-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, OJgigC73PKT7XbsDo9KXZ0HMAV5aQGy5kelqaQ3siotPWdCQTs4UG2xVk5yZYe9G yLtRAZY+jMFw4hE7lftNUA== 0000891092-10-002682.txt : 20100630 0000891092-10-002682.hdr.sgml : 20100630 20100630153125 ACCESSION NUMBER: 0000891092-10-002682 CONFORMED SUBMISSION TYPE: 20-F PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20091231 FILED AS OF DATE: 20100630 DATE AS OF CHANGE: 20100630 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ICTS INTERNATIONAL N V CENTRAL INDEX KEY: 0001010134 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20-F SEC ACT: 1934 Act SEC FILE NUMBER: 000-28542 FILM NUMBER: 10927114 BUSINESS ADDRESS: STREET 1: BIESBOSCH 225 CITY: 1181 JC AMSTELVEEN STATE: P7 ZIP: 0000000000 BUSINESS PHONE: 31 20 347 1077 MAIL ADDRESS: STREET 1: BIESBOSCH 225 CITY: 1181 JC AMSTELVEEN STATE: P7 ZIP: 0000000000 FORMER COMPANY: FORMER CONFORMED NAME: ICTS HOLLAND PRODUCTION BV DATE OF NAME CHANGE: 19960306 20-F 1 e39250-20f.txt FORM 20-F UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 20-F [_] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [_] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of event requiring this shell company report . . . . . . . For the transition period from _________________ to _________________ COMMISSION FILE NUMBER 0-28542 ICTS INTERNATIONAL, N.V. ------------------------------------------------------------------------------- (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) Avraham Dan, Tel: +31-20-3471077, Email: dan@ictsusa.com, Address: Same as above ------------------------------------------------------------------------------- (Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person) Securities registered or to be registered pursuant to Section 12(b) of the Act: Title of each Class: None Name of each exchange on which registered: None Securities registered or to be registered pursuant to Section 12(g) of the Act: Common Stock, par value 0.45 Euro per share ----------------------------------------------------------------------------- (Title of Class) 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 of the period covered by the annual report: 7,890,137 --------- Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES [_] NO [X] If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. YES [_] NO [X] Note - Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those sections. Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [_] Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES [X] NO [_] Indicate by check mark whether the registrant is a large accelerated filer, am accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X] Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing: U.S. GAAP [X] International Financial Reporting Standards as issued Other [_] by the International Accounting Standards Board [_] 2 If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow. Item 17 [_] Item 18 [_] If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES [_] NO [X] (APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS) Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YES [_] NO [_] When used in this Form 20-F, the words "may", "will", "expect", "anticipate", "continue", "estimates", "project", "intend" and similar expressions are intended to identify Forward-Looking Statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 regarding events, conditions and financial trends that may affect the Company's future plans of operations, business strategy, operating results and financial position. Prospective investors are cautioned that any Forward-Looking Statements are not guarantees of future performance and are subject to risks and uncertainties and those actual results may differ materially from those included within the Forward-Looking Statements as a result of various factors. 3 Table of Contents Part I - ------ Item 1 Identity of Directors, Senior Management and Advisers ..... 5 Item 2 Offer Statistics and Expected Timetable ................... 5 Item 3 Key Information ........................................... 5 Item 4 Information on the Company ................................ 12 Item 5 Operating and Financial Review and Prospects .............. 21 Item 6 Directors, Senior Management and Employees ................ 37 Item 7 Major Shareholders and Related Party Transactions ......... 47 Item 8 Financial Information ..................................... 49 Item 9 The Offer and Listing ..................................... 52 Item 10 Additional Information .................................... 53 Item 11 Quantitative and Qualitative Disclosures about Market Risk ............................................. 66 Item 12 Description of Securities other than Equity Securities .... 66 Part II - ------- Item 13 Defaults, Dividend Arrearages and Delinquencies ........... 66 Item 14 Material Modifications to the Rights of Security Holders and the Use of Proceeds ................................. 66 Item 15 Controls and Procedures ................................... 66 Item 16A Audit Committee Financial Expert .......................... 68 Item 16B Code of Ethics ............................................ 68 Item 16C Fees Paid to our Independent Registered Public Accounting Firm ......................................... 68 Item 16D Exemptions from Listing Standards for Audit Committees .... 68 Item 16E Purchases of Equity Securities by the Issuer and Affiliated .......................................... 68 Purchasers ................................................ 68 Item 16F Change in Accountant's Disclosure ......................... 68 Item 16G Corporate Governance ...................................... 69 Part III - -------- Item 17 Financial Statements ...................................... 69 Item 18 Financial Statements ...................................... 69 Item 19 Exhibits .................................................. 69 Exhibits - -------- Exhibit 12.1 Certification Exhibit 13.1 Certification 4 PART I Item 1. Identity of Directors, Senior Management and Advisers Not Applicable Item 2. Offer Statistics and Expected Timetable Not Applicable Item 3. Key information. Operations ICTS International N.V. ("ICTS") was established by the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively referred to as, the "Company") operate in two main businesses: (a) airport security and other aviation services and (b) technology. The airport security and other aviation services business provides security and other services to airlines and airport authorities, predominantly in the United States of America and Europe. The technology business is predominantly involved in the development and sale of identity security software to financial institutions and airport authorities, predominantly in Europe and Israel. In December 2005, the Company committed to a plan to cease the operations of its entertainment business in the United States of America. Accordingly, as of that date, the assets, liabilities and results of operations of the entertainment business were classified as discontinued operations in the Company's consolidated financial statements. The nature of the ongoing discontinued operations of the entertainment business consists mainly of activities associated with the settlement of ongoing litigation, including disputes related to unpaid vendor and rent obligations. In July 2009, the Company entered into a settlement arrangement with the former landlord of the entertainment business to resolve the disputes between the parties related to unpaid rent obligations. Selected Financial Data Selected data set forth below have been derived from the ICTS Consolidated Financial Statements which have been prepared in accordance with generally accepted accounting principles in the United States of America ("US GAAP"). The Selected Consolidated Financial Data set forth below should be read in conjunction with Item 5 Operating and Financial Review and Prospects and the ICTS Consolidated Financial Statements and the Notes to those Financial Statements included in Item 18 in this Annual Report. 5 The following table summarizes certain balance data for ICTS for the years ended December 31, 2009, 2008, 2007, 2006, and 2005: (U.S. Dollars in thousands) - ------------------------------------------------------------------------------- 2009 2008 2007 2006 2005 - ------------------------- ------- ------- ------- ------- ------ Cash and cash equivalents $4,835 $3,750 $2,095 $1,743 $5,927 Current assets 21,198 16,571 18,644 17,519 25,444 Total assets from discontinued operations -- -- 2,873 130 537 Total assets 26,827 25,396 27,103 26,555 32,213 Current liabilities 31,832 31,869 30,305 33,577 28,101 Total liabilities from discontinued operations 1,222 9,174 10,619 13,441 11,424 Shareholders' deficiency (18,290) (22,965) (20,610) (19,002) (5,148) - ------------------------------------------------------------------------------- Selected Financial Data Statement of Operations The following table summarizes certain statement of operations data for ICTS for the years ended December 31, 2009, 2008, 2007, 2006, and 2005:
(U.S. Dollars in thousands except per share data) Year ended December 31, ------------------------------------------------------------- 2009 2008 2007 2006 2005 --------- --------- --------- --------- --------- Revenue $95,861 $98,809 $64,780 $60,791 $57,713 Cost of revenue 83,491 85,107 52,397 55,284 53,721 --------- --------- --------- --------- --------- GROSS PROFIT 12,370 13,702 12,383 5,507 3,992 Selling, general and administrative expenses 14,313 15,341 13,338 14,878 11,690 --------- --------- --------- --------- --------- OPERATING LOSS (1,943) (1,639) (955) (9,371) (7,698) Other income (expense), net (1,638) (856) (3,580) 527 (761) --------- --------- --------- --------- --------- LOSS BEFORE EQUITY LOSS FROM INVESTMENTS IN AFFILIATES AND INCOME TAX BENEFIT (EXPENSE) (3,581) (2,495) (4,535) (8,844) (8,459) Equity loss from investments in affiliates -- -- (2,479) (132) (486) Income tax benefit (expense) 418 (402) (966) (846) (2,387) --------- --------- --------- --------- --------- LOSS FROM CONTINUING OPERATIONS (3,163) (2,897) (7,980) (9,822) (11,332) Income (loss) from discontinued operations 6,086 928 5,422 (4,248) (13,548) --------- --------- --------- --------- --------- NET INCOME (LOSS) $2,923 $(1,969) $(2,558) $(14,070) $(24,880) ========= ========= ========= ========= ========= NET INCOME (LOSS) PER SHARE, BASIC AND DILUTED: Continuing Operations $(0.47) $(0.44) $(1.22) $(1.51) $(1.74) Discontinuing Operations 0.90 0.14 0.83 (0.65) (2.07) ========= ========= ========= ========= ========= Net income (loss) per share 0.43 $(0.30) $(0.39) $(2.16) $(3.81) ========= ========= ========= ========= ========= Weighted average number of shares outstanding 6,790,707 6,528,100 6,528,100 6,528,100 6,528,100 ========= ========= ========= ========= =========
Risk Factors You should carefully consider the risks described below regarding the business and the ownership of our shares. If any of the risks actually occur, our business, financial condition or results of operations could be adversely affected, and the price of our common stock could decline significantly. 6 Developments that have had a significant impact on our operations. One major event in 2001 and early 2002 significantly changed our business operations: the passage of the Aviation and Transportation Security Act (the "Security Act") by the United States Congress in response to the terrorist attacks on September 11, 2001, pursuant to which the Federal Government through the United States Transportation Security Administration ("TSA") took over aviation security services in the U.S. in November 2002. As a result of this event, we have limited aviation security operations in the U.S. If we are unable to increase revenues from aviation security services, our financial condition and results of operations will be adversely materially affected. In February 2002, we entered into an aviation security services contract with the TSA to continue to provide aviation security services in all of our current airport locations at that time until the earlier of either the completed transition of these security services on an airport by airport basis to the U.S. Federal Government or November 2002. In connection with payments made by the TSA to Huntleigh USA Corporation Inc. ("Huntleigh"), a wholly owned subsidiary of the Company, for aviation security services provided in 2002, the Defense Contract Management Agency has indicated that it believes that Huntleigh should not have been paid on a fixed price basis as believed by Huntleigh, but on an actual costs plus basis, what the TSA would consider a reasonable profit. On that later basis, Huntleigh may be required to repay to the TSA the difference between such amount and the actual amounts paid to it. Huntleigh, however, has various claims for additional amounts it considers are due to it for the services provided to the TSA. Potential liability claims As a result of the September 11th terrorist attacks, numerous lawsuits have been commenced against us and our U.S. subsidiary. The cases arise out of airport security services provided for United Flight 175 out of Logan Airport in Boston, Massachusetts which crashed into the World Trade Center. The outcome of these cases is uncertain. If there is an adverse outcome with respect to any of these claims which is not covered by insurance, then there may be a significant adverse impact on us. Most of those claims are in the process of being settled at no cost to the Company. Losses in recent years We incurred losses from continuing operations of $3.2 million, $2.9 million, $8.0 million, $9.8 million, and $11.3 million in 2009, 2008, 2007, 2006 and 2005 respectively. The losses were accompanied by net cash provided by (used in) operating activities of $(4.6) million, $3.9 million, $(3.6) million, $(7.6) million and $(5.2) million in 2009, 2008, 2007, 2006 and 2005, respectively, and at December 31, 2009 the Company had a working capital deficiency of $10.6 million and negative equity of $18.3 million. If we do not achieve new service contracts and profitability, the viability of our company will be in question and our share price will likely decline. 7 Auditors' going concern opinion In their report, our auditors have expressed an opinion that there is substantial doubt about our ability to continue as a going concern. As of December 31, 2009 and for the year then ended, the Company had a net loss from continuing operations of $3.2 million, a net working capital deficiency of $10.6 million and shareholders' deficiency of $18.3 million. Loans from principal stockholder Our financing activities have consisted primarily of loans from our principal shareholder. We do not have any other continual commitments or identified sources of additional capital from third parties. There is no assurance that our principal shareholder will continue making loans to us and even if loans are made, there is no assurance that the terms will be favorable to the Company. IRS audit One of our U.S. subsidiaries, ICTS USA, Inc and its Subsidiaries, has undergone an examination by the IRS for the years ended December 31, 2004, 2003 & 2002. The IRS has proposed a number of adjustments that collectively result in an assessed tax liability and penalties of more than $7.3 million plus interest. Management is vigorously contesting the proposed adjustments, and has filed a "Protest" with the IRS. This matter will be heard by the Appellate Division of the IRS, at which time management will have an opportunity to present its position on the various issues raised at the examination level. Management has provided for possible tax liabilities resulting from this examination in its consolidated financial statements presented herein. Key personnel Our success will largely depend on the services of our senior management and executive personnel. The loss of the services of one or more of such key personnel could have a adverse impact on our operations. Our success will also be dependent upon our ability to hire and retain additional qualified executive personnel. We cannot assure you that we will be able to attract, assimilate and retain personnel with the attributes necessary to execute our strategy. We cannot assure you that one or more of our executives will not leave our employment and either work for a competitor or otherwise compete with us. Our contracts with airports or airlines may be canceled or not renewed. Our revenues are primarily provided from services pursuant to contracts, which are cancelable on short notice at any time, with or without cause. We cannot assure you that an existing client will decide not to terminate us or fail to renew a contract. In addition consolidation in the airline industry could also result in a loss of customers. Any such termination or failure to renew a contract with us could have a material adverse effect on our results of operations and financial condition. There is a material contract that will expire in 2011 and the Company is in the process of negotiations to renew the contract. If the negotiations will not be in the Company's favor it will have a material adverse effect on the Company's financial results. 8 If our relationship with our major customers is impaired, then there may be a material adverse affect on our results of operations and financial condition. Our major customers include the major airlines servicing the United States. Currently our customers' financial results have suffered because of the economic slowdown which affected our situation as service provider. The airline industry continues to encounter financial difficulties and this may have a material adverse impact on our business. Development of new technology As part of our technology business strategy, we develop technological solutions and systems for the aviation security industry, develop security activities other than aviation security such as banking, and seek other revenue producing businesses and business opportunities. We cannot assure you that we will be able to develop new systems or develop systems that are commercially viable. Our success in developing and marketing our systems will also depend on our ability to adapt to rapid technology changes in the industry and to integrate such changes into our systems. We cannot assure you that we will be successful in our attempts to change or implement our business strategy. We may not have the expertise to be successful in developing our business in areas that are not related to the security industry. We compete in a highly competitive industry and our competitors may be more successful in developing new technology and achieving market acceptance of their products. Competition Competition in the aviation security industry as well as in the non-security related aviation services industry is intense. Many of our competitors have greater financial, technical and marketing resources. We expect that our competitors will develop and market alternative systems and technologies that may have greater functionality or be more cost effective than the services we provide or the systems that we may develop. If our competitors develop such systems we may not be able to successfully market our systems. Even if we are able to develop systems with greater functionality which are more cost effective than those developed by our competitors, we may not be able to achieve market acceptance of our systems. Governmental regulation The aviation security industry is subject to extensive governmental regulation, the impact of which is difficult to predict. The Security Act has had a significant negative impact on our aviation security business in the USA. In addition, our ability to successfully market new systems will be dependent upon government regulations over which we have no control. Any existing or new regulation may cause us to incur increased expenses or impose substantial liability upon us. The likelihood of such new legislation is difficult to predict. For example, during 2007, the TSA took over part of Huntleigh's business related to ticketing. Annual loss of revenue due to taking of the business was approximately $5 million. 9 Legislation designed to protect privacy rights. From time to time, personal identity databases and technologies utilizing such databases have been the focus of organizations and individuals seeking to curtail or eliminate the use of personal identity information technologies on the grounds that personal information and these technologies may be used to diminish personal privacy rights. In the event that such initiatives result in restrictive legislation, the market for our products may be adversely affected. In addition, in the event that the Company fails to detect terrorist activity as a result of legislation designed to protect privacy rights, the market for our products may be adversely affected. Licenses for operations A license to operate is required from the airport authority in the airports in which we currently operate. The loss of, or failure to obtain, a license to operate in one or more of such airports could result in the loss of, or the inability to compete for, contracts in the airports in which we have licenses. Litigation We are currently a defendant in several significant lawsuits, the loss of which could have a material adverse effect on the Company. Currency risk A substantial portion of our revenue is generated in foreign countries. We generally retain our income in local currency at the location the funds are received. Since our financial statements are presented in United States dollars, any significant fluctuation in the currency exchange rate between such currency and the United States dollar would affect our results of operations and financial condition. Limitations in price share The market price of our common stock may be volatile, which may make it more difficult for you to resell your shares when you want at prices you find attractive. The market price of our common stock may from time to time be significantly affected by a large number of factors, including, among others, variations in our operating results, the depth and liquidity of the trading market for our shares, and differences between actual results of operations and the results anticipated by investors and securities analysts. Many of the factors which affect the market price of our common stock are outside of our control and may not even be directly related to us. Main shareholders activities As of December 31, 2009, there are three main shareholders in the Company, which own together approximately 81.3% of our shares (excluding conversion rights). Their interests could conflict with yours; significant sales of shares held by them could have a negative effect on our stock price. 10 Mr. Menachem Atzmon, a director and chairman of the Supervisory Board of the Company, as a representative of the Atzmon Family Trust, owns or controls approximately 61.4% of our issued and outstanding common stock (excluding conversion rights). As a result of such ownership, and/or control, the Atzmon Family Trust is able to significantly influence all matters requiring shareholder approval, including the election of directors and approval of significant corporate transactions. Such concentration may also have the effect of delaying or preventing a change in control. Dividends We cannot assure you that any dividends will be declared or paid on our common stock. Laws in the Netherlands As a Netherlands "Naamloze Vennootschap" (N.V.) public limited liability company, we are subject to certain requirements not generally applicable to corporations organized under the laws of jurisdictions within the United States. Among other things, the authority to issue shares is vested in the general meeting of shareholders, except to the extent such authority to issue shares has been delegated by the shareholders or by the Articles of Association to another corporate body for a period not exceeding five years. The issuance of the common shares is generally subject to shareholder preemptive rights, except to the extent that such preemptive rights have been excluded or limited by the general meeting of shareholders (subject to a qualified majority of two-thirds of the votes if less than 50% of the outstanding share capital is present or represented) or by the corporate body designated to do so by the general meeting of shareholders or the Articles of Association. Such a designation may only take place if such corporate body has also been designated to issue shares. In this regard, the general meeting of shareholders has authorized our Supervisory Board to issue any authorized and unissued shares at any time up to five years from December 17, 2008, the date of such authorization, and has authorized the Supervisory Board to exclude or limit shareholder preemptive rights with respect to any issuance of common shares prior to such date. Such authorizations may be renewed by the general meeting of shareholders from time to time, for up to five years at a time. This authorization would also permit the issuance of shares in an acquisition, provided that shareholder approval is required in connection with a statutory merger (except that, in certain limited circumstances, the board of directors of a surviving company may resolve to legally merge the company). Shareholders do not have preemptive rights with respect to shares which are issued against payment other than in cash. Our corporate affairs are governed by our Articles of Association and by the laws governing corporations incorporated in the Netherlands. Our public shareholders may have more difficulty in protecting their interests in the face of actions by the Supervisory Board or the Management Board, or their members, or controlling shareholders, than they would as shareholders of a company incorporated in the United States. Pursuant to mandatory Dutch corporate law, adoption of our annual accounts by the general meeting of shareholders does not automatically discharge the Supervisory Board and Management Board and their members from liability in respect of the exercise of their duties for the particular financial year. In order to discharge the Supervisory Board and Management Board and their members from liability a separate resolution thereto needs to be adopted by the general meeting of shareholders (which resolution 11 can be adopted in the same meeting in which the annual accounts will be adopted). Such discharge of the Supervisory Board and the Management Board and their members by the shareholders is subject to the provisions of Dutch law, including provisions relating to liability of members of supervisory boards and management boards upon the bankruptcy of a company pursuant to the relevant provisions of the Dutch Civil Code and is furthermore not absolute and will not be effective as to matters misrepresented or not disclosed to the shareholders. An individual member of the Supervisory Board or the Management Board who can prove that he is not at fault for such an omission or misrepresentation would not be liable. U.S. judgments may not be enforceable in the Netherlands A significant number of our activities are located outside the United States. In addition, members of the Management and Supervisory Boards and certain experts named herein are residents of countries other than the United States. As a result, it may not be possible for investors to effect service of process within the United States upon such persons or to enforce against such persons judgments of courts of the United States predicated upon civil liabilities under the United States federal securities laws. There is no treaty between the United States and the Netherlands for the mutual recognition and enforcement of judgments (other than arbitration awards) in civil and commercial matters. Therefore, a final judgment for the payment of money rendered by any federal or state court in the United States based on civil liability, whether or not predicated solely upon the federal securities laws, would not be directly enforceable in the Netherlands. The party that wishes to enforce such judgment in the Netherlands will have to institute second proceedings before a competent court in the Netherlands in order to obtain a similar decision that is capable of enforcement. A court in the Netherlands will, under current practice, normally issue a judgment incorporating the judgment rendered by the United States court if it finds that (i) the United States court assumed jurisdiction on international recognized grounds, (ii) the judgment was obtained in compliance with principles of due process, (iii) the judgment is final and conclusive and (iv) recognition of the judgment does not contravene the public policy or public order of the Netherlands. We cannot assure you that United States investors will be able to enforce any judgments in civil and commercial matters, including judgments under the federal securities laws against us or members of the Management or Supervisory Board [or certain experts named herein] who are residents of the Netherlands or countries other than the United States. In addition, a court in the Netherlands might not impose civil liability on us or on the members of the Management or Supervisory Boards in an original action predicated solely upon the federal securities laws of the United States brought in a court of competent jurisdiction in the Netherlands. Item 4. Information on the Company History and Development of the Company Unless the context indicates otherwise, all references herein to the "Company" or "ICTS" include ICTS International N.V., and its subsidiaries. 12 Aviation Security and Other Aviation Services Business ICTS is a public limited liability company organized under the laws of The Netherlands in 1992. Our offices are located at Biesbosch 225, 1181 JC Amstelveen, The Netherlands and its telephone number is +31-20-347-1077. The Company's predecessor, International Consultants on Targeted Security Holland B.V. ("ICTS Holland"), was founded in the Netherlands in 1987. Until 1994, subsidiaries and affiliates of ICTS Holland conducted similar business in which the Company is currently engaged. As of January 1, 1994, ICTS Holland's interest in its subsidiaries was transferred to ICTS International B.V. ("ICTS International"). Thereafter, ICTS International purchased from a third party all of the outstanding shares of ICTS Holland, incorporated in The Netherlands in 1992 without any operations prior to its acquisition by ICTS International. As of January 1, 1996, the Company acquired all of the assets and assumed all of the liabilities of ICTS International. As of January 1, 1999, the Company acquired 80% of the issued and outstanding capital stock of Huntleigh and in January 2001 the Company exercised its option to acquire the remaining 20% making Huntleigh a wholly owned subsidiary. Huntleigh is a provider of aviation services and limited security services in the United States. In the wake of the events which occurred on September 11, 2001, the Federal Government of the United States, in November, 2001, enacted the Aviation and Transportation Security Act (the "Security Act") Public Law 107-71. Under the Security Act, entities may provide aviation security services in the United States only if they are owned and controlled at least 75% by U.S. citizens. As a company organized under the laws of the Netherlands, ICTS is not able to comply with the ownership requirements under the Security Act. The Security Act is administered through the TSA. In the fourth quarter of 2002, pursuant to the Security Act, the Federal government through the TSA, took over substantially all of the aviation security operations in U.S. airports. As a result, ICTS, through its wholly owned subsidiary, Huntleigh, provides limited aviation services in the United States. In 2001 and 2002, ICTS sold substantially all of its European operations in two stages, for an aggregate purchase price of $103 million. As a result of the sale, ICTS fully divested itself at that time from its European operations, except for its operations in the Netherlands and Russia. In February 2005, as the non-competition restrictions related to the sale of the European aviation security operations as mentioned above expired, the Company made a strategic decision to re-enter the European aviation security market. In March 2005, the Company established a wholly owned subsidiary, I-SEC International Security B.V., under which all the European aviation security activities provided by ICTS are operated. Since 2005, the company re-entered the aviation security business in Europe by signing contracts with U.S. certain carriers. Following these contracts I-SEC established new subsidiaries throughout Europe and the Far East, in the Netherlands, France, England, Spain, Hungary, Germany, Japan and other countries. 13 Technology Business Our technology business is predominantly involved in the development and sale of identity security software to aviation market and financial institutions, predominantly in Europe and Israel. Entertainment Business On December 23, 2003, the Company, through wholly owned subsidiaries, purchased from ITA International Tourist Attractions, Ltd., ("ITA") certain assets owned by ITA and used by it in the development, establishment and operation of motion-based entertainment theaters. In early 2006, the Company closed its motion-based entertainment theaters. From this date on, the financial results of the entertainment business have been included in discontinued operations on the Company's consolidated financial statements. The nature of the ongoing discontinued operations of the entertainment business consists mainly of activities associated with the settlement of ongoing litigation, including disputes related to unpaid vendor and rent obligations. Business Overview General ICTS specializes in the provision of aviation security services. Following the taking of its aviation security business in the United States by the TSA in 2002, ICTS through its subsidiary Huntleigh engages primarily in non-security related activities in the USA. ICTS, through I-SEC International Security B.V. ("I-SEC"), supplies aviation security services at airports in Europe and the Far East. In addition, I-SEC Technologies B.V. and its subsidiaries develop technological systems and solutions for the following markets: aviation and non-aviation security, banking and other markets. Business Strategy We are currently pursuing the following business strategy: Developing Security Related Technology We are focusing on developing security systems and technology for the aviation security and non-aviation security markets. ICTS is using the know-how and expertise it has acquired in the provision of enhanced aviation security services to develop such security systems and technology. Aviation Security Operations in Europe Through the I-SEC subsidiary, we supply aviation security at airports, airlines and governments in Europe and the far east. During 2008, I-SEC was contracted to provide and extend the security services it provides to Schiphol Airport in Amsterdam ("Schiphol"). The contract is for a period of five years. ICTS NAS, a partnership in which ICTS held 50% interest, had one contract serving Schiphol which expired in February 2008. ICTS NAS is being liquidated. 14 U.S. Operations We continue to provide limited security services and non-security aviation services in the U.S. through its subsidiary, Huntleigh. Services Services Offered in Europe In 2005, the Company completed the initial phase of its re-entry and penetration into the international aviation security market. This phase, executed in parallel to the expansion of the Company's existing operations in The Netherlands and in Russia, includes the establishment of subsidiaries and the provision of services at international airports in London, United Kingdom; Paris, France; Barcelona, Spain; Budapest, Hungary; Edinburgh, Scotland, Tokyo, Japan and others. I-SEC is supplying a range of aviation security services and implementing state-of-the-art technologies at these locations within the framework of long-term contracts signed with various airlines. We also provide consulting services to airlines and airports through the I-SEC subsidiary. We recommend the adoption of specified security procedures, develop recruitment and training programs for clients to hire necessary security personnel and work with airport authorities to ensure that they comply with applicable local requirements. We train airline employees to screen passengers and to perform other security measures through extensive courses and written training manuals. Services Offered in the United States Prior to the enactment of the Security Act, Huntleigh was one of the leading providers of security and non-security aviation services in the United States. Huntleigh currently provides limited aviation security services and other separate services at approximately 27 airports in 23 states. The limited security services provided by Huntleigh involves the following: o Charter Flight Screening for Airlines - which includes security check of passengers' body and carry-on items. o Cargo Security Screening - for some international and domestic carriers. o Aircraft Search - Search of the entire aircraft to detect dangerous objects. Each of the non-security services involves one of the following specific job classifications: Agent Services For Airlines Agent services include: passenger service, ground handling, vendor behind counters and baggage service. Although an agent is a Huntleigh employee, the employee is considered a representative of specific airlines. Guard Services Guard services involve guarding secured areas, including aircraft. 15 Queue Monitors Huntleigh provide queue monitors assisting passengers before the checkpoint. Aircraft Cleaning Huntleigh provides employees who perform interior aircraft cleaning services. Janitorial Huntleigh provides to airline airport offices, airline terminal areas, airline gates, etc. cleaning (janitorial) services. Ramp Services Ramp services include: o directing the aircraft into the arrival gate and from the departure gate o cleaning the aircraft o conducting cabin searches o stocking supplies o de-icing the aircraft and o moving luggage from one airplane to the baggage room and vice versa. Shuttle Service Huntleigh shuttles airline crews from their hotels to the aircraft back and forth in airports. Skycap Services Provider A skycap assists passengers with their luggage. Located at the curbside of the check-in at airports, a skycap checks in passengers' luggage and meets security requirements established by the TSA to screen passengers. A skycap also assists arriving passengers with transporting luggage from the baggage carousel to ground transportation or other designated areas. A skycap also may transport checked baggage from the curbside check-in to the airline counter. Concierge Service involves a skycap monitoring the baggage carousel to ensure that passengers do not remove luggage not belonging to them. Wheelchair attendants Wheelchair attendants transport passengers through the airport in airline and/or Company owned wheelchairs and may also operate electric carts for transporting passengers through the airport. Working closely with the attendants are dispatch agents who monitor requests and assignments for wheelchairs and dispatch the attendants as needed. 16 Baggage Handling Services Huntleigh provides employees who move passengers' baggage from the check- in counter to screening machines and/or vice versa, as well as moving oversized baggage from check-in to appropriate bag belts. Technological Systems and Solutions The Company, through its subsidiaries is involved in the development and sale of the technology listed below. APS The accumulated know-how and expertise of ICTS in the implementation of computer-based processors for advanced passenger screening enabled ICTS to develop its APS technology and system. The APS system is an automated computerized system that enables the pre-departure analysis of passenger information and is designed to screen airline passengers in a faster and more efficient manner. I-BOX I-BOX, a unique technological platform developed by the Company, comprises one of the main contributors to operational efficiency of the Company and is being used as part of our aviation security systems. It is an advanced mobile unit that can be implemented with multiple choices of software packages. The I-BOX systems provides an unparalleled level of performance while reducing processing times to a minimum, thus eliminating related delays and avoiding inconvenience to the passengers. The I-BOX system has been deployed successfully in various locations around the world, providing our customers with enhanced security operations. Travel Documents Check Travel DocCheck (TDC) is the travel industry's most reliable and easy to operate system for automated clearing of travel document compliance. It verifies that the passengers' travel documents fully comply with the requirements of countries of destination and transit prior to embarkation, and also facilitates the detection of forged travel documents. Automated Travel Check enhances the level of security, assists in combating illegal immigration and reduces or mitigates associated civil penalties for airlines. Identity Document Authentication and Management System (FDI) FDI is designed to speed-up client authentication and capture/retrieve document data and images. FDI is a fully automated, easy to operate, front-end client enrollment system. Key features: o Full page document scanning (automated or push-button) o Hi-resolution document imaging o Photograph extraction o Full content extraction 17 o Multi-layer identity authentication (performance enabled by client hardware capabilities) o Simple indications o Ability to investigate alerts, carry out manual double-checks and investigate template and watch-list libraries FDI works with a range of operating system environments and terminals with minimal system requirements. The system can work with a wide range of document scanners (from simple scanners to full featured 3-illumination enterprise scanners) and links with any type of biometric input device. FDI-equipped terminals can work stand-alone or in real-time network with enterprise systems. Electronic Identity Document Authentication and Management System ("E-ID") E-ID is a fully automated system for authentication and enrollment of persons carrying electronic identity documents (ePassports, e-IDs/EMV cards). E-ID is designed to speed-up full scope client authentication, capture/retrieve printed, embedded and electronic data, and capture document images. Key features: o Full capture of electronic chip data (in compliance with country and industry regulations) o Handling of all common electronic security standards o Full page document scanning (automated or push-button) o Hi-res document imaging o Photograph extraction o Full content extraction o Multi-layer identity authentication (performance enabled by client hardware capabilities) o Simple indications o Ability to investigate alerts, carry out manual double-checks and investigate template and watch-list libraries E-ID works with a range of operating system environments and terminals with minimal system requirements. The system can work with a wide range of document scanners (simple scanners, full featured 3-illumination enterprise scanners), self-service kiosks, with internal or external biometric chip readers, and links with any type of biometric input device. E-ID equipped terminals can work stand-alone or in real-time network with enterprise systems. 18 Smart Document reader (SDR) SDR is a proprietary state-of-the-art software solution that automatically extracts data from a variety of standard and non-standard travel documents, ID documents, E-ID documents, driver's licenses, airline boarding passes and various mass transit tickets at extremely high levels of accuracy and speed. SDR also implements various advanced means and proprietary checks to detect forged documents. It comprises a main component in many of the advanced technological systems offered by the Company. Bank Client Security and regulatory Compliance Solution ICTS, through its subsidiary, I-SEC Technologies B.V., offers a unique front-end solution meeting the banking industry's security and regulatory compliance requirements, including Section 326 of the USA Patriot Act, while also ensuring that bank clients are provided with a high level of customer service. It is a fully automated banking check authentication system. Contrary to back-end systems offered by the competitors, our front-end solution incorporates unique features, such as a dynamic questionnaire, developed on the basis of ICTS's experience in detection of suspicious signs and in advanced document checks. Marketing of Security Systems and Technology We market our technologies by establishing projects with airports, airlines, banks and other existing and potential customers. Main Customers In 2009 we had two main customers, each one constituting 10% or more of the Company's consolidated revenues, which accounted together for 56%, 55% and 29% of our revenue during the years ended December 31, 2009, 2008 and 2007, respectively. Revenue Revenue in the U.S. Our revenue in the USA during the years 2009, 2008 and 2007 totaled $36.8 million (38% of total revenue), $40.4 million (41% of total revenue) and $46.7 million (72% of total revenue) respectively. Revenue in Europe, Japan and other locations Our revenue in Europe, Japan and other locations during the years 2009, 2008 and 2007 totaled $59.1 million (62% of total revenue), $58.0 million (59% of total revenue) and $18 million (28% of total revenue) respectively. Competition Competition in the aviation security industry as well as in the non-security related aviation services industry is intense. Many of our competitors have greater financial, technical and marketing resources. 19 We expect that our competitors will develop and market alternative systems and technologies that may have greater functionality or be more cost effective than the services we provide or the systems that we may develop. If our competitors develop such systems we may not be able to successfully market our systems. Even if we are able to develop systems with greater functionality which are more cost effective than those developed by our competitors, we may not be able to achieve market acceptance of our systems because our competitors have greater financial and marketing resources. Aviation Security Regulatory Matters Our aviation security activities are subject to various regulations imposed by authorities and various local and federal agencies having jurisdiction in the serviced area. ICTS, on behalf of its clients, is responsible for adherence to such regulations relating to certain security aspects of their activities. ICTS is also responsible to prevent passengers without proper travel documentation from boarding a flight, thereby avoiding fines otherwise imposed on its clients by immigration authorities. We are subject to random periodic tests by government authorities with regard to the professional level of its services and training. Any failure to pass such a test may result in the loss of a contract or a license to perform services or a fine or both. In the airports in which we operate, a license to operate is required from the respective airport authority. ICTS currently holds the licenses required to operate in such locations. Climate Change Regulation Our business is not affected directly or indirectly in any way by existing and pending, local, state, regional, federal or international legal requirements and agreements related to climate change. Organizational Structure The following are the significant subsidiaries of ICTS as of December 31, 2008: ICTS USA, Inc. (New York - 100%) and its wholly-owned subsidiaries. I-SEC Technologies B.V. (The Netherlands - 100%) and its wholly-owned subsidiaries. I-SEC Global Security B.V. (The Netherlands - 100%) and its wholly-owned subsidiaries. Property, Plant and Equipment We lease premises under long-term operating leases, in most cases with renewal options. Lease expenses from continuing operations for the years ended December 31, 2009, 2008 and 2007 were $1.9 million, $1.5 million and $1.2 million, respectively. 20 Future minimum lease payments under long-term leases from continued operations are as follows (in thousands): Year Ended December 31, 2009 ----------------- 2010 $ 1,196 2011 1,139 2012 1,131 2013 1,019 2014 1,004 ------- $ 5,489 ------- Item 5. Operating and Financial Review and Prospects This section contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 concerning our business, operations and financial condition. All statements other than statements of historical facts included in this annual report on Form 20-F regarding ICTS's strategy, future operations, financial position, costs, prospects, plans and objectives of management are forward-looking statements. When used in this annual report on Form 20-F the words "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate", and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. Because these forward-looking statements involve risks and uncertainties, actual results could differ materially from those expressed or implied by these forward-looking statements for a number of important reasons, including those discussed under "Risk Factors" and elsewhere in this annual report on Form 20-F. We cannot guarantee any future results, levels of activity, performance or achievements. The forward-looking statements contained in this annual report on Form 20-F represent management's expectations as of the date of this annual report on Form 20-F and should not be relied upon as representing ICTS's expectations as of any other date. Subsequent events and developments will cause management's expectations to change. However, while we may elect to update these forward-looking statements, ICTS specifically disclaims any obligation to do so, even if its expectations change. Overview We operate in two reportable segments (a) airport security and other aviation services and (b) technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provide security and other services to airlines and airport authorities, predominantly in the United States of America and Europe. The technology segment is predominantly involved in the development and sale of identity security software to financial institutions and airport authorities, predominantly in Europe and Israel. 21 In December 2005, we committed to a plan to cease the operations of our entertainment segment in the United States of America. Accordingly, as of that date, the assets, liabilities and results of operations of the entertainment segment were classified as discontinued operations in the Company's consolidated financial statements. The nature of the ongoing discontinued operations of the entertainment segment consists mainly of activities associated with the settlement of ongoing litigation, including disputes related to unpaid vendor and rent obligations. In July 2009, the Company entered into a settlement arrangement with the former landlord of the entertainment segment to resolve all disputes between the parties related to unpaid rent obligations. Critical Accounting Policies The consolidated financial statements have been prepared in accordance with U.S. GAAP. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Our critical accounting policies that require the use of judgment and estimates are listed below. Please refer to Note 2 of ICTS's consolidated financial statements included in this Annual Report for the year ended December 31, 2009 for a summary of ICTS's significant accounting policies. Accounts Receivable Accounts receivable represent amounts due to the Company for services rendered and are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on historical collection experience, factors related to a specific customer and current economic trends. The Company writes off accounts receivable against the allowance for doubtful accounts when the balance is determined to be uncollectible. Long-Lived Assets We review long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset's carrying value. Contingent Liabilities We are subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the normal course of its business activities. Liabilities for such contingencies are recognized when: (a) information available prior to the issuance of the consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can reasonably be estimated. 22 Stock-Based Compensation Share-based payment awards to employees, including stock options, are measured at the fair value of the award on the date of grant based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The compensation expense resulting from share-based payments is recorded over the vesting period of the award in selling, general and administrative expense in the accompanying consolidated statements of operations. Income Taxes We account for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when realization of net deferred tax assets is not considered more likely than not. Uncertain tax positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position is recognized in the consolidated financial statements in the period during which management believes it is more likely than not that the position will not be sustained. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured is reflected as income taxes payable in the accompanying consolidated balance sheets. The Company recognizes interest related to uncertain tax positions in interest expense. The Company recognizes penalties related to uncertain tax positions in selling, general and administrative expenses. Recently Issued Accounting Pronouncements In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141(R), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) replaces Statement of Financial Accounting Standards No. 141, "Business Combinations," and was primarily codified into FASB Accounting Standards Codification Topic 805, "Business Combinations" ("ASC 805"). ASC 805 establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including non-controlling interests, contingent consideration, and certain acquired contingencies. ASC 805 also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. The Company adopted ASC 805 on 23 January 1, 2009. ASC 805 will have an impact on the accounting for any businesses acquired by the Company after its date of adoption. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160"). SFAS 160, which was primarily codified into FASB Accounting Standards Codification Topic 810, "Consolidation" ("ASC 810"), establishes accounting and reporting standards for the non-controlling interest in a subsidiary (previously referred to as minority interests). ASC 810 requires non-controlling interests to be reported as a separate component of stockholder's deficiency and present any net income (loss) allocable to non-controlling interests and stockholders separately in its statement of operations. ASC 810 also requires that a retained non-controlling interest, upon the deconsolidation of a subsidiary, be initially measured at its fair value. The Company adopted ASC 810 on January 1, 2009. ASC 810 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. In April 2008, the FASB issued FASB Staff Position SFAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP SFAS 142-3"). FSP SFAS 142-3, which was primarily codified into FASB Accounting Standards Codification Topic 350, "Goodwill and Other Intangible Assets" ("ASC 350"), amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under this guidance. The objective of this guidance is to improve the consistency between the useful life of a recognized intangible asset under this guidance and the period of expected cash flows used to measure the fair value of the asset under ASC 805 and other US GAAP. The Company adopted ASC 350 as of January 1, 2009. The adoption of ASC 350 did not have a material effect on the Company's consolidated financial position, results of operations, or cash flows. In June 2008, the FASB ratified EITF 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-05"). EITF 07-5, which was primarily codified into FASB Accounting Standards Codification Topic 815, "Derivatives and Hedging ("ASC 815")," provides framework for determining whether an instrument is indexed to an entity's own stock. The Company adopted ASC 815 as of January 1, 2009. The adoption of ASC 815 did not have a material effect on the Company's consolidated financial position, results of operations, or cash flows. In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165, which was primarily codified into FASB Accounting Standards Codification Topic 855, "Subsequent Events" ("ASC 855"), establishes standards for the accounting and disclosure of subsequent events. ASC 855 introduces new terminology, defines a date through which management must evaluate subsequent events, and lists the circumstances under which an entity must recognize and disclose events or transactions occurring after the balance sheet date. The Company adopted ASC 855 on December 31, 2009. The adoption of ASC 855 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. 24 In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)." SFAS 167, which was primarily codified into FASB Accounting Standards Codification Topic 810, "Consolidation" ("ASC 810") seeks to improve financial reporting by enterprises involved with variable interest entities. The Company adopted ASC 810 as of January 1, 2009. The adoption of ASC 810 did not have a material effect on the Company's consolidated financial position, results of operations, or cash flows. In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS 168"). SFAS 168, which was primarily codified into FASB Accounting Standards Codification Topic 105, "Generally Accepted Accounting Principles" ("ASC 105"), established the FASB Accounting Standards Codification as the source of authoritative nongovernmental generally accepted accounting principles in the United States of America ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of these provisions, the codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the codification became non-authoritative. The Company adopted ASC 105 on December 31, 2009. In December 2009, the FASB issued Accounting Standards Update 2009-17, "Consolidations - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities" ("Update 2009-17"). Update 2009-17 amends Topic 810, "Consolidations" of the Accounting Standards Codification by replacing the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (a) the obligation to absorb losses of the entity or (b) the right to receive benefits from the entity. The amendments also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the information provided to users of financial statements. The adoption of Update 2009-17 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. In February 2010, the FASB issued Accounting Standards Update 2010-9, "Subsequent Events, Amendments to Certain Recognition and Disclosure Requirements" ("Update 2010-9"). Update 2010-9 amends Topic 855, "Subsequent Events," of the Accounting Standards Codification by eliminating the requirement to disclose the date through which subsequent events were evaluated for public entities and clarifying the application of ASC 855 in revised financial statements. The amendments in Update 2010-9 are effective upon issuance. The Company adopted Update 2010-9 on December 31, 2009. The adoption of Update 2010-9 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. 25 Results of Operations The following table summarizes our results of operations for the years ended December 31, 2009, 2008 and 2007:
(U.S. Dollars in thousands) Year Ended December 31, -------------------------------------------------- 2009 2008 2007 -------- -------- -------- Revenue $ 95,861 $ 98,809 $ 64,780 Cost of revenue 83,491 85,107 52,397 -------- -------- -------- GROSS PROFIT 12,370 13,702 12,383 Selling, general and administrative expenses 14,313 15,341 13,338 -------- -------- -------- OPERATING LOSS (1,943) (1,639) (955) Other income (expense), net (1,638) (856) (3,580) -------- -------- -------- LOSS BEFORE EQUITY LOSS FROM INVESTMENTS IN AFFILIATES AND INCOME TAX BENEFIT (EXPENSE) (3,581) (2,495) (4,535) Equity loss from investments in affiliates -- -- (2,479) Income tax benefit (expense) 418 (402) (966) -------- -------- -------- LOSS FROM CONTINUING OPERATIONS (3,163) (2,897) (7,980) Income from discontinued operations 6,086 928 5,422 -------- -------- -------- NET INCOME (LOSS) $ 2,923 $ (1,969) $ (2,558) ======== ======== ========
The following table sets forth, for the annual periods indicated, certain results of operations data as a percentage of revenue for the years ended December 31, 2009, 2008 and 2007: Year Ended December 31, -------------------------- 2009 2008 2007 ----- ----- ----- Revenue.......................................... 100% 100% 100% Cost of revenue ................................. 87.1% 86.1% 80.9% Gross profit..................................... 12.9% 13.9% 19.1% Selling, general and administrative expenses..... 15.0% 15.5% 20.6% Operating loss................................... (2.1)% (1.7)% (1.5)% Loss from continuing operations.................. (3.3)% (2.9)% (12.3)% Income from discontinued operations.............. 6.4% 0.9% 8.4% Net income (loss)................................ 3.1% (2.0)% (3.9)% The following table sets forth, for the annual periods indicated, revenue generated by country: (U.S. Dollars in thousands) Year ended December 31, ----------------------------------- 2009 2008 2007 ----------------------------------- United States of America $36,794 $40,421 $46,745 Netherlands 42,344 44,173 7,619 Other 16,723 14,215 10,416 ------- ------- ------- Total $95,861 $98,809 $64,780 ======= ======= ======= 26 Year Ended December 31, 2009 Compared to Year Ended December 31, 2008 (U.S. Dollars in thousands unless otherwise indicated) Revenue. Revenue decreased from $98.8 million during the year ended December 31, 2009 to $95.9 million during the year ended December 31, 2009. Such decrease resulted from a decrease in revenue from operations in the U.S. of $3.6 million and operations in Netherlands of $1.9 million partially offset by an increase in operations in other locations of $2.6 million. The decrease in revenue in the U.S. relates mostly to the slowdown in the global economy, which resulted in the provision of less services. In addition, during 2009, the Company evaluated its service contacts and elected to terminate certain unprofitable contracts. The decrease in revenue in the Netherlands is mainly due to currency fluctuations as the 2008 average exchange rate (1.47 Dollar to Euro) decreased in 2009 (1.39 Dollar to Euro). Revenue in 2009 based on the 2008 exchange rate would total $44.7 million compared to $44.2 million in 2008. The increase in revenue from other locations is mainly attributed to a full year of operations in Tokyo, Japan. Cost of Revenue. The cost of revenue decreased from $85.1 million in 2008 to $83.5 million in 2009. The decrease was mainly due to a decrease in payroll and related costs as a result of the decline in revenue. However, our gross margin also decreased from 13.9% to 12.9% mainly due higher costs associated with providing technology-related support services in Israel. Selling, General and Administrative Expenses ("SG&A".) SG&A expenses were $14.3 million for the year ended December 31, 2009 or 15% of revenue, compared to $15.3 million or 15.5% of revenue for the year ended December 31, 2008. This decrease mainly results from a decrease in legal and professional fees associated with the Company defending itself against various legal claims and the elimination of start-up costs we incurred during year ended December 31, 2008 to expand our operations in Europe and Japan, partially offset by a one-time non-cash charge of $0.6 million related to the issuance of shares to a related party. Other Income (Expense), net. Other expenses for the year ended December 31, 2009 totaled $1.6 million compared to $0.9 million in 2008. This increase in other expenses is due to a one-time recovery of $0.4 million related to the release of a guarantee in 2008 that the Company previously provided to a third party and the increase in foreign currency losses related to transactions denominated in Euros. Income Tax Benefit (Expense). In 2009, the Company had an income tax benefit of $0.4 million compared to income tax expense of $0.4 million in 2008. In 2009, the Company recognized a benefit of $0.4 million related to its activities in Europe. The decrease in the income tax expense in 2009 compared to 2008 is primarily due to the decrease in income from continuing operations at certain European locations. 27 Income from Discontinued Operations. Income from discontinued operations totaled $6.1 million in 2009 compared to $0.9 million in 2008. The increase results mainly from the recovery of $4.7 million related to the settlement of a dispute with the former landlord of the Company's entertainment segment related to unpaid rent obligations of $7.3 million and the recovery of $1.2 million in vendor disputes resulting from management's assessment that payments to resolve the dispute are unlikely. Year Ended December 31, 2008 Compared to Year Ended December 31, 2007 (U.S. Dollars in thousands unless otherwise indicated) Revenue. Revenues for the year ended December 31, 2008 were $98.8 million (2007: $64.8 million) consisted of $40.4 million (2007: $46.7 million) from US operations, $44.2 million (2007: $7.6 million) from operations in The Netherlands, $6.4 million (2007: $4.8 million) from operations in France and $7.8 ,million (2007: $5.7 million) from operations in other locations. The decrease in the revenues from the operations in the US relates mostly to the fact that since the fourth quarter of 2007 the TSA operates the checks of the boarding authorization of passengers and the comparison to the passengers' IDs before allowing the passengers to pass through the checkpoint. Loss of revenues for the Company is approximately $5 million for 2008. Increase in the revenue from The Netherlands relates mainly to a new contract with Schiphol Airport which added $34.4 million to the revenues. Increase in the other locations was the result of increase in new contracts and more volume at existing locations. Cost of Revenue. The cost of revenue in 2008 was reduced by $4.3 million related to the agreement of the Company with the DOL. In addition, in 2008, the Company expanded its operations in Europe, which resulted in additional cost of revenue related to labor and start-up costs in the Netherlands. These additional labor and start-up costs resulted in the decrease in the gross margin percentage from 19.1% in 2007 to 13.9% in 2008. Selling, General and Administrative Expenses. Selling, general and administrative expenses were $15.3 million for the year ended December 31, 2008 or 15.5% as percentage of revenue, as compared to $13.3 million, 20.6% as percentage of revenue for the year ended December 31, 2007. The 2007 SG&A expenses included $1.1 million expense regarding potential penalties resulting from IRS audit for the years 2002 - 2004, comparing to a penalty reduction of $0.2 million in 2008 recorded as part of the IRS tax accrual examination by the Company's tax advisors. The SG&A expenses, net of the IRS penalties, totaled $15.5 million in 2008 compared to $12.2 million in 2007. The increase in the SG&A expenses in 2008 relate mainly to the increase of the aviation security operations in Europe. Other Income (Expenses), Net. Other expense for the year ended December 31, 2008 totaled $0.9 million compared to $3.6 million in 2007. Other expense for the year 2008 relates to the following: (a) Income of $0.4 million relates to agreement between the Company and Bilu which released ICTS from guarantees that were provided by the Company in the past and were fully accrued for. 28 (b) Financial expenses net in 2008 were $1.3 million (2007: $3.3 million). Financial expenses of $0.5 million compared to $2.2 million in 2007, relate to estimated interest for previous years' possible tax exposure in the US. Interest expenses to related parties totaled $0.3 million, both in 2008 and 2007. The interest is calculated according to the loan terms - Libor plus 1.5%. The outstanding loan as of December 31, 2008 was $6.1 million compared to $6.5 million in 2007. (c) Other expenses in 2007 of $0.3 million included profit of $0.3 million from investments that were fully impaired in the previous years and an impairment of the investment in Plangraphics which totaled $0.6 million. Income Tax Benefit (Expense). Tax expenses in 2008 totaled $0.4 million compared to $1.0 million in 2007. The Company expensed in 2008 an amount of $0.2 million regarding the 2002-2004 IRS audit compared to $0.7 million in 2007. Equity Loss from Investment in Affiliates. During 2007 the Company wrote off all its investments in associated companies. As a result of that the share in loss of associated companies in 2008 was zero compared to $2.5 million in 2007. Income from Discontinued Operations. ICTS's profit from discontinued operations totaled $0.9 million compared to profit of $5.4 million in 2007. There are two legal claims outstanding against us regarding our discontinued operations. We have fully accrued for the claims of the landlord regarding the two sites of the entertainment operations. As of December 31, 2008 and 2007 the total accruals were $7.3 and $8.5 million, respectively. The change of $1.2 million on the accruals was recorded based on the change in the claims. In 2007 the Company recognized similar income of $1.6 million following the changes in the claims between the years 2007 and 2006. The 2007 amount included also $2.8 million relating to refund received from the IRS in the USA. 29 The following table sets forth, for the annual periods indicated, certain financial data related to the Company's reportable segments. (U.S. Dollars in thousands)
Airport Security and Other Aviation Corporate Services Technology Total ---------------------------------------------- Year ended December 31, 2009: Revenue $ -- $ 95,146 $ 715 $ 95,861 Depreciation and amortization 11 681 23 715 Income (loss) from continuing operations (3,729) 2,777 (2,211) (3,163) Year ended December 31, 2008: Revenue -- 97,930 879 98,809 Depreciation and amortization 12 741 29 782 Income (loss) from continuing operations (5,120) 2,965 (742) (2,897) Year ended December 31, 2007: Revenue -- 63,982 798 64,780 Depreciation and amortization 25 1,163 30 1,218 Loss from continuing operations (4,825) (2,722) (433) (7,980)
Corporate Segment Loss from continuing operations decreased for the year ended December 31, 2009 as compared to the year ended December 31, 2008 primarily due to the recognition of income tax expense associated with uncertain tax positions in 2008 and a decrease in legal and professional fees in U.S. during the year ended December 31, 2009. Loss from continuing operations increased for the year ended December 31, 2008 compared to the year ended December 31, 2007 primarily due to one-time expenses incurred in 2007 related to the Company's new contract with Schiphol Airport in the Netherlands as well as the recognition of certain tax positions in the U.S. Airport Security and Other Aviation Services Segment The decrease in revenue for the year ended December 31, 2009 compared to the year ended December 31, 2008 relates mostly to a decrease in revenue in the U.S. and Europe offset by an increase in revenue from the newly established operation in Japan. The decrease in income from continuing operations for the year ended December 31, 2009 compared to 2008 is primarily due fluctuations in the currency exchange rates and a decrease in the U.S. business. The increase in revenue for the year ended December 31, 2008 compared to the year ended December 31, 2007 results mainly from a new contract with Schiphol Airport in the Netherlands, which added $34.4 million of revenue. The 30 increase in income from continuing operations for the year ended December 31, 2008 compared to 2007 was mainly due to the expansion of operations in the Netherlands, which were profitable and a decrease in amortization expense related to the customer relationship, which was fully amortized in 2008. Technology Segment During the year ended December 31, 2009, the Company expanded its costs for the technology activities mostly by recruiting more employees, which resulted in an increase in payroll and related costs. Liquidity and Capital Resources The most significant expenditures for all of our businesses are related to payroll and related costs, legal fees and other professional fees. We have historically financed such expenditures through cash flows from operations and funding received from a line of credit with a commercial bank in the United States of America and borrowings from a convertible note arrangement with a related party. As of December 31, 2009, the Company has cash on hand of $4.8 million (not including a short-term certificate of deposit of $3.5 million, which serves as collateral for its line of credit in the United States of America). We have a history of recurring losses from continuing operations and working capital deficiencies. The Company incurred losses from continuing operations of $3.2 million, $2.9 million and $8 million during the years ended December 31, 2009, 2008, and 2007, respectively. As of December 31, 2009, the Company had a working capital deficit and shareholders' deficiency of $10.6 million and $18.3 million, respectively. In addition, the Company is subject to potential material contingencies in connection with: (a) its exposure to certain tax assessments made against it in the United States of America by the Internal Revenue Service, (b) the September 11, 2001 terrorist attacks in the United States of America, (c) certain claims made against the Company by the United States Department of Labor, and (d) certain claims made against the Company by the United States Transportation Security Administration ("TSA"). Furthermore, one of the subsidiaries of ICTS is in default of its line of credit in the United States of America, which expires on September 30, 2010, as a result of violations of certain required financial covenants. These factors raise substantial doubt about the Company's ability to continue as a going concern. The report of our independent registered public accounting firm on our 2009 consolidated financial statements includes an explanatory paragraph stating that there is substantial doubt with respect to our ability to continue as a going concern. Management believes that the Company's operating cash flows and related party financing activities will provide it with sufficient funds to meet its obligations and execute its business plan for the next twelve months. However, there are no assurances that management's plans to generate sufficient cash to continue to operate the Company will be successful. The 2009 consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 31 Cash Flows from Operating Activities Our cash flows from operating activities vary significantly from year to year, depending on our operating results and timing of cash receipts and disbursement on accounts receivable and payable. Net cash used in operating activities for the year ended December 31, 2009 was $4.6 million. This use of cash resulted from a net loss from continuing operations of $3.2 million and net cash used by operating assets and liabilities of $2.7 million, partially offset by non-cash charges of $0.7 million for depreciation and amortization and $0.6 million relating to an issuance of common stock to a related party. The net cash used in operating assets and liabilities is primarily attributable to a decrease in accounts payable of $1.4 million and cash used in discontinued operations of $1.9 million, partially offset by an increase in accrued expenses and other current liabilities of $0.6 million. For the year ended December 31, 2008, net cash provided by operating activities was $3.9 million. This resulted from a net loss from continuing operations of $2.9 million and net cash provided by operating assets and liabilities of $5.9 million, partially offset by non-cash charges of $0.8 million for depreciation and amortization, offset by $0.1 million in stock-based compensation. The net cash provided by operating assets and liabilities is primarily attributable to an increases in accrued expenses and other liabilities of $4.9 million, net cash provided by discontinued operations of $2.4 million, partially offset by increase in accounts receivable of $1.3 million. For the year ended December 31, 2007, net cash used in operating activities was $3.6 million. This use of cash resulted from a net loss from continuing operations of $8.0 million and net cash provided by operating assets and liabilities of $3.9 million, partially offset by non-cash charges of $1.2 million for depreciation and amortization, $3.1 million related to the impairment of marketable equity securities and investment in affiliates, $0.4 million in stock-based compensation and a gain on a settlement of a liability of $4.3 million. The net cash provided by operating assets and liabilities is primarily attributable to increases in accounts payable of $0.6 million and accrued expenses and other current liabilities of $2.8 million. Cash Flows from Investing Activities Net cash used in investing activities for the year ended December 31, 2009 was $0.8 million and consisted primarily of capital expenditures. Net cash provided by investment activities for the year ended December 31, 2008 was $0.6 million and consisted primarily of capital expenditures of $1.0 million and an increase in other assets of $0.2 million, partially offset by a decrease in restricted cash of $1.8 million. Net cash used in investing activities for the year ended December 31, 2007 was $1.1 million and consisted primarily of capital expenditures of $0.8 million and an increase in restricted cash of $0.8 million, partially offset by proceeds from sale of property and equipment and equity method investments of $0.4 million. 32 In March 2010, we purchased 5,400,000 shares of Inksure's common stock for $0.7 million pursuant to a private placement of Inksure Technologies, Inc. securities. We do not anticipate making any other significant investments at this time, except for routine capital expenditures. Cash Flows from Financing Activities Net cash provided by financing activities for the year ended December 31, 2009 was $6.2 million, which consisted primarily of $1.2 million increase in a line of credit with a commercial bank in the United States of America, $3.9 million of proceeds from convertible note arrangement with a related party and $1.2 million in proceeds from the exercise of stock options. Net cash used in financing activities for the year ended December 31, 2008 was $2.1 million and consisted primarily of a $1.8 million decrease in a line of credit with a commercial bank in the United States of America and $0.2 million in repayments on a convertible note payable arrangement with a related party. Net cash provided by financing activities for the year ended December 31, 2007 was $5.0 million, which consisted primarily of $1.6 million increase in a line of credit with a commercial bank in the United States of America, $4.0 million of proceeds from a convertible note arrangement with a related party, partially offset by $0.2 million in repayments on other liabilities and $0.4 million of net cash used in discontinued operations. The Company expects to continue to draw down from its lines of credit and related party financing as necessary to meet its short-term cash needs. In May 2010, the Company increased its borrowing capacity from on a convertible note arrangement with a related party from $10 million to $12 million and received an additional $0.8 million in financing from the related party to fund its operations. Borrowings One of the subsidiaries of ICTS has an arrangement with a commercial bank in the United States of America, which provides up to $8,000 in borrowings and letters of credit. The borrowing base of the arrangement is limited to 85% of the subsidiary's eligible accounts receivable, as defined, and 95% of the subsidiary's cash collateral. Borrowings under the arrangement are secured by the subsidiary's accounts receivable of $6,213 and a $3,500 certificate of deposit. Borrowings under the arrangement are also guaranteed by ICTS. The original term of the arrangement, which was set to expire on March 31, 2010, was extended to June 30, 2010 and can be automatically extended for an additional one-year term unless either the Company or the commercial bank elect to terminate the arrangement prior to the expiration date. In June 2010, the original term of the arrangement was extended to September 30, 2010. Borrowings made under the arrangement will be designated as either prime rate or LIBOR rate loans at the option of the subsidiary. Prime rate loans bear interest, which is payable monthly, at the bank's prime rate plus 1% per annum. LIBOR rate loans bear interest, which are payable monthly, at LIBOR plus 350 basis points per annum. For the years ended December 31, 2009, 2008 and 2007, the weighted average interest rate on this arrangement is 4.25%, 5.25% and 6.00%, respectively. The arrangement subjects the subsidiary to certain financial and non-financial covenants, including minimum tangible net worth, minimum interest coverage ratio, minimum EBITDA, a required excess availability 33 under the borrowing base and a capital expenditure limitation. As of December 31, 2009 and for the year then ended, the subsidiary is in violation of its minimum EBITDA and capital expenditure limitation covenants. As of December 31, 2009, the subsidiary has approximately $6,070 in borrowings, $444 in outstanding letters of credit and $864 in unused borrowing capacity under the arrangement. As of December 31, 2008, the subsidiary had approximately $4,848 in borrowings, $575 in outstanding letters of credit and $1,518 in unused borrowing capacity under the arrangement. One of the subsidiaries of ICTS had an arrangement with a commercial bank in Europe to provide it with up to (euro)650 in borrowings. Borrowings under the arrangement were limited to 60% of the subsidiary's eligible accounts receivable, secured by the assets of the subsidiary, and guaranteed by ICTS. Borrowings made under the arrangement bear interest, which is payable monthly, at the commercial bank's euro base rate plus 2% per annum. For the years ended December 31, 2008 and 2007, the weighted average interest rate on this arrangement is 7.30% and 6.73%, respectively. The arrangement expired in February 2008. In February 2008, two of the subsidiaries of ICTS jointly entered into a credit agreement with a commercial bank to provide them with a borrowing arrangement of up to (euro)2,150. The available capacity under the borrowing arrangement automatically reduces to (euro)1,650 on May 1, 2008, (euro)1,150 on August 1, 2008 and (euro)650 on January 1, 2009. Borrowings under the arrangement bear interest, which is payable monthly, at the bank's euro base rate (subject to a floor of 3.5%) plus 2% per annum. For the years ended December 31, 2009 and 2008, the weighted average interest rate on this arrangement is 7.30% and 6.73%. Borrowings under the arrangement are secured by the assets of the subsidiaries and guaranteed by ICTS. As of December 31, 2008, there are no outstanding borrowings and (euro)1,200 in outstanding guarantees under the arrangement. On May 1, 2009, the credit agreement expired. In September 2006, the Company entered into an arrangement with an entity related to its main shareholder to provide it with up to $3,050 in revolving loans through April 2007. Loans received under the arrangement bear interest, which is payable at maturity, at LIBOR plus 1.5% per annum. The arrangement was secured by 2,157,894 shares of Inksure Technologies, Inc. common stock. In January 2007, the borrowing capacity under the arrangement was increased to $6,263 and the term was extended to April 2008. In connection with the extension, the holder was granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $3.50 per share. The Company determined that the conversion feature did not qualify as a free standing derivative instrument or contain any intrinsic value which would be considered beneficial. In April 2008, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $6,644 in revolving loans through November 2010. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is payable at maturity, at LIBOR plus 1.5% per annum. The arrangement is secured by a 26% interest in one of the Company's subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.75 per share. The Company determined 34 that the conversion feature did not qualify as a free standing derivative instrument or contain any intrinsic value which would be considered beneficial. In April 2009, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $7,310 in revolving loans through November 2011. The term of the arrangement can be automatically extended for four additional six month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the prime rate charged by the Company's European commercial bank on March 31, 2010. The arrangement is secured by a 26% interest in one of the Company's subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.10 per share. The Company determined that the conversion feature did not qualify as a free standing derivative instrument or contain any intrinsic value which would be considered beneficial. In September 2009, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $10,000 in revolving loans through November 2011. The term of the arrangement can be automatically extended for four additional six month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the prime rate charged by the Company's European commercial bank on March 31, 2010. The arrangement is secured by a 26% interest in one of the Company's subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.10 per share. The Company determined that the conversion feature did not qualify as a free standing derivative instrument or contain any intrinsic value which would be considered beneficial. In May 2010, the borrowing capacity under the Company's convertible notes payable to a related party was increased to $12,000 and the term was extended to November 2012 pursuant to an oral amendment between the parties. At December 31, 2009 and 2008, notes payable to related party consists of $9,066 and $5,501, respectively, in principal and $1,078 and $571, respectively, in accrued interest. Interest expense related to these notes is $514, $297 and $280 for the years ended December 31, 2009, 2008 and 2007, respectively. For the years ended December 31, 2009, 2008 and 2007, the weighted average interest rate on this arrangement is 5.54%, 5.31% and 6.27%, respectively. In June 2010, two of the subsidiaries of ICTS jointly entered into a credit arrangement with a commercial bank to provide them with up to (euro)400 in revolving loans through February 2012. Borrowings under the arrangement bear interest, which is payable monthly, at 1.8% above the European Libor rate per annum, are secured by the accounts receivable of the subsidiaries and guaranteed by ICTS. 35 Research and Development Costs Research and development costs are expensed as incurred and consist primarily of payroll and related costs related to development of identity security software. Research and development costs are $1 million, $0.3 million and $0.3 million during the years ended December 31, 2009, 2008, and 2007, respectively. Trend information Labor market conditions may require the Company to increase its prices. Cost of labor is the main variable in determining any cost increases. The Company is affected by the worldwide economic slowdown, which affects the aviation industry. As the Company is a service provider to this industry, it affects the results of the Company. Off-balance sheet arrangements The Company is a party to two employment agreements and various operating lease arrangements. In addition, ICTS has no unconsolidated special purpose entities. The following table summarizes ICTS's future contractual obligations as of December 31, 2009:
Contractual Obligations Payments due by Period (in thousands) - ----------------------- ----------------------------------------------------------------- Less 1-3 4-5 more than Total than 1 year years years 5 years ------- ----------- ------- ------ --------- Line of credit (1) $ 6,070 $ 6,070 $ -- $ -- $-- Convertible notes payable - related party (including interest) (2) 10,144 -- 10,144 -- -- Operating lease obligations 5,489 1,196 3,289 1,004 -- Employment contracts 648 331 317 Settlement with former landlord (3) 1,300 1,300 -- -- -- Liability to Department of Labor 3,000 -- 3,000 -- -- Interest and fees on line of credit and Convertible notes payable - related party (4) 1,600 1,050 550 -- -- Other 558 94 384 -- 80 ------- ------- ------- ------ --- $28,809 $10,041 $17,684 $1,004 $80 ------- ------- ------- ------ ---
(1) In June 2010, the expiration date was extended to September 30, 2010. (2) In May 2010, the maturity date was extended to November 2012. (3) Included in current liabilities from discontinued operations on the consolidated financial statements. (4) Interest and fees are estimated based on future interest rates expected to be applicable. The following table summarizes ICTS's other future commercial obligations as of December 31, 2009:
Other Obligations Payments due by Period (in thousands) - ----------------- ----------------------------------------------------------------- Less 1-3 4-5 more than Total than 1 year years years 5 years ------- ----------- ------- ------ --------- Letters of credit $ 444 $ 444 $ -- $ -- $ -- ----- ----- ---- ---- ---- $ 444 $ 444 $ -- $ -- $ -- ----- ----- ---- ---- ----
36 Item 6. Directors, Senior Management and Employees The following table lists the directors and executive officers of ICTS: Age Position ----- ---------- Menachem Atzmon 66 Chairman of the Supervisory Board David W. Sass 74 Member of the Supervisory Board Eytan Barak 66 Member of the Supervisory Board, Member of Compensation and Audit Committee Elie Housman 73 Member of the Supervisory Board, Chairman of the Compensation Committee Gordon Hausmann 64 Member of the Supervisory Board, Member of the Compensation Committee and Member of the Audit Committee Philip M. Getter 73 Member of the Supervisory Board, Chairman of the Audit Committee Avraham Dan 65 Managing Director Ran Langer 64 Managing Director Raanan Nir 61 Managing Director Alon Raich 34 Chief Financial Officer Menachem J. Atzmon is a CPA (Isr). Since 1996 Mr. Atzmon has been the managing director of Albermale Investment Ltd., an investment company. Since January 1998 he has served as the chairman of the management board of Seehafen Rostock. Mr. Atzmon acts as a member of the board of Capital Points, Ltd. a listed Company on the Tel Aviv Stock Exchange in Israel. He has been a member of the Supervisory Board of ICTS since 1999. David W. Sass for the past 49 years has been a practicing attorney in New York City and is currently a senior partner in the law firm of McLaughlin & Stern, LLP. He has been a director of ICTS since 2002. Mr. Sass is a director of Inksure Technologies, Inc., a company which develops, markets and sells customized authentication systems designed to enhance the security of documents and branded products and to meet the growing demand for protection from counterfeiting and diversion. He is also a director of several privately held corporations. He is a director of the Temple University Law Foundation and an Honorary Trustee of Ithaca College. Eytan Barak is a CPA (Isr). From the year 2001 to the present, Mr. Barak is a partner in Dovrat-Barak Investment in High-Tech Companies Ltd., He is currently, and has been since 2004, a member of the Board of Directors of two companies owned by the Tel-Aviv Municipality. In addition, he is currently a member of the board of directors since the year 2006 in Mer Telecommunications Solution (MTS), a public company. He is since the year 2000 to the present a member of the executive board and a member of the finance committee of the Olympic Committee of Israel. Since 2008 to the present, he is a member of the board of directors of Menora Mivtachim Mutual Funds Ltd. Since January 2009, he is a member of the board of directors in Eltek Ltd, Meshulam Levinstrin Contracting & Engineering Ltd, and Elgo irrigation Ltd, public companies. Elie Housman was a principal at Charterhouse Group International, a privately held merchant bank, from 1989 until June 2001. At Charterhouse, Mr. Housman was involved in the acquisition of a number of companies with total sales of several hundred million dollars. Mr. Housman was the Chairman of Novo Plc. in London, a leading company in the broadcast storage and services 37 industry. He is a director of Top Image System, Ltd. At present, Mr. Housman is a director of a number of privately held companies in the United States. He became a member of the Supervisory Board of ICTS in 2002. Gordon Hausmann is the senior partner of his own law firm which he founded in London 28 years ago. He specializes in business finance and banking law. He holds office as a Board Member of the UK subsidiaries of various quoted companies, Company Secretary of Superstar Holidays Ltd., (a subsidiary of El Al Airlines Ltd.) Director of Dominion Trust Co. (UK) Ltd., associated with a private Swiss banking group, and a Governor of the Hebrew University. Philip M. Getter is currently the managing member of GEMPH Development LLC. From 2000 to 2005 he was president of DAMG Capital, LLC Investment Bankers. Prior thereto he was most recently head of Investment Banking and a member of the board of directors of Prime Charter, Ltd. He has more than thirty years of corporate finance experience. Having served as Administrative Assistant to the Director of United States Atomic Energy Commission from 1958 to 1959, he began his Wall Street career as an analyst at Bache & Co. in 1959. He was a partner with Shearson, Hammill & Company from 1961 to 1969 and a Senior Partner of Devon Securities, an international investment banking and research boutique from 1969 to 1975. Mr. Getter was a member of the New York Society of Security Analysts. From 1975 to 1983 he was President and CEO of Generics Corporation of America, a public company that was one of the largest generic drug manufacturers in the United States. As Chairman and CEO of Wolins Pharmaceutical from 1977 to 1983 he led the reorganization and restructuring one of the oldest and largest direct to the profession distributors of pharmaceuticals. Mr. Getter became a director of Inksure Technologies, Inc. in 2003 and was appointed as the Chairman of the Board in 2008. In 2009, Mr. Getter resigned from Inksure's Board. Inksure develops, markets and sells customized authentication systems designed to enhance the security of documents and branded products and to meet the growing demand for protection from counterfeiting and diversion. He has been a member of the League of American Theatres and Producers, Advisory Board of the American Theatre Wing, Trustee of The Kurt Weill Foundation for Music, a member of the Tony Administration Committee and has produced for Broadway, television and film. Mr. Getter received his B.S. in Industrial Relations from Cornell University. He is Chairman of the Audit Committees of EVCI Career Colleges, Inksure Technologies, Inc. as well as the Company. Avraham Dan is a CPA (Isr). Mr. Dan joined ICTS in June 2004 as Chief Financial Officer. Since September 2004 to the present, Mr. Dan is a Managing Director. From 1995 to 2001 he was Chief Executive Officer and a Director of Pazchem Limited, an Israeli chemical company. Mr. Dan holds an MBA degree from Pace University, NY. Ran Langer joined ICTS in 1988 through 1998 as General Manager of the German subsidiaries of ICTS. From 1998 to the present, he serves as General Manager of Seehafen Rostock Umschlagsgesellschaft mbH, the operator of the Seaport in Rostock, Germany. Mr. Langer became a Managing Director of ICTS in September 2004. 38 Raanan Nir has been managing director, since 2002, of his own company, Red Flag, B.V., which is a trust company established in The Netherlands, providing financial and general management services. From 2000 to 2002 he was in charge of finance for an IT start-up company. From 1998 to 2000 he was CFO of ICTS International, N.V. Alon Raich is a CPA (Isr), joined ICTS in September 2005 as Financial Controller and became Chief Financial Officer (CFO) of the Company in 2008. From 2001 to 2005 he worked in the accounting firm, Kesselman & Kesselman, PriceWaterhouseCoopers (PwC). Mr. Raich is currently on the Board of Inksure Technologies Inc. ("Inksure"), serving as the Chairman of the Audit Committee. Mr. Raich holds a BA degree in economics and accounting and an MA degree in law from Bar-Ilan University, Israel. Summary Compensation Table The following table sets forth compensation earned by the executive officers and the highest paid executive during 2009 (in thousands):
- ------------------------------------------------------------------------------------------------------------------------------------ Nonqualified Name and Non-Equity Deferred Number of Number Principal All Other Incentive Plan Compensation Option of Stock Position Year Salary Bonus Compensation Compensation Earnings Awards Awards Total $ $ $ $ $ $ - ------------------------------------------------------------------------------------------------------------------------------------ Avraham Dan, 2009 180 -- 60 -- -- -- -- 240 Managing 2008 180 68 60 -- -- -- -- 308 Director 2007 180 -- 60 -- -- -- -- 240 - ------------------------------------------------------------------------------------------------------------------------------------ Ran Langer, 2009 -- -- -- -- -- -- -- -- Managing 2008 -- -- -- -- -- -- -- -- Director 2007 -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Raanan Nir, 2009 -- -- 58 -- -- -- -- 58 Managing 2008 -- -- -- -- -- -- -- -- Director 2007 -- -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Doron Zicher, 2009 284 336 36 -- -- -- -- 656 Managing 2008 294 321 36 -- -- -- -- 651 Director of 2007 242 174 39 -- -- -- -- 455 Subsidiary - ------------------------------------------------------------------------------------------------------------------------------------
Each member of the Supervisory Board who is not an employee of the Company receives an annual fee of $10,000 and a fee for each Board or committee meeting attended of $1,000. The Chairman of the Audit Committee receives an additional $20,000 per year. As of December 31, 2009, no director's fees have been paid for the past two years. Mr. Dan has been employed as a Managing Director under a five year employment agreement commencing February 1, 2005, at a monthly compensation of $15,000. Mr. Dan is also entitled to benefits and a bonus in the amount of 1.3% of the Company's net income (excluding extraordinary items). Mr. Langer has been employed as Managing Director since 2004 without compensation. Mr. Nir has been employed as a Managing Director since 2008 at an annual salary of $58,000. Mr. Doron Zicher has been employed as a Managing Director of the Company's European subsidiaries under a five year employment agreement commencing January 1, 2005. Mr. Zicher's employment agreement was extended effective January 1, 2010 for a period of two years at a monthly compensation of 17,000 Euros. Mr. Zicher is also entitled to benefits and a bonus in the amount of 5% of net income of two of the Company's European subsidiaries and 39 2.5% of net income of all other subsidiaries involved in the aviation business with exception of the Company's U.S. subsidiaries. In addition, Mr. Zicher is entitled to receive a bonus, net of sale expenses, of 8% of the sale proceeds in the event the Company's I-SEC subsidiary is sold. The following table sets forth information concerning the aggregate compensation paid or accrued on behalf of all of our directors and executive officers as a group for the year ended December 31, 2009. Salaries, fees, Pension, retirement commissions and other and bonuses similar benefits --------------- ------------------- (in thousands) --------------------------------------- Directors as a group (6 persons) $ 107 $ -- All officers as a group(7 persons) $1,432 $104 Background and Compensation Philosophy Our Compensation Committee consists of Elie Housman, Chairman, Gordon Hausmann and Eytan Barak, all independent directors. The Compensation Committee and, prior to its establishment our Supervisory Board of Directors determined the compensation to be paid to our executive officers based on our financial and operating performance and prospects, the level of compensation paid to similarly situated executives in comparably sized companies, and contributions made by the officers' to our success. Each of the named officers will be measured by a series of performance criteria by the supervisory board of directors, or the compensation committee on a yearly basis. Such criteria will be set forth based on certain objective parameters such as job characteristics, required professionalism, management skills, interpersonal skills, related experience, personal performance and overall corporate performance. Our Supervisory Board of Directors and Compensation Committee have not adopted or established a formal policy or procedure for determining the amount of compensation paid to our executive officers. The Compensation Committee makes an independent evaluation of appropriate compensation of key employees, with input from management. The Compensation Committee has oversight of executive compensation plans, policies and programs. Our compensation program for our executive officers and all other employees is designed such that it will not incentivize unnecessary risk-taking. The base salary component of our compensation program is a fixed amount and does not depend on performance. Our cash incentive program takes into account multiple metrics, thus diversifying the risk associated with any single performance metric, and we believe it does not incentivize our executive officers to focus exclusively on short-term outcomes. Our equity awards are limited by the terms of our equity plans to a fixed maximum specified in the plan, and are subject to vesting to align the long-term interests of our executive officers with those of our stockholders. 40 Elements of Compensation We provide our executive officers with a base salary and certain bonuses to compensate them for services rendered during the year. Our policy of compensating our executives with a cash salary has served us well. Board Practices We have a Supervisory Board and a Management Board. The Supervisory Board has the primary responsibility for supervising the policies of the Management Board and the general course of corporate affairs and recommending the adoption of the annual financial statements of ICTS by its shareholders. The Management Board is responsible for the day-to-day operations of ICTS. Members of the Supervisory Board and the Management Board are appointed by the shareholders for a term of one year. Non-executive officers are appointed by and serve at the pleasure of the Management Board. The members of the Supervisory Board and the initial year they joined the Board are as follows: Menachem Atzmon (1999), Eytan Barak (2006), Elie Housman (2002), Gordon Hausmann (2005), David W. Sass (2002) and Philip M. Getter (2003). The Audit Committee consists of Philip M. Getter, Chairman, Eytan Barak and Gordon Hausmann, all of whom are independent. Mr. Getter and Mr. Barak have financial expertise. The audit committee evaluates ICTS's accounting policies and practices and financial reporting and internal control structures, selects independent auditors to audit the Company's financial statements and confers with the auditors and the officers. The Audit Committee has an Operating Charter as well. We do not have a Nominating Committee. The members of the Audit Committee and Compensation Committee are all independent and were never officers or employees of ICTS except Mr. Elie Housman, for a short period, was chairman of the Board of ICTS under contract. The Supervisory Board of the Company has adopted a Code of Ethics for principal Executive Officers, Directors and senior financial officers. The Articles of Association of ICTS require at least one member of both the Management Board and the Supervisory Board, but do not specify a maximum number of members for such boards. The general meeting of shareholders determines the exact number of members of both the Management Board and the Supervisory Board. Under the laws of the Netherlands and the Articles of Association, each member of the Supervisory Board and Management Board holds office until such member's resignation, death or removal, with or without cause, by the shareholders. Employees As of December 31, 2009, we have 3,150 employees, of which 950 employees are located in Europe and 2,200 are located in the United States. Share Ownership See tables under Item 7: "Major Shareholders" and "Related Party Transactions" below. 41 Options to Purchase Securities The Management Board and the Supervisory Board on November 30, 2004 have approved and the shareholders have adopted on February 12, 2005, the 2005 Equity Incentive Plan, (the "Plan"). The Plan provides a means whereby employees, officers, directors, and certain consultants and independent contractors of the Company ("Qualified Grantees") may acquire the Common Shares of the Company pursuant to grants of (i) Incentive Stock Options ("ISO"), (ii) non-qualified stock options (the NQSO) and (iii) restricted stock. A summary of the significant provisions of the Plan is set forth below. The following description of the Plan is qualified in its entirety by reference to the Plan itself. The purpose of the Plan is to further the long-term stability, continuing growth and financial success of the Company by attracting and retaining key employees, directors and selected advisors through the use of stock incentives, while stimulating the efforts of these individuals upon whose judgment and interest the Company is and will be largely dependent for the successful conduct of its business. The Company believes that the Plan will strengthen these persons' desire to remain with the Company and will further the identification of those persons' interests with those of the Company's shareholders. The Plan shall be administered by the Compensation Committee of the Supervisory Board. The Plan provides that options to purchase up to 1,500,000 Common Shares of the Company may be issued to the employees, certain consultants and directors. All present and future employees shall be eligible to receive incentive awards under the Plan, and all present and future non-employee directors shall be eligible to receive non-statutory options under the Plan. An eligible employee or non-employee director shall be notified in writing, stating the number of shares for which options are granted, the option price per share, and conditions surrounding the grant and exercise of the options. The exercise price of shares of Company Stock covered by an ISO and NQSO shall be not less than 100% of the fair market value of such shares on the date of grant; provided that if an ISO is granted to an employee who, at the time of the grant is a 10% shareholder, then the exercise price of the shares covered by the incentive stock option shall be not less than 110% of the fair market value of such shares on the date of grant. The Plan also provides for cashless exercise of Options at the discretion of the Compensation Committee. In such event, there may be a charge to the earnings of the Company with respect to the cashless exercise of the Options. The Compensation Committee may determine the number of shares that may be awarded to a participant as restricted stock and the provisions relating to risk of forfeiture and may determine that the restricted stock is only earned upon the satisfaction of performance goals established by the Committee. The Committee shall also determine the nature, length and starting date of any performance period and the terms thereof. The Compensation Committee, in November 2004, recommended, and the Supervisory Board and the Management Board have approved, the granting of the following options under the 2005 Equity Incentive Plan as follows: 42 1. Menachem Atzmon (Chairman of the Board) - 550,000 options of which 250,000 shall be immediately vested and 300,000 options to be vested equally over the next three years. With respect to the Options for 200,000 shares they are granted in lieu of a current salary for Mr. Atzmon. Options are exercisable at $1.35 per share representing the fair market value on the date of grant. These options have been exercised during 2009. 2. Doron Zicher (Key Employee) - 45,000 options to be vested equally over the next three years. Options are exercisable at $1.35 per share representing the fair market value on the date of grant. These options have been exercised during 2009. 3. Ran Langer (Managing Director) - 65,000 options to be vested equally in the next three years. Options are exercisable at $1.35 per share representing the fair market value on the date of grant. These options have been exercised during 2009. 4. Avraham Dan (Managing Director) - 55,000 options to be vested equally in the next three years. Options are exercisable at $1.35 per share representing the fair market value on the date. These options have been exercised during 2009. 5. Directors - 30,000 options were granted to each of the Directors, at that time, namely, Elie Housman, Philip Getter (exercised), M. Albert Nissim (exercised) and David W. Sass (exercised). The Options shall be immediately vested as to 10,000 shares and shall vest 10,000 shares on each anniversary in the event such person is a Director of the Company at that time. The options are exercisable at $1.35 per share representing the fair market value on the date of grant. 6. Committee Chairmen - The Chairman of the Audit Committee and the Chairman of the Compensation Committee should each be granted 30,000 additional Options. The Options shall be immediately vested as to 10,000 shares and shall vest 10,000 shares on each anniversary in the event such person is a Director of the Company at that time. The options are exercisable at $1.35 per share representing the fair market value on the date of grant. The Compensation Committee, in October 16, 2006, recommended, and the Supervisory Board and the Management Board have approved, the granting of the following options under the 1999 and the 2005 Equity Incentive Plans as follows: 1. Menachem Atzmon (Chairman of the Board) - 350,000 options of which 250,000 shall be immediately vested and 100,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. These options have been exercised during 2009. 2. Doron Zicher (Key Employee) - 55,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. 3. Ran Langer (Managing Director) - 45,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. 43 4. Avraham Dan (Managing Director) - 45,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. 5. Philip Getter (Chairman - Audit Committee) - 40,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. 6. Eli Housman (Chairman - Compensation Committee) - 45,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. 7. David W. Sass (Director) - 20,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. These options have been exercised during 2009. 8. Gordon Hausmann (Director) - 50,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. 9. Eytan Barak (Director) - 30,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. 10. Richard Sporn (Key Employee) - 15,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. These options have been exercised. 11. Alon Raich (Key Employee) - 15,000 options to be vested equally over three years. Options are exercisable at $1.00 per share representing the fair market value on the date of grant. On December 17, 2008 shareholders adopted the 2008 Employee, Director and Commitment Stock Option Plan (the "Plan"). The Plan provides a means whereby employees, officers, directors, and certain consultants and independent contractors of the Company ("Qualified Grantees") may acquire the Common Shares of the Company pursuant to grants of (i) Incentive Stock Options ("ISO") and (ii) "non-qualified stock options". A summary of the significant provisions of the Plan is set forth below. The following description of the Plan is qualified in its entirety by reference to the Plan itself. The purpose of the Plan is to further the long-term stability, continuing growth and financial success of the Company by attracting and retaining key employees, directors and selected advisors through the use of stock incentives, while stimulating the efforts of these individuals upon whose judgment and interest the Company is and will be largely dependent for the successful conduct of its business. The Company believes that the Plan will strengthen these individuals' desire to remain with the Company and will further the identification of their interests with those of the Company's shareholders. The Plan provides that options to purchase up to 1,500,000 Common Shares of the Company may be issued to the employees and outside directors. All present and future employees shall be eligible to receive incentive awards under the Plan, and all present and future non-employee directors shall be eligible to receive non-statutory options under the Plan. An eligible employee or non-employee director shall be notified in writing, stating the number of 44 shares for which options are granted, the option price per share, and conditions surrounding the grant and exercise of the options. The exercise price of shares of Company Stock covered by an ISO shall not be less than 100% of the fair market value of such shares on the date of grant; provided that if an ISO is granted to an employee who, at the time of the grant, is a 10% shareholder, then the exercise price of the shares covered by the incentive stock option shall not be less than 110% of the fair market value of such shares on the date of the grant. The exercise price of shares covered by a non-qualified stock option shall be not less than 85% of the fair market value of such shares on the date of the grant. The Plan shall be administered by the Compensation Committee. No options have been granted under this plan as of the date hereof. A summary of the Options granted is as follows: As of December 31, 2009, there were outstanding options to purchase 332,000 shares of common stock. Options were granted to directors, executive officers and employees of the Company at exercise price of $1.00 per share under the plans. All these options are vested as of December 31, 2009. Options available for grant under the plans are 2,279,502. The plans expire by their terms at various dates through 2018. All current executive officers (Managing Directors) (3 persons) as a group: 90,000 Options. All current directors (6 persons) as a group: 160,000 Options. All non-executive officers and other (4 persons) as a group: 82,000 Options. U.S. Federal Income Tax Consequences The rules governing the U.S. federal tax treatment of stock options, restricted stock and shares acquired upon the exercise of stock options are quite technical. Therefore, the description of U.S. federal income tax consequences set forth below is necessarily general in nature and does not purport to be complete. Moreover, the statutory provisions are subject to change, as are their interpretations, and their application may vary in individual circumstances. In particular, the "American Jobs Creation Act of 2004" imposed new rules concerning the taxation of various deferred compensation arrangements. It is not clear whether, and to what extent, these new rules apply to awards under the Plan. Although the Company does not believe that awards under the Plan are affected by the new rules, there can be no assurance to that effect until adequate guidance is forthcoming from the U.S. Treasury Department. Finally, the tax consequences under applicable state, local and foreign income tax laws may not be the same as under the U.S. federal income tax laws. Incentive Stock Options ISOs granted pursuant to the Plan are intended to qualify as incentive stock options within the meaning of Section 422A of the Internal Revenue Code. If the participant makes no disposition of the shares acquired pursuant to exercise of an ISO within one year after the transfer of shares to such participant and within two years from grant of the option, such participant will realize no taxable income as a result of the grant or exercise of such 45 option, and any gain or loss that is subsequently realized may be treated as long-term capital gain or loss, as the case may be. Under these circumstances, neither the Company nor any subsidiary will be entitled to a deduction for federal income tax purposes with respect to either the issuance of the ISOs or the issuance of shares upon their exercise. If shares acquired upon exercise of ISOs are disposed of prior to the expiration of the above time periods, the participant will recognize ordinary income in the year in which the disqualifying disposition occurs, the amount of which will generally be the lesser of (i) the excess of the fair market value of the shares on the date of exercise over the option price, or (ii) the gain recognized on such disposition. Such amount will ordinarily be deductible for federal income tax purposes by the Company or subsidiary for which the participant performs services ("service recipient") in the same year, provided that the amount constitutes reasonable compensation for services that would result in a deduction for U.S. federal income tax purposes and that certain federal income tax withholding requirements are satisfied. In addition, the excess, if any, of the amount realized on a disqualifying disposition over the market value of the shares on the date of exercise will be treated as capital gain. The foregoing discussion does not consider the impact of the alternative minimum tax, which may be particularly applicable to the year in which an ISO is exercised. Non-qualified Stock Options A participant who acquires shares by exercise of a NQSO generally realizes as taxable ordinary income, at the time of exercise, the difference between the exercise price and the fair market value of the shares on the date of exercise. Such amount will ordinarily be deductible by the service recipient for federal income tax purposes in the same year, provided that the amount constitutes reasonable compensation for services that would result in a deduction for U.S. federal income tax purposes and that certain federal income tax withholding requirements are satisfied. Subsequent appreciation or decline in the value of the shares on the sale or other disposition of the shares will generally be treated as capital gain or loss. Restricted Stock A participant granted shares of restricted stock under the Plan is not required to include the value of such shares in ordinary income until the first time such participant's rights in the shares are transferable or are not subject to substantial risk of forfeiture, whichever occurs earlier, unless such participant timely files an election under Section 83(b) of the Internal Revenue Code to be taxed on the receipt of the shares. In either case, the amount of such income will be equal to the excess of the fair market value of the stock at the time the income is recognized over the amount (if any) paid for the stock. The service recipient will ordinarily be entitled to a deduction, in the amount of the ordinary income recognized by the participant, for the service recipient's taxable year in which the participant recognizes such income, provided that the amount constitutes reasonable compensation for services that would result in a deduction for U.S. federal income tax purposes and that certain federal income tax withholding requirements are satisfied. 46 Item 7. Major Shareholders and Related Party Transactions Major Shareholders The following table sets forth certain information regarding ownership of the Company's Common Shares as of June 15, 2010 (including options exercisable within 60 days from that date) with respect to: (1) Each person who is known by the Company to own beneficially more than 5% of the Company's outstanding Common Shares. (2) Each director or officer who holds more than 1% of the Common shares. (3) All directors and officers as a group. None of the directors or officers, excluding Mr. Menacham Atzmon, owns 1% or more of ICTS outstanding share capital.
- ----------------------------------------------------------------------------------------------- Percent of Amount Beneficially Common Shares Name Shareholders Holding Five Percent or More Owned (a) Outstanding (b) - ----------------------------------------------------------------------------------------------- Atzmon Family Trust (c) 4,847,226 61.4% - ----------------------------------------------------------------------------------------------- Nicholas P. Monteban, Xalladio Holding B.V. and Galladio Capital Management B.V. 665,000 8.4% - ----------------------------------------------------------------------------------------------- Amos Megides 906,644 11.5% - ----------------------------------------------------------------------------------------------- All officers and directors as a group including the Atzmon Family Trust (10 persons) 5,230,263 64.3% - -----------------------------------------------------------------------------------------------
(a) The amounts include common shares owned by each of the above, directly or indirectly and options immediately exercisable or exercisable within 60 days from June 15, 2010. (b) As to each shareholder, the percentage is calculated using the amount beneficially owned by such shareholder (as determined in accordance with (a) above) divided by the number of total outstanding common shares and the shares issuable pursuant to the exercise of options exercisable within 60 days from the date of the grant, if any held by such shareholder. Common shares subject to options that are immediately exercisable or exercisable within 60 days of the date of the grant are deemed outstanding for computing the ownership percentage of the shareholder holding such options, but are not deemed outstanding for computing the ownership of any other shareholders. (c) 1. The Atzmon Family Trust ("Trust") was created for the benefit of the family of Mr. Menachem J. Atzmon. The Trust own Aragata Holdings Co., Limited., which holds approximately 61.4% of the issued and outstanding Common Shares on behalf of the Trust. Mr. Atzmon disclaims any beneficial interest in the Atzmon Family Trust. Aragata Holdings Co., Limited and the Atzmon Family Trust may be able to appoint all the directors of ICTS and control the affairs of ICTS. 2. As of May 31, 2010 the Company received loans from related party in total amount of $9.9 million and accrued interest of $1.2 million. The loan is convertible to the Company's common stock at a rate of $2.10 per share. 47 Review, Approval or Ratification of Transactions with Related Persons All ongoing and future transactions between us and any of our officers and directors and their respective affiliates, including loans by our officers and directors, will be on terms believed by us to be no less favorable than are available from unaffiliated third parties. Such transactions or loans, including any forgiveness of loans, will require prior approval by the Audit Committee (whose members are "independent" directors) and by a majority of our disinterested "independent" directors (to the extent we have any) or the members of our board who do not have an interest in the transaction, in either case who had access, at our expense, to our attorneys or independent legal counsel. We will not enter into any such transaction unless our disinterested ("independent") directors determine that the terms of such transaction are no less favorable to us than those that would be available to us with respect to such a transaction from unaffiliated third parties. We will not enter into a business combination or invest alongside any of our directors, officers, any affiliate of ours or of any of our directors or officers or a portfolio company of any affiliate of our directors or officers. Related Party Transactions We had an outstanding guarantee with respect to certain related party debt obligations of $2.5 million, which were fully reserved. In 2007, the Company was released from $0.7 million of the guarantee. In 2008, the Company paid $1.4 million to settle certain outstanding obligations under the guarantee and was released from its remaining guarantee of $0.4 million. We recognized other income related to the recovery of its guarantee of $0, $421, and $0 during the years ended December 31, 2009, 2008 and 2007, respectively. Entities related to two of our board members provide legal services to us. Legal expense related to these services is $0.1 million, $0.1 million and $0.1 million for the years ended December 31, 2009, 2008 and 2007, respectively. Included in accounts payable on the accompanying consolidated balance sheet is $0.1 million and $0.1 million due for these services as of December 31, 2009 and 2008, respectively. We engaged the services an entity owned by a related party as a subcontractor for one of its subsidiaries. The Company incurred expenses of $0.2 million and $0.1 million for such services for the years ended December 31, 2008 and 2007, respectively. In June 2009, a European bank, issued a performance guarantee in the amount of (euro)1.2 million to one of our customers to secure our performance under the service contract between the parties. The performance guarantee extends for the period June 24, 2009 through April 16, 2013. To secure the European bank's guarantee, an entity related to the Company's main shareholder provided a guarantee to the European bank for the same amount. In July 2009, we entered into a settlement arrangement with the former landlord of its entertainment segment to resolve all disputes between the parties related to unpaid rent obligations for $2.6 million. The Company's obligation under the settlement arrangement is secured by a $1.3 million irrevocable standby letter of credit issued to the former landlord by an entity related to the Company's main shareholder. 48 On July 15, 2009, we issued 300,000 shares of fully vested, non-forfeitable common stock to an entity related to the Company's main shareholder as consideration for guaranteeing certain of our obligations. We recognized the fair value of the shares on the date of issuance of $0.6 million in selling, general and administrative expenses in the accompanying statements of operations and comprehensive income (loss). The Company has an arrangement with an entity related to its main shareholder to provide it with revolving loans. See liquidity and capital resources section for further information on this arrangement. The Company has an ownership interest in Inksure Technologies, Inc. ("Inksure") of 27.4% as of December 31, 2009 and 2008. The Company's chief financial officer serves as a non-employee director of Inksure. In addition, one of the members of the Company's Board of Directors also serves as a non-employee director of Inksure. In March 2010, the Company purchased 5,400,000 shares of Inksure's common stock for $0.7 million pursuant to a private placement of Inksure Technologies, Inc. securities, which decreased its ownership percentage in Inksure from 27.4% to 23.9%. Item 8. Financial Information The Consolidated Financial Statements and Financial Statement Schedule are included herein on pages F-1 through F-37 Legal Proceedings United States Transportation Security Administration In February 2002, the Company was awarded a security services contract (the "TSA Contract") by the TSA to continue to provide security services in all of its current airport locations until the earlier of either the completed transition of these security services on an airport-by-airport basis to the TSA or November 2002. In accordance with the terms of the TSA Contract, the United States Federal government provided the Company with a non-interest bearing advance payment of approximately $26 million, which was payable to the TSA in monthly installments of approximately $1.3 million commencing in April 2002. Through December 31, 2009, the Company has repaid $11,700 of the advance. As of December 31 2009, the amount due from the TSA with respect to services provided under the TSA contract is $17.3 million. The Company has reflected the amount due from the TSA of $3 million, net of the remaining unpaid advance, as a receivable from TSA on the accompanying consolidated balance sheets as of December 31, 2009 and 2008. The TSA filed a contract dispute with the Office of Dispute Resolution for Acquisition ("ODRA") in connection with the TSA contract seeking reimbursement of an alleged overpayment of principal in the amount of $59.2 million. This claim follows the lawsuit which the Company had already filed against the TSA for repeated breach of contract. The Company is vigorously challenging the TSA's claims, which it asserts is devoid of any factual or legal merit. The TSA's filing comes on the heels of a recent decision by the ODRA granting the Company's motion for partial summary judgment against the TSA for breach of contract by failing to give appropriate notice for the transitioning of airport locations. With respect to the claim for the $59,200 overpayment, the Company has filed a motion to dismiss the action, which has been denied. 49 On March 30, 2009, ODRA denied both cross motions for summary judgment, stating that the TSA has not met its burden of proof that the prices in the purported 2006 definitization were reasonable and that ODRA was not willing to revisit the issue of the statute of limitations in the summary judgment format but left open the possibility of deciding in the Company's favor on this issue until the record is complete and fully briefed. Settlement negotiations followed and the parties have reached a possible resolution. The settlement proposal has been reduced to a writing, which has not yet been executed by the Company. At this time, the Company is not willing to execute the proposed agreement because of its continuing dispute with the United States Department of Labor ("DOL"). If the Company is unable to reach an acceptable resolution with the DOL, then the Company will examine its option with the DOL and determine if it should execute the agreement with the TSA or seek to resume its litigation against the TSA for the amounts previously asserted in that litigation. The collection of the receivable from the TSA and the resolution of the liability to the DOL is currently undeterminable. United States Department of Labor During 2003, the DOL finalized its audit of the pay rates used to compensate employees for services rendered pursuant to the TSA Contract. The DOL concluded that in certain instances, employees had not been paid the correct base rate, fringe benefits, vacation and holiday pay resulting in a penalty of $7.1 million. In 2007, the Company reached a settlement with the DOL with respect to this claim and agreed to pay them $3 million. The settlement requires the first $3 million of any settlement with the TSA to be remitted to the DOL and prohibits the DOL from pursuing any collection activity on its receivable until the TSA matter is resolved. As of December 31, 2009 and 2008, a liability to the DOL of $3 million is reflected on our consolidated balance sheets. This amount is exclusive of any amounts which may be received from the TSA. September 11, 2001 Terrorist Attacks As a result of the September 11, 2001 terrorist attacks, numerous lawsuits charging the Company with wrongful death and/or property damage were commenced in the United States District Court, Southern District of New York, resulting from certain airport security services provided by the Company for United Flight 175 out of Logan Airport in Boston, Massachusetts. All but one of the wrongful death/personal injury cases relating to Flight 175 have been settled, leaving the focus of the litigation on the many property damage and insurance subrogation lawsuits. The Company may be indemnified by the airlines if the Company is found to have followed the procedures specified by the Federal Aviation Administration. However, if the Company is found to have violated these screening regulations, it could be liable for damages. Based on an internal review of this matter, the Company has not found any evidence of non-compliance with respect to the security services provided at Boston's Logan International Airport on September 11, 2001. The Company maintains an aviation insurance policy, which may provide limited coverage for liabilities that may be assessed against the Company as a result of the events of September 11, 2001. The liabilities under these cases may, by statute, be limited to the policy coverage. After the September 11 50 terrorist attacks, the Company's insurance carriers cancelled all war risk provisions contained in the Company's insurance policies. Management is unable to determine the likelihood of an unfavorable outcome or estimate a range of loss with respect to the remaining open claims against the Company. Accordingly, no provision has been included in the accompanying consolidated balance sheets related to this matter. United States Government The Company had commenced an action against the United States Government with respect to its Fifth Amendment rights relating to the taking of its business. In December 2004, the United States Government's motion to dismiss the case was denied. A motion for reconsideration was also filed by the defendant and denied. The trial for this action was held and in March 2007, the court ruled against the Company's action. The Company appealed the decision and in May 2008, the United States Court of Appeals for the Federal Circuit affirmed the lower court's ruling. On December 1, 2008, the Company appealed the case to the United States Supreme Court, which refused to hear it. Audiovisual-Washington, Inc. In September 2005, Avitecture, Inc. (a/k/a Audiovisual-Washington, Inc.) ("Avitecture") filed a Demand for Arbitration and Mediation against one of the Company's subsidiaries in the United States of America with the American Arbitration Association in Somerset, New Jersey. The Demand for Arbitration alleges that the subsidiary owes Avitecture $0.2 million for audio, video and control systems. The case was decided against the Company's subsidiary in an arbitration proceeding, which resulted in an award to Avitecture of $0.2. The arbitrator's decision was affirmed by the Superior Court of New Jersey in May 2007 and the Appellate Court in February 2008. As of December 31, 2008, the Company had $0.2 in accrued expenses and other current liabilities from discontinued operations related to the judgment against it. During 2009, based upon management's assessment that payments are unlikely, the $0.2 previously accrued by the Company was eliminated and recognized in income from discontinued operations. Turner Construction Company In November 2005, Turner Construction Company ("Turner") filed a Demand for Arbitration and Mediation against one of the Company's subsidiaries in the United States of America with the American Arbitration Association in Somerset, New Jersey. The Demand for Arbitration alleges that pursuant to a written agreement dated in October 2003, the subsidiary owes Turner $1 million for work and/or services performed. In an arbitration proceeding, the arbitrator awarded Turner $1 million plus interest. This award was affirmed on appeal. As of December 31, 2008, the Company had $1 million in accrued expenses and other current liabilities from discontinued operations related to the judgment against it. During 2009, based upon management's assessment that payments are unlikely, the $1 million previously accrued by the Company was eliminated and recognized in income from discontinued operations. 51 Landlord Claims Two of the Company's subsidiaries have been sued by their former landlord (which is the same entity for both properties) alleging breach of their respective leases. The former landlord was seeking unpaid rent for the entire terms of the leases for $2.6 million in Atlantic City, New Jersey and $3.7 million in Baltimore, Maryland, plus legal fees. The Company filed a bankruptcy petition for both of the subsidiaries. However, the former landlord was able to prevail in one of the claims because of a guarantee given by the Company in connection with the lease in one of the locations. In January 2008, a judgment of $2.6 million was awarded in favor of the former landlord. The subsidiary has filed an appeal to challenge the judgment. As of December 31, 2008, the Company has $7.3 million in other liabilities from discontinued operations related to the unpaid rent obligations owed to the former landlord of the Company's subsidiaries. In July 2009, the Company entered into a settlement arrangement with the former landlord to resolve all disputes between the parties related to the unpaid rent obligations and agreed to pay $2.6 million to the former landlord in four equal installments during 2009 and 2010. Fraport A.G. International Airport Services Worldwide The Company was in a dispute with Fraport A.G. International Airport Services Worldwide over the alleged unlawful use of the letter combination "ICTS" by the Company. Fraport initiated proceedings before the district court of Amsterdam. The principal amount claimed was (euro) 0.1 million ($0.1 million as of December 31, 2008). This dispute was settled in 2008 without any liability to the Company. Item 9. The Offer and Listing ICTS's shares of common stock are currently traded on the Bulletin Board OTC under the symbol ICTSF.OB. The reported high and low closing sales prices per shares during the last five years were as follows: Year High Low ---- ----- ----- 2005 $3.23 $1.58 2006 $2.54 $0.10 2007 $2.79 $1.40 2008 $2.30 $1.70 2009 $2.55 $1.50 The reported high and low closing sales prices per share during each quarter for the last 3 years were as follows: 2007 High Low ------ ----- ----- First Quarter $2.79 $2.00 Second Quarter $2.25 $1.60 Third Quarter $2.05 $1.45 Fourth Quarter $1.98 $1.40 52 2008 High Low ------ ----- ----- First Quarter $2.20 $1.80 Second Quarter $2.20 $2.00 Third Quarter $2.30 $1.92 Fourth Quarter $2.20 $1.70 2009 High Low ---- ----- ----- First quarter $2.25 $1.50 Second quarter $2.55 $1.50 Third Quarter $2.25 $1.80 Fourth Quarter $2.25 $1.82 Item 10. Additional Information Memorandum and Articles of Association Introduction The material provisions of the Company's Articles of Association are summarized below. Such summaries do not purport to be complete statements of these provisions and are qualified in their entirety by reference to such exhibit. The Company was established by the Department of Justice at Amstelveen, Netherlands on October 9, 1992. The objectives of the Company are generally to manage and finance businesses, extend loans and invest capital as described in greater detail in Article 2 of the Company's Articles of Association. Shares Our authorized share capital is currently divided into 17,000,000 common shares, par value 0.45 Euro per common share. The common shares may be in bearer or registered form. As of December 31, 2009, 7,890,137 shares were issued and outstanding. Dividends Dividends on common shares may be paid out of annual profits shown in the Company's annual accounts, which must be adopted by the Company's Supervisory Board. The Management Board, with the prior approval of the Supervisory Board, may decide that all or part of the Company's profits should be retained and not be made available for distribution to shareholders. Those profits that are not retained shall be distributed to holders of common shares, provided that the distribution does not reduce shareholders' equity below the issued share capital increased by the amount of reserves required by Netherlands law. At its discretion, subject to statutory provisions, the Management Board may, with the prior approval of the Supervisory Board, distribute one or more interim dividends on the common shares before the annual accounts have been approved by the Company's shareholders. Existing reserves that are distributable in accordance with Netherlands law may be made available for distribution upon proposal by the Management Board, subject to prior approval by the Supervisory Board. With respect to cash payments, the rights to dividends and distributions shall lapse if such dividends or distributions are not claimed within five years following the day after the date on which they were made available. 53 Voting Rights Members of our Supervisory Board are appointed by the general meeting. The Company's Articles of Association provide that the term of office of each Supervisory Director will expire no later than June in each calendar year. Members of the Supervisory Board may be re-appointed. General Meetings of Shareholders Our general meetings of shareholders will be held at least once a year, not later than six months after the end of the fiscal year. Notices convening a general meeting will be mailed to holders of registered shares at least 15 days before the general meeting and will be published in national newspapers in the Netherlands and abroad in countries where the Company's bearer shares are admitted for official quotation. In order to attend, address and vote at the general meeting of shareholders, the holders of the Company's registered shares must notify it in writing of their intention to attend the meeting and holders of the Company's bearer shares must direct the depository to their bearer shares, each as specified in the published notice. The Company currently does not solicit from or nominate proxies for its shareholders and is exempt from the proxy rules of the Securities Exchange Act of 1934. However, shareholders and other persons entitled to attend the general meetings of shareholders may be represented by proxies with written authority. Other general meetings of shareholders may be held as often as deemed necessary by the Supervisory Board or the Management Board and must be held if one or more shareholders or other persons entitled to attend the general meeting of shareholders jointly representing at least 10% of the Company's issued share capital make a written request to the Supervisory Board or the Management Board that a meeting must be held and specifying in detail the business to be dealt with at such meeting. Resolutions are adopted at general meetings of shareholders by a majority of the votes cast, except where a different proportion of votes are required by the Articles of Association or Netherlands law, in a meeting in which holders of at least one-third of the outstanding common shares are represented. Each share carries one vote. Amendment of Articles of Association and Winding Up A resolution presented to the general meeting of shareholders amending the Company's Articles of Association or winding up the Company may only be taken after a proposal made by the Management Board and approved by the Supervisory Board. A resolution to dissolve the Company must be approved by at least a three-fourths majority of the votes cast. Approval of Annual Accounts Our annual Netherlands statutory accounts, together with a certificate of its auditors, will be submitted to the general meeting of shareholders for approval. Consistent with business practice in the Netherlands and as provided by the Company's Articles of Association, approval of the annual accounts by the shareholders discharges the Management Board and the Supervisory Board from liability for the performance of their respective duties for the past financial year. Under Netherlands law, this discharge is not absolute and will not be effective with respect to matters which are not disclosed to the shareholders. 54 Liquidation Rights In the event of the Company's dissolution and liquidation, the assets remaining after payment of all debts and liquidation expenses are to be divided proportionately among the holders of the common shares. Issues of Shares; Pre-emptive Rights Our Supervisory Board has the power to issue shares. The shareholders have by an authorizing resolution provided such authority for a five year period from December 17, 2008. The number of shares the Supervisory Board is authorized to issue must be set at the time of the resolution and may not exceed 17,000,000 shares of the common shares then outstanding. Shareholders have a pro rata pre-emptive right of subscription to any common shares issued for the purpose of raising capital, which may be limited or eliminated, if designated for this purpose by the general meeting of shareholders (whether by means of any authorizing resolution or an amendment to the Company's Articles of Association). Repurchase and Cancellation of Shares We may repurchase its common shares, subject to compliance with the requirements of certain laws of the Netherlands (and provided the aggregate nominal value of the Company's common shares acquired by it at any one time amounts to no more than one-tenth of its issued share capital). Common shares owned by the Company may not be voted or counted for quorum purposes. Any such purchases are subject to the approval of the Supervisory Board and the authorization of the general meeting of shareholders. Authorization is not effective for more than 18 months. The Company may resell shares it purchases. Upon a proposal of the Management Board and approval of the Supervisory Board, the Company's shareholders at the general meeting shall have the power to decide to cancel shares acquired by the Company or to reduce the nominal value of the common shares. Any such proposal is subject to general requirements of Netherlands law with respect to reduction of share capital. Shares may only be cancelled by vote of the shareholders at the general meeting. Only shares which the Company holds or for which it holds the depository receipts may be cancelled. However, an entire class may be cancelled provided the Company repays the par value to the holders of such shares. Material contracts For material contracts See "Item 8 - Financial Information". Exchange controls There are no governmental laws, decrees or regulations in The Netherlands, the Company's jurisdiction of organization, that restrict the Company's export or import of capital in any material respect, including, but not limited to, foreign exchange controls. There are no limitations imposed by Netherlands law or the Company's charter documents on the right of nonresident or foreign owners to hold or vote Common Shares. 55 Taxation United States Federal Income Tax Consequences The following discussion summarizes the material anticipated U.S. federal income tax consequences of the acquisition, ownership and disposition of shares by a U.S. Holder (as defined below). This summary deals only with shares held as capital assets and does not deal with the tax consequences applicable to all categories of investors some of which (such as tax-exempt entities, banks, broker-dealers, investors who hold shares as part of hedging or conversion transactions and investors whose functional currency is not the U.S. dollar) may be subject to special rules. This summary does not deal with the tax consequences for U.S. Holders who own at any time, directly or indirectly, through certain related parties, 10% or more of the voting stock or nominal paid-in capital of the Company. The summary does not purport to be a complete analysis or listing of all the potential tax consequences of holding shares, nor does it purport to furnish information in the same detail or with the attention to an investor's specific tax circumstances that would be provided by an investor's own tax adviser. Accordingly, prospective purchasers of shares are advised to consult their own tax advisers with respect to their particular circumstances and with respect to the effects of U.S. federal, state, local, or other laws to which they may be subject. As used herein, the term "U.S. Holder" means a beneficial owner of shares that is (i) for United States federal income tax purposes a citizen or resident of the United States, (ii) a corporation or other entity created or organized in or under the laws of the United States or any political subdivision thereof, or (iii) an estate or trust, the income of which is subject to United States federal income taxation regardless of its source. The summary is based on the Internal Revenue Code of 1986, as amended (the "Code"), judicial decisions, administrative pronouncements, and existing and proposed Treasury regulations, changes to any of which after the date of this Annual Report on Form 20-F could apply on a retroactive basis and affect the tax consequences described herein. Taxation of Dividends For U.S. federal income tax purposes, the gross amount of distributions (including any withholding tax thereon) made by the Company out of its current or accumulated earnings and profits (as determined under U.S. federal income tax principles) will be included in the gross income of a direct U.S. Holder as foreign source dividend income on the date of receipt but will not be eligible for the dividends received deduction generally allowed to U.S. corporations. Subject to the discussion below regarding passive foreign investment companies, the Company should be considered to be a "qualified foreign corporation" so that such dividends should be eligible to be taxed as net capital gains (at a maximum U.S. federal rate of 15 percent). Distributions in excess of the earnings and profits of the Company will be treated, for U.S. federal income tax purposes, first as a nontaxable return of capital to the extent of the U.S. Holder's basis in the shares (thereby increasing the amount of any gain and decreasing the amount of any loss realized on the subsequent disposition of such shares) and then as a gain from the sale or exchange of the shares. The amount of any dividend paid in Euro will be equal to the U.S. dollar value of the Euro on the date of receipt regardless of whether the U.S. Holder converts the payment into U.S. dollars. 56 The declaration of dividends will be at the discretion of the Company's board of directors and will depend upon the Company's earnings, capital requirements, financial position, general economic conditions, and other pertinent factors. The Company cannot assure you that dividends will be paid in the future. Foreign Tax Credits U.S. Holders will generally be entitled to claim a credit against their United States federal income tax liability for the amount of Netherlands dividend withholding tax imposed on dividends paid to U.S. Holders. See Netherlands Dividend Withholding Tax. U.S. Holders who are entitled to the benefits of a reduced rate of Netherlands dividend withholding tax under the U.S. Tax Treaty will be allowed a credit for only the amount of withholding tax provided for under the U.S. Tax Treaty (i.e. 15%). However, the full amount of the dividend, including any withheld amounts in excess of 15%, will be subject to current United States federal income taxation whether or not such Holder obtained a refund of the excess amount withheld. In the event the Company pays a dividend to a U.S. Holder out of the earnings of a non-Dutch subsidiary, however, it is possible that under certain circumstances such U.S. Holder would not be entitled to claim a credit for a portion of any Dutch taxes withheld by the Company from such dividend. The portion of Dutch withholding tax that may not be creditable in this instance equals a maximum of 3% of the gross amount of such dividend (or 20% of the Dutch taxes withheld in the case of a U.S. Holder entitled to claim a 15% withholding rate under the U.S. Tax Treaty). This limitation could only potentially apply under circumstances where the Company pays dividends on the shares. Depending on the particular circumstances of the U.S. Holder, dividends accrued from shares will generally be classified, for foreign tax credit purposes, as passive income or financial services income. A U.S. Holder who finds it more advantageous because of such limitations, to claim the Netherlands dividend withholding tax as a deduction instead of a credit may do so, but only for a year for which such Holder does not claim a credit for any foreign taxes. If the U.S. Holder is a U.S. partnership, trust, or estate, any tax credit is available only to the extent that the income derived by such partnership, trust, or estate is subject to U.S. tax on the income of a resident either in its hands or in the hands of its partners or beneficiaries, as the case may be. Taxation on Sale or Disposition of Shares Subject to the discussion below regarding passive foreign investment companies, U.S. Holders will recognize capital gain or loss for U.S. federal income tax purposes on the sale or other disposition of shares in an amount equal to the difference between the U.S. dollar value of the amount realized and the U.S. Holder's adjusted tax basis in the shares. In general, a U.S. Holder's adjusted tax basis in the shares will be equal to the amount paid by the U.S. Holder for such shares. For shares held for one year or less, any such gain or loss will generally be treated as short-term gain or loss and taxed as ordinary gain or loss. If the shares have been held for more than a year, any such gain or loss will generally be treated as long-term capital gain or loss. U.S. Holders are advised to consult a competent tax adviser regarding applicable capital gains tax provisions and sourcing of capital gains and losses for foreign tax credit purposes. 57 Gift and Estate Tax An individual U.S. Holder may be subject to U.S. gift and estate taxes on shares in the same manner and to the same extent as on other types of personal property. Backup Withholding and Information Reporting Payments in respect of the shares may be subject to information reporting to the U.S. Internal Revenue Service and to a 31% U.S. backup withholding tax. Backup withholding generally will not apply, however, to a Holder who furnishes a correct taxpayer identification number or certificate of foreign status and makes any other required certification or who is otherwise exempt from backup withholding. Generally, a U.S. Holder will provide such certification on Form W-9 (Request for Taxpayer Identification Number and Certification) and a non-US Holder will provide such certification on a version of Form W-8 (Certificate of Foreign Status). Passive Foreign Investment Company Management has determined that the Company has not been a passive foreign investment company ("PFIC") for United States federal income tax purposes for prior taxable years and believes that the Company will not be treated as a PFIC for the current and future taxable years, but this conclusion is a factual determination made annually and thus subject to change. The Company would be a PFIC with respect to a U.S. Holder if, for any taxable year in which such U.S. Holder held shares, either (i) at least 75% of the Company's gross income for the taxable year is passive income, or (ii) at least 50% of the Company's assets are attributable to assets that produce or are held for the production of passive income. Under a "look-through" rule, a corporation takes into account a pro rata share of the income and the assets of any corporation in which it owns, directly or indirectly, 25% or more of the stock by value. Passive income generally includes dividends, interest, royalties, rents (other than rents and royalties derived from the active conduct of a trade or business and not derived from a related person), annuities, and gains from assets that produce passive income. The 50% asset test would apply to the Company based on fair market values. If the Company is a PFIC for any taxable year during which a U.S. Holder holds shares, the U.S. Holder will be subject to special tax rules with respect to: o any "excess distribution" that the U.S. Holder receives on shares, and o any gain the U.S. Holder realizes from a sale or other disposition (including a pledge) of the shares, unless the U.S. Holder makes a "qualified electing fund" or "mark-to-market" election as discussed below. Distributions the U.S. Holder receives in a taxable year that are greater than 125% of the average annual distributions the U.S. Holder received during the shorter of the three preceding taxable years or the U.S. Holder's holding period for the shares will be treated as an excess distribution. Under these special tax rules: 58 o the excess distribution or gain will be allocated ratably over the U.S. Holder's holding period for the shares, o the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which the Company was a PFIC, will be treated as ordinary income, and o the amount allocated to each other year will be subject to tax at the highest tax rate in effect for that year and the interest charge generally applicable to underpayments of tax will be imposed on the resulting tax attributable to each such year. The tax liability for amounts allocated to years prior to the year of disposition or "excess distribution" cannot be offset by any net operating losses, and gains (but not losses) realized on the sale of the shares cannot be treated as capital, even if the U.S. Holder holds the shares as capital assets. If we were to become a PFIC, a U.S. Holder may avoid taxation under the excess distribution rules discussed above by making a "qualified electing fund" election to include the U.S. Holder's share of the Company's income on a current basis. However, a U.S. Holder may make a qualified electing fund election only if the Company, as a PFIC, agrees to furnish the shareholder annually with certain tax information. Management has not decided whether, under such circumstances, the Company would prepare or provide such information. Alternatively, if we were to become a PFIC, a U.S. Holder may make a mark-to-market election to elect out of the excess distribution rules discussed above. If a U.S. Holder made a mark-to-market election for the shares, the U.S. Holder would include in income each year an amount equal to the excess, if any, of the fair market value of the shares as of the close of the U.S. Holder's taxable year over the U.S. Holder's adjusted basis in such shares. A U.S. Holder is allowed a deduction for the excess, if any, of the adjusted basis of the shares over their fair market value as of the close of the taxable year only to the extent of any net mark-to-market gains on the shares included in the U.S. Holder's income for prior taxable years. Amounts included in a U.S. Holder's income under a mark-to-market election, as well as gain on the actual sale or other disposition of the shares are treated as ordinary income. Ordinary loss treatment also applies to the deductible portion of any mark-to-market loss on the shares, as well as to any loss realized on the actual sale or disposition of the shares, to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included for such shares. A U.S. Holder's basis in the shares will be adjusted to reflect any such income or loss amounts. Other than net capital gains treatment for dividends, the tax rules that apply to distributions by corporations which are not PFICs would apply to distributions by the Company. The mark-to-market election is available only for stock which is regularly traded on a national securities exchange that is registered with the Securities and Exchange Commission, or the national market system established pursuant to section 11A of the Exchange Act, or any exchange or market that the IRS has determined has rules sufficient to carry out the purposes of the income tax rules. There can be no assurance that the Company will continue to satisfy the requirements of the mark-to-market election. 59 Taxes in the Netherlands The following is a general non-exhaustive discussion of the tax laws in the Netherlands as they relate to the operations of the Company. Corporate Income Taxes We are incorporated under the laws of the Netherlands and is therefore subject to the tax laws of the Netherlands. In 2009 the standard corporate income tax rate will be 20% on profits up to (euro)0.2 million and 25.5% for the excess. In 2008 the standard corporate income tax rate was 20% applicable for taxable profits up to (euro)0.3 million and 25.5% for the excess. We and a number of our Dutch resident subsidiary companies form a fiscal unity for Dutch corporate income tax purposes. As a result, Dutch corporate income tax is levied from these entities on a consolidated basis at the level of ICTS. For Dutch corporate income tax purposes business affiliates should calculate their profits on an "at arm's length" basis. In case transactions between such affiliates are made or imposed on conditions (transfer prices) which differ from those conditions which would have been made or imposed between independent entities in the free market, the profits of those entities are determined as if the latter conditions had been agreed. Participation Exemption In general, the Dutch participation exemption is applicable to a shareholding held by ICTS in a subsidiary company in case the following conditions are met: (i) The subsidiary company has a capital divided into shares; and (ii) We hold at least 5% of the nominal paid-in share capital of the subsidiary company; unless the subsidiary company can be considered as a low-taxed portfolio investment company; A subsidiary company is considered as "low-taxed" in case the company is not subject to a profit tax that equals at least an effective tax rate of 10% over a taxable base determined according to Dutch standards. Whether or a subsidiary company qualifies as a (low taxed) portfolio investment company is determined based on an asset test at the level of the subsidiary. A shareholding is qualified as a portfolio investment if the assets of the subsidiary directly or indirectly consist predominantly (i.e. for more than 50%) of "free portfolio investments", being portfolio assets that are not used for business activities, including assets used for passive group financing activities. The test is applied from the perspective of the subsidiary itself. Nonetheless, the participation exemption will be applicable in case 90% or more of the assets of the subsidiary company consist of real estate. In case the participation exemption is applicable, income in the hands of ICTS arising from dividends paid by subsidiaries or capital gains from the disposal of its shares in such subsidiaries is exempt from corporate income tax in The Netherlands. Apart from special provisions in relation to certain 60 liquidation losses, capital losses incurred in relation to qualifying participations are not deductible for Dutch corporate income tax purposes. In case the participation exemption is not applicable, income derived from a subsidiary company will be taxed in the hands of ICTS against ordinary corporate income tax rates, while a (partial) credit may be allowed for underlying taxes. Costs related to the acquisition of qualifying participations are generally added to the cost price of the acquisition and are as such not deductible. Other expenses relating to participations (e.g. the cost of financing), regardless of whether they are resident in the Netherlands or abroad, are in principle deductible (however, see infra). As of 2007, costs related to the disposal of participations falling within the scope of the participation exemption will also no longer be deductible. Interest deduction limitations As of January 1, 2004, thin capitalization rules were introduced in the Netherlands which include restrictions on the deductibility of interest in the case of companies that are excessively financed by debts. A company is regarded as excessively financed by debts if the average annual debt for tax purposes exceeds three times the average annual equity for tax purposes to the extent that the excess is larger than 0.5 million Euros. As an alternative to applying the fixed 3:1 debt/equity ratio, as a safe harbor, ICTS may from year to year decide to apply the average debt/equity ratio of the "top entity" of the group of companies to which it belongs as its maximum debt/equity ratio based on the statutory commercial (consolidated) accounts of that entity. The amount of non-deductible interest is limited to interest due to affiliated group companies (to the extent that such interest exceeds interest received from affiliated group companies). Besides the thin-capitalization regulations, Dutch tax law includes various other sets of anti-abuse provisions in relation to deduction of interest. Loss compensation As of 2008 the term for carry-back operating losses is reduced to one year. Further, the term for carry-forward of losses is restricted to nine years, subject to certain anti-abuse provisions. Not yet compensated losses will disappear after these terms have lapsed. Based on transitional rules, losses sustained in book years up to and including 2002 may be set-off against profits of book years up to and including 2011. Limitations on loss compensation may also apply in the case of so-called "holding losses", - losses incurred in a book year during which the activities of ICTS (jointly with the subsidiary companies that form part of the fiscal unity for Dutch corporate income tax purposes) for the entire or almost entire year, entirely or almost entirely consist of the holding of participations or the direct financing of related companies. This will be deemed not to be the case if at least 25 employees are engaged in other activities on a full-time basis. 61 Corporate Income Tax 2007 Act, other changes As of January 1, 2007, changes to the corporate income tax legislation include the introduction of an "interest box" and a "patent box". In the interest box regime (not yet entered into force), subject to certain conditions, the positive balance of interest receivable from and payable to group companies will be taxed against an effective tax rate of 5% (up to a certain maximum depending on the amount of equity for tax purposes). Application of the interest box regime is optional. Therefore, ICTS may determine itself whether or not to apply the interest box regime. If applied, the interest box regime must, in principle, be applied by all Dutch resident group companies for a period of at least 3 years. In the patent box regime, which has entered into force, income from self-developed intangible assets will be taxed an effective tax rate of 10%. In general, the maximum amount of income to be taxed this special rate is limited to 4 times the total costs in relation to the intangible assets. Application of the patent box is possible in relation only to intangible assets for which a patent is granted. Further, application of the patent box regime is subject to the condition that the income generated with an intangible asset, can for 30% or more, be attributed to the patent. Brands, images and similar assets are excluded from the patent box regime. Application of the patent box regime is optional. ICTS may also decide to deduct R&D costs against other regularly taxed income when determining its taxable income. At a later stage, subject to certain conditions aimed at avoiding that costs are deducted against regular corporate income tax rates whereas income is taxed under the patent box regime against an effective rate of 10%, ICTS may in this case still decide to apply the patent box regime. Further, as of January 1, 2008 restrictions apply on the depreciation period of goodwill and other business assets. The minimum depreciation period for goodwill is 10 years. The minimum depreciation period for other business assets is 5 years. It should still be possible to value assets at lower going-concern value. Further, restrictions have been introduced on the depreciation of real estate property. Depreciation of investment property is no longer allowed in case the book value of the property falls below the official fair market value of the property for tax purposes. The depreciation of real estate property used as part of a trade or business is allowed as long as the book value of the real estate property does not fall below 50% of the official fair market value of the property for tax purposes. Dutch Tax Consequences of Holding Shares The following is a general, non-exhaustive summary of Dutch tax consequences to a holder of Common Shares who is not, or is not deemed to be, a resident of the Netherlands for purposes of the relevant tax codes (a "non-resident Shareholder") and is based upon laws and relevant interpretations thereof in effect as of the date of this Annual Report, all of which are subject to change, possibly on a retroactive basis. The summary does not address taxes imposed by the Netherlands other than dividend withholding tax, personal income tax, corporate income tax and gift and inheritance tax. The discussion does not address the tax consequences under tax laws in any other jurisdictions besides the Netherlands. 62 Dividend Withholding Tax in the Netherlands We currently do not anticipate paying any dividends in the foreseeable future. To the extent that dividends are distributed by ICTS, such dividends ordinarily would be subject, under the tax laws of the Netherlands, to a withholding tax at a rate of 15%. Dividends include distributions in cash or in kind, deemed dividends and redemption and liquidation proceeds in excess of, for Dutch tax purposes, recognized paid-in capital. In case there are profits or in case profits can be anticipated, the repayment of ICTS' share premium is also subject to dividend withholding tax. Further, share dividends are subject to Dutch dividend withholding tax, unless distributed out of the paid-in share premium of ICTS as recognized for tax purposes in the Netherlands. A non-resident Shareholder can be eligible for a reduction or a refund of Dutch dividend withholding tax under a tax convention which is in effect between the country of residence of the shareholder and the Netherlands, or under the provisions of the EU Parent/Subsidiary Directive. The Netherlands has concluded such conventions with, among others, the United States, most European Union member states, Canada, Switzerland and Japan. Under most of these conventions, dividend withholding tax in the Netherlands is effectively set at a rate of 15% in the case of an individual shareholder, and is reduced to lower rates in the case of a corporate shareholder. Under the tax convention currently in force between the United States and the Netherlands (the "Treaty"), dividends paid by us to an individual shareholder resident in the United States or a corporate shareholder organized under the laws of the United States or any State or territory thereof holding less than 10% of the voting power in ICTS (each, a "U.S. Treaty Shareholder"), are subject to Dutch dividend withholding tax of 15%, unless such U.S. Treaty Shareholder has a permanent establishment or permanent representative in the Netherlands to which or to whom the Common Shares are attributable. Subject to certain conditions, the dividend withholding tax rate may be reduced to 5% or 0% in case a qualifying U.S. resident corporate shareholder would hold at least 10% respectively at least 80% of the voting power in ICTS. Generally, there is no dividend withholding tax applicable in the Netherlands on the sale or disposition of Common Shares to persons other than ICTS or its subsidiaries or affiliates. In case of sale or disposition of Common Shares to ICTS or any of its subsidiaries, dividend withholding tax in the Netherlands may apply. However, after January 1, 2008, in exceptional cases, Dutch dividend withholding tax will not apply to repurchases of shares by ICTS. In addition, in an effort to reduce the practice of dividend stripping to reduce or avoid the applicable taxes, the Dutch tax authorities have introduced new laws to avoid such practices effective retroactively as of April 27, 2001, which may have an impact on the levy of dividend withholding tax. Income Tax and Corporate Income Tax in the Netherlands Based on Dutch domestic tax law, a non-resident Shareholder is subject to Dutch income tax or Dutch corporate income tax with respect to dividends distributed by us on the Common Shares or with respect to capital gains derived from the sale or disposal of Common Shares in case: 63 (a) the non-resident Shareholder carries on a business in the Netherlands through a permanent establishment or a permanent representative to which or to whom the Common Shares are attributable; or (b) the non-resident Shareholder has a direct or indirect substantial interest or deemed substantial interest in the share capital of ICTS as defined in the tax code in the Netherlands, which interest does not form part of the assets of an enterprise of that non-resident Shareholder; or (c) the non-resident Shareholder is entitled to a share in the profits of an enterprise effectively managed in The Netherlands, other than through ownership of securities or, in the case of an individual shareholder, through employment, to which enterprise the Common Shares are attributable. Generally, there is a substantial interest in the share capital of ICTS if the non-resident Shareholder, alone or together with his or her partner (spouse, registered partner or other individuals as defined in the Dutch 2001 Personal Income Tax Act), owns, directly or indirectly, (i) 5% or more of the issued capital of any class of shares in ICTS, (ii) options to acquire 5% or more of the issued capital of any class of shares or (iii) profit-sharing rights to 5% or more of the annual profits or liquidation distributions of ICTS. If an individual, alone or together with his partner, does not have a substantial interest based on these tests, he or she may nevertheless be deemed to have a substantial interest in case certain relatives hold a substantial interest in ICTS. In case of a substantial interest held by a corporate shareholder, a receivable the non-resident Shareholder has from ICTS may also belong to such substantial interest. Non-resident Shareholders owning a substantial interest in ICTS may be subject to income tax upon the occurrence of certain events, for example when they cease to own a substantial interest. The Netherlands' right to levy tax with respect to dividends distributed by ICTS to a non-resident Shareholder or capital gains derived from the sale or disposal of shares in ICTS by a non-resident Shareholder may be limited under a tax convention which may be in effect between the country of residence of the shareholder and the Netherlands. In case Dutch income tax is due with respect to dividends distributed by ICTS, Dutch dividend withholding tax levied with respect to such dividends can be credited against the income tax due as a pre-tax. If certain conditions are met, a non-resident individual taxpayer can opt to be treated like a resident of the Netherlands for tax purposes. This choice will allow the individual to benefit from deductions and other tax benefits only available to residents of the Netherlands. Whether or not such choice could be beneficial should be determined separately in each individual case. Netherlands Gift, Inheritance Tax and Transfer Tax Upon Gift or Death A gift or inheritance of Common Shares from a non-resident Shareholder will be subject to gift, inheritance tax, and transfer tax upon gift or death in the Netherlands in case: (a) (i) the Common Shares are an asset attributable to a Dutch resident enterprise or to a permanent establishment or a permanent representative of a non-resident enterprise, as well as the Common Shares are an asset that comes of a co-entitlement other than being a shareholder, in such an enterprise, or (ii) the non-resident Shareholder is entitled to a share in 64 the profits of an enterprise effectively managed in the Netherlands, other than through ownership of securities or through employment, to which enterprise the Common Shares are attributable; or (b) the Common Shares held by the non-resident qualify as "fictitious real estate holdings" for Dutch real estate transfer tax purposes; or (c) the non-resident Shareholder has been a resident of the Netherlands at any time during the ten years preceding the time of the gift or death and is a national of the Netherlands at the time of the gift or death; or (d) for purposes of the tax on gifts, the non-resident Shareholder has been a resident of the Netherlands at any time during the twelve months preceding the time of the gift; or (e) the beneficiaries of a deceased non-resident Shareholder have requested the treatment of the deceased Shareholder as a resident of the Netherlands according to the Dutch inheritance taxes; or (f) In case of a gift of the Common Shares by a non-resident Shareholder, the recipient has requested to have the donor treated as a resident of the Netherlands for Dutch gift tax purposes. Tax assessment in the U.S Under ongoing tax examination of the U.S subsidiaries of the Company, by the U.S tax authorities, through the years ended December 31, 2002 to 2004, the subsidiaries were required to provide information regarding their treatment of certain expenses. The IRS has proposed a number of adjustments that collectively result in an assessed tax liability including penalties of $7.3 million plus interest. Management is vigorously contesting the proposed adjustments and has filed a "protest" with the IRS. This matter will be heard by the Appellate Division of the IRS, at which time management will have a opportunity to present its position on the various issues raised at the examination level. Management has provided for possible tax liabilities resulting from this examination in its financial statements presented herein. Documents on display We are subject to the informational requirements of the Securities Exchange Act of 1934, as amended. In accordance with these requirements, the Company files reports and other information with the United States Securities and Exchange Commission ("SEC"). These materials may be inspected at the Company's office in Amstelveen, The Netherlands. Documents filed with the SEC may also be read and copied at the SEC's public reference room at Room 1024, Judiciary Plaza Building, 450 Fifth Street N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at 500 West Madison Street, Suite 1400, Chicago, IL 60661. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. The SEC also maintains a web site at http://www.sec.gov that contains reports, proxy statements and other information regarding registrants that file electronically with the SEC. Subsidiary Information Not applicable 65 Item 11. Quantitative and Qualitative Disclosure About Market Risk Foreign Currency Exchange Risk - applies to our operations outside the USA. In 2009, approximately 38% of the Companies revenues were derived in the United States, and approximately 62% was derived in Europe. The Company is subject to market risks associated with foreign currency exchange rate fluctuations. We do not utilize derivative instruments to manage its exposure to such market risk. As such, significant foreign currency exchange rate fluctuations can have a material impact of the Company's financial position, results of operations, and cash flows. Interest Rate Risk - We are subject to changes in interest rates based on Federal Reserve actions and general market conditions. The Company does not utilize derivative instruments to manage its exposure to interest rate risk. We believe that moderate interest rate increases will not have a material adverse impact on the results of their operations, or financial position, in the foreseeable future. An increase of 1% in the interest rate would have increased the Company's interest expense for factor advances, bank loans, and other parties, by approximately $180 in the year ended December 31, 2009. Item 12. Description of Securities Other than Equity Securities Not applicable PART II Item 13. Defaults, Dividend Arrearages and Delinquencies As of December 31, 2009, one of our subsidiaries was in violation of its minimum EBITDA and capital expenditure limitation covenants. The credit line will expire on September 30, 2010. Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds Not applicable Item 15. Controls and Procedures. Management's report on internal control over financial reporting (a) Our management, including our chief executive officer and chief financial officer, have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2009. Based on such review, our chief executive officer and chief financial officer have concluded that we have in place effective controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. (b) Our management including our chief executive officer and our chief financial officer are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 66 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures that: o pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets, o provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors, and o provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements. Our management recognizes that there are inherent limitations in the effectiveness of any system of internal control over financial reporting, including the possibility of human error and the circumvention or override of internal control. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation, and may not prevent or detect all misstatements. Further, because of changes in conditions, the effectiveness of internal control over financial reporting may vary over time. Our management including our chief executive officer and our chief financial officer assessed the effectiveness of our internal control over financial reporting as of December 31, 2009. In conducting its assessment of internal control over financial reporting, management based its evaluation on the framework in "Internal Control - Integrated Framework" issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Management has based the assessment in a scope that includes the significant subsidiaries i.e. ISEC International Security B.V, Procheck International BV, I-SEC Netherlands BV, I-SEC France, I-SEC Japan and Huntleigh Corp USA; collectively "Subsidiaries". Our management including our chief executive officer and our chief financial officer has concluded based on its assessment, that our internal control over financial reporting was effective as of December 31, 2009 based on these criteria. This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the SEC that permit us to provide only management's report in this annual report. (c) There were no changes in our internal control over financial reporting that occurred during the year ended December 31, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 67 Item 16A. Audit Committee Financial Experts The members of the Audit Committee consist of Philip M. Getter, Gordon Hausmann and Eytan Barak. All members are independent, with no relationship with management. Mr. Getter and Mr. Barak have financial expertise. Mr. Getter is the Chairman of the Audit Committee and Eytan Barak is a CPA (Isr). Item 16B. Code of Ethics We have adopted a Code of Ethics for principal's executive officers and senior financial officers. Item 16C. Fees Paid to Our Independent Registered Public Accounting Firm The following table sets forth the aggregate fees billed by our independent registered public accounting firms, Mayer Hoffman McCann CPAs (formerly MHM Mahoney Cohen, CPAs, ("MHM")) and 25 MAD LIQUIDATION CPA, P.C. (formerly known as Mahoney Cohen & Company, CPA, P.C.) for services rendered to us during the years ended December 31, 2009 and 2008. The audit committee has considered whether the provision of these services is compatible with maintaining the principal accountant's independence and has concluded that such services are compatible. All fees were reviewed and pre-approved by the audit committee (in thousands). 2009 2008 ---- ---- Audit fees $300 $300 Audit related fees -- -- Tax fees -- -- ---- ---- Total fees $300 $300 ---- ---- Item 16D. Exemptions from listing standards for Audit Committees. One of the Company's directors who acts as the chairman of the Company's Audit Committee was also a director and chairman of the Audit Committee of one of the Company's affiliates until November 2009. Other than such affiliation such director meets the independence requirement for each such entity. Item 16E. Purchase of Equity Securities by the Issuer and Affiliated Purchasers Not applicable. Item 16F. Change in Accountants Disclosure. ICTS International N.V. ("the Company") appointed Mayer Hoffman McCann CPAs ("MHM") (formerly known as MHM Mahoney Cohen CPAs) as the Company's new auditor as approved by the Audit Committee of the Board of Directors on January 8, 2009. The Company was notified that the shareholders of 25 MAD LIQUIDATION CPA, P.C. (formerly known as Mahoney Cohen & Company, CPA, P.C.) ("MAD"), became shareholders of Mayer Hoffman McCann P.C. pursuant to an asset purchase agreement. The New York practice of Mayer Hoffman McCann P.C. now operates under the name MHM Mahoney Cohen CPAs. 68 During the Company's two most recent fiscal years ended December 31, 2007 and December 31, 2006, and through the date of this Current Report on this Form 6-K, the Company did not consult with MHM regarding any of the matters or reportable events set forth in Item 304 (a)(2) (i) and (ii) of Regulation S-K. The audit reports of MAD were based on the consolidated financial statements of the Company as of and for the years ended December 31, 2007 and 2006 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified except that both reports included emphasis paragraphs relating to an uncertainty as to the Company's ability to continue as a going concern and regarding other uncertainties. In connection with the audits of the Company's consolidated financial statements for each of the fiscal years ended December 31, 2007 and December 31, 2006 and through the date of this Current Report on Form 6-K, there were (i.) no disagreements between the Company and MAD on any matters of accounting principles or practices, financial statement disclosures, or auditing scope or procedures, which disagreements, if not resolved to the satisfaction of MAD, would have caused MAD to make reference to the subject matter of the disagreement in their reports on the Company's financial statements for such years or for any reporting period since the Company's last fiscal year end and (ii) no reportable events within the meaning set forth in Item 304 (a)(1)(v) of Regulation S-K were noted, except in 2006 the Company reported material weaknesses as noted on Item 15 of Form 20-F for the year ended December 31, 2006 filed July 17, 2007. These matters were remediated in 2007. Item 16G. Corporate Governance. There are no significant differences between the corporate governance practices in the Netherlands and the U.S. The Company has adapted the U.S. practices. PART III Item 17. Financial Statements See Item 18. Item 18. Financial Statements The Consolidated Financial Statements and Financial Statement Schedule of the Company as of December 31, 2009 and 2008 and for each of the three years ended December 31, 2009, including the report of our independent registered public accounting firm thereon are set forth on pages F-1 to F-37. Item 19. Exhibits 1. Articles of Association of the Company.* 2. Articles of Amendment of the Articles of Association filed as exhibit to Form 6K dated April 22, 2009. 3. Specimen of the Company's Common Stock.* 4. Code of Ethics for Principal Executive Officers and Senior Financial Officers.** 69 Certification by the Registrant's Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 Certification by the Registrant's Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 * Incorporated by reference to the Company's 1999 annual report filed with the Commission on Form 20-F. ** Incorporated by reference to the Company's 2003 annual report filed with the Commission on Form 20-F. SIGNATURES The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this annual report on its behalf. ICTS INTERNATIONAL, N.V. AND SUBSIDIARIES By: /s/ Avraham Dan ----------------------------- Name: Avraham Dan Title: Managing Director Date: June 30, 2010 70 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES 2009 ANNUAL REPORT INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Consolidated Financial Statements: Reports of Independent Registered Public Accounting Firms F-2 Consolidated Balance Sheets as of December 31, 2009 and 2008 F-4 Consolidated Statements of Operations and Comprehensive Income (Loss) for the Years Ended December 31, 2009, 2008 and 2007 F-5 Consolidated Statements of Changes in Shareholders' Deficiency for the Years Ended December 31, 2009, 2008 and 2007 F-6 Consolidated Statements of Cash Flows for the Years Ended December 31, 2009, 2008 and 2007 F-7 Notes to Consolidated Financial Statements F-9 Financial Statement Schedule: Valuation and Qualifying Accounts F-37 F-1 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of ICTS INTERNATIONAL N.V. AND SUBSIDIARIES We have audited the accompanying consolidated balance sheets of ICTS International N.V. and Subsidiaries (the "Company") as of December 31, 2009 and 2008 and the related consolidated statements of operations and comprehensive income (loss), changes in shareholders' deficiency, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ICTS International N.V. and Subsidiaries as of December 31, 2009 and 2008 and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America. As disclosed in Notes 12 and 15, the Company is involved in significant litigation in connection with (a) its exposure to certain tax assessments made against it in the United States of America by the Internal Revenue Service, (b) the September 11, 2001 terrorist attacks in the United States of America, (c) certain claims made against the Company by the United States Department of Labor, and (d) certain claims made by the Company against the United States Transportation Security Administration. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from continuing operations, deficiencies in working capital and is subject to potential material contingencies, as discussed in the preceding paragraph. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. /s/ Mayer Hoffman McCann CPAs (The New York Practice of Mayer Hoffman McCann P.C.) New York, New York June 30, 2010 F-2 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of ICTS INTERNATIONAL N.V. AND SUBSIDIARIES We have audited the accompanying consolidated statements of operations and comprehensive income (loss), changes in shareholders' deficiency, and cash flows of ICTS International N.V. and Subsidiaries (the "Company") for the year ending December 31, 2007. These financial statements are the responsibility of the Company management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the results of operations and cash flows of ICTS International N.V. and Subsidiaries for the year ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. As disclosed in Notes 12 and 15, the Company is involved in significant litigation in connection with: (a) its exposure to certain tax assessments made against it in the United States of America by the Internal Revenue Service, (b) the September 11, 2001 terrorist attacks in the United States of America, (c) unpaid rent obligations related to certain non-core businesses which have been discontinued in the United States of America, ,(d) certain claims made against the Company by the United States Department of Labor, (e) certain claims made by the Company against the United States Transportation Security Administration, and (f) the successful renewal of a material contract by one of the Company's subsidiaries. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from continuing operations, deficiencies in working capital and is subject to potential material contingencies, as discussed in the preceding paragraph. These matters raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties. /s/ 25 MAD LIQUIDATION CPA, P.C. (formerly known as Mahoney Cohen & Company, CPA, P.C.) New York, New York June 30, 2008 F-3 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (US $ in thousands, except per share data)
December 31, ------------------------------- ASSETS 2009 2008 ------------------------------- CURRENT ASSETS: Cash and cash equivalents $ 4,835 $ 3,750 Restricted certificate of deposit 3,500 -- Accounts receivable, net 11,556 11,448 Prepaid expenses and other current assets 1,307 1,373 ------------------------------- Total current assets 21,198 16,571 Property and equipment, net 1,873 1,728 Goodwill 314 314 Restricted certificate of deposit -- 3,500 Receivable - United States Transportation Security Administration 3,000 3,000 Other assets 442 283 ------------------------------- Total assets $ 26,827 $ 25,396 =============================== LIABILITIES AND SHAREHOLDERS' DEFICIENCY CURRENT LIABILITIES: Notes payable-bank $ 6,070 $ 4,861 Accounts payable 2,684 4,087 Accrued expenses and other current liabilities 21,856 21,023 Current liabilities from discontinued operations 1,222 1,898 ------------------------------- Total current liabilities 31,832 31,869 Convertible notes payable to related party, including accrued interest 10,144 6,072 Other liabilities 3,141 3,144 Non-current liabilities from discontinued operations -- 7,276 ------------------------------- Total liabilities 45,117 48,361 ------------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 15) SHAREHOLDERS' DEFICIENCY: Common stock, (euro) 0.45 par value; 17,000,000 shares authorized; 7,890,137 shares issued and outstanding as of December 31, 2009; 6,672,980 shares issued and 6,528,100 shares outstanding as of December 31, 2008 4,409 3,605 Additional paid-in capital 20,661 20,655 Accumulated deficit (35,904) (38,827) Accumulated other comprehensive loss (7,456) (7,499) Treasury stock, at cost; 144,880 shares as of December 31, 2008 -- (899) ------------------------------- Total shareholders' deficiency (18,290) (22,965) ------------------------------- Total liabilities and shareholders' deficiency $ 26,827 $ 25,396 ===============================
The accompanying notes are an integral part of the consolidated financial statements. F-4 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (US $ in thousands, except per share data)
Year Ended December 31, -------------------------------------------------------- 2009 2008 2007 -------------------------------------------------------- Revenue $ 95,861 $ 98,809 $ 64,780 Cost of revenue 83,491 85,107 52,397 -------------------------------------------------------- GROSS PROFIT 12,370 13,702 12,383 Selling, general, and administrative expenses 14,313 15,341 13,338 -------------------------------------------------------- OPERATING LOSS (1,943) (1,639) (955) Other expenses (1,638) (856) (3,580) -------------------------------------------------------- LOSS BEFORE EQUITY LOSS FROM INVESTMENTS IN AFFILIATES AND INCOME TAX BENEFIT (EXPENSE) (3,581) (2,495) (4,535) Equity loss from investments in affiliates -- -- (2,479) Income tax benefit (expense) 418 (402) (966) -------------------------------------------------------- LOSS FROM CONTINUING OPERATIONS (3,163) (2,897) (7,980) Income from discontinued operations, net of income tax benefit (expense) of $0, ($2) and $2,470 in 2009, 2008 and 2007, respectively. 6,086 928 5,422 -------------------------------------------------------- NET INCOME (LOSS) $ 2,923 $ (1,969) $ (2,558) ======================================================== INCOME (LOSS) PER SHARE - BASIC AND DILUTED Continuing operations $ (0.47) $ (0.44) $ (1.22) Discontinued operations 0.90 0.14 0.83 -------------------------------------------------------- Net income (loss) $ 0.43 $ (0.30) $ (0.39) ======================================================== Weighted average number of shares outstanding 6,790,707 6,528,100 6,528,100 ======================================================== COMPREHENSIVE INCOME (LOSS) Net income (loss) $ 2,923 $ (1,969) $ (2,558) Translation adjustment 43 (487) 80 Unrealized gain on marketable equity securities -- -- 497 -------------------------------------------------------- Comprehensive income (loss) $ 2,966 $ (2,456) $ (1,981) ========================================================
The accompanying notes are an integral part of the consolidated financial statements. F-5 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIENCY (US $ in thousands, except per share data)
Accumulated Common Stock Additional Other Total -------------------- Paid-In Accumulated Comprehensive Treasury Shareholders' Shares Amount Capital Deficit Loss Stock Deficiency ---------------------------------------------------------------------------------------------- BALANCE AT JANUARY 1, 2007 6,528,100 $3,605 $ 20,181 $(34,300) $(7,589) $(899) $(19,002) Stock-based compensation -- -- 373 -- -- -- 373 Net loss -- -- -- (2,558) -- -- (2,558) Translation adjustment -- -- -- -- 80 -- 80 Unrealized gain on marketable equity securities -- -- -- -- 497 -- 497 ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2007 6,528,100 3,605 20,554 (36,858) (7,012) (899) (20,610) Stock-based compensation -- -- 101 -- -- -- 101 Net loss -- -- -- (1,969) -- -- (1,969) Translation adjustment -- -- -- -- (487) -- (487) ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2008 6,528,100 3,605 20,655 (38,827) (7,499) (899) (22,965) Exercise of stock options 1,062,037 674 171 -- -- 310 1,155 Issuance of shares to related party 300,000 130 (165) -- -- 589 554 Net income -- -- -- 2,923 -- -- 2,923 Translation adjustment -- -- -- -- 43 -- 43 ---------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 2009 7,890,137 $4,409 $ 20,661 $(35,904) $(7,456) $ -- $(18,290) ==============================================================================================
The accompanying notes are an integral part of the consolidated financial statements. F-6 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (US $ in thousands, except per share data)
Year Ended December 31, ---------------------------------------------- 2009 2008 2007 ---------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 2,923 $(1,969) $(2,558) Income from discontinued operations 6,086 928 5,422 ---------------------------------------------- Loss from continuing operations (3,163) (2,897) (7,980) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 715 781 1,218 Impairment of property and equipment -- 4 48 Deferred income taxes -- -- -- Loss on sale of property and equipment -- (12) (59) Impairment of investments -- -- 855 Equity loss in investments in affiliates -- -- 2,290 Stock-based compensation -- 101 373 Gain on settlement of liability -- -- (4,266) Issuance of shares to related party 554 -- -- Changes in assets and liabilities: Accounts receivable, net 40 (1,339) 364 Prepaid expenses and other current assets 92 265 103 Other receivable - United States Transportation Security Administration -- (64) -- Other assets (155) 38 (202) Accounts payable (1,440) (306) 633 Accrued expenses and other current liabilities 640 4,930 2,827 Net cash provided by (used in) discontinued operations (1,866) 2,356 175 ---------------------------------------------- Net cash provided by (used in) operating activities (4,583) 3,857 (3,621) ---------------------------------------------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment (865) (1,042) (792) Proceeds from sale of property and equipment 26 61 135 Proceeds from sale of equity method investments -- -- 295 Decrease (increase) in restricted cash -- 1,791 (770) Increase in other assets -- (185) -- Net cash provided by discontinued operations -- -- 55 ---------------------------------------------- Net cash provided by (used in) investing activities $ (839) $ 625 $(1,077) ----------------------------------------------
The accompanying notes are an integral part of the consolidated financial statements. F-7 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONCLUDED) (US $ in thousands, except per share data)
Year Ended December 31, ------------------------------------------------ 2009 2008 2007 ------------------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Repayments of other liabilities $ (5) $ (91) $ (195) Net increase (decrease) in notes payable - bank 1,209 (1,824) 1,562 Net proceeds (repayments of) convertible notes payable to related party 3,872 (234) 3,991 Proceeds from exercise of stock options 1,155 -- -- Net cash used in discontinued operations -- -- (373) ------------------------------------------------ Net cash provided by (used in) financing activities 6,231 (2,149) 4,985 ------------------------------------------------ EFFECT OF CHANGES IN FOREIGN CURRENCY EXCHANGE RATES ON CASH AND CASH EQUIVALENTS 276 (678) 65 ------------------------------------------------ INCREASE IN CASH AND CASH EQUIVALENTS 1,085 1,655 352 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 3,750 2,095 1,743 ------------------------------------------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 4,835 $ 3,750 $ 2,095 ================================================
Year Ended December 31, ------------------------------------------------ 2009 2008 2007 ------------------------------------------------ SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES Cashless exercise of stock options $ 75 $ -- $ -- ================================================ SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES Cash paid during the year for: Interest $ 315 $ 565 $ 624 ================================================ Income taxes $ 124 $ 270 $ 226 ================================================
The accompanying notes are an integral part of the consolidated financial statements. F-8 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 1 - ORGANIZATION Description of Business ICTS International N.V. ("ICTS") was established by the Department of Justice in Amstelveen, Netherlands on October 9, 1992. ICTS and subsidiaries (collectively referred to as, the "Company") operate in three reportable segments: (a) corporate (b) airport security and other aviation services and (c) technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provides security and other services to airlines and airport authorities, predominantly in the United States of America and Europe. The technology segment is predominantly involved in the development and sale of identity security software to financial institutions and airport authorities, predominantly in Europe and Israel. Liquidity and Financial Condition The Company has a history of recurring losses from continuing operations and working capital deficiencies. The Company incurred losses from continuing operations of $3,163, $2,897 and $7,980 during the years ended December 31, 2009, 2008, and 2007, respectively. As of December 31, 2009, the Company had a working capital deficit and shareholders' deficiency of $10,634 and $18,290, respectively. In addition, as further described in Notes 12 and 15, the Company is subject to potential material contingencies in connection with: (a) its exposure to certain tax assessments made against it in the United States of America by the Internal Revenue Service, (b) the September 11, 2001 terrorist attacks in the United States of America, (c) certain claims made against the Company by the United States Department of Labor, and (d) certain claims made by the Company against the United States Transportation Security Administration ("TSA"). Furthermore, one of the subsidiaries of ICTS is in default of its line of credit in the United States of America, which expires on September 30, 2010, as a result of violations of certain required financial covenants (see Note 6). These factors raise substantial doubt about the Company's ability to continue as a going concern. Management believes that the Company's operating cash flows and related party financing activities will provide it with sufficient funds to meet its obligations and execute its business plan for the next twelve months. However, there are no assurances that management's plans to generate sufficient cash to continue to operate the Company will be successful. The accompanying consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The significant accounting policies are as follows: F-9 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Functional Currency The accompanying consolidated financial statements are presented in United States dollars. The Company has determined that the functional currency of its foreign subsidiaries is the local currency, which is predominantly the Euro. For financial reporting purposes, the assets and liabilities of such subsidiaries are translated into United States dollars using exchange rates in effect at the balance sheet date. The revenue and expenses of such subsidiaries are translated into United States dollars using average exchange rates in effect during the reporting period. Resulting translation adjustments are presented as a separate category in shareholders' deficiency called accumulated other comprehensive loss. Use of Estimates The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. The most significant estimates and assumptions included in these consolidated financial statements consist of the: (a) calculation of the allowance for doubtful accounts, (b) determination of the fair value of shares of common stock issued to a related party, (c) determination of the fair value of stock options upon the modification of the Company's stock option plans, (d) recognition of contingent liabilities, (e) calculation of income taxes, and (f) impairment evaluation of marketable equity securities and equity method investments. Actual results could differ from those estimates. Principles of Consolidation The consolidated financial statements include the accounts of ICTS International N.V. and its wholly-owned subsidiaries. All significant intercompany balances have been eliminated in consolidation. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash and cash equivalents. Restricted Certificate of Deposit The Company has a $3,500 certificate of deposit with a commercial bank that serves as cash collateral to secure a line of credit in the United States of America (see Note 6). The certificate of deposit matures on September 30, 2010. Accounts Receivable Accounts receivable represent amounts due to the Company for services rendered and are recorded net of an allowance for doubtful accounts. The allowance for doubtful accounts is based on historical collection experience, factors related to a specific customer and current economic trends. The Company writes off accounts receivable against the allowance for doubtful accounts when the balance is determined to be uncollectible. As of December 31, 2009 and 2008, the allowance for doubtful accounts is $253 and $328, respectively. F-10 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Marketable Equity Securities All of the Company's marketable equity securities are classified as available for sale securities. Available for sale securities are reported at fair value (which is determined based upon the quoted market prices of the underlying securities) with unrealized gains (losses) being reported, net of related income taxes, as a separate component of shareholders' deficiency called accumulated other comprehensive loss. Realized gains (losses) are included in the consolidated statements of operations and comprehensive income (loss) upon the sale of the securities. During 2007, the Company determined that the decline in fair value of its marketable equity securities was other than temporary and that the marketable equity securities were impaired. Accordingly, the Company recognized an impairment charge of $600 (see Note 11). The impairment charge represents the carrying value of the marketable equity securities as of December 31, 2007 of $103 and cumulative unrealized losses through December 31, 2007 of $497 which were previously recognized in accumulated other comprehensive loss. Investments in Affiliates The Company accounts for investments in the equity securities of companies which represent an ownership interest of 20% or more and the ability to exercise significant influence, provided that ability does not represent control, using the equity method. The equity method requires the Company to recognize its share of the net income (loss) of its investees in the consolidated statement of operations until the carrying value of the investment is zero. Property and Equipment Equipment and facilities, internal-use software, and vehicles are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The estimated useful lives used in determining depreciation are as follows: Years ----- Equipment and facilities 3-20 Internal-use software 7 Vehicles 3-7 Leasehold improvements are amortized using the straight-line method over the shorter of the term of the lease or the estimated useful lives of the assets. Capitalized Internal-Use Software Costs The Company capitalizes the cost of internal-use software that has a useful life in excess of one year in property and equipment. These costs consist of payments made to third party consultants for the installation and integration of software and related travel costs. Software maintenance and training costs, including related travel costs, are expensed in the period in which they are incurred. F-11 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Customer Relationship The customer relationship represents the fair value of an airport contract of an acquired business. The customer relationship is amortized using the straight-line method over the life of the contract of six years. As of December 31, 2009, the customer relationship is fully amortized. Amortization expense is $0, $53 and $648 for the years ended December 31, 2009, 2008 and 2007, respectively. Goodwill Goodwill represents the excess purchase price over the fair value of the net tangible and intangible assets of an acquired business. Goodwill is reviewed for impairment by reporting unit on an annual basis or when events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying value of the reporting unit's goodwill is not recoverable based upon a discounted cash flow analysis, then an impairment charge is recorded for the difference between the carrying value and the fair value of the reporting unit's goodwill. During the years ended December 31, 2009, 2008 and 2007, the Company has not recorded any impairment charges on its goodwill. Long-Lived Assets The Company reviews long-lived assets, other than goodwill, for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. The Company assesses recoverability by determining whether the net book value of the related asset will be recovered through the projected undiscounted future cash flows of the asset. If the Company determines that the carrying value of the asset may not be recoverable, it measures any impairment based on the projected future discounted cash flows as compared to the asset's carrying value. During the years ended December 31, 2009, 2008, and 2007, the Company has recorded impairment charges on its long-lived assets of $0, $4 and $48, respectively. Convertible Debt Instruments The Company evaluates convertible debt instruments to determine whether the embedded conversion option needs to be bifurcated from the debt instrument and accounted for as a freestanding derivative instrument or considered a beneficial conversion option. An embedded conversion option is considered to be a freestanding derivative when: (a) the economic characteristics and risks of the embedded conversion option are not clearly and closely related to the economic characteristics and risks of the host instrument, (b) the hybrid instrument that embodies both the embedded conversion option and the host instrument is not re-measured at fair value under otherwise applicable US GAAP with changes in fair value reported in earnings as they occur, and (c) a separate instrument with the same terms as the embedded conversion option would be considered a derivative instrument subject to certain requirements (except for when the host instrument is deemed to be conventional). When it is determined that an embedded conversion option should not be bifurcated from its host instrument, the embedded conversion option is evaluated to determine whether it contains any intrinsic value which needs to be discounted from the carrying value of the convertible debt instrument. The intrinsic value of an embedded conversion option is considered to be the difference between the fair value of the underlying security on the commitment date of the debt instrument and the effective conversion price embedded in the debt instrument. F-12 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Contingent Liabilities The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the normal course of its business activities. Liabilities for such contingencies are recognized when: (a) information available prior to the issuance of the consolidated financial statements indicates that it is probable that a liability had been incurred at the date of the consolidated financial statements and (b) the amount of loss can reasonably be estimated. Comprehensive Income (Loss) Comprehensive income (loss) reflects changes in shareholders' deficiency that result from transactions and economic events from non-owner sources. The Company's comprehensive income (loss) for the years ended December 31, 2009, 2008, and 2007 consists of its net income (loss), foreign currency translation adjustment and unrealized gain on marketable equity securities. Stock-Based Compensation Share-based payment awards to employees, including stock options, are measured at the fair value of the award on the date of grant based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The compensation expense resulting from share-based payments is recorded over the vesting period of the award in selling, general and administrative expense in the accompanying consolidated statements of operations. Revenue Recognition Revenue is recognized as services are rendered, based on the terms contained in the Company's contractual arrangements with customers, provided the fee is fixed and determinable, and collection of the related receivable is reasonably assured. Cost of Revenue Cost of revenue represents primarily payroll and related costs associated with employees who provide services under the terms of the Company's contractual arrangements. Such costs are recognized as services are provided. Advertising Costs Advertising costs are expensed as incurred. Advertising costs during the years ended December 31, 2009, 2008 and 2007 are $48, $235 and $111, respectively. Research and Development Costs Research and development costs are expensed as incurred and consist primarily of payroll and related costs. Research and development costs are $1,001, $330 and $317 during the years ended December 31, 2009, 2008, and 2007, respectively. F-13 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Value Added Tax Certain of the Company's operations are subject to Value Added Tax ("VAT") applied on the services sold in those respective countries. The Company is required to remit the VAT collected to the tax authorities, but may deduct the VAT paid on certain eligible purchases. The Company records the VAT amount payable or receivable in each respective country on a net basis in the accompanying consolidated balance sheets. Income Taxes The Company accounts for income taxes using the liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date. Valuation allowances are established when realization of net deferred tax assets is not considered more likely than not. Uncertain tax positions are determined based upon the likelihood of the positions being sustained upon examination by taxing authorities. The benefit of a tax position is recognized in the consolidated financial statements in the period during which management believes it is more likely than not that the position will not be sustained. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured is reflected as income taxes payable in the accompanying consolidated balance sheets. The Company recognizes interest related to uncertain tax positions in interest expense. The Company recognizes penalties related to uncertain tax positions in selling, general and administrative expenses. Income (Loss) Per Share Basic income (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted income (loss) per share is determined in the same manner as basic income (loss) per share, except that the number of shares is increased to include potentially dilutive securities using the treasury stock method. Because the Company incurred a loss from continuing operations in all periods presented, all potentially dilutive securities were excluded from the computation of diluted income (loss) per share because the effect of including them is anti-dilutive. F-14 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income (Loss) Per Share (Continued) The following table summarizes the number of common shares attributable to potentially dilutive securities outstanding for each of the periods which were excluded in the calculation of diluted income (loss) per share: Year Ended December 31, ----------------------------------- 2009 2008 2007 --------- --------- --------- Stock Options 332,000 1,632,000 1,723,000 Shares Issuable upon Conversion of Convertible Notes Payable to Related Party 4,830,476 2,208,000 1,865,000 --------- --------- --------- Total 5,162,476 3,840,000 3,588,000 ========= ========= ========= Fair Value of Financial Instruments The fair values of cash and cash equivalents, restricted certificate of deposit, accounts receivable, accounts payable, accrued expenses and other current liabilities, and notes payable-bank approximate their carrying values due to the short-term nature of the instruments. The carrying values of the convertible notes payable to related party and other liabilities are not readily determinable because: (a) these instruments are not traded and, therefore, no quoted market prices exist upon which to base an estimate of fair value and (b) there were no readily determinable similar instruments on which to base an estimate of fair value. Concentration of Credit Risk Financial instruments which are subject to concentrations of credit risk consist primarily of cash and cash equivalents, restricted certificate of deposit and accounts receivable. The Company maintains cash and cash equivalents and restricted cash in accounts with high quality financial institutions in the United States of America, Europe, and Israel. Bank accounts at financial institutions located in the United States of America are insured by the Federal Deposit Insurance Corporation ("FDIC") for up to $250 per institution through December 31, 2013. As of December 31, 2009, cash and cash equivalents being held in the United States of America do not exceed the FDIC limit. Bank accounts located in Europe and Israel which hold $4,787 as of December 31, 2009 are uninsured. The Company renders services to a limited number of airlines and airports through service contracts and provides credit without collateral. Some of these airlines and airports may have difficulties in meeting their financial obligations which can have a material adverse effect on the Company's financial position, results of operations and cash flows. To mitigate this risk, the Company regularly reviews the credit worthiness of its customers through its credit evaluation process. Revenue from two customers represented 56%, 55% and 29% of total revenue during the years ended December 31, 2009, 2008 and 2007, respectively. Accounts receivable from these two customers represented 38% and 41% of total accounts receivable as of December 31, 2009 and 2008, respectively. F-15 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Risks and Uncertainties The Company is currently engaged in direct operations in numerous countries and is therefore subject to risks associated with international operations (including economic and/or political instability and trade restrictions). Such risks can cause the Company to have significant difficulties in connection with the sale or provision of its services in international markets and have a material impact on the Company's consolidated financial position, results of operations and cash flows. Furthermore, as a result of its international operations, the Company is subject to market risks associated with foreign currency exchange rate fluctuations. The Company does not utilize derivative instruments to manage its exposure to such market risk. As such, significant foreign currency exchange rate fluctuations can have a material impact on the Company's consolidated financial position, results of operations and cash flows. Recently Issued Accounting Pronouncements In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141(R), "Business Combinations" ("SFAS 141(R)"). SFAS 141(R) replaces Statement of Financial Accounting Standards No. 141, "Business Combinations," and was primarily codified into FASB Accounting Standards Codification Topic 805, "Business Combinations" ("ASC 805"). ASC 805 establishes principles and requirements for determining how an enterprise recognizes and measures the fair value of certain assets and liabilities acquired in a business combination, including non-controlling interests, contingent consideration, and certain acquired contingencies. ASC 805 also requires acquisition-related transaction expenses and restructuring costs be expensed as incurred rather than capitalized as a component of the business combination. The Company adopted ASC 805 on January 1, 2009. ASC 805 will have an impact on the accounting for any businesses acquired by the Company after its date of adoption. In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, "Non-controlling Interests in Consolidated Financial Statements - an amendment of ARB No. 51" ("SFAS 160"). SFAS 160, which was primarily codified into FASB Accounting Standards Codification Topic 810, "Consolidation" ("ASC 810"), establishes accounting and reporting standards for the non-controlling interest in a subsidiary (previously referred to as minority interests). ASC 810 requires non-controlling interests to be reported as a separate component of stockholder's deficiency and present any net income (loss) allocable to non-controlling interests and stockholders separately in its statement of operations. ASC 810 also requires that a retained non-controlling interest, upon the deconsolidation of a subsidiary, be initially measured at its fair value. The Company adopted ASC 810 on January 1, 2009. ASC 810 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. F-16 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recently Issued Accounting Pronouncements (CONTINUED) In April 2008, the FASB issued FASB Staff Position SFAS 142-3, "Determination of the Useful Life of Intangible Assets" ("FSP SFAS 142-3"). FSP SFAS 142-3, which was primarily codified into FASB Accounting Standards Codification Topic 350, "Goodwill and Other Intangible Assets" ("ASC 350"), amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under this guidance. The objective of this guidance is to improve the consistency between the useful life of a recognized intangible asset under this guidance and the period of expected cash flows used to measure the fair value of the asset under ASC 805 and other US GAAP. The Company adopted ASC 350 as of January 1, 2009. The adoption of ASC 350 did not have a material effect on the Company's consolidated financial position, results of operations, or cash flows. In June 2008, the FASB ratified EITF 07-5, "Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity's Own Stock" ("EITF 07-05"). EITF 07-5, which was primarily codified into FASB Accounting Standards Codification Topic 815, "Derivatives and Hedging ("ASC 815")," provides framework for determining whether an instrument is indexed to an entity's own stock. The Company adopted ASC 815 as of January 1, 2009. The adoption of ASC 815 did not have a material effect on the Company's consolidated financial position, results of operations, or cash flows. In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, "Subsequent Events" ("SFAS 165"). SFAS 165, which was primarily codified into FASB Accounting Standards Codification Topic 855, "Subsequent Events" ("ASC 855"), establishes standards for the accounting and disclosure of subsequent events. ASC 855 introduces new terminology, defines a date through which management must evaluate subsequent events, and lists the circumstances under which an entity must recognize and disclose events or transactions occurring after the balance sheet date. The Company adopted ASC 855 on December 31, 2009. The adoption of ASC 855 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)." SFAS 167, which was primarily codified into FASB Accounting Standards Codification Topic 810, "Consolidation" ("ASC 810") seeks to improve financial reporting by enterprises involved with variable interest entities. The Company adopted ASC 810 as of January 1, 2009. The adoption of ASC 810 did not have a material effect on the Company's consolidated financial position, results of operations, or cash flows. F-17 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Recently Issued Accounting Pronouncements (CONTINUED) In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, "The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles - a replacement of FASB Statement No. 162" ("SFAS 168"). SFAS 168, which was primarily codified into FASB Accounting Standards Codification Topic 105, "Generally Accepted Accounting Principles" ("ASC 105"), established the FASB Accounting Standards Codification as the source of authoritative nongovernmental generally accepted accounting principles in the United States of America ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of these provisions, the codification superseded all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the codification became non-authoritative. The Company adopted ASC 105 on December 31, 2009. In December 2009, the FASB issued Accounting Standards Update 2009-17, "Consolidations - Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities" ("Update 2009-17"). Update 2009-17 amends Topic 810, "Consolidations" of the Accounting Standards Codification by replacing the quantitative-based risks and rewards calculation for determining which reporting entity, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which reporting entity has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (a) the obligation to absorb losses of the entity or (b) the right to receive benefits from the entity. The amendments also require additional disclosures about a reporting entity's involvement in variable interest entities, which will enhance the information provided to users of financial statements. The adoption of Update 2009-17 is not expected to have a material impact on the Company's consolidated financial position, results of operations or cash flows. In February 2010, the FASB issued Accounting Standards Update 2010-9, "Subsequent Events, Amendments to Certain Recognition and Disclosure Requirements" ("Update 2010-9"). Update 2010-9 amends Topic 855, "Subsequent Events," of the Accounting Standards Codification by eliminating the requirement to disclose the date through which subsequent events were evaluated for public entities and clarifying the application of ASC 855 in revised financial statements. The amendments in Update 2010-9 are effective upon issuance. The Company adopted Update 2010-9 on December 31, 2009. The adoption of Update 2010-9 did not have a material effect on the Company's consolidated financial position, results of operations or cash flows. NOTE 3 - DISCONTINUED OPERATIONS In December 2005, the Company committed to a plan to cease the operations of its entertainment segment in the United States of America. Accordingly, as of that date, the assets, liabilities and results of operations of the entertainment segment were classified as discontinued operations in the Company's consolidated financial statements. The nature of the ongoing discontinued operations of the entertainment segment consists mainly of activities associated with the settlement of ongoing litigation, including disputes related to unpaid vendor and rent obligations (see Notes 15). F-18 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 3 - DISCONTINUED OPERATIONS (Continued) In July 2009, the Company entered into a settlement arrangement with the former landlord of the entertainment segment to resolve all disputes between the parties related to unpaid rent obligations. Pursuant to the settlement arrangement, the Company agreed to pay $2,600 to the former landlord in four equal installments of $650. The first two installments were paid upon the execution of the settlement arrangement and on December 31, 2009. The remaining payments are payable on June 30, 2010 and December 31, 2010. As a result of the settlement arrangement, the Company recognized a gain of $4,756 in its results from discontinued operations. The payment of the Company's obligation under the settlement arrangement is secured by a $1,300 irrevocable standby letter of credit issued to the former landlord by an entity related to the Company's main shareholder (see Note 13). Furthermore, during 2009, based upon management's assessment that payments are unlikely, the remaining disputes of the entertainment segment related to unpaid vendor obligations of $1,156 which were previously accrued by the Company were eliminated and recognized as income from discontinued operations. A summary of the Company's assets and liabilities from discontinued operations as of December 31, 2009 and 2008 are as follows: December 31, ------------------ 2009 2008 ------------------ Accrued expenses and other current liabilities $ 1,222 $1,898 ------------------ Total current liabilities from discontinued Operations $ 1,222 $1,898 ================== Other liabilities $ -- $7,276 ------------------ Total non-current liabilities from discontinued operations $ -- $7,276 ================== A summary of the Company's results from discontinued operations for the years ended December 31, 2009, 2008 and 2007 are as follows: December 31, -------------------------------- 2009 2008 2007 -------------------------------- Operating income $6,086 $ 932 $ 2,634 Impairment loss -- -- (55) Other income (expense), net -- (2) 373 Income tax benefit (expense) -- (2) 2,470 -------------------------------- Income from discontinued operations $6,086 $ 928 $ 5,422 ================================ F-19 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 4 - INVESTMENTS IN AFFILIATES ICTS Netherlands Airport Services VOF The Company has a 50% ownership interest in ICTS Netherlands Airport Services VOF ("NAS"), a joint venture with an unrelated third party. NAS provided airport services at the Amsterdam Schiphol Airport in the Netherlands pursuant to a long-term service contract. On February 1, 2008, the service contract expired and NAS ceased its operations. The Company does not expect to receive any cash distributions upon the final liquidation of NAS. As of December 31, 2009 and 2008, the Company's investment in NAS is $0. The Company recognized an equity loss in affiliates related to its investment in NAS of $0, $0 and $2,003 during the years ended December 31, 2009, 2008 and 2007, respectively. The Company recorded an impairment charge of $192 during the year ended December 31, 2007 and discontinued its use of the equity method to account for its joint venture in NAS. The $192 impairment charge consists of $332 relating to the carrying amount of the investment in NAS as of December 31, 2007, net of $140 in accumulated other comprehensive income previously recognized. As of December 31, 2009, the Company's share of the underlying net assets of NAS exceeds the carrying value of its investment in NAS by $118. The market value of the Company's investment in NAS as of December 31, 2009 is not determinable. Balance sheet data for NAS is summarized below: December 31, ----------------- 2009 2008 ----------------- Current assets $255 $1,637 ----------------- Total assets $255 $1,637 ================= Current liabilities $ 19 $1,544 Shareholders' equity 236 93 ----------------- Total liabilities and shareholders' equity $255 $1,637 ================= Statement of operations data for NAS is summarized below: For the Year Ended December 31, --------------------------------------- 2009 2008 2007 --------------------------------------- Revenue $ -- $ 5,931 $ 62,684 Gross profit -- 625 873 Net income (loss) 143 (565) (4,006) Inksure Technologies, Inc. The Company has an ownership interest in Inksure Technologies, Inc. ("Inksure") of 27.4% as of December 31, 2009 and 2008. The Company's chief financial officer serves as a non-employee director of Inksure. In addition, one of the members of the Company's Board of Directors also serves as a non-employee director of Inksure. Inksure develops, markets and sells customized authentication systems designed to enhance the security of documents and branded products. During the year ended December 31, 2007, the Company's investment in Inksure was reduced to $0 and the use of the equity method was suspended. F-20 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 4 - INVESTMENTS IN AFFILIATES (CONTINUED) Inksure Technologies, Inc. (Continued) The Company recognized an equity loss in affiliates related to its investment in Inksure of $0, $0 and $284 during the years ended December 31, 2009, 2008 and 2007, respectively. As of December 31, 2009, the Company's carrying value of its investment in Inksure exceeds the Company's share of the underlying net assets of Inksure by $1,918. The market value of the Company's investment in Inksure as of December 31, 2009 is $497. Balance sheet data for Inksure is summarized below: December 31 -------------------------- 2009 2008 -------------------------- Current assets $ 3,451 $ 3,090 Non-current assets 211 288 -------------------------- Total assets $ 3,662 $ 3,378 ========================= Current liabilities $ 10,063 $ 8,093 Non-current liabilities 598 -- Shareholders' deficiency (6,999) (4,715) -------------------------- Total liabilities and Shareholder's deficiency $ 3,662 $ 3,378 ========================= Statement of operations data for Inksure is summarized below: December 31, ------------------------------------ 2009 2008 2007 ------------------------------------ Revenue $ 3,335 $ 2,158 $ 2,890 Gross profit 2,962 1,654 1,782 Net loss (1,468) (3,528) (3,078) NOTE 5 - PROPERTY AND EQUIPMENT Property and equipment is as follows: December 31, ------------------ 2009 2008 ------------------ Equipment and facilities $3,515 $3,694 Internal-use software 509 -- Vehicles 678 693 Leasehold improvements 446 304 ------------------ 5,148 4,691 Less: accumulated depreciation and amortization 3,275 2,963 ------------------ Total property and equipment, net $1,873 $1,728 ================== Depreciation expense is $715, $728 and $570 for the years ended December 31, 2009, 2008 and 2007, respectively. F-21 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 6 - NOTES PAYABLE - BANK One of the subsidiaries of ICTS has an arrangement with a commercial bank in the United States of America, which provides up to $8,000 in borrowings and letters of credit. The borrowing base of the arrangement is limited to 85% of the subsidiary's eligible accounts receivable, as defined, and 95% of the subsidiary's cash collateral. Borrowings under the arrangement are secured by the subsidiary's accounts receivable of $6,213 and a $3,500 certificate of deposit (see Note 2). Borrowings under the arrangement are also guaranteed by ICTS. The original term of the arrangement, which was set to expire on March 31, 2010, was extended to June 30, 2010 and can be automatically extended for an additional one-year term unless either the Company or the commercial bank elect to terminate the arrangement prior to the expiration date. In June 2010, the original term of the arrangement was extended to September 30, 2010 (see Note 16). Borrowings made under the arrangement will be designated as either prime rate or LIBOR rate loans at the option of the subsidiary. Prime rate loans bear interest, which is payable monthly, at the bank's prime rate plus 1% per annum. LIBOR rate loans bear interest, which are payable monthly, at LIBOR plus 350 basis points per annum. For the years ended December 31, 2009, 2008 and 2007, the weighted average interest rate on this arrangement is 4.25%, 5.25% and 6.00%, respectively. The arrangement subjects the subsidiary to certain financial and non-financial covenants, including minimum tangible net worth, minimum interest coverage ratio, minimum EBITDA, a required excess availability under the borrowing base and a capital expenditure limitation. As of December 31, 2009 and for the year then ended, the subsidiary is in violation of its minimum EBITDA and capital expenditure limitation covenants (see Note 1). As of December 31, 2009, the subsidiary has approximately $6,070 in borrowings, $444 in outstanding letters of credit and $864 in unused borrowing capacity under the arrangement. As of December 31, 2008, the subsidiary had approximately $4,848 in borrowings, $575 in outstanding letters of credit and $1,518 in unused borrowing capacity under the arrangement. One of the subsidiaries of ICTS had an arrangement with a commercial bank in Europe to provide it with up to (euro)650 in borrowings. Borrowings under the arrangement were limited to 60% of the subsidiary's eligible accounts receivable, secured by the assets of the subsidiary, and guaranteed by ICTS. Borrowings made under the arrangement bear interest, which is payable monthly, at the commercial bank's euro base rate plus 2% per annum. For the years ended December 31, 2008 and 2007, the weighted average interest rate on this arrangement is 7.30% and 6.73%, respectively. The arrangement expired in February 2008. In February 2008, two of the subsidiaries of ICTS jointly entered into a credit agreement with a commercial bank to provide them with a borrowing arrangement of up to (euro)2,150. The available capacity under the borrowing arrangement automatically reduces to (euro)1,650 on May 1, 2008, (euro)1,150 on August 1, 2008 and (euro)650 on January 1, 2009. Borrowings under the arrangement bear interest, which is payable monthly, at the bank's euro base rate (subject to a floor of 3.5%) plus 2% per annum. For the years ended December 31, 2009 and 2008, the weighted average interest rate on this arrangement is 7.30% and 6.73%. Borrowings under the arrangement are secured by the assets of the subsidiaries and guaranteed by ICTS. As of December 31, 2008, there are no outstanding borrowings and (euro)1,200 in outstanding guarantees under the arrangement. On May 1, 2009, the credit agreement expired. The Company is indebted to a commercial bank for bank overdrafts of $0 and $13 as of December 31, 2009 and 2008, respectively. These amounts bear interest, which is payable monthly, at 7% per annum. F-22 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 7 - ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES Accrued expenses and other current liabilities are as follows: December 31, ------------------ 2009 2008 ------------------ Accrued payroll and related $ 4,028 $ 4,774 Accrued vacation 2,621 2,287 Accrued VAT 2,026 1,756 Income taxes payable 9,815 9,614 Other 3,366 2,592 ------------------ Total accrued expenses and other current liabilities $21,856 $21,023 ================== NOTE 8 - CONVERTIBLE NOTES PAYABLE TO RELATED PARTY In September 2006, the Company entered into an arrangement with an entity related to its main shareholder to provide it with up to $3,050 in revolving loans through April 2007. Loans received under the arrangement bear interest, which is payable at maturity, at LIBOR plus 1.5% per annum. The arrangement was secured by 2,157,894 shares of Inksure Technologies, Inc. common stock (See Note 4). In January 2007, the borrowing capacity under the arrangement was increased to $6,263 and the term was extended to April 2008. In connection with the extension, the holder was granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $3.50 per share. The Company determined that the conversion feature did not qualify as a free standing derivative instrument or contain any intrinsic value which would be considered beneficial. In April 2008, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $6,644 in revolving loans through November 2010. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is payable at maturity, at LIBOR plus 1.5% per annum. The arrangement is secured by a 26% interest in one of the Company's subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.75 per share. The Company determined that the conversion feature did not qualify as a free standing derivative instrument or contain any intrinsic value which would be considered beneficial. F-23 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 8 - CONVERTIBLE NOTES PAYABLE TO RELATED PARTY (CONTINUED) In April 2009, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $7,310 in revolving loans through November 2011. The term of the arrangement can be automatically extended for four additional six month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the prime rate charged by the Company's European commercial bank on March 31, 2010. The arrangement is secured by a 26% interest in one of the Company's subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.10 per share. The Company determined that the conversion feature did not qualify as a free standing derivative instrument or contain any intrinsic value which would be considered beneficial. In September 2009, the Company entered into a new arrangement with an entity related to its main shareholder, which replaced all previous arrangements between the parties, to provide it with up to $10,000 in revolving loans through November 2011 (see Note 16). The term of the arrangement can be automatically extended for four additional six month periods at the option of the holder. All outstanding borrowings from previous arrangements were applied to the borrowing capacity of the new arrangement. Loans received under the arrangement bear interest, which is compounded semi-annually and payable at maturity, at the prime rate charged by the Company's European commercial bank on March 31, 2010. The arrangement is secured by a 26% interest in one of the Company's subsidiaries. In connection with the arrangement, the holder was granted an option to convert outstanding notes payable under the arrangement into the Company's common stock at a price of $2.10 per share. The Company determined that the conversion feature did not qualify as a free standing derivative instrument or contain any intrinsic value which would be considered beneficial. In May 2010, the borrowing capacity under the Company's convertible notes payable to a related party was increased to $12,000 and the term was extended to November 2012 pursuant to an oral amendment between the parties. At December 31, 2009 and 2008, notes payable to related party consists of $9,066 and $5,501, respectively, in principal and $1,078 and $571, respectively, in accrued interest. Interest expense related to these notes is $514, $297 and $280 for the years ended December 31, 2009, 2008 and 2007, respectively. For the years ended December 31, 2009, 2008 and 2007, the weighted average interest rate on this arrangement is 5.54%, 5.31% and 6.27%, respectively. NOTE 9 - OTHER LIABILITIES Other liabilities are as follows: December 31, ------------------- 2009 2008 ------------------- Liability to Department of Labor (Note 15) $3,000 $3,000 Other 141 144 ------------------- Total other liabilities $3,141 $3,144 =================== F-24 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 10 - STOCK-BASED COMPENSATION In 1999, the Company adopted the 2003 Equity Incentive Plan and reserved 600,000 shares of common stock for future issuance. The plan expired in 2009. In February 2005, the Company adopted the 2005 Equity Incentive Plan and reserved 1,500,000 shares of common stock for future issuance. The plan expires in 2015. In December 2008, the Company adopted the 2008 Employees and Directors Commitment Stock Option Plan and reserved 1,500,000 shares of common stock for future issuance. No stock options have been issued under this plan. The plan expires in 2018. Under the Company's stock option plans, stock options may be granted to employees, officers, directors and consultants of the Company at an exercise price equivalent to at least the fair market value of the Company's common stock on the date of grant with expiration terms of not more than ten years. Options granted under the plans generally vest over a period of three years. In September 2009, the Board of Directors ratified the cashless exercise feature contained in the Company's 2003 and 2005 Equity Incentive Plans to facilitate the exercise of stock options which are set to expire in 2009 and 2011. Under the cashless exercise feature of these plans, an option holder electing to exercise stock options using this feature would effectively pay for the exercise of a portion of his/her stock options by surrendering their rights to another portion of their stock options to affect a stock for stock transfer. The Company determined that the modification of the stock option plans did not result in any incremental compensation cost. As of December 31, 2009, the Company has 2,279,502 options available for future grants. A summary of the Company's stock option activity is as follows:
Weighted Weighted Average Remaining Average Contractual Term Intrinsic Number Exercise Price (in years) Value ----------- -------------- ----------------- --------- Outstanding as of January 1, 2009 1,632,000 $1.19 1.80 $ -- Granted -- -- -- -- Exercised (1,062,037) $1.22 -- -- Forfeited / Expired (237,963) $1.33 -- -- ----------------------------------------------------------------- Outstanding as of December 31, 2009 332,000 $1.00 1.80 $ -- ----------------------------------------------------------------- Exercisable as of December 31, 2009 332,000 $1.00 1.80 $ -- =================================================================
There were no stock options granted during the years ended December 31, 2009, 2008 and 2007. As of December 31, 2009 and 2008, all outstanding stock options are fully vested. As of December 31, 2009, the Company did not have any unrecognized compensation cost related to stock options granted under the stock option plans. During the years ended December 31, 2009, 2008 and 2007, the Company recognized $0, $101 and $373 in compensation expense related to the issuance of stock options under the stock option plans. F-25 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 11 - OTHER EXPENSES Other expenses are summarized as follows: 2009 2008 2007 -------------------------------- Interest expense $(1,554) $(1,660) $(3,537) Interest income 40 228 325 Foreign currency gain (loss) (102) 141 (122) Recovery of guarantee from related party (see Note 13) -- 421 -- Gain from the sale of marketable equity securities -- -- 349 Impairment of marketable equity securities (see Note 2) -- -- (600) Other (22) 14 5 -------------------------------- Total other expenses $(1,638) $ (856) $(3,580) ================================ NOTE 12 - INCOME TAXES The components of loss before equity loss from investments in affiliates and income tax (benefit) expense are as follows: Year Ended December 31, ------------------------------ 2009 2008 2007 ------------------------------ The Netherlands $ 484 $ 2,383 $(1,764) Subsidiaries outside of the Netherlands (4,065) (4,878) (2,771) ------------------------------ Loss before equity loss from investments in affiliates and income tax benefit (expense) $(3,581) $(2,495) $(4,535) ============================== The components of income tax benefit (expense) are as follows: Year Ended December 31, ----------------------------- 2009 2008 2007 ----------------------------- Current: The Netherlands $ 286 $ (19) $(268) Subsidiaries outside of the Netherlands 132 (383) (740) ----------------------------- 418 (402) (1,008) Deferred: The Netherlands -- -- -- Subsidiaries outside of the Netherlands -- -- 42 ----------------------------- -- -- 42 ----------------------------- Total income tax benefit (expense) $ 418 $ (402) $(966) ============================= F-26 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 12 - INCOME TAXES (CONTINUED) The components of deferred tax assets and liabilities are as follows: December 31, ------------------------ 2009 2008 ------------------------ Deferred tax assets: Operating loss carry-forwards $ 24,375 $ 21,968 Allowance for doubtful accounts 90 96 Accrued expenses 3,307 5,131 ------------------------ Total deferred tax assets 27,772 27,195 Deferred tax liabilities: Depreciation on property and equipment (76) (43) Contingent advance (4,370) (4,370) ------------------------ Total deferred tax liabilities (4,446) (4,413) ------------------------ Net deferred tax assets 23,326 22,782 Less: valuation allowance 23,326 22,782 ------------------------ $ -- $ -- ======================== The ultimate realization of the net deferred tax assets in each jurisdiction the Company does business in is dependent upon the generation of future taxable income in that jurisdiction during the periods in which net operating loss carry-forwards are available and the net deferred tax assets shown above become deductible. At present, the Company does not have a sufficient history of generating taxable income in the various jurisdictions it does business in to conclude that it is more likely than not that the Company will be able to realize all of its net deferred tax assets in the near future and, therefore, a valuation allowance was established for the full carrying value of the net deferred tax assets. A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation allowance. Should the Company become profitable in any of the jurisdictions in does business in during future periods, with supportable trends; the valuation allowance will be reversed. As of December 31, 2009, the Company has net operating loss carry-forwards of $39,110 in the Netherlands which will expire in 2011 through 2017. As of December 31, 2009, the Company has net operating loss carry-forwards of $30,971 in the United States of America which will expire in 2025 through 2029. The ultimate utilization of such net operating loss carry-forwards is limited in certain situations. In addition, as of December 31, 2009, the Company has $698 in tax credits for the welfare to work and work opportunity programs in the United States of America that expire in 2024 through 2028. During the year ended December 31, 2009, the valuation allowance increased by $544. F-27 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 12 - INCOME TAXES (CONTINUED) The Company's effective income tax rate differs from the Netherlands' statutory rate of 25.5% as follows: Year Ended December 31, -------------------------------- 2009 2008 2007 -------------------------------- Effective income tax benefit from continuing operations at statutory rate $ 913 $ 636 $ 1,156 Rate differential (116) 149 (287) Non-deductible (expense) income (172) 203 75 Prior year tax assessments 281 (251) (747) Changes in valuation allowance (544) (950) (1,513) Other (176) (189) 350 -------------------------------- Income tax benefit (expense) from continuing operations $ 418 $(402) $ (966) ================================ A reconciliation of the beginning and ending amounts of unrecognized income tax benefits is as follows: December 31, ------------------- 2009 2008 ------------------- Balance at January 1 $5,652 $ 5,449 Additions related to prior period tax positions -- 4,091 Reductions related to prior period tax positions -- (3,888) ------------------- Balance at December 31 $5,652 $ 5,652 =================== A reconciliation of the beginning and ending amounts of accrued interest is as follows: December 31, ----------------------- 2009 2008 ----------------------- Balance at January 1 $2,713 $ 2,179 Additions charged to expense 452 1,964 Reductions charged to expense -- (1,430) ----------------------- Balance at December 31 $3,165 $ 2,713 ======================= A reconciliation of the beginning and ending amounts of accrued tax penalties is as follows: December 31, ------------------- 2009 2008 ------------------- Balance at January 1 $947 $ 1,150 Additions charged to expense -- 818 Reductions charged to expense -- (778) Reductions related to tax authorities notice -- (243) ------------------- Balance at December 31 $947 $ 947 =================== F-28 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 12 - INCOME TAXES (CONTINUED) The total amount of unrecognized tax benefits, including interest and penalties, is $9,764 and $9,312 as of December 31, 2009 and 2008, respectively, and is included in accrued expenses and other current liabilities in the accompanying consolidated balance sheets. Such unrecognized tax benefits would favorably impact the Company's effective tax rate, if recognized. The Company files income tax returns in the Netherlands and other foreign jurisdictions. Income tax returns for the tax years 2006 to 2009 are subject to examination in the Netherlands. Income tax returns for the tax years 2002 to 2009 are subject to examination in foreign jurisdictions. The Company is subject to an ongoing tax examination of its subsidiaries in the United States of America by the Internal Revenue Service ("IRS") for the tax years 2002 to 2004. In connection with this examination, the subsidiaries were required to provide information regarding their treatment of certain expenses. In August 2006, the Company was advised that a criminal investigation by the United States Department of Justice, Tax Division, was commenced regarding possible criminal tax violations by these subsidiaries for the tax years 2002 and 2003 with respect to certain royalty payments made to the Company. In 2008, the Company was advised that the criminal investigation was dismissed. However, the IRS proposed a number of adjustments to the Company's filed income tax returns for the tax years 2002 to 2004 which collectively result in an assessed income tax liability, including penalties, of $7,325. Management is vigorously contesting the proposed adjustments and has filed a protest with the IRS. This matter will be heard by the Appellate Division of the IRS, at which time management will have an opportunity to present its position on the various issues raised. Based on the issues raised and the tax authorities' position, the Company has included a provision in its consolidated financial statements, which the Company considers adequate to cover the potential liability related to such assessments. NOTE 13 - RELATED PARTY TRANSACTIONS The Company had an outstanding guarantee with respect to certain related party debt obligations of $2,515, which were fully reserved. In 2007, the Company was released from $665 of the guarantee. In 2008, the Company paid $1,429 to settle certain outstanding obligations under the guarantee and was released from its remaining guarantee of $421. The Company recognized other income related to the recovery of its guarantee of $0, $421, and $0 during the years ended December 31, 2009, 2008 and 2007, respectively (See Note 11). Entities related to two of the Company's board members provide legal services to the Company. Legal expense related to these services is $114, $93 and $138 for the years ended December 31, 2009, 2008 and 2007, respectively. Included in accounts payable on the accompanying consolidated balance sheet is $140 and $106 due for these services as of December 31, 2009 and 2008, respectively. F-29 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 13 - RELATED PARTY TRANSACTIONS (CONTINUED) The Company engaged the services an entity owned by a related party as a subcontractor for one of its subsidiaries. The Company incurred expenses of $15, $176 and $91 for such services for the years ended December 31, 2009 and 2008 and 2007, respectively. In June 2009, a European bank, issued a performance guarantee in the amount of (euro)1,200 to one of the Company's customers to secure the Company's performance under the service contract between the parties. The performance guarantee extends for the period June 24, 2009 through April 16, 2013. To secure the European bank's guarantee, an entity related to the Company's main shareholder provided a guarantee to the European bank for the same amount. In July 2009, the Company entered into a settlement arrangement with the former landlord of its entertainment segment to resolve all disputes between the parties related to unpaid rent obligations for $2,600(see Note 3). The Company's obligation under the settlement arrangement is secured by a $1,300 irrevocable standby letter of credit issued to the former landlord by an entity related to the Company's main shareholder. On July 15, 2009, the Company issued 300,000 shares of fully vested, non-forfeitable common stock to an entity related to the Company's main shareholder as consideration for guaranteeing certain Company obligations. The Company recognized the fair value of the shares on the date of issuance of $554 in selling, general and administrative expenses in the accompanying statements of operations and comprehensive income (loss). NOTE 14 - SEGMENT AND GEOGRAPHICAL INFORMATION The Company operates in three reportable segments: (a) corporate (b) airport security and other aviation services and (c) technology. The corporate segment does not generate revenue and contains primarily non-operational expenses. The airport security and other aviation services segment provide security and other services to airlines and airport authorities, predominantly in the United States of America and Europe. The technology segment is predominantly involved in the development and sale of identity security software to financial institutions and airport authorities, predominantly in Europe and Israel. All inter-segment transactions are eliminated in consolidation. The accounting policies of the segments are the same as the accounting policies of the Company as a whole. The operating results of these business segments are regularly reviewed by the chief operating decision maker and the performance of the business segments are based primarily on loss from continuing operations. F-30 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 14 - SEGMENT AND GEOGRAPHICAL INFORMATION (Continued)
Airport Security and Other Aviation Corporate Services Technology Total -------------------------------------------------------------------- Year ended December 31, 2009: Revenue $ -- $ 95,146 $ 715 $ 95,861 Depreciation and amortization 11 681 23 715 Income (loss) from continuing operations (3,729) 2,777 (2,211) (3,163) Total assets 586 25,662 579 26,827 Year ended December 31, 2008: Revenue -- 97,930 879 98,809 Depreciation and amortization 12 741 29 782 Income (loss) from continuing operations (5,120) 2,965 (742) (2,897) Total assets 640 24,209 547 25,396 Year ended December 31, 2007: Revenue -- 63,982 798 64,780 Depreciation and amortization 25 1,163 30 1,218 Loss from continuing operations (4,825) (2,722) (433) (7,980) Total assets 4,019 22,571 513 27,103
Revenue by country is summarized as follows: Year ended December 31, ----------------------------------- 2009 2008 2007 ----------------------------------- United States of America $36,794 $40,421 $46,745 Netherlands 42,344 44,173 7,619 Other 16,723 14,215 10,416 ----------------------------------- Total $95,861 $98,809 $64,780 =================================== Property and equipment, net of accumulated depreciation and amortization, by country is summarized as follows: December 31, --------------------- 2009 2008 --------------------- United States of America $ 849 $ 521 Netherlands 803 933 Other 221 274 --------------------- $1,873 $1,728 ===================== F-31 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 15 - COMMITMENTS AND CONTINGENCIES Operating Leases The Company leases certain equipment and premises under non-cancelable operating leases. Future minimum lease payments under non-cancelable operating leases are as follows: Year Ended December 31, ------------ 2010 $1,196 2011 1,139 2012 1,131 2013 1,019 2014 1,004 ------ $5,489 ====== Rent expense for the years ended December 31, 2009, 2008 and 2007 is $1,875, $1,521 and $1,191, respectively. Legal Proceedings United States Transportation Security Administration In February 2002, the Company was awarded a security services contract (the "TSA Contract") by the TSA to continue to provide security services in all of its current airport locations until the earlier of either the completed transition of these security services on an airport-by-airport basis to the TSA or November 2002. In accordance with the terms of the TSA Contract, the United States Federal government provided the Company with a non-interest bearing advance payment of approximately $26,000, which was payable to the TSA in monthly installments of approximately $1,300 commencing in April 2002. Through December 31, 2009, the Company has repaid $11,700 of the advance. As of December 31 2009, the amount due from the TSA with respect to services provided under the TSA contract is $17,300. The Company has reflected the amount due from the TSA of $3,000, net of the remaining unpaid advance, as a receivable from TSA on the accompanying consolidated balance sheets as of December 31, 2009 and 2008. The TSA filed a contract dispute with the Office of Dispute Resolution for Acquisition ("ODRA") in connection with the TSA contract seeking reimbursement of an alleged overpayment of principal in the amount of $59,200. This claim follows the lawsuit which the Company had already filed against the TSA for repeated breach of contract. The Company is vigorously challenging the TSA's claims, which it asserts is devoid of any factual or legal merit. The TSA's filing comes on the heels of a recent decision by the ODRA granting the Company's motion for partial summary judgment against the TSA for breach of contract by failing to give appropriate notice for the transitioning of airport locations. With respect to the claim for the $59,200 overpayment, the Company has filed a motion to dismiss the action, which has been denied. F-32 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Legal Proceedings (Continued) United States Transportation Security Administration (Continued) On March 30, 2009, ODRA denied both cross motions for summary judgment, stating that the TSA has not met its burden of proof that the prices in the purported 2006 definitization were reasonable and that ODRA was not willing to revisit the issue of the statute of limitations in the summary judgment format but left open the possibility of deciding in the Company's favor on this issue until the record is complete and fully briefed. Settlement negotiations followed and the parties have reached a possible resolution. The settlement proposal has been reduced to a writing, which has not yet been executed by the Company. At this time, the Company is not willing to execute the proposed agreement because of its continuing dispute with the United States Department of Labor ("DOL"). If the Company is unable to reach an acceptable resolution with the DOL, then the Company will examine its option with the DOL and determine if it should execute the agreement with the TSA or seek to resume its litigation against the TSA for the amounts previously asserted in that litigation. The collection of the receivable from the TSA and the resolution of the liability to the DOL is currently undeterminable. United States Department of Labor During 2003, the DOL finalized its audit of the pay rates used to compensate employees for services rendered pursuant to the TSA Contract. The DOL concluded that in certain instances, employees had not been paid the correct base rate, fringe benefits, vacation and holiday pay resulting in a penalty of $7,100. In 2007, the Company reached a settlement with the DOL with respect to this claim and agreed to pay them $3,000. The settlement requires the first $3,000 of any settlement with the TSA to be remitted to the DOL and prohibits the DOL from pursuing any collection activity on its receivable until the TSA matter is resolved. As of December 31, 2009 and 2008, a liability to the DOL of $3,000 is reflected on the accompanying consolidated balance sheets (see Note 9). This amount is exclusive of any amounts which may be received from the TSA. September 11, 2001 Terrorist Attacks As a result of the September 11, 2001 terrorist attacks, numerous lawsuits charging the Company with wrongful death and/or property damage were commenced in the United States District Court, Southern District of New York, resulting from certain airport security services provided by the Company for United Flight 175 out of Logan Airport in Boston, Massachusetts. All but one of the wrongful death/personal injury cases relating to Flight 175 have been settled, leaving the focus of the litigation on the many property damage and insurance subrogation lawsuits. The Company may be indemnified by the airlines if the Company is found to have followed the procedures specified by the Federal Aviation Administration. However, if the Company is found to have violated these screening regulations, it could be liable for damages. Based on an internal review of this matter, the Company has not found any evidence of non-compliance with respect to the security services provided at Boston's Logan International Airport on September 11, 2001. F-33 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Legal Proceedings (Continued) September 11, 2001 Terrorist Attacks (Continued) The Company maintains an aviation insurance policy, which may provide limited coverage for liabilities that may be assessed against the Company as a result of the events of September 11, 2001. The liabilities under these cases may, by statute, be limited to the policy coverage. After the September 11 terrorist attacks, the Company's insurance carriers cancelled all war risk provisions contained in the Company's insurance policies. Management is unable to determine the likelihood of an unfavorable outcome or estimate a range of loss with respect to the remaining open claims against the Company. Accordingly, no provision has been included in the accompanying consolidated balance sheets related to this matter. United States Government The Company had commenced an action against the United States Government with respect to its Fifth Amendment rights relating to the taking of its business. In December 2004, the United States Government's motion to dismiss the case was denied. A motion for reconsideration was also filed by the defendant and denied. The trial for this action was held and in March 2007, the court ruled against the Company's action. The Company appealed the decision and in May 2008, the United States Court of Appeals for the Federal Circuit affirmed the lower court's ruling. On December 1, 2008, the Company appealed the case to the United States Supreme Court, which refused to hear it. Audiovisual-Washington, Inc. In September 2005, Avitecture, Inc. (a/k/a Audiovisual-Washington, Inc.) ("Avitecture") filed a Demand for Arbitration and Mediation against one of the Company's subsidiaries in the United States of America with the American Arbitration Association in Somerset, New Jersey. The Demand for Arbitration alleges that the subsidiary owes Avitecture $222 for audio, video and control systems. The case was decided against the Company's subsidiary in an arbitration proceeding, which resulted in an award to Avitecture of $200. The arbitrator's decision was affirmed by the Superior Court of New Jersey in May 2007 and the Appellate Court in February 2008. As of December 31, 2008, the Company had $200 in accrued expenses and other current liabilities from discontinued operations related to the judgment against it. During 2009, based upon management's assessment that payments are unlikely, the $200 previously accrued by the Company was eliminated and recognized in income from discontinued operations (see Note 3). F-34 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Legal Proceedings (Continued) Turner Construction Company In November 2005, Turner Construction Company ("Turner") filed a Demand for Arbitration and Mediation against one of the Company's subsidiaries in the United States of America with the American Arbitration Association in Somerset, New Jersey. The Demand for Arbitration alleges that pursuant to a written agreement dated in October 2003, the subsidiary owes Turner $948 for work and/or services performed. In an arbitration proceeding, the arbitrator awarded Turner $956 plus interest. This award was affirmed on appeal. As of December 31, 2008, the Company had $956 in accrued expenses and other current liabilities from discontinued operations related to the judgment against it. During 2009, based upon management's assessment that payments are unlikely, the $956 previously accrued by the Company was eliminated and recognized in income from discontinued operations (see Note 3). Landlord Claims Two of the Company's subsidiaries have been sued by their former landlord (which is the same entity for both properties) alleging breach of their respective leases. The former landlord was seeking unpaid rent for the entire terms of the leases for $2,600 in Atlantic City, New Jersey and $3,700 in Baltimore, Maryland, plus legal fees. The Company filed a bankruptcy petition for both of the subsidiaries. However, the former landlord was able to prevail in one of the claims because of a guarantee given by the Company in connection with the lease in one of the locations. In January 2008, a judgment of $2,600 was awarded in favor of the former landlord. The subsidiary has filed an appeal to challenge the judgment. As of December 31, 2008, the Company has $7,276 in other liabilities from discontinued operations related to the unpaid rent obligations owed to the former landlord of the Company's subsidiaries. In July 2009, the Company entered into a settlement arrangement with the former landlord to resolve all disputes between the parties related to the unpaid rent obligations and agreed to pay $2,600 to the former landlord in four equal installments during 2009 and 2010 (See Note 3). Fraport A.G. International Airport Services Worldwide The Company was in a dispute with Fraport A.G. International Airport Services Worldwide over the alleged unlawful use of the letter combination "ICTS" by the Company. Fraport initiated proceedings before the district court of Amsterdam. The principal amount claimed was (euro) 57,700 ($80,800 as of December 31, 2008). This dispute was settled in 2008 without any liability to the Company. F-35 ICTS INTERNATIONAL N.V. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (US $ and (euro) in thousands, except per share data) NOTE 15 - COMMITMENTS AND CONTINGENCIES (CONTINUED) Legal Proceedings (Continued) General The Company is subject to various investigations, claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. These claims are primarily related to grievances filed by current and former employees for unfair labor practices or discrimination, and for passenger aviation claims. Management recognizes a liability for any matter when the likelihood of an unfavorable outcome is deemed to be probable and the amount is able to be reasonably estimated. Management has concluded that such claims, in the aggregate, would not have a material adverse effect on the Company's consolidated financial position, results of operations, or cash flows. Bonus Contingency The Managing Director of one of the Company's European subsidiaries is entitled to receive a bonus payment equivalent to 8% of the proceeds received by the Company upon the successful sale of the subsidiary. Employment Contracts The Company has non-cancellable employment contracts with two of its officers which provide, among other things, for annual base salary and bonus based upon the financial performance of the Company. The annual base salary payments, excluding the potential bonus, required under the employment contracts are as follows: Year Ended December 31, ------------ 2010 $ 331 2011 317 ----- $ 648 ===== NOTE 16 - SUBSEQUENT EVENTS In March 2010, the Company purchased 5,400,000 shares of Inksure's common stock for $675 pursuant to a private placement of Inksure's securities, which decreased its ownership percentage in Inksure from 27.4% to 23.9% (see Note 4). In April 2010, two of the subsidiaries of ICTS jointly entered into a credit arrangement with a commercial bank to provide them with up to (euro)400 in revolving loans through February 2012. Borrowings under the arrangement bear interest, which is payable monthly, at 1.8% above the European Libor rate per annum, are secured by the accounts receivable of the subsidiaries and guaranteed by ICTS. In June 2010, an entity related to the Company's main shareholder provided a letter of credit of $550 to a commercial bank to guarantee an extension of a borrowing arrangement on behalf of one of the subsidiaries of ICTS (see Note 6). F-36 Financial Statement Schedule - Valuation and Qualifying Accounts (U.S. $ in thousands)
Charges to Charges to Beginning of Costs and Other Deductions End of Year Expenses Accounts (1) Year - ------------------------------------------------------------------------------------------------------------------------------------ Allowance for doubtful accounts: Year Ended December 31, 2007 994 (299) -- (188) 507 Year Ended December 31, 2008 507 (51) -- (128) 328 Year Ended December 31, 2009 328 -- -- (78) 253 Allowance for net deferred tax assets: Year Ended December 31, 2007 26,163 -- -- (4,331) 21,832 Year Ended December 31, 2008 21,832 950 -- -- 22,782 Year Ended December 31, 2009 22,782 544 -- -- 23,326
(1) Write-offs, net of recoveries F-37 EX-12.1 2 e39250ex12-1.txt CERTIFICATION Exhibit 12.1 CERTIFICATIONS* I, Avraham Dan, Managing Director and Alon Raich, Chief Financial Officer certify that: 1. We have reviewed this annual report on Form 20-F of ICTS International, N.V. (the "Company") for the year ended December 31, 2009; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; 4. The Company's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the company's internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and 5. The company's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. Dated: June 30, 2010 By: /s/ Alon Raich -------------- Alon Raich, Chief Financial Officer By: /s/ Avraham Dan --------------- Avraham Dan, Managing Director EX-13.1 3 e39250ex13-1.txt CERTIFICATION EXHIBIT 13.1 CERTIFICATION In connection with the annual report of ICTS International, N.V. (the "Company") on Form 20-F for the period ending December 31, 2009 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Avraham Dan, Managing Director of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of Section 3(a) or 15(d) of the Securities and Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /s/ Avraham Dan --------------- Avraham Dan, Managing Director Dated: June 30, 2010 -----END PRIVACY-ENHANCED MESSAGE-----