "treasury stock".
n. Comprehensive income
In 1998, the Company adopted SFAS No. 130 "Reporting Comprehensive Income",
which was issued in June 1997. SFAS 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.
NOTE 3 - TIME DEPOSITS AND MARKETABLE SECURITIES
Time deposits and marketable securities are comprised of the following:
December 31,
----------------------------------
1998 1997
--------------- --------------
Time deposits, US dollar-denominated....................................................$ 4,674 $ 2,218
Governmental bonds, held to maturity.................................................... 39 181
Marketable securities................................................................... 587 902
--------------- --------------
$ 5,300 $ 3,301
=============== ==============
As of December 31, 1998 time deposits of $74 and governmental bonds of $39 are
pledged as collateral for the Company's obligations to a lessor; in addition,
time deposits of $4,600 and marketable securities of $580 are pledged as
collateral for short-term loans and third party bank guarantees.
NOTE 4 - SHORT-TERM LOANS AND CURRENT MATURITIES
Comprised of the following:
Interest rate as of
December 31, December 31,
-----------------------------------
1998 1998 1997
---------------- -------------
US dollar denominated short-term loans
A.M.S. Advanced Maintenance Systems Ltd. ("A.M.S";
Note 7) 7% $ 103 -
Related company 100 -
Non-negotiable promissory notes - - 1,043
203 1,043
Current maturities of long-term loans and receivable 877 -
$ 1,080 $ 1,043
================ =============
F-10
|
NOTE 5 - TRANSACTIONS REGARDING CERTAIN SUBSIDIARIES
a. In November 1994, ICTS sold 55% of ICTS Consultants on Targeted
Security GmbH (ICTS GmbH) for $1,277. During 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 Company's consolidated financial
statements since July 1, 1997.
b. On January 15, 1997, the Company, through its US wholly-owned
subsidiary, acquired 82.5% of the outstanding shares of Service
Service, Inc. ("SSI"), an Illinois corporation, for $543. The purchase
price exceeded the fair value of 82.5% of the net assets of SSI by
approximately $450, which was allocated to goodwill.
c. As of January 1998, ICTS sold 100% of Trainsoft Ltd., an Israeli subsidiary, to A.M.S. for $189.
d. As to an acquisition of a subsidiary in January 1999 - see Note 23.
NOTE 6 - INVESTMENTS IN AFFILIATES
Investments are comprised of the following: December 31,
--------------------------------
1998 1997
------------- --------------
Investment in 49% of Procheck International B.V. (PI) (1997 - 46.6%), including
unamortized
goodwill of $206 and $151 for December 31, 1998 and 1997, $ 339 $ 268
respectively...................................................................
Investment in 37% of Demco Consultants Ltd., including unamortized goodwill
of $771 (a)................................................................ - 1,162
Investment in 33% of a joint venture (b)....................................... 817 570
$ 1,156 $ 2,000
============= ==============
(a.) 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. As a result,
commencing January 1, 1998, the Company ceased to account for the investment in
the remaining 19% of Demco by the equity method, and this investment is stated
at cost and is included as other investments (Note 7).
(b) In 1997, the Company, together with its affiliate PI and A.M.S, have signed
an agreement to set up a joint venture in which each party has 33% interest. The
joint venture has not been established yet. Accordingly, such investment
represents amounts invested by the Company.
Equity in results of affiliates included in the consolidated statements of
operations, is comprised of the following:
----------------------------------------------
Year ended December 31,
----------------------------------------------
1998 1997 1996
-------------- ------------- -------------
Procheck International B.V. ........................................... $ 214 $ 96 $ 145
Demco Consultants Ltd. ................................................ - (20) -
ICTS Consultants on Targeted Security GmbH (Note 5) ...................... - 45 60
$ 214 $ 121 $ 205
============== ============= =============
Equity in results of affiliates is shown net of amortization of goodwill.
Set forth below is summarized financial data of Procheck International B.V. and
ICTS Consultants on Targeted Security GmbH:
December 31,
-------------------------------
Procheck International B.V. 1998 1997
----------------------------
-------------- -------------
Balance Sheet Data:
Current assets.......................................................... $ 889 $ 772
Non-current assets...................................................... 118 88
Current liabilities..................................................... 738 608
Shareholders' equity............................................. 270 252
F-11
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 6 - INVESTMENTS IN AFFILIATES (continued)
Year ended December 31,
----------------------------------------------
1998 1997 1996
-------------- ------------- -------------
Operating Data:
Revenues................................................................ $ 1,910 1,438 $ 1,768
Gross profit............................................................ 710 345 477
Net income.............................................................. 471 227 319
Year ended December 31,
-------------------------------
ICTS Consultants on Targeted Security GmbH 1997 1996
Operating Data: (*)
Revenues................................................................ $ 12,850 $14,200
Gross profit............................................................ 2,257 2,057
Net income.............................................................. 373 256
(*) As mentioned in Note 5, in July 1997, the Company increased its interest in
ICTS GmbH to 100%. Revenues, gross profit and net income from January 1, 1997
through June 30, 1997 amounted to $6,396, $1,125 and $175, respectively.
NOTE 7 - OTHER INVESTMENTS
Other investments are comprised of the following:
December 31,
U.S. dollar-denominated loans: 1998 1997
--------------
John Bryce (a)
Bearing 7.5% interest.............................................. $ 3,302 $ 2,734
Bearing 6.0% interest.............................................. 191
Bonds.............................................................. 547 547
--------------
4,040 3,281
Related company (b) 465 -
4,505 3,281
Less-current maturities (869) -
Total U.S. dollar-denominated loans (*) 3,636 3,281
Cash held for acquisition of 80% of Huntleigh Corporation and acquisition
costs (Note 23)................................................ 5,434 -
Investment in 5.4% of Pioneer Commercial Funding Corp. (c)......... 189 -
Investment in 19% of Demco Consultants Ltd. ................................ 639 -
Investment in 9.3% of Bilu Investments Ltd. (1997 - 6.0%) (d)....... 302 187
Severance Pay fund.......................................................... 76 153
$ 10,276 $ 3,621
============== =============
(*) The loans and bonds mature in the following years
after December 31, 1999:
2000...................................................................... $ 829
2001...................................................................... 2,172
2002...................................................................... 46
2003 ..................................................................... 54
2004 and thereafter ...................................................... 535
$ 3,636
==============
F-12
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 7 - OTHER INVESTMENTS (continued)
(a) In 1997 and 1998, ICTS lent $2,915 to A.M.S. Advanced Maintenance Systems
Ltd. and John Bryce Systems Ltd., 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 for an exercise price of $2,915. Furthermore, under the terms of the
bond purchase agreement, the previous holders of such bond have "put" options
which may, under certain conditions, require ICTS to purchase their respective
equity interests in John Bryce, representing 24% of the equity of John Bryce,
for up to $850. ICTS also has a "call" option to purchase such interests for up
to $1,015. Since the shareholder was under liquidation and receivership, the
above- mentioned agreements were granted court approval. Regarding legal
proceedings in connection with ICTS' option, see Note 14.
The loans and the bond are collateralized by a second priority floating lien on
John Bryce's assets. Through December 31, 1998, ICTS was entitled to minority
representation on the Board of Directors of John Bryce. Commencing January 1999,
for as long as the loans to John Bryce are outstanding or the above option of
ICTS is in effect and unexercised, ICTS has the right to appoint the majority of
the Board of Directors of John Bryce.
Costs of $281 related to the agreements, have been reported as part of the loan
and bond balances. Interest of $159 was incurred during 1998.
The $191 loan is the result of the sale of Trainsoft Ltd. (Note 5).
The $465 loan to related company is the result of the sale of Demco. (Note 6).
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. 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 occured since their acquisition is temporary. The shares are restricted
under Rule 144 of the Security and Exchange Commission.
Bilu is a privately held company based in Israel. ICTS acquired the shares 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 Investments Ltd. ("Bilu") for $95. In addition
to the above-mentioned investments, ICTS has guaranteed $2,905 of Bilu's
obligations, out of this amount $ 1,800 was given on behalf of Leedan's and
Rogosin's share.
NOTE 8 - PROPERTY AND EQUIPMENT
a. Property and equipment are summarized as follows:
December 31,
----------------------------------
1998 1997
--------------- --------------
Cost
Equipment and facilities................................................................$ 1,017 $ 908
Vehicles................................................................................ 340 299
Rented property......................................................................... 938 942
Office furniture and equipment.......................................................... 1,476 1,137
--------------- --------------
3,771 3,286
Less - accumulated depreciation......................................................... (1,817) (1,386)
$ 1,954 $ 1,900
=============== ==============
b. Depreciation expense totalled $ 466, $ 386 and $ 225 in 1998, 1997 and 1996,
respectively.
F-13
|
c. A portion of the Company's equipment is pledged as collateral to secure bank
loans. The rented property is rented to third parties pursuant to long-term and
short-term leases. The rented property collateralizes three mortgages,
denominated in DM, the balance of which is US $827 at December 31, 1998.
NOTE 9 - LONG-TERM RECEIVABLE
December 31,
----------------------------------
1998 1997
--------------- --------------
A restructured trade receivable, denominated in French francs:
Receivable before discount..........................................................$ 241 $ 225
Less discount....................................................................... (58) (62)
--------------- --------------
Receivable, net of discount......................................................... 183 163
Less current maturities............................................................. (7) -
$ 176 $ 163
=============== ==============
The receivable is non-interest bearing; accordingly, interest has been imputed
at a 5% discount rate. The receivable as of December 31, 1998 mature in the year
2003 and thereafter.
NOTE 10 - SHORT-TERM BANK DEBT
Short-term bank debt classified by currency and interest rates is summarized as
follows:
Interest rate as of
December 31, December 31,
-----------------------------------
1998 1998 1997
------------------- ---------------- -------------
ICTS
US dollars (US$)............................................ 6.2%-7.5% $ 3,361 $ 1,925
Other....................................................... - 113 -
Subsidiaries
British pounds (GBP)........................................ 9.0% 92 -
US dollars (US$)........................................... - 60
Other....................................................... - 97 2
$ 3,663 $ 1,987
================ =============
Pursuant the agreement with the bank, ICTS has undertaken not to transfer or
charge 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 11 - ACCRUED EXPENSES AND OTHER LIABILITIES Accrued expenses and other
liabilities are summarized as follows:
December 31,
----------------------------------
1998 1997
--------------- --------------
Payroll and related liabilities................................................ $ 6,866 $ 5,600
Taxes to government institutions, including taxes currently payable............ 1,908 2,462
Related parties................................................................ 219 161
Accrued expenses and other..................................................... 811 729
$ 9,804 $ 8,952
=============== ==============
F-14
|
NOTE 12 - LONG-TERM DEBT Long-term debt is summarized as follows:
December 31,
----------------------------------
1998 1997
--------------- --------------
Banks and financial institutions.............................................. $ 5,930 $ 928
Others........................................................................ 806 956
--------------
6,736 1,884
Less-current maturities...................................................... (562) (277)
$ 6,174 $ 1,607
=============== ==============
Long-term debt classified by currency and interest rates is as follows:
Interest rate
as of
December 31, December 31,
------------------------------------
1998 1998 1997
------------------- --------------- ---------------
ICTS
US dollars (US$)............................................... 6.25%* $ 5,000 $ -
Subsidiaries
US dollars (US$)............................................... 7.0% 310 355
Italian lire (LIT) 7.0% 433 518
German marks (DEM)............................................. 5.2% 827 789
British pounds (GBP)........................................... 10.06% - 11% 126 188
Other.......................................................... 40 34
6,736 1,884
Less-current maturities......................................... (562) (277)
$ 6,174 $ 1,607
=============== ===============
*The interest is determined on basis of LIBOR with the addition of a margin of 1%.
The long-term debt matures in following years after December 31, 1999:
2000............................................................. $ 1,342
2001............................................................. 1,347
2002............................................................. 1,230
2003............................................................ 1,513
2004 and thereafter............................................. 742
$ 6,174
===============
The $5,000 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.
F-15
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 13 - 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 14 - COMMITMENTS AND CONTINGENT LIABILITIES
a. The Company leases premises under long-term leases, in most cases with
renewal options. Rental expense for the years ended December 31, 1998,
1997 and 1996 was $1,300, $1,164, and $806, respectively.
Future minimum lease payments under long-term leases, as of December 31,
1998, are as follows:
1999.................................................................$931
2000..................................................................554
2001..................................................................418
2002..................................................................286
2003..................................................................185
$ 2,374
==========
b. Restrictions on operations: The Company is restricted in its operations by
the terms of an agreement with an affiliate. Pursuant to the agreement, the
Company may not provide security services in The Netherlands, other than through
the affiliate. 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 majority owned by Leedan. The
Company is also restricted by the terms of a joint venture agreement which
prohibits the Company from providing security services in Southeast Asia.
c. Effective January 1, 1998, the Company 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.
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 also 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, the Company guaranteed various debt obligations of a third party
arising from its trading in commodities in Eastern Europe. The Company's fees
for these guarantees were contingent upon the results of the trading. On
December 28, 1997, a new agreement was signed between the parties, which
replaced the contingent fees with a 2.5% annual fee. On December 31, 1997, the
guarantees totaled $3,236, which was to be reduced by $100 each month, starting
January 31, 1998, and to be released in full by December 27, 1998. In 1998, the
guarantee was reduced by $1,000 and the Company guaranteed additional $55. The
third party called one of two options it had, to extend the guarantees until
December 27, 1999. On December 31, 1998 the guarantees totaled $2,291. The third
party has a successive option to call for the then outstanding guarantees to be
extended until June 30, 2000.
F-16
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 14 - CONTINGENT LIABILITIES AND COMMITMENTS (continued)
f. ICTS guaranteed $200 in debt obligations of John Bryce.
g. 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.
As mentioned in Note 7, ICTS guaranteed $2,905 in debt obligations of Bilu
Investments Ltd.
i. In 1998, the liquidator of one of John Bryce's shareholders and others
commenced a transaction that, upon completing, might nullify ICTS' option
to purchase its interest in John Bryce (Note 7). 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 said proceedings, ICTS provided a
bank guarantee of NIS 1,020 (approximately $250), to cover possible
damages, if any, to the defendants.
NOTE 15 - OTHER INCOME (EXPENSE)
Other income (expense) is comprised of the following:
Year ended December 31,
1998 1997 1996
----------------- ----------------- -----------------
Realized gain from sale of short-term investment (a)............$ - $ - $ 4,652
Realized gain from sale of investment in affiliate (b) - 352 -
Write off of loans (c) ......................................... (410) - -
Other expenses.................................................. (293) (126) (105)
$ (703) $ 226 $ 4,547
================= ================= =================
a. I November 1996 ICTS sold its 20% interest in Maman. Cargo Terminal &
Handling Ltd. ("Maman"), a publicly held Israeli company, purchased during
October and November 1996. ICTS has committed to refrain from purchasing any
shares in Maman for a period of 5 years.
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.
c. In 1998, ICTS made four loans, amounting to $411 to its former subsidiary
Trainsoft Ltd. ("Trainsoft") (Note 5). The loans were denominated in US
dollars, and bore 6% annual interest. Each of the loans was to be repaid
after twelve months. The Company's management decided to write off these
loans due to Trainsoft's financial position and the absence of any
collateral.
F-17
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 16- INCOME TAXES
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.
a. The components of the provision for income taxes are as follows:
Year ended December 31,
----------------------------------------------------------
1998 1997 1996
------------------- ---------------- ---------------
Current taxes...................................................$ 1,465 $ 1,150 $ 564
Deferred taxes.................................................. (628) 1,207 (115)
$ 837 $ 2,357 $ 449
=================== ================ ===============
b. The components of deferred tax assets are as follows:
December 31,
----------------------------------
1998 1997
--------------- --------------
Carry forward losses .................................................................. $ 1,214 $ 87
Public offering costs (*).............................................................. - 431
Severance pay.......................................................................... 200 208
Other.................................................................................. 139 113
--------------- --------------
1,553 839
Valuation allowance.................................................................... - (27)
--------------- --------------
$ 1,553 $ 812
=============== ==============
Presented in the balance sheets as follows:
Among other current assets............................................................. $ 186 $ 155
As a non-current asset ................................................................ 1,367 657
$ 1,553 $ 812
=============== ==============
(*) The public offering costs are tax deductible. The deferred taxes were
credited to additional paid-in capital.
Income (loss) before taxes on income is composed as follows:
Year ended December 31,
---------------------------------------------------------
1998 1997 1996
------------------ ---------------- ---------------
The Company and subsidiary in Holland $ (1,436) $ 4,035 $ 5,313
Subsidiaries outside of Holland 2,941 2,247 1,695
$ 1,505 $ 6,282 $ 7,008
================== ================ ===============
d. Taxes on income included in the income statements:
Year ended December 31,
---------------------------------------------------------
1998 1997 1996
------------------ ---------------- ---------------
Current:
In The Netherlands $ 28 $ 5 $ (25)
Out of The Netherlands 1,437 1,145 589
1,465 1,150 564
Deferred:
In The Netherlands (612) 1,173 65
Out The Netherlands (16) 34 (180)
(628) 1,207 (115)
$ 837 $ 2,357 $ 449
================== ================ ===============
F-18
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 16- INCOME TAXES (continued)
e. The Company's effective income tax rate differs from The Netherlands
statutory rate of 35% due to the following:
Year ended December 31,
---------------------------------------------------------
1998 1997 1996
------------------ ---------------- ---------------
Income before taxes and equity in results of affiliates........ $ 1,505 $ 6,282 $ 7,008
================== ================ ===============
Statutory tax rate............................................. 35% 35% 35%
================== ================ ===============
Expected tax at statutory rate................................. 527 2,199 2,453
Reconciliation for earnings taxed at different rates............ 206 231 56
Expenses not deductible for tax purposes, principally
goodwill................................... 205 182 154
Non-taxable income (1996 - principally capital gain) (115) (231) (1,805)
Reversal of valuation allowance................................. (27) - (347)
Other........................................................... 41 (24) (62)
Income taxes.....................................................$ 837 $ 2,357 $ 449
================== ================ ===============
NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
The Company operates in Europe, the United State of America and other countries,
giving rise to exposure to market risks from changes in foreign exchange rates.
The Company utilizes derivative financial instruments to reduce those risks, nor
it hold or issue financial instruments for trading purposes.
At December 31, 1998, the company had outstanding currency options for the
purchase of $ 5 million for German marks and for the selling of $1 million for
German Marks, and forward exchange contracts for the purchase of 14.9 million
German marks for US Dollars.
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, 1998 and 1997, accounts receivable from three customers amounted
to 32% and 38%, respectively. For the years ended December 31, 1998, 1997 and
1996, sales to major customers (constituting 10% or more of the Company's
consolidated revenues) amounted to 44%, 41% and 40% of revenues, respectively,
as set forth below:
Year ended December 31,
-------------------------------------------------
1998 1997 1996
-------------- ------------ --------------
(% of consolidated revenues)
Customer A................................................ 17% 18% 18%
Customer B................................................ 16% 14% 15%
Customer C................................................ 11% 9% 7%
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 loans (Note 4), long-term loans (Note 7) and long-term receivables
(Note 9). 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 7 and 14. Regarding these guarantees, the Company does not
believe exposure to loss is likely.
F-19
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 17 - FINANCIAL INSTRUMENTS AND RISK MANAGEMENT (continued) 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.
NOTE 18 - SEGMENT INFORMATION
The Company adopted in 1998 FAS131, "Disclosures about Segments of an Enterprise
and Related Information", which was issued in June 1997 by the FASB. 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 location of customers:
Year ended December 31,
-------------------------------------------
1998 1997 1996
------------ ------------ -------------
Germany $ 12,839 $ 6,630 $ -
France 14,018 12,744 12,845
United Kingdom 17,757 16,087 11,060
Italy 5,218 4,751 3,611
Other 14,298 13,586 11,427
Total $ 64,130 $ 53,798 $ 38,943
============ ============ =============
2) Most of the Company's long-lived assets are located in Germany.
b. As to the Company's major customers, see Note 17.
NOTE 19 - RELATED PARTY TRANSACTIONS
a. Revenues received and expenses incurred from related parties are as follows:
Year ended December 31,
------------------------------------------------
1998 1997 1996
--------------- -------------- ------------
Revenues........................................................... $ 61 $ 223 $ 336
Cost of revenues................................................... $ 13 $ 38 $ 49
Selling, general and administrative expenses....................... $ 68 $ 517 $ 418
=============== ============== ============
Expenses due to investment in Maman (Note 14)...................... $ - $ - $ 731
=============== ============== ============
Interest expense................................................... $ - $ 136 $ 50
Interest income.................................................... $ - $ (96) $ -
Offering expenses.................................................. $ - $ - $ 52
=============== ============== ============
F-20
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 19 - RELATED PARTY TRANSACTIONS (continued)
b. Balances with related parties are as follows:
December 31,
---------------------------------
1998 1997
--------------- --------------
Accounts receivable.................................................. $ 215 $ 227
Short term loans .................................................... $ 100 $ -
Other investments.................................................... $ 465 $ -
Accrued expenses and other liabilities............................... $ 219 $ 161
=============== ==============
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's supervisory board. In 1997, the Company paid $591 to
Leedan and its affiliate for such services.
d. In 1996, the Company, 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 above-mentioned company.
e. Under an option agreement entered into concurrently with the purchase of the
Company by Leedan in 1994, two related parties, each of whom own 20% of ICTS
HOLLAND (Mr. Ezra Harel and Mr. Lior Zouker) were each granted options to
purchase 20% of the shares of the Company owned by Leedan for the price paid
by Leedan for the Company plus 8% interest from January 1, 1994.
Subsequently, Mr. Ezra Harel transferred half of his option to an unrelated
third party. Immediately prior to the consummation of the initial public
offering, those options were exercised.
f. 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 5).
g. Regarding options granted by ICTS to Mr. Lior Zouker, the Chief Executive
Officer, see Note 21.
h. Regarding interest income on loan to ICTS (Asia Pacific) Ltd., see Note 15
(b).
Regarding acquisitions of investments from Leedan and its affiliate see Note 7c
and 7d.
j. 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 (Note 23).
k. As mentioned in note 7, commencing January 1999, ICTS have the right to
appoint majority of the Board of Directors of John Bryce. See Notes 3, 5, 6,
7 and 14 as to transactions with John Bryce.
l. Regarding guarantees given in the benefit of related parties - see Note 7
(d).
F-21
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands, except share and per share data)
NOTE 20 - EARNINGS PER SHARE
The following table shows the computation of basic and diluted earnings per
share:
Year ended December 31,
-----------------------------------------------
1998 1997 1996
-------------- ------------- -------------
BASIC EARNINGS PER SHARE COMPUTATION
Net income.................................................. $ 882 $ 4,046 $ 6,764
Weighted average common shares outstanding ................. 6,497,688 6,565,747 4,994,167
Basic earnings per share.................................... $ 0.14 $ 0.62 $ 1.35
============== ============= =============
DILUTED EARNINGS PER SHARE COMPUTATION
Net income................................................. $ 882 $ 4,046 $ 6,764
============== ============= =============
Weighted average common shares outstanding ................ 6,497,688 6,565,747 4,994,167
Incremental common shares from stock options - calculated
under the treasury method......... 19,652 115,493 104,755
----------- ----------- -------------
Adjusted weighted - average common shares 6,517,340 6,681,240 5,098,922
Diluted earnings per share.................................. $ 0.14 $ 0.61 $ 1.33
============== ============= =============
Options, granted under Share Option Plan (Note 21), to purchase 256,500 shares
of common stock at exercise price between $7.5 to $10.75 per share were
outstanding during 1998. Options to purchase 42,000 shares of common stock at
$10.75 per share were outstanding during 1997 and 1996. The options were not
included in the computation of diluted earnings per share due to the fact that
the options' exercise price was greater than the average market price of the
common shares. The options, which expire on different dates, but in no event
later than July 2002, were still outstanding at December 31, 1998.
NOTE 21 - STOCK OPTIONS
Pursuant to a Share Option Plan of 600,000 options, since 1995 the Company
granted 599,700 options to purchase common shares to certain employees, members
of the supervisory board and a consultant.
In addition, in 1995 the Company granted 108,000 options to purchase common
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 $7.00 per share, and expire in
September 1999.
During 1995, the Company granted, to certain employees and a consultant, 343,200
options to purchase common shares at $6.50 per share which was the fair market
value of the common shares underlying such option grants at the time of grant.
Those options vest over a period ending April 1999 at the latest, and expire on
different dates, but in no event later than July 2000. In 1997, 4,480 options
were exercised and as of December 31, 1998, 335,720 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
common shares at $10.75 per share, which was the fair market value of the Common
Shares underlying such option grants at the time of grant. Those options were
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 common
shares at exercise price between $7.5 to $9.25 per share, which were the fair
market values of the common shares underlying such option grants at the time of
each grant. The options expire on different dates, but in no event later than
December 2002. As of December 31, 1998, 59,750 options were exercisable.
F-22
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands except per share data)
NOTE 21 - STOCK OPTIONS (continued)
In November 1997, the Company granted 120,000 options to Mr. Zouker, its Chief
Executive Officer, to purchase common shares at $8 per share, which was more
than the fair market value of the common shares underlying such option grants at
the time of grant. Those options were vested in November 1997 and expire in
December 2002. 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 option awarded in 1997, 1996 and 1995, consistent with the provision of
SFAS No. 123, the Company's net income for 1998, 1997 and 1996 would have been
decreased by approximately $96, $635 and $162, respectively. The Company's basic
earnings per common share and the earnings per common share - assuming dilution,
for 1998, 1997 and 1996, would have been decreased by $0.01, $0.09 and $0.03 per
share, respectively.
The weighted average fair values on the dates of grant for options granted
during 1997 and 1996, were $3.80 and $1.95 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 1998, 1997 and 1996 is as follows:
1998 1997 1996
---------------------------- ------------------------------- ----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(Shares in thousands) Shares Price Shares Price Shares Price
---------- --------------- ------------ --------------- ---------- ----------
Options outstanding at
beginning of year......... 496 7.58 285 7.12 243 6.50
Options granted............. - - 215 8.16 42 10.75
Options exercised.......... - - (4) (6.50)
---------- --------------- ------------ --------------- ---------- ---------
Options outstanding at
end of year................496 7.58 496 7.58 285 7.12
========== =============== ============ =============== ========== ========
Options exercisable at
end of year................457 7.50 384 7.55 151 7.68
========== =============== ============ =============== ========== ==========
F-23
|
ICTS INTERNATIONAL N.V.
NOTES TO FINANCIAL STATEMENTS (continued)
(US $ in thousands)
NOTE 22 - NEW ACCOUNTING STANDARDS NOT YET ADOPTED
On June 15, 1998, the FASB issued Statement of Financial Accounting Standards
No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS
133"). FAS No. 133 establishes a new model for accounting for derivatives and
hedging activities. SFAS No. 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. SFAS No.133 is effective for calendar-year companies as from January
1, 2000, but earlier application is permitted. The company believes that the
impact of adopting SFAS No. 133 will not have a material effect on the Company.
NOTE 23- SUBSEQUENT EVENT
On January 6, 1999, the Company acquired 80% of the outstanding shares of
Huntleigh Corporation ("Huntleigh"), based in St. Louis, Missouri, for $5,900.
Both, the Company and the seller, have options to acquire and sell,
respectively, the remaining 20% at an agreed upon price formula.
F-24
|
1. 1. Report of independent auditors
To the Shareholders of Procheck International B.V.
Introduction
We have audited the accompanying balance sheets of Procheck
International B.V. as of December 31, 1998 and 1997 and the
related statements of operations, shareholders' equity and cash
flows for each of the years ended December 31, 1998, 1997 and
1996 as included in this report. 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.
Scope
We conducted our audits in accordance with auditing standards
generally accepted in the United States. Those standards require
that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
Opinion
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of the company as of December 31, 1998 and 1997 and the results
of its operations and its cash flows for the years ended
December 31, 1998, 1997 and 1996, in conformity with accounting
principles generally accepted in the United States.
March 15, 1999
PricewaterhouseCoopers N.V.
Rotterdam, The Netherlands
F-25
|
Procheck International B.V.
2. 1. Balance sheet as at December 31, 1998
December 31, 1998 December 31, 1997
NLG NLG NLG NLG
Current assets
Cash and cash equivalents 708,957 1,1209,10
Trade debtors 475,408 331,076
Other receivables 492,297 106,728
Total current assets 1,676,662 1,558,714
Fixed assets 223,478 178,104
Total assets 1,900,140 1,736,818
Current liabilities
Accounts payable 38,647 16,900
ICTS International N.V., current account 715,494 777,332
Seceurop Beheer B.V., current account 209,601 259,187
Taxes and social securities 334,161 92,105
Other liabilities 93,417 82,474
Total current liabilities 1,391,320 1,227,998
Shareholders' equity
Issued capital 500,000 500,000
Share premium account 8,820 8,820
Retained earnings 250,000 0
758,820 508,820
Repurchased shares -250000 0
Total shareholders' equity 508,820 508,820
Total liabilities and shareholders' equity 1,900,140 1,736,818
The accompanying notes are an integral part of these statements.
F-26
|
2. 2. Statement of operations as at December 31, 1998
1998 1997 1996
NLG NLG NLG
Net sales 3,789,980 2,807,255 2,981,484
Operating expenses
Salaries and social securities 1,607,700 1,487,477 1,499,761
Depreciation fixed assets 61,886 63,971 15,893
Other operating expenses 711,119 582,028 661,822
Total operating expenses 2,380,705 2,133,476 2,177,476
Operating income 1,409,275 673,779 804,008
Interest income 28,058 16,552 17,069
Interest expense 0 -2,493 -1,191
Income before taxes 1,437,333 6,878,38 819,886
Income taxes 502,740 244,683 281,567
Net income 934,593 443,155 538,319
The accompanying notes are an integral part of these statements.
F-27
|
2. 3. Statement of shareholders' equity
Common Share Share Retained Re- Total
shares amount premium earnings purchased
shares
NLG NLG NLG NLG NLG
January 1, 1996 500 500,000 8,820 0 0 508,820
Net income 0 0 0 538,319 0 538,319
Dividends 0 0 0 -538,319 0 -538,319
December 31, 1996 500 500,000 8,820 0 0 508,820
Net income 0 0 0 443,155 0 443,155
Dividends 0 0 0 -443,155 0 -443,155
December 31, 1997 500 500,000 8,820 0 0 508,820
Net income 0 0 0 934,593 0 934,593
Dividends 0 0 0 -684,593 0 -684,593
Repurchased shares 0 0 0 0 -250,000 -250,000
December 31, 1998 500 500,000 8,820 250,000 -250,000 508,820
The accompanying notes are an integarl part of these statements.
F-28
|
2. 4. Statement of cash flows
December 31,
1998 1997 1996
NLG NLG NLG
Cash flows from operating activities
Operating income 1,409,275 673,779 804,008
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Depreciation 61,886 63,971 15,893
Trade debtors -144,332 -58,865 35,637
Other receivables -385,569 -90,306 21,941
Accounts payable 21,747 -64,337 59,279
Other liabilities 141,575 388,693 361,335
Interest income 28,058 14,059 15,878
Income taxes -502,740 -244,683 -281,567
Net cash provided by operating activities 629,900 682,311 1,032,404
Cash flows from investing activities
Purchase of equipment -107,260 -50,658 -181,509
Disposal of equipment 0 0 670
Net cash used in investing activities -107,260 -50,658 -180,839
Cash flows from financing activities
Dividends -684,593 -443,155 -538,319
Repurchased shares -250,000 0 0
Net cash used in financing activities -934,593 -443,155 -538,319
Change in cash and cash equivalents -411,953 188,498 313,246
Balance cash and cash equivalents beginning of year 1,120,910 932,412 619,166
Balance cash and cash equivalents end of year 708,957 1,120,910 932,412
The accompanying notes are an integral part of these statements.
F-29
|
Procheck International B.V.
2. 5. Notes to the financial statements
2.5.1. General
Operations
Procheck International B.V. is a provider of enhanced aviation
security services. The Company primarily serves the European
operations of the major U.S. carriers at Schiphol, the main
international airport in the Netherlands. The company's
principal service is the implementation of passengers risk
evaluation and classification procedures, generally described as
"profiling". The Company is also engaged in security consulting
for airlines and airports and in the provision of other security
services. The company operates in one segment.
Basis of presentation
The financial statements were prepared in accordance with
generally accepted accounting principles of the United States
and are presented in Dutch Guilders.
2.5.2. Significant accounting policies
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions in determining the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the
reported period. Actual results could differ from those
estimates.
2.5.3. Accounting policies
Cash and cash equivalents
Cash and cash equivalents consist of cash and liquid investment
instruments with an original maturity of three months or less.
Fixed assets These assets are valued at cost less depreciation, based on the
estimated useful life.
F-30
|
2.5.4. Determination of results
General
Result represents the difference between the realizable value of
the services rendered and the costs and other charges for the
year. The result on transactions are recognized in the year in
which they are realized. Losses are taken as soon as they are
foreseeable. The comprehensive income equals the net income.
Net sales
Net sales represents the amounts charged to third parties for
services rendered in the reporting year exclusive VAT.
Costs
Costs are allocated to the reporting year to which they relate.
Depreciation is provided by the straight-line method over the
estimated useful life.
Income taxes
Deferred tax assets and liabilities, if any, are recognized for
the estimated future tax effects attributable to temporary
differences between income tax bases of assets and liabilities
and their reported amounts in the financial statements, and to
tax loss carryforwards. Measurement of deferred tax liabilities
and assets is based on provisions of the enacted tax laws, and
deferred tax assets are reduced, if necessary, by the amount of
tax benefits the realization of which is not considered likely
based on available evidence. Deferred tax liabilities and assets
are classified as current or non-current based on the
classification of the related asset or liability for financial
reporting, or according to the expected reversal date of the
specific temporary differences, if not related to an asset or
liability for financial reporting.
F-31
|
2.6 Notes to the balance sheet
2.6.1 Other receivables
Amongst others, the other receivables comprise loans to D.
Zicher Holding B.V., totaling NLG 215,000. In 1998 a loan of NLG
200,000 has been issued to D. Zicher Holding. Interest charges
of this loan amount to 4 %. Besides that, a loan of NLG 15,000
has been issued to D. Zicher Holding in 1997. Interest charges
of this loan amount to 3 %. There are no further agreements with
regard to securities or redemption schemes.
2.6.2 Fixed assets
Fixed assets can be summarized as follows:
Office Computer Cars Total
equipment hard- and
software
NLG NLG NLG NLG
Book value at December 31, 1997 15,307 1,215,22 41,275 178,104
Additions 9,410 37,850 60,000 107,260
Depreciation -6,099 -33,737 -22,050 -61,886
Book value at December 31, 1998 18,618 125,635 79,225 223,478
Depreciation rates 20% 25% 30%
2.6.3 Issued capital
There has been no change in the issued capital. The authorized
capital amounts to NLG 2,500,000 divided in 1,250 shares A of
NLG 1,000 and 1,250 shares B of NLG 1,000; 500 shares have been
issued and fully paid up, divided in 245 shares A and 255 shares
B.
F-32
|
2.6.4 Retained earnings
Resulting from the profit appropriation, an amount of NLG
250,000 has been added to the retained earnings during 1998.
2.6.5 Repurchased shares
In 1998 it was decided by the Shareholders' Meeting to
repurchase 5% of the sharecapital (12 shares A and 13 shares B
with a nominal value of NLG 25,000) from D. Zicher Holding as
per July 1, 1998 for an amount of NLG 250,000. This will be
further formalized during 1999.
2.6.6 Commitments
Lease obligations
The company leases premises under operating lease, expiring in
1999. Future minimum lease payments, as of December 31, 1998
amounts to NLG 15,168 during 1999. As per December 31, 1998, the
lease arrangements are short-term commitments.
Future participation
The Company has the intention of participating for 33 1/3 % in a
joint venture during 1999. Procheck will transfer mainly
knowledge and know-how into the new company. Because this joint
venture is not established yet, the financial consequences for
Procheck International cannot be determined at this moment.
F-33
|
2. 7. Notes to the statement of operations
2.7.1 Salaries and social securities
1998 1997 1996
NLG NLG NLG
Salaries 1,384,390 1,384,079 1,388,831
Pension charges 53,568 42,940 45,374
Other social charges 169,742 60,458 65,556
1,607,700 1,487,477 1,499,761
2.7.2 Income tax
1998
NLG
Result from ordinary activities before taxation 1,437,333
Investment premiums not taxable -4,480
Non-deductible expenses 3,546
Taxable income 1,436,399
Corporation tax to be paid (35%), charged to profit and loss account 502,740
As no temporary differences exist as per December 31, 1998, the
taxable income and calculated corporation tax equals the amounts
for fiscal purposes.
F-34
|
The following taxes have been paid during the years ended
December 31, 1998, 1997 and 1996:
1998 1997 1996
NLG NLG NLG
Taxes paid 240,600 380,111 274,064
F-35
|
3. Other
3.1 Supplementary information
3.1.1 Profit appropriation
NLG
Net profit for the financial year 1998 934,593
Added to the retained earnings 250,000
Distributed to the shareholders 684,593
934,593
3.1.2 Earnings per share
1998 1997
number of outstanding common shares (weighted average) 487.5 500
NLG NLG
operating income per common share 2,891 1,348
net income per common share 1,917 886
3.1.3 Financial instruments
The Company's financial instruments that are exposed to
concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company places
its cash and cash equivalents with high credit quality
institutions. The Company provides normal trade credit, in the
normal course of business, to a Ministry of the Dutch
Governance, its primarily customer, and to other customers.
Based on past experience and the identity of its current
customers, the Company believes that its accounts receivable
exposure is limited. Book value approximates fair value because
of the short maturity of these instruments.
F-36
|
3.1.4 Related parties
As per December 31, 1998, ICTS International N.V. and Seceurop Beheer B.V. had the
outstanding shares of the Company.
Expenses incurred from these related parties are as follows:
1998 1997 1996
NLG NLG NLG
Services fees 168,000 168,000 150,000
Administration services 0 12,000 12,000
Balances with related parties are as follows:
1998 1997 1996
NLG NLG NLG
Current accounts payable 925,095 1,054,177 588,193
The amounts payable will be settled currently.
3.1.5 Employment benefits
Yearly the company pays a certain percentage of its salaries to
an insurance company on behalf of an insured pension plan.
Except for this yearly payment, the insurance company bears the
full responsibility to fulfill the obligations and rights of the
pension plan. Besides this pension plan, certain employment
contracts contain profit sharing elements.
F-37
|
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 19, 1999
|
ARTICLES OF INCORPORATION
On this thirty first day of May, nineteen hundred and ninety-six, appeared before me, Mr Cornelis Everardus Martinus van Steenderen, civil law notary, practicing at Rijswijk (South Holland, The Netherlands):
Theodor Franciscus Hubertus Reijnen, civil law Notary awaiting Crown appointment, residing at 2264 KM Leidschendam, Schadeken 207, a married man, born at Nijmegen on the second day of January Nineteen hundred -and sixty-three and holder of a valid passport of the Kingdom of the Netherlands, number W687635,
The appearer declared:
-- that the general meeting of shareholders of the private limited company ICTS HOLLAND Production B.V., registered office at The Hague, and whose place of business is at 1185 ZH Amstelveen, Binderij 7G, which company was incorporated by deed executed on October ninth nineteen hundred and ninety- two before Mr J. van Elswijk, civil law notary, resident at Rotterdam and the Articles of Association of which company have been altered most recently by deed executed on March eighth, nineteen hundred and ninety-five before Mr. R.G.M.C. ridder van Rappard, civil law notary, resident at Rotterdam, has resolved to:
a. conversion into a company limited by shares ("N.V."); and
b. alter and lay down over again its Articles of Association;
-- that he, the appearer, has been appointed by that resolution to apply for the required declaration of no objection on the draft of the present deed, and has been authorized to make the changes which may be required by or on behalf of the Minister of Justice and furthermore has been authorized to have the deed executed and signed;
-- that said resolution and said appointment and authorization are apparent from a writing to be attached to this deed;
-- that an expert as referred to in section 393 Volume of the Netherlands Civil Code has given the certificate as referred to in section 72 subsection part b of Volume 2 of the Netherlands Civil Code, which certificate shall be attached to this deed;
-- that the MMinistry ofJustice on the sixteenth day of April nineteen hundred and ninety-six under number B.V. 440.855 has declared that no objections have
been found to exist; the draft of this deed on which the declaration that no objection have been found to exist is noted shall be attached to this deed.
The appearer, acting as aforementioned, declared to convert the private limited company into a company limited by shares and to amend and lay down over again the Articles of Association of said company as follows:
ARTICLES OF ASSOCIATION
Name and registered office. .
Article 1.
1. The name of the Company limited by shares is: ICTS INTERNATIONAL N.V. and has its registered office in Amstelveen, The Netherlands.
2. The Company has been established for an indefinite period of time.
Objects.
Article 2.
.
1. The objects for which the Company has been established are:
a. to advise and render other services regarding the security of persons and goods and to arrange for (cause others to arrange for) such security by order of companies, government bodies and private persons; in particular but not exclusively: to (have others) install, manage and check security systems for the prevention and control of crime and terrorism in and around grounds, buildings, installations, vessels and aircraft;
b. to acquire and dispose of participation or other interests in companies and enterprises, whether or not together with others, to cooperate with companies and enterprises and to manage the same;
c. to acquire, manage, commercially exploit, encumber, dispose of property including intellectual and industrial property rights, and to invest capital;
d. to grant loans or cause the granting of loans, in particular, but not exclusively, to legal persons and companies which are subsidiaries and/or group companies of the company or in which the Company has a participation, all with due of observance of the statutory provisions and to draw loans or to cause the drawing of loans;
e. to enter into agreements by which the company commits itself as guarantor or joint and several, debtor, warrants performance by a third party or commits itself besides or on behalf of others, in particular, but not exclusively, for the benefit of legal persons and companies as referred to under d, all with due observance to the provisions of paragraph 2 of this article;
f. to perform any and all acts which are related or maybe conducive to the foregoing;
g. to engage in any other lawful act or activity for which companies may be organized under the Netherlands Civil Code, as amended from time to time.
2. Unless the provisions of section 98c of Book 2 of the Netherlands Civil Code apply, the Company may not stand surety, give price guarantees, enter into agreements by which the Company commits itself as guarantor or joint and several debtor, warrants performance by a third party or commits itself besides or on behalf of others, with an eye to the taking or acquiring by others of shares in its capital or depo sitary receipts thereof.
Capital.
Article 3.
The authorized capital of the Company is ten million guilders (NLG 10,000,000), divided into ten million (10,000.000) common shares, with a nominal value of one guilder (NLG 1.) each.
Definitions. .
Article 4.
1. In these Articles of Association the following terms shall have the following meaning:
a. Management Board/Managing Director(s): the management/managing officer(s) within the meaning of Book 2 of the Netherlands Civil code;-
b. Supervisory Board/Members of the Supervisory Board: the supervisory board/members of the supervisory board within the meaning of Book 2 of the Netherlands Civil Code;
c. shares: shares in the capital of the Company;
d. the General Meeting: the body of the Company formed by shareholders and other persons entitled to vote;
e. the General Meeting of Shareholders: the meeting of shareholders and other persons entitled to attend the General Meeting;
f. the Annual Meeting: The General Meeting of Shareholders held for the purpose of discussion and adoption of the annual accounts;
g. annual accounts: the balance sheet and the profit and loss account with the explanatory notes thereon, both in drafted and adopted form, unless the context shows differently;
h. the law: the law of The Netherlands.
2. In these Articles of Association the term "in writing" shall also mean: by telegram, by telex or by telecopier.
Shares: share certificates.
.
Article 5.
1. The shares may not be divided into sub-shares.
2. The shares shall be registered shares.
3. Registered shares shall be available:
-- in the form of an entry in the share register without issue of a share certificate ("uncertificated shares"); or
-- at the option of the shareholder, in the form of an entry in the share register with issue of a certificate ("certificated shares").
4. Upon request of a shareholder collective share certificates for any number of shares may be issued to that shareholder. Where these Articles of Association refer to share certificates this term shall include collective share certificates.
5. Share certificates shall be signed by or on behalf of the Management Board either by original signature or by printed facsimile.
6. Subject to the approval of the Supervisory Board the Management Board can determine that for the trade at foreign Exchanges share certificates shall be issued
complying with the requirements set by said foreign Exchange(s) and not provided with any dividend sheet.
7. The shareholder may, upon his request, have issued to him one or more share certificates for his shares.
8. Damaged, but in the opinion of the Management Board still identifiable share certificates, may be exchanged by the Management Board for duplicates; the Management Board shall in that case ensure that the damaged documents are destroyed. For the destroyed or lost share certificates, the Management Board may issue duplicates, while complying with such requirements as the Management Board shall determine. Each document newly to be issued shall be clearly provided with the word: "duplicate" and shall bear the same specification as the document which it is to replace. The issue of the duplicate shall render the document which it replaces null and void. All costs of implementation of the provisions of this paragraph shall be for the applicants account, unless determined otherwise by the Management Board.
Usufruct and pledge on shares. Delivery of title to shares.
.
Article 6.
1. Shares may be encumbered with usufruct.
2. Shares may be pledged as security. A pledge may also be created without acknowledgment by or service on the Company.
3. A shareholder without the right to vote as a result -of a qualified right created on his shares and a usufructuary and pledgee with the right to vote shall have the rights granted to holders of depositary receipts issued with the cooperation of the Company under the law. Usufructuaries and pledgees of shares without the right to vote shall not have such rights.
Notification of place of residence and address. Notices and communications. Register of shareholders.
Article 7.
1. With due regard to the provisions of the law in respect of registered shares a register shall be kept by or on behalf of the Company, which register shall be regularly updated and, at the discretion of the Management Board, may, in whole or in part, be kept in more than one copy and at more than one place. As long as shares in the Company are quoted on the NASDAQ National Market, a part of the share register may be kept in New York.
2. Each shareholder's name, his address and such further data as the Management Board deems desirable, whether at the request of a shareholder or not, shall be entered in the register.
3. The form and the contents of the share register shall be determined by the Management Board with due regard to the provisions of paragraphs 1 and 2 of this Article.
4. Upon request a shareholder shall be given free of charge a declaration of what is stated in the register with regard to the shares registered in his name, which declaration may be signed by a specially authorized person to be appointed by the Management Board for this purpose.
5. The provisions of the preceding four paragraphs shall equally apply to those who hold a right of usufruct or lien on one or more shares, with the proviso that the other data required by law must be entered in the register.
Transfer of shares
Article 8.
1. The transfer of shares and the creation and the transfer of a limited right thereon shall take place in accordance with the applicable provisions of the law.
2. The allotment of shares on the partitioning of any joint property shall take place in accordance with the applicable formalities for transfer of shares in such situations.
Issue of shares. Payment
.
Article 9.
1. The General Meeting or, as the case may be, the Supervisory Board if and to the extent that it has been designated thereto by the General Meeting shall decide in respect of the issue of shares; if the Supervisory Board has been designated thereto, the General Meeting may not decide in respect of the issue as long as the designation is in effect.
2. The General Meeting or, as the case may be, the Supervisory Board shall determine the price of issue as well as the other conditions of issue, the payment in foreign currencies on shares included.
3. If the Supervisory Board is designated as authorized to decide on the issue of shares, such designation shall specify the number of shares which may be issued. Such designation shall also determine the duration of the designation which may not
exceed five years. The designation can be renewed each time for a period not exceeding five years. Unless stipulated otherwise upon designation, it may not be withdrawn.
4. The provisions of paragraphs 1 through 3 of this Article shall apply mutatis mutandis to the granting of rights to take shares, but shall not apply to the issue of shares to a person who exercises a previously acquired right to take shares.
5. The Company may not subscribe for its own shares.
6. Shares shall never be issued below nominal value, without prejudice to the provisions of Section 80, Subsection 2 of Book 2 of the Netherlands Civil Code.
7. Payment shall be made in cash insofar as another form of payment has not been agreed upon, with due observance of the relevant provisions of the law. Payment may only be made in foreign currencies with the permission of the Company and, furthermore, with due observance of the relevant provisions of the law. preemptive right upon issue .
Article 10.
1. On the issuance of common shares, each holder of common shares shall have a right of pre-emption in proportion to the aggregate nominal value of his common shares, with due observance of the relevant limitations set by law. Holders of common shares shall have a similar right of pre-emption if options are granted to subscribe for common shares.
2. The right of pre-emption may, subject to due observance of the relevant provisions of the law, be limited or excluded by the General Meeting or by the Supervisory Board designated in this respect by resolution of the General Meeting for a fixed period of time not exceeding five years. Such a designation may only be made if the Supervisory Board is also or simultaneously designated as the body authorized to, issue shares.
Acquisition by the Company of its own shares. Reduction of capital.
Article 11.
1. Any acquisition by the Company of partly paid shares in its own capital shall be null and void.
2. The Company may acquire fully paid up shares for no consideration or if:
a. its shareholders equity, reduced by the acquisition price is not less than the paid and called up part off the capital Increased by the reserves which must be maintained by law or these Articles of Association;
b. the nominal amount of the shares in its capital to be acquired and already jointly held by the Company and its subsidiaries does not exceed one-tenth of the issued capital.
3. The factor deciding whether the acquisition is valid shall be the amount of the shareholders equity as shown in the most recently adopted balance sheet, reduced by the acquisition price of shares in the capital of the Company and any payments from profit or reserves from third parties, which became due by the Company and its subsidiaries after the balance sheet date. In the event that more than six months of a financial year have passed without the annual accounts having been adopted, acquisition in accordance with paragraph 2 other than for no consideration, shall not be permitted.
4. The Company may acquire shares in its own capital other than for no consideration only after the General Meeting has authorized the Management Board thereto. This authorization shall be valid for a period not exceeding eighteen months. In the authorization the General Meeting shall determine how many shares may be acquired, how they may be acquired and between which limits the price should be. No authorization shall be required, insofar as the Articles of Association permit the Company to acquire its own shares for the purpose of transferring the same to employees of the Company or of a group Company under a scheme applicable to such employees such shares must be officially listed on an exchange.
5. The preceding paragraphs shall not apply in respect of shares acquired by the Company by universal succession.
6. The term shares where used in the preceding paragraphs of this Article shall include depositary receipts of shares.
7. Acquisition of shares in violation of the provisions of this Article shall be null and void. The Managing Directors shall be jointly and severally liable vis-a-vis the transferor in good faith who suffers a loss as a result of such nullity.
8. On proposal of the Supervisory Board, the General Meeting may decide to reduce the issued capital by withdrawing shares or by reducing the amount of shares by alteration of the Articles of Association. In such resolution the shares to which the resolution relates shall be designated and the implementation of the resolution shall be arranged. The paid up and called part of the capital may not be reduced below the minimum capital prescribed at the time of the resolution.
9. A resolution to withdraw may only relate to shares held by the Company itself or the depositary receipts whereof are held by the Company.
10. Partial repayment in respect of shares or dispensation of the obligation to pay up shall be possible only in the implementation of a resolution to reduce the amount of the shares. Repayment or dispensation shall be effected proportionally in respect of all shares. The requirement of proportionally may be deviated from with the approval of all shareholders concerned.
11.The notice convening a meeting at which a resolution referred to in paragraph 8 or 10 of this Article shall be passed, shall state the object of the reduction of capital and the manner of implementation. The provisions of Article 21 of these Articles of Association shall apply mutatis mutandis.
12.The Company shall deposit the resolutions referred to in paragraphs 8 or 10 of this Article at the office of the commercial register and shall announce the deposit in a national daily newspaper.
Joint owners of a share.
Article 12.
If more than one person jointly possess rights in respect of a share, such joint owners may exercise such rights only by having themselves represented vis-a-vis the Company by one person.
Management and supervision.
Article 13.
1. The Company shall be managed by a Management Board consisting of one or more Directors. The Management Board shall be under the supervision of a Supervisory Board consisting of one or more Members. Only natural persons are capable of being Members of the Supervisory Board.
2. The number of Managing Directors and Members of the Supervisory Board shall be determined by the General Meeting.
3. The remuneration and the further terms of employment of each of the Managing Directors shall be determine by the Supervisory Board. The General Meeting can grant a remuneration to one -or more Members of the Supervisory Board.
4. The Managing Directors and Members of the Supervisory Board shall be appointed by the General Meeting. The Members of the Supervisory Board shall be
appointed for an indefinite period of time. The Supervisory Board can make recommendations for Managing Directors or Members of the Supervisory Board.
5. A person who has attained the age of seventy-two years cannot be appointed to be a Member of the supervisory Board. A Member of the Supervisory Board shall retire at that latest on the day on which the Annual Meeting is held in the financial year in which he attains the age of seventy-two years.
6. Managing Directors and Members of the Supervisory Board may be suspended or removed from office by the General Meeting at all times. Besides, Managing Directors can at all times be suspended by the Supervisory Board, the reasons for such suspension being stated.
7. If in the event of suspension of a Managing Director or a Member of the Supervisory Board the General Meeting has not within three months after the effective date of suspension resolved to remove him from office, the suspension shall end. The suspended Managing Director or Member of the Supervisory Board shall be given the opportunity to account for his actions to the General Meeting and may have himself assisted for that purpose by a legal adviser.
Management Board
Article 14
.
1. Subject to these articles and the relevant provisions of the law, the
Management Board is entrusted with the management of the Company. The Management
Board represents the Company. Moreover, the Company can be represented by two
Managing Directors acting jointly. If a member of the Management Board has a
conflict of interest with the Company, such member of the Management Board will
immediately notify the Supervisory Board of any such conflict and the Company
will not be represented by a Managing Director in such matter. In such
situations, the Supervisory Board shall be authorized to appoint a disinterested
person, either from within or outside of the supervisory Board, to represent the
Company.
2. If there is more than one member of the Management Board, such members may divide their activities between or among themselves in such fashion as they -- shall mutually agree, subject to review and modification, it appropriate, by the Supervisory Board.
3. The Management Board is authorized to appoint persons who may represent the Company and to grant such persons any title and power as it deems appropriate.
4. Members of the Management Board serve until their resignation, death or removal.
5. If one or more Managing Directors are absent or unable to act, the other Managing Directors or the sole remaining Managing Director shall be temporarily entrusted with the entire management. In the event that all Managing Directors are absent or unable to act, a person appointed to this end for an indefinite period of time by the Supervisory Board from among or not from among its members shall temporarily be charged with the entire management.
Supervisory Board.
1. It shall be the duty of the Supervisory Board to supervise the conduct of affairs by the Management Board and the general course of business in the Company and in the business connected with it. It shall assist the Management Board by advice. In the accomplishment of their task the Members of the supervisory Board shall be guided by the interests of the Company and of the business connected with it.
2. The Management Board shall furnish the Supervisory Board in due time with the particulars which the latter needs for the performance of its task and shall, besides, furnish each Member of the Supervisory Board with all the information about the Company's affairs which he may desire. The Supervisory Board shall be authorized to inspect and to cause to be inspected all the books, records and correspondence of the Company; each Member of the Supervisory Board shall at all times have access to all the buildings and grounds used by the Company.
3. In the accomplishment of its task the Supervisory Board may call in the assistance of experts at the Company's expense.
4. The Supervisory Board shall appoint one of its members to be chairman.
5. Each Member of the Supervisory Board as well as the Management Board shall be entitled to convene a meeting of the Supervisory Board. At a meeting of the supervisory Board a Member of the Supervisory Board may have himself represented by another Member of this Board, appointed by an instrument in writing.
6. The supervisory Board shall pass resolutions by an absolute majority of votes. In case of an equality of votes the proposal shall be regarded as rejected.
7. The Supervisory Board can also pass resolution without holding a meeting, provided this is done in writing, each of the Members of the Supervisory Board has cast his vote and none of them has opposed this manner of passing resolutions. A resolution shall then have been passed if more than half of the number of Members of the Supervisory Board have pronounced in favor of the proposal.
8. If there is only one Member of the Supervisory Board, he shall have all the powers and obligations conferred or imposed respectively upon the Supervisory Board and its chairman by these Articles of Association.
General Meeting of Shareholders.
Article 16 .
1. General Meetings of Shareholders shall be held in the place where the Company has its registered office or in Amsterdam, Rotterdam or The Hague. Lawful resolutions may be passed at a General Meeting of Shareholders held elsewhere than in the preceding sentence, only if the entire issued capital is represented.
2. At least one General Meeting of Shareholders shall be held each year, not later than six months after the -end of the financial year.
3. The Managing Board and the Supervisory Board shall be equally entitled to convene a General Meeting of Shareholders. The Managing Board and the Supervisory Board shall be required to call a General Meeting of Shareholders if one or more shareholders jointly representing at least one tenth of the issued capital shall so request in writing, thereby stating the subjects to be considered in detail. If in such case neither the Managing Board nor the Supervisory Board have taken such measures that the -General fleeting of Shareholders can be held within six weeks of the request, each of the shareholders concerned shall be authorized to call a General Meeting of Shareholders themselves with due observance of the relevant provisions of these Articles of Association.
4. All convocations of General Meetings of Shareholders and all notifications to shareholders and beneficiaries of a usufruct and pledgees to whom voting rights have been granted shall be made by letter mailed to their addresses as shown in the register of shareholders.
5. Communications which by law or the Articles of Association must be addressed to the General Meeting may be made by inclusion either in the notice calling the meeting or in the document deposited for inspection at the office of the Company and in a place in Amsterdam provided that this is stated in the notice calling the meeting. The notice shall be sent no later than on the fifteenth day prior to the day of the meeting.
6. If the entire issued capital is represented at the meeting as well as all other persons who by virtue of the law or these Articles of Association must be called to the meeting legally valid resolutions may be passed by the General Meeting of Shareholders about all subjects put forward for the vote, provided that they are passed
unanimously even if the requirements set by law or these Articles of Association in respect of the notice of the General Meeting of Shareholders were not observed.
7. Each shareholder and each person to whom the law grants this right shall be authorized, in person or by a proxy appointed in writing, to attend and address the General Meeting of Shareholders. Before he is granted access to a meeting a shareholder, a person as referred to in the previous sentence or their proxy shall sign an attendance list and state his name and, insofar as applicable, the number of votes which he may cast. A proxy shall also state the name of the person he represents.
8. Members of the Supervisory Board, Members of the Management Board and any other persons who have the right of access pursuant to law shall have access to the General Meeting of Shareholders. In addition, the General Meeting may decide on the admittance of persons other than the persons referred to in the previous sentence. Members of the Supervisory Board and Members of the Management Board shall have an advisory voice at the General Meeting of Shareholders.
Article 17.
1. The General Meeting of Shareholders shall be presided over by the Chairman of the Supervisory Board or, in his absence, by a member of the Supervisory Board selected by the supervisory Board acting as a body. The Supervisory Board has the authority to designate a person who is not a member of the Supervisory Board as chairman of the General Meeting of Shareholders. If no members of the Supervisory Board are present, the General Meeting of shareholders shall be presided over by the person appointed for that purpose by the General Meeting itself.
2. Unless a notarial record is drawn up, minutes of the meeting shall be kept by a person designated thereto by the Chairman who can also appoint himself as such, which minutes shall be confined at that or the next meeting by the General Meeting and which shall be signed in evidence thereof by the Chairman and the person keeping the minutes of that meeting. Each Managing Director, as well as one or more holders of shares representing at least one tenth of the issued capital may determine that a notarial record be drawn up. The cost of a notarial record shall be for the account of the Company.
Voting at General Meeting of Shareholders
Article 18
1. Each share carries the right to cast one vote.
2. Resolutions may be adopted only when a quorum of at least fifty percent (50%) of the outstanding shares entitled to vote are represented and require an absolute
majority of the Votes cast. Section 120 subsection 3 of Book 2 of the Netherlands Civil Code is hereby deemed to be inapplicable. Resolutions of the General Meeting of shareholders with respect to an amendment of the Articles of Association, dissolution of the Company, acquisition of its own shares by the Company or pertaining to a merger may be adopted only when a quorum of at least fifty percent of the outstanding shares entitled to vote are represented and require a vote of at least two-thirds of the votes cast, representing more than fifty percent (50 %) of the outstanding capital.
3. If there is a tie in the vote for the election of the Members of the Supervisory Board, the chairman of the Supervisory Board shall select which nominee shall be elected. For all other shareholders' resolutions, if there is a tie it the vote, the proposal shall be rejected.
4. Abstentions on a particular matter shall be counted toward the quorum, but shall not be counted as affirmative votes.
Financial year, annual account and distribution of profit.
.
Article 19.
1. The financial year of the Company shall coincide with the calendar year.
2.Each year within five months after the end of the financial year of the Company, save where this period is extended by a maximum of six months by the General Meeting on account of special circumstances, the Management Board shall draw up the annual accounts and deposit the same at the office of the Company open to the inspection of the shareholders. Within this period the Management Board unless section 403 of Book 2 of the Netherlands Civil Code -applies to the Company shall furthermore draw up the annual report and deposit it for inspection as stated above. The particulars as referred to in section 392, subsection 1 of Book 2 of the Netherlands Civil Code shall be added to these documents and furthermore, if the Supervisory Board gave an opinion, that opinion shall be added to these documents. The annual accounts shall be signed by all Managing--. Directors and Members of the Supervisory Board; if the signature of one or more of them is missing, this and the reason for such absence shall be stated.
3. Without prejudice to the provisions of the preceding paragraph, the Company shall ensure that the documents referred to in said paragraph shall be available at its office for inspection as stated above from the date of convening of the General Meeting of Shareholders at which said documents are to be considered. The persons entitled to inspect said documents may obtain a copy thereof at no cost.
4. The annual accounts shall be adopted by the General Meeting. Adoption of the annual accounts without reservation shall constitute a discharge from liability of the Managing Directors and the Members of the Supervisory Board, without prejudice to
the provisions of sections l. and 150 Volume 2 of the Netherlands Civil Code.
Article 20
.
1. The profit shall be determined in accordance with generally accepted
accounting principals.
2. Of the profit appearing from the annual accounts adopted by the General Meeting such a sum can be reserved as shall be fixed by the supervisory Board.
3. The remaining profits after the application of paragraph 2 of this Article shall be available to the General Meeting.
4. The Company may make distributions of profit to the shareholders only to the extent that the shareholders equity exceeds the paid and called up part of the capital increased by the amount of the reserves which it is required to maintain by law or by these Articles of Association.
5. Distribution of profit shall be made only after adoption of the annual accounts which shows that such distribution is possible.
6. In calculating the distribution of profit shares or the depositary receipts thereof, the full ownership -. of which is vested in the Company or in respect of which the Company has usufruct shall not be counted.
7. The Company may pay interim dividends with due observance of the provisions of paragraph 4. The resolution to distribute an interim dividend shall be passed by the Management Board after the approval of the Supervisory Board has been obtained.
8. The date on which dividends and other distributions become payable, no later than three months from the date such dividends have been declared shall be determined by the Supervisory Board and announced in-accordance with the provisions of Article 16, Section 4.
9. Dividends which have not been claimed within five years after the date on which they were made payable shall be forfeited to the benefit of the Company.
Alteration of the Articles of Association and winding up.
Article 21
When a proposal to amend these Articles of Association or dissolve the Company is made to the General Meeting, -this must be stated in the convocation to the General Meeting of Shareholders. With respect to an amendment to the Articles of
Association, a copy of the proposal in which the proposed modification is stated in full must -. be filed at the office of the Company for inspection by every shareholder and must be kept on file and available for inspection until the end of the meeting. The provisions of Article 123 of the Netherlands Civil Code shall apply accordingly. In addition, no amendment to the Articles of Association will become effective until the Dutch Ministry of Justice has reviewed and approved such amendment and the notarial deed of alteration of the Articles of Association has been executed.
Liquidation.
Article 22.
1. If the Company is wound up, its liquidation shall be carried out by the Management Board under the supervision of the Supervisory Board. The provisions of Article 13 and Article 14, paragraphs 2. and 2, shall apply mutatis mutandis.
2. The General Meeting shall determine the remuneration of the liquidators.
3. During the liquidation these Articles of Association shall remain in force to the extent possible.
4. The surplus assets remaining after satisfaction of all liabilities of the Company, shall be paid to the shareholders pro rata to the amount paid up on each one's shares. Indemnification.
Article 23
1. The Company shall, to the fullest extent permitted by the law indemnify, and advance expenses to, Bach of its now acting and former members of the Supervisory Board, members of the Management Board, officers, employees and agents, whenever any such person is made a party, or threatened to be made a party, in any action, suit or proceeding by reason of his or her service with the Company.
2. The Company is authorized, to the fullest extent permitted by the law, as amended from time to time, to produce liability insurance on behalf of its now acting and former members of the Supervisory Board, -members of the Management Board, officers, employees and agents.
Finally the following statement was made:
The issued share capital amounts to four million guilders (NLG. 4,000,000.)
End of deed.
This instrument, drawn up in one original copy, was executed in Rijswijk (South Holland) on the date first before written. After the substance of this instrument had been stated -to the person appearing, he declared that he had noted the contents of this instrument and did not require it to be read out in full.
Subsequently, following a partial reading in accordance with the law, this instrument was signed by the person appearing, who is known to me, Notary, and by me, Notary.
COMMON STOCK COMMON STOCK
PAR VALUE 1 Dutch Guilder
SEE REVERSE FOR CERTAIN
DEFINITIONS AND LIMITATIONS
ICTS INTERNATIONAL N.V.
INCORPORATED UNDER THE LAWS OF THE NETHERLANDS
AUTHORIZED SIGNATURE
SECRETARY
PRESIDENT
the following abbreviations, when used in the inscription on the face of this certificate, shall be constured as though they were written out in full according to applicable laws or regulations:
TEN COM - as tentnants in common
TEN ENT - as tenants by the entireties
JT TEN - as joint tenants with right of survivorship and not as
tenants in common
UNIF GIFT MIN ACT - Custodian
(Cust) (Minor)
Under Uniform Gifts to Minor Act
(State)
Addtional abbreviations may also be used though not in the above
list.
For Value received hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
(NAME AND ADDRESS OF TRANSFEREE SHOULD BE PRINTED OR TYPEWRITTEN)
Shares
of the Common Stock represented by the within Certificate and do
hereby irrevocably constitute and appoint
Attorney
to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated
SIGNATURE
Signature(s) Guaranteed
By
THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE PROGRAM) PURSUANT TO S.E.C. RULE 17Ad-1 5.
NOTICE: The signature of this assignment must correspond with name(s) as written upon the face of the certificate in every particular without alteration or enlargement or any change whatever.
Consent of Kessleman & Kesselman, Independent Auditors
We consent to the incorporation of our report (and all references to our firm) with respect to the consolidated financial statements of ICTS International N.V. for each of the fiscal years ended December 31, 1998, 1997 and 1996, in its Annual Report (Form 20-F) for the fiscal year ended December 31, 1998, filed with the Securities and Exchange Commission and with NASDAQ.
Kesselman & Kesselman
Certified Public Accountants
March 15, 1999
Ramat Gan, Israel
PriceWaterHouseCoopers
Marten Meesweg 25
3068 AV Rotterdam
P.O. Box 8800
3009 AV Rotterdam
The Netherlands
Telephone +31(10)407)5500
Consent of PricewaterhouseCoopers N.V. Independent Auditors
We consent to the incorporation of our report (and all references to our firm) with respect to the financial statement of Procheck International B.V. for the year ended December 31, 1998 in the Annual Report (Form 20-F) for the fiscal year ended December 31, 1998, filed by ICTS International N.V. with the Securities and Exchange Commission and with NASDAQ.
March 17, 1999
Rotterdam, the Netherlands
PricewaterhouseCoopers N.V.
Certified Public Accountants